IMPINJ INC 10-K

Item 8. Financial Statements and Supplementary Data Page Report of Independent Registered Public Accounting Firm 59 Consolidated Balance Sheets 61 Consolidated Statements of Operations 62 Consolidated Statements of Comprehensive Loss 63 Consolidated Statements of Changes in Stockholders’ Equity 64 Consolidated Statements of Cash Flows 65 Notes to Consolidated Financial Statements 66 The supplementary financial information required by this Item 8 is included in Item 7 under the caption “Quarterly Results of Operations.” 58 Table of Contents Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Impinj, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of Impinj, Inc and subsidiaries (the Company) as of December 31, 2020, the related consolidated statements of operations, comprehensive loss, changes in stockholders' equity and cash flows for the year ended December 31, 2020 , and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020, and the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2020. Seattle, Washington February 17, 2021 59 Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Impinj, Inc. Opinion on the Financial Statements We have audited the consolidated balance sheet of Impinj, Inc. and its subsidiaries (the “Company”) as of December 31, 2019, and the related consolidated statements of operations, of comprehensive loss, of changes in stockholder’s equity and of cash flows for each of the two years in the period ended December 31, 2019, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Change in Accounting Principle As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019. Basis for Opinion These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. / s / PricewaterhouseCoopers LLP Seattle, Washington March 2, 2020 We served as the Company's auditor from 2003 to 2019. 60 Table of Contents Impinj, Inc. Consolidated Balance Sheets (in thousands, except par value) December 31, 2020 December 31, 2019 Assets: Current assets: Cash and cash equivalents $ 23,636 $ 66,898 Short-term investments 82,453 49,597 Accounts receivable, net of allowances of $ 533 and $ 1,281 at December 31, 2020 and 2019, respectively 25,003 23,735 Inventory 36,329 34,153 Prepaid expenses and other current assets 3,943 2,386 Total current assets 171,364 176,769 Property and equipment, net 16,531 17,442 Operating lease right-of-use assets 13,761 16,501 Other non-current assets 2,079 453 Goodwill 3,881 3,881 Total assets $ 207,616 $ 215,046 Liabilities and stockholders' equity: Current liabilities: Accounts payable $ 10,144 $ 5,600 Accrued compensation and employee related benefits 5,529 5,859 Accrued and other current liabilities 1,468 4,107 Current portion of operating lease liabilities 3,641 3,380 Current portion of deferred revenue 6,811 551 Total current liabilities 27,593 19,497 Long-term debt, net of current portion 54,556 50,876 Operating lease liabilities, net of current portion 15,266 18,907 Other long-term liabilities 805 314 Deferred revenue, net of current portion 277 213 Total liabilities 98,497 89,807 Commitments and contingencies (Note 11) Stockholders' equity: Preferred stock, $ 0.001 par value — 5,000 shares authorized, no shares issued and outstanding at December 31, 2020 and 2019 — — Common stock, $ 0.001 par value — 495,000 shares authorized, 23,350 and 22,217 shares issued and outstanding at December 31, 2020 and 2019, respectively 23 22 Additional paid-in capital 423,759 387,926 Accumulated other comprehensive income 3 34 Accumulated deficit ( 314,666 ) ( 262,743 ) Total stockholders' equity 109,119 125,239 Total liabilities and stockholders' equity $ 207,616 $ 215,046 The accompanying notes are an integral part of these consolidated financial statements . 61 Table of Contents Impinj, Inc. Consolidated Statements of Operations (in thousands, except per share data) Year Ended December 31, 2020 2019 2018 Revenue $ 138,923 $ 152,836 $ 122,633 Cost of revenue 73,783 78,834 64,352 Gross profit 65,140 74,002 58,281 Operating expenses: Research and development 48,590 38,880 34,168 Sales and marketing 28,663 32,642 32,934 General and administrative 34,958 24,141 22,299 Restructuring costs — — 3,749 Total operating expenses 112,211 95,663 93,150 Loss from operations ( 47,071 ) ( 21,661 ) ( 34,869 ) Other income, net 650 1,242 808 Interest expense ( 5,413 ) ( 1,794 ) ( 1,403 ) Loss on debt extinguishment — ( 576 ) — Loss before income taxes ( 51,834 ) ( 22,789 ) ( 35,464 ) Income tax benefit (expense) ( 89 ) ( 198 ) 233 Net loss $ ( 51,923 ) $ ( 22,987 ) $ ( 35,231 ) Net loss per share — basic and diluted $ ( 2.28 ) $ ( 1.05 ) $ ( 1.65 ) Weighted-average shares outstanding — basic and diluted 22,819 21,847 21,334 The accompanying notes are an integral part of these consolidated financial statements. 62 Table of Contents Impinj, Inc. Consolidated Statements of Comprehensive Loss (in thousands) Year Ended December 31, 2020 2019 2018 Net loss $ ( 51,923 ) $ ( 22,987 ) $ ( 35,231 ) Other comprehensive income (loss), net of tax: Unrealized gain (loss) on investments ( 31 ) 43 27 Total other comprehensive income (loss) ( 31 ) 43 27 Comprehensive loss $ ( 51,954 ) $ ( 22,944 ) $ ( 35,204 ) The accompanying notes are an integral part of these consolidated financial statements. 63 Table of Contents Impinj, Inc. Consolidated Statements of Changes in Stockholders’ Equity (in thousands) Accumulated Additional Other Total Common Stock Paid-in Accumulated Comprehensive Stockholders' Shares Amount Capital Deficit Income (loss) Equity Balance at December 31, 2017 20,973 $ 21 $ 323,482 $ ( 204,525 ) $ ( 36 ) $ 118,942 Issuance of common stock 519 — 2,828 — — 2,828 Stock-based compensation — — 11,317 — — 11,317 Net loss — — — ( 35,231 ) — ( 35,231 ) Other comprehensive income — — — — 27 27 Balance at December 31, 2018 21,492 21 337,627 ( 239,756 ) ( 9 ) 97,883 Issuance of common stock 725 1 9,196 — — 9,197 Stock-based compensation — — 18,486 — — 18,486 Net loss — — — ( 22,987 ) — ( 22,987 ) Other comprehensive income — — — — 43 43 Equity component of issuance of 2019 Notes, net of issuance costs of $ 1,089 (Note 7) — — 32,743 — 32,743 Premiums paid for Capped Call Transactions (Note 7) — — ( 10,126 ) — — ( 10,126 ) Balance at December 31, 2019 22,217 22 387,926 ( 262,743 ) 34 125,239 Issuance of common stock 1,133 1 10,158 — — 10,159 Stock-based compensation — — 25,675 — — 25,675 Net loss — — — ( 51,923 ) — ( 51,923 ) Other comprehensive loss — — — — ( 31 ) ( 31 ) Balance at December 31, 2020 23,350 $ 23 $ 423,759 $ ( 314,666 ) $ 3 $ 109,119 The accompanying notes are an integral part of these consolidated financial statements. 64 Table of Contents Impinj, Inc. Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, 2020 2019 2018 Operating activities: Net loss $ ( 51,923 ) $ ( 22,987 ) $ ( 35,231 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation 4,504 4,809 4,534 Stock-based compensation 25,675 18,486 11,317 Non-cash restructuring benefit — — ( 454 ) Accretion of discount or amortization of premium on short-term investments 224 ( 506 ) ( 419 ) Amortization of debt issuance costs and debt discount 3,680 206 75 Loss on debt extinguishment — 576 — Deferred income taxes — — ( 395 ) Changes in operating assets and liabilities: Accounts receivable ( 1,268 ) ( 5,273 ) 3,782 Inventory ( 2,176 ) 10,572 2,358 Prepaid expenses and other assets ( 3,081 ) ( 524 ) 473 Deferred revenue 6,324 ( 70 ) ( 381 ) Deferred rent — — ( 260 ) Accounts payable 3,491 1,046 326 Accrued compensation and employee related benefits ( 330 ) ( 1,486 ) 1,819 Operating lease right-of-use assets 2,740 2,153 — Operating lease liabilities ( 3,380 ) ( 3,038 ) — Accrued liabilities and other liabilities ( 1,357 ) 744 ( 390 ) Restructuring liabilities — — 1,069 Net cash provided by (used in) operating activities ( 16,877 ) 4,708 ( 11,777 ) Investing activities: Purchases of investments ( 82,735 ) ( 72,413 ) ( 51,651 ) Proceeds from maturities of investments 49,522 61,743 52,352 Purchases of property and equipment ( 3,074 ) ( 2,429 ) ( 6,367 ) Net cash used in investing activities ( 36,287 ) ( 13,099 ) ( 5,666 ) Financing activities: Proceeds from issuance of 2019 Notes, net of issuance costs — 83,475 — Premiums paid for capped call transactions — ( 10,126 ) — Principal payments on finance lease obligations ( 257 ) ( 522 ) ( 900 ) Payments on term and equipment loans — ( 28,192 ) ( 2,451 ) Proceeds from term loans, net of debt issuance costs — 3,991 16,350 Proceeds from exercise of stock options and employee stock purchase plan 10,159 9,133 2,689 Net cash provided by financing activities 9,902 57,759 15,688 Net increase (decrease) in cash and cash equivalents ( 43,262 ) 49,368 ( 1,755 ) Cash and cash equivalents Beginning of period 66,898 17,530 19,285 End of period $ 23,636 $ 66,898 $ 17,530 Supplemental disclosure of cashflow information: Cash paid for interest 1,720 1,612 1,179 Purchases of property and equipment not yet paid 1,076 557 513 Disposal of fully depreciated property and equipment 308 1,432 3,105 The accompanying notes are an integral part of these consolidated financial statements. 65 Table of Contents IMPINJ, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Description of Business Impinj, Inc., a Delaware corporation, is headquartered in Seattle, Washington. Impinj platform comprising multiple product families, wirelessly connects individual items and delivers data about the connected items to business and consumer applications enabled by our partner network. Impinj derives revenue from selling endpoint ICs, reader ICs, readers, gateways and software as well as from development, service and license agreements. Note 2. Summary of Significant Accounting Policies Basis of Presentation and Principles of Consolidation The accompanying consolidated financial statements include Impinj, Inc. and its wholly owned subsidiaries. We have eliminated intercompany balances and transactions in consolidation. Certain amounts on our consolidated balance sheets in prior period have been reclassified to conform to current period presentation. We have prepared these consolidated financial statements in conformity with U.S. generally accepted accounting principles, or GAAP. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the related disclosures as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, sales incentives, estimate to complete development contracts, deferred revenue, inventory excess and obsolescence, income taxes, determination of the fair value of stock awards and compensation and employee-related benefits. To the extent there are material differences between these estimates, judgments, or assumptions and actual results, our financial statements will be affected. Covid-19 has introduced significant additional uncertainty with respect to estimates, judgments and assumptions about current and forecasted demand, which may materially impact the estimates previously listed, among others. Concentrations of Credit Risk Financial instruments , which potentially subject us to concentrations of credit risk, consist primarily of cash equivalents, investments and accounts receivable. We place cash and cash equivalents and investments with major financial institutions, which management assesses to be of high credit quality, to limit our investments exposure. We extend credit to customers based upon our evaluation of the customer’s financial condition and generally collateral is not required. The following table presents total revenue and accounts receivable concentration for the periods presented or as of the dates presented: Year Ended December 31, 2020 2019 2018 Revenue: Avery Dennison ( 1) 32 % 31 % 39 % North American logistics provider * 14 * Arizon 10 * 10 42 % 45 % 49 % * Less than 10% (1) Includes concentration of revenue related to Smartrac NV, or Smartrac. In March 2020, Avery Dennison completed an acquisition of Smartrac. 66 Table of Contents As of December 31, 2020 2019 Accounts Receivable: Avery Dennison ( 1) 21 % 28 % Arizon 17 * Xindeco 12 * Blue Star * 18 50 % 46 % * Less than 10% (1) Includes concentration of accounts receivable related to Smartrac. Concentration of Supplier Risk We outsource the manufacturing and production of our hardware products to a small number of suppliers. Although there are a limited number of manufacturers for hardware products, we believe that other suppliers could provide similar products on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would adversely affect our operating results. Cash and Cash Equivalents Cash includes demand deposits with banks or financial institutions. Cash equivalents include short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity that they present minimal risk of changes in value because of changes in interest rates. Our cash equivalents include only investments with an original or remaining maturity of three months or less at the date of purchase. We regularly maintain cash in excess of federally insured limits at financial institutions. Investments Our investments consist of fixed income securities, which include U.S. government agency securities, corporate notes and bonds and commercial paper. Because we use the investments to support current operations, the contractual maturities of our available-for-sale, or AFS, debt securities are due in one year or less and are classified as short-term investments. AFS debt securities are carried at fair value with unrealized gains and losses reported as a component of other comprehensive income (loss). For AFS debt securities where fair value is less than cost, we intend to hold or more-likely-than-not will not be required to sell such securities; if any, we record credit-related impairment in the consolidated statements of operations through an allowance for credit losses and adjust each period for changes in credit risk. The gross unrealized gains or losses on short-term investments as of December 31, 2020 and 2019 were not material. Fair Value Measurement Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The standards also establish a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value: • Level 1 — Quoted prices in active markets for identical assets or liabilities. • Level 2 — Assets and liabilities valued based on observable market data for similar instruments, such as quoted prices for similar assets or liabilities. • Level 3 — Unobservable inputs that are supported by little or no market activity; instruments valued based on the best available data, some of which is internally developed, and considers risk premiums that a market participant would require. We applied the following methods and assumptions in estimating our fair value measurements: 67 Table of Contents Cash E quivalents — Cash equivalents consist of highly liquid investments, including money market funds with original or remaining maturities of less than three months at the acquisition date. We record the fair value measurement of these assets based on quoted market prices in active markets. Investments — Our investments comprise fixed income securities, which include U.S. government agency securities, corporate notes and bonds, commercial paper and treasury bills. The fair value measurement of these assets is based on observable market-based inputs or inputs that are derived principally from or corroborated by observable market data by correlation or other means. Long-term Debt —See Note 7 for the carrying amount and estimated fair value of our convertible senior notes due 2026. Accounts Receivable and Allowances Accounts receivable comprises amounts billed currently due from customers, net of an allowance for doubtful accounts, an allowance for sales returns and price exceptions. The allowance for doubtful accounts is our best estimate of the amount of probable lifetime-expected credit losses in existing accounts receivable and is determined based on our historical collections experience, age of the receivable, knowledge of the customer and the condition of the general economy and industry as a whole. We record changes in our estimate to the allowance for doubtful accounts through bad debt expense and write off the receivable and corresponding allowance when accounts are ultimately determined to be uncollectible. Bad debt expense is included in general and administrative expenses. For the periods presented in this report, bad debt expense and the allowance for doubtful account were not material. We derive a majority of our accounts receivable from sales to original equipment manufacturers, or OEMs, original design manufacturers, or ODMs, as well as to distributors who are large, well-established companies. We do not have customers that represent a significant credit risk based on current economic conditions and past collection experience. Also, we have not had material past-due balances on our accounts receivable as of December 31, 2020 or 2019; except for $ 1.2 million past-due rent receivables from our sublease as of December 31, 2020, which we deem collectible based on credit risk of the sub-lessee. The allowance for sales returns and price exceptions is our best estimate based on our historical experience and currently available evidence. We record changes in our estimate to the allowance for sales returns and price exceptions through revenue and relieve the allowance when product returns are received for sales returns and when claims are processed for price exceptions. The following table summarizes our allowance for sales returns (in thousands): Balance at Beginning of Year Additional Reserve Applied Sales Return Balance at End of Year Allowance for sales returns and price exceptions: During year ended December 31, 2020 $ 1,072 $ 1,109 $ ( 1,775 ) $ 406 During year ended December 31, 2019 373 2,939 ( 2,240 ) 1,072 During year ended December 31, 2018 3,495 1,426 ( 4,548 ) 373 Inventory Inventories are stated at the lower of cost or estimated net realizable value using the average costing method, which approximates the first-in, first-out method. Inventories comprise raw materials, work-in-process and finished goods. We continuously assess the value of our inventory and write down its value for estimated excess and obsolete inventory. This evaluation includes an analysis of inventory on hand, current and forecasted demand, product development plans, and market conditions. If future demand or market conditions are less favorable than our projections, or our product development plans change from current expectations, a write-down of excess or obsolete inventory may be required, and would be reflected in cost of goods sold in the period the updated information is known. 68 Table of Contents We recorded inventory excess and obsolescence charges, which had an unfavorable net impact of 2.2 %, 1.7 % and 1.2 % on our gross margin for 2020, 2019 and 2018, respectively. Property and Equipment We record p roperty and equipment at cost and depreciate it using the straight-line method over the estimated useful lives of the related assets. The useful lives are as follows: Category Useful Life Laboratory equipment 3 to 10 years Computer equipment and software 3 to 5 years Furniture and fixtures 3 to 7 years Equipment acquired under finance leases 3 to 7 years Leasehold improvements Shorter of remaining lease term or expected useful life Maintenance and repair costs are charged to expense as incurred. Major improvements, which extend the useful life of the related asset, are capitalized. Upon disposal of a fixed asset, we record a gain or loss based on the differences between the proceeds received and the net book value of the disposed asset. Other Assets Other assets primarily comprise capitalized implementation costs from cloud computing arrangements and security deposits. We capitalize eligible costs associated with cloud computing arrangements over the term of the arrangement, plus reasonably certain renewals, and recognize those costs on a straight-line basis in the same line item in the consolidated statement of operations as the expense for fees associated with the cloud computing arrangement. Cloud computing arrangement costs, included in prepaid expenses and other current assets were $ 228,000 and other non-current assets were $ 1.8 million as of December 31, 2020. Amortization expense associated with the cloud computing arrangements was not material for 2020. Cash flows related to capitalized implementation costs are presented in cash flows used in operating activities. Goodwill Goodwill is measured as the excess of the cost of acquisition over the sum of the amounts assigned to identifiable tangible and intangible assets acquired less liabilities assumed. We perform an annual impairment assessment of goodwill at the reporting unit level as of September 30, or more frequently if indicators of potential impairment exist. Our annual impairment assessment requires a comparison of the fair value of our reporting unit to the carrying value. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying value of a reporting unit is greater than its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Additionally, we will consider the income tax effect from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss. Revenue Recognition We generate revenue primarily from sales of hardware products. We also generate revenue from software, extended warranties, enhanced maintenance, support services, and nonrecurring engineering development services, all of which are not material. 69 Table of Contents We recognize revenue when control of the promised goods or services is transferred to our customers, which for hardware sales is generally at the time of product shipment as determined by the agreed-upon shipping terms. We measure revenue based on the amount of consideration we expect to be entitled-to in exchange for those goods or services. The period between when we transfer control of promised goods or services and when we receive payment is expected to be one year or less, and that expectation is consistent with our historical experience. As such, we do not adjust our revenues for the effects of a significant financing component. We recognize any variable consideration, which primarily comprises sales incentives, as a reduction of revenue at the time of revenue recognition. We estimate sales incentives based on our historical experience and current expectations at the time of revenue recognition and update them at the end of each reporting period as additional information becomes available. Our reader and gateway products are highly dependent on embedded software and cannot function without this embedded software. In these cases, we account for the hardware and software license as a single performance obligation and recognize revenue at the point in time when control is transferred. Our contracts with customers with multiple performance obligations generally include a combination of hardware products, standalone software, extended warranty and enhanced maintenance and support services. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling-price basis. In instances where the standalone selling price is not directly observable, such as when we do not sell the product or service separately, we determine the standalone selling price using one, or a combination of, the adjusted market assessment or expected cost-plus margin. Amounts allocated to extended warranty and enhanced maintenance sold with our reader and gateway products are deferred and recognized on a straight-line basis over the term of the arrangement, which is typically from one to three years . Amounts allocated to support services sold with our reader and gateway products are deferred and recognized when control of the promised services is transferred to our customers. For nonrecurring engineering development agreements that involve significant production, modification or customization of our products, we generally recognize revenue over the performance period using the cost-input method because it best depicts the transfer of services to the customer. We receive payments under these agreements based on a billing schedule. Contract assets relate to our conditional right to consideration for our completed performance under these agreements. Accounts receivable are recorded when the right to consideration becomes unconditional. For the periods presented in this report, our contract assets, deferred revenue and the value of unsatisfied performance obligations for nonrecurring engineering development agreements are not material. If our customer pays consideration before we transfer a good or service to the customer under the contract, those amounts are classified as contract liabilities, or deferred revenue. Contract liabilities are recognized as revenue as we transfer control of the promised goods or services to our customers. Payment terms typically range from 30 to 120 days . We present revenue net of sales tax in our consolidated statements of operations. Shipping charges billed to customers are included in revenue and the related shipping costs are included in cost of revenue. Practical Expedients and Exemptions: We expense sales commissions when incurred because the amortization period is expected to be one year or less. We record these costs within sales and marketing expenses. We do not disclose the value of unsatisfied performance obligations for (1) contracts with an original expected length of one year or less and (2) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed . Product Warranties We provide limited warranty coverage for most products, generally ranging from a period of 90 days to one year from the date of shipment. We record a liability for the estimated cost of product warranties based on historical claims, product failure rates and other factors when the related revenue is recognized. We review these estimates periodically and adjust the warranty reserves as actual experience differs from historical estimates or other information becomes available. The warranty liability primarily includes the anticipated cost of materials, labor and shipping necessary to repair or replace the product. Accrued warranty costs in 2020 and 2019 were not material. 70 Table of Contents Leases In February 2016, the FASB, issued guidance on leases. We adopted this standard on January 1, 2019 using the effective-date modified retrospective transition method. We determine whether an arrangement is or contains a lease at inception. Right-of-use, or ROU, assets represent our right to use an identified asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of future lease payments over the lease term. We use an incremental borrowing rate in determining the present value of future lease payments as our operating leases do not provide an implicit rate. Our incremental borrowing rate is based on a credit-adjusted risk-free rate, which best approximates a secured rate over a similar term of lease. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Our lease agreements may contain variable costs such as common area maintenance, insurance, real estate taxes or other costs. Variable lease costs are expensed as incurred on the consolidated statements of operations. Our lease agreements generally do not contain any residual value guarantees or restrictive covenants. We have various non-cancellable operating lease agreements for office, warehouse and research and development space in the U.S., China, Thailand and Malaysia, with expiration dates from 2021 to 2026 . Certain of these arrangements have free or escalating rent payment provisions and optional renewal and termination clauses that are factored into the classification and measurement of the lease when appropriate. These lease agreements typically include lease and non-lease components and are generally accounted for as a single lease component. Leases with an initial term of 12 months or less are not recorded on our consolidated balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Research and Development Costs 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; external consulting and service costs; prototype materials; other new-product development costs; and an allocated portion of infrastructure costs which include occupancy, depreciation and software costs. Foreign Currency Our foreign subsidiaries are considered to be extensions of the U.S. Company. The functional currency of the 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. Income Taxes We use the asset and liability approach for accounting, which requires recognizing deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and tax bases. We measure deferred tax assets and liabilities using enacted tax rates expected to be in effect when such assets and liabilities are recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the year that includes the enactment date. We determine deferred tax assets, including historical net operating losses, and deferred tax liabilities, based on temporary differences between the book and tax bases of assets and liabilities. We believe that it is currently more likely than not that our deferred tax assets will not be realized and as such, we have recorded a full valuation allowance for these assets. We evaluate the likelihood of our ability to realize deferred tax assets in future periods on a quarterly basis, and when appropriate evidence indicates we would revise our valuation allowance accordingly. 71 Table of Contents We utilize a two-step approach for evaluating uncertain tax positions. First, we evaluate recognition, which requires us to determine if the weight of available evidence indicates that a tax position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes. If a tax position is not considered more likely than not to be sustained, no benefits of the position are recognized. Second, we measure the uncertain tax position based on the largest amount of benefit which is more likely than not to be realized on effective settlement. This process involves estimating our actual current tax exposure, including assessing the risks associated with tax audits, together with assessing temporary differences resulting from the different treatment of items for tax and financial reporting purposes. If actual results differ from our estimates, our net operating loss and credit carryforwards could be materially impacted. Our realization of the benefits of the NOLs and credit carryforwards depends on sufficient taxable income in future years. We have established a valuation allowance against the carrying value of our deferred tax assets, as it is currently more likely than not that we will not be able to realize these deferred tax assets. In addition, using NOLs and credits to offset future income subject to taxes may be subject to substantial annual limitations due to the “change in ownership” provisions of the Code and similar state provisions. Events that cause limitations in the amount of NOLs that we may use in any one year include, but are not limited to, a cumulative ownership change of more than 50 %, as defined by Code Sections 382 and 383, over a three-year period. Utilizing our NOLs and tax credit carryforwards could be significantly reduced if a cumulative ownership change of more than 50% has occurred in our past or occurs in our future. We do not anticipate that the amount of our existing unrecognized tax benefits will significantly increase or decrease within the next 12 months. Due to the presence of NOLs in most jurisdictions, our tax years remain open for examination by taxing authorities back to 2000 . Stock-Based Compensation We have equity incentive plans that are more fully described in “ Note 9 Stock-Based Awards ”. We measure stock-based compensation costs for all share-based awards at fair value on the grant date and recognize compensation expense on a straight-line basis over the requisite service period, which typically vest over four years . We account for forfeitures as they occur. We determine the fair value of restricted stock units, or RSUs, based on the closing price of our common stock at the date of grant. We determine the fair value of stock options at the date of grant by using the Black-Scholes option-pricing model. We also use the Black-Scholes option-pricing model to determine the fair value of each common share issued under the ESPP. We determine the fair value of the ESPP grants on the first day of each offering period. In 2019, we began granting RSUs with performance conditions, or PSUs, replacing what has historically been our annual cash-bonus program for our senior executives and other bonus-eligible employees. The number of PSUs that ultimately vest will depend on the extent to which we achieve specified fiscal year financial performance metrics. We record compensation expense each period on a straight-line basis based on our estimate of the most probable number of PSUs that will vest and recognize that expense over the requisite service period. Net Loss per Share Net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding. We have outstanding stock options, RSUs, PSUs, and ESPPs which we include in the calculation of diluted net loss per share if their effect would be dilutive. The diluted net loss per share is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. We use the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net loss per share, if applicable since we expect to settle the principal amount of the outstanding 2019 Notes in cash. For more information about the 2019 Notes, please refer to Note 7 to our consolidated financial statements . 72 Table of Contents Recently Adopted Accounting Standards In June 2016, the Financial Accounting Standards Board, or FASB, issued guidance on the measurement of credit losses on financial instruments. This guidance requires measurement and recognition of expected credit losses for financial assets held at amortized cost. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. We adopted this standard on January 1, 2020 and the adoption of this guidance did not materially impact our financial positions, results of operations or cash flows. Recently Issued Accounting Standards Not Yet Adopted In August 2020, the FASB issued guidance on debt with conversion and other options. This guidance eliminates the beneficial- and cash-conversion accounting models for convertible instruments, amends the derivative scope exception for contracts in an entity’s own equity. Additionally, the guidance requires the application of the “if-converted” method to calculate the impact of convertible instruments on diluted earnings per share. Although we are still evaluating the impact of the updated guidance and the effects on our financial statements, we anticipate using modified retrospective transition on January 1, 2021 to account for our convertible notes due 2026, or the 2019 Notes, on a whole-instrument basis. As a result, we anticipate long-term debt to increase approximately $ 29.3 million, additional paid-in capital to decrease approximately $ 32.7 million, accumulated deficit to decrease approximately $ 3.4 million on January 1, 2021. We anticipate no change to the net deferred tax liabilities with a decrease in deferred tax liability offset by a corresponding increase in valuation allowance upon adoption. Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the SEC did not have, or are not expected to have, a material impact on our present or future consolidated financial statements. Note 3. Fair Value Measurements The following table presents the balances of assets measured at fair value on a recurring basis, by level within the fair value hierarchy, as of the dates presented (in thousands): December 31, 2020 December 31, 2019 Level 1 Level 2 Total Level 1 Level 2 Total Cash equivalents: Money market funds $ 12,425 $ — $ 12,425 $ 45,663 $ — $ 45,663 Total cash equivalents 12,425 — 12,425 45,663 — 45,663 Short-term investments: U.S. government agency securities — 20,293 20,293 — 32,323 32,323 Corporate notes and bonds — 13,185 13,185 — 13,305 13,305 Commercial paper — 23,983 23,983 — 3,969 3,969 Treasury bill — 24,992 24,992 — — — Total short-term investments — 82,453 82,453 — 49,597 49,597 Total $ 12,425 $ 82,453 $ 94,878 $ 45,663 $ 49,597 $ 95,260 We did no t have any Level 3 assets as of December 31, 2020 or 2019. There were no liabilities measured at fair value as of December 31, 2020 or 2019. See Note 7 for the carrying amount and estimated fair value of our convertible senior notes due 2026 . 73 Table of Contents Note 4. Inventory The following table presents the detail of inventories as of the dates presented (in thousands): December 31, 2020 December 31, 2019 Raw materials $ 5,275 $ 5,579 Work-in-process 9,815 7,485 Finished goods 21,239 21,089 Total inventory $ 36,329 $ 34,153 Note 5. Property and Equipment The following table presents the detail of property and equipment as of the dates presented (in thousands): December 31, 2020 December 31, 2019 Laboratory equipment $ 18,240 $ 15,326 Computer equipment and software 5,292 4,927 Furniture and fixtures 1,138 1,138 Equipment acquired under finance leases 3,461 3,461 Leasehold improvements 10,559 10,554 Total property and equipment, gross 38,690 35,406 Less: Accumulated depreciation ( 22,159 ) ( 17,964 ) Total property and equipment, net $ 16,531 $ 17,442 Depreciation expense, which includes amortization of finance lease assets, was $ 4.5 million, $ 4.8 million and $ 4.5 million for the years ended December 31, 2020, 2019 and 2018, respectively. The net book value of property and equipment acquired under finance leases was $ 0.4 million and $ 0.7 million at December 31, 2020 and 2019, respectively. Note 6. Income Taxes We are subject to federal and state income taxes in the United States and foreign jurisdictions. The following table presents U.S. and foreign components of income (loss) before incomes taxes: Year Ended December 31, 2020 2019 2018 U.S. $ ( 52,343 ) $ ( 23,291 ) $ ( 35,933 ) Foreign 509 502 469 Loss before income taxes $ ( 51,834 ) $ ( 22,789 ) $ ( 35,464 ) 74 Table of Contents The following table presents the detail of income tax benefit (expense) for the periods presented (in thousands): Year Ended December 31, 2020 2019 2018 Current: U.S. - Federal $ — $ — $ — U.S. - State ( 56 ) ( 36 ) ( 23 ) Foreign ( 76 ) ( 150 ) ( 140 ) ( 132 ) ( 186 ) ( 163 ) Deferred: U.S. - Federal 32 ( 11 ) 404 U.S. - State 11 ( 1 ) ( 8 ) Foreign — — — 43 ( 12 ) 396 Total income tax benefit (expense) $ ( 89 ) $ ( 198 ) $ 233 We have not recorded a liability for U.S. income taxes and foreign withholding taxes on the undistributed earnings of foreign subsidiaries as of December 31, 2020 as we intend to permanently reinvest future such earnings outside the United States. The amount of the unrecognized deferred tax liability, if incurred, is expected to be immaterial. The following table presents a reconciliation of the federal statutory rate and our effective tax rate for the periods presented: Year Ended December 31, 2020 2019 2018 U.S. Statutory Rate 21.0 % 21.0 % 21.0 % Change in valuation allowance ( 23.6 ) ( 22.9 ) ( 20.6 ) State taxes (net of federal benefit) ( 0.4 ) ( 0.4 ) 0.5 Federal research and development credit 3.9 5.9 4.1 Incentive stock options 0.2 ( 1.9 ) ( 2.9 ) Unrecognized tax benefits ( 1.1 ) ( 1.2 ) ( 1.0 ) Other, net ( 0.2 ) ( 1.4 ) ( 0.4 ) Effective income tax rate ( 0.2 %) ( 0.9 %) 0.7 % We continue to maintain a full valuation allowance against our net deferred tax assets in the U.S., but recognize deferred income tax expense (benefit) due to the change in the indefinite deferred tax liability related to goodwill, which is partially offset by indefinite tax attributes. Deferred federal, state and foreign income taxes reflect the net tax impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and such amounts for tax purposes. 75 Table of Contents The following table presents the significant components of our deferred tax assets and liabilities as of the dates presented (in thousands) : December 31, 2020 December 31, 2019 Net operating loss carryforwards $ 45,714 $ 38,391 Credit carryforwards 10,607 9,083 Capitalized research and development 1,481 2,235 Operating lease liabilities 4,030 4,830 Allowances 2,200 1,694 Deferred compensation 283 176 Deferred revenue 59 46 Stock-based compensation 4,359 2,846 Other 398 156 Deferred tax assets 69,131 59,457 Less: Valuation allowance ( 58,820 ) ( 46,602 ) Net deferred tax assets 10,311 12,855 Deferred tax liability: Goodwill ( 689 ) ( 645 ) Depreciation and amortization ( 590 ) ( 1,716 ) Operating lease ROU assets ( 2,933 ) ( 3,576 ) 2019 Notes ( 6,204 ) ( 7,066 ) Deferred tax liabilities ( 10,416 ) ( 13,003 ) Net deferred tax liability $ ( 105 ) $ ( 148 ) Realization of deferred tax assets is dependent upon the generation of future taxable income, if any, the timing and amount of which are uncertain. We have provided a full valuation allowance against the net deferred tax assets as of December 31, 2020 and 2019 because, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be realized. We have accumulated federal tax losses of approximately $ 213.5 million and $ 179.1 million, respectively, as of December 31, 2020 and 2019, which are available to reduce future taxable income. The Tax Cuts and Jobs Act, or TCJA, enacted on December 22, 2017 altered the carryforward period for federal net operating losses and as a result, all net operating losses generated in 2018 and forward have an indefinite life. Of the net operating losses reported, we have accumulated $ 84.8 million with an indefinite life as of December 31, 2020 . We have accumulated state tax losses of approximately $ 21.0 million and $ 23.8 million as of December 31, 2020 and 2019, respectively. Additionally, we have net research and development credit carryforwards of $ 14.0 million and $ 12.0 million as of December 31, 2020 and 2019, respectively, which are available to reduce future tax liabilities. The pre-2018 federal tax losses and research and development credit carryforwards began expiring in 2020 . Under Sections 382 and 383 of the Internal Revenue Code, if a corporation undergoes an ownership change, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change income or income tax liability may be limited. We have completed a formal IRC Section 382 study and the attributes disclosed in this footnote reflect the conclusion of that study. However, subsequent ownership changes may affect the limitation in future years We are currently not under audit in any tax jurisdiction. Tax years from 2000 through 2020 are currently open for audit by federal and state taxing authorities. We establish reserves for tax positions based on estimates of whether, and the extent to which, additional taxes will be due. The reserves are established when we believe that positions might be challenged by taxing authorities despite our belief that our tax return positions are fully supportable. 76 Table of Contents The following table presents the total balance of unrecognized tax benefits as of the dates presented (in thousands): Year Ended December 31, 2020 2019 2018 Balance at beginning of period $ 3,428 $ 3,159 $ 2,906 Gross decreases to tax positions in prior periods ( 417 ) — — Gross increases to tax positions in current periods 508 269 253 Balance at end of period $ 3,519 $ 3,428 $ 3,159 At December 31, 2020, the total amount of unrecognized tax benefits of $ 3.5 million is recorded as a reduction to the deferred tax asset. If recognized, it would have no impact to our effective tax rate as we have a full valuation allowance. We do not anticipate that the amount of existing unrecognized tax benefits will significantly increase or decrease within the next 12 months. Accrued interest and penalties related to unrecognized tax benefits are recorded as income tax expense and are zero . Note 7. Long-term debt Convertible Senior Notes In December 2019, we issued convertible senior notes due 2026, or the 2019 Notes, in an aggregate principal amount of $ 86.3 million. The 2019 Notes are our senior unsecured obligations and are governed by the indenture for the 2019 Notes. The 2019 Notes accrue interest at a fixed rate of 2.00 % per year, payable semi-annually in arrears on June 15 and December 15 of each year, beginning June 15, 2020. Upon conversion, the 2019 Notes will be convertible into cash, shares of our common stock or a combination thereof, at our election. The 2019 Notes will mature on December 15, 2026 , unless earlier repurchased, redeemed, or converted in accordance with the terms of the indenture. Our net proceeds from issuing the 2019 Notes were approximately $ 83.5 million after deducting fees and expenses. We used a portion of the proceeds to pay the cost of the capped call transactions described below and repay our senior credit facility. The 2019 Notes are convertible at an initial conversion rate of 28.9415 shares of our common stock per $1,000 principal amount of the 2019 Notes, which is equal to an initial conversion price of approximately $ 34.55 per share of our common stock, subject to adjustment under certain circumstances in accordance with the indenture. Prior to the close of business on the business day immediately preceding September 15, 2026, holders of the 2019 Notes may convert all or a portion of their 2019 Notes under the following circumstances: • during any fiscal quarter commencing after the fiscal quarter ending on March 31, 2020 (and only during such fiscal quarter), if the last reported sale price of our common stock, for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130 % of the conversion price on each applicable trading day ; • during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the 2019 Notes for each trading day was less than 98 % of the product of the last reported sale price of our common stock and the conversion rate on each such trading day ; • prior to the close of business on the second scheduled trading day immediately preceding the redemption date if we call the 2019 Notes for redemption; or • upon the occurrence of specified corporate events, as described in the indenture. On or after September 15, 2026, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of the 2019 Notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances. 77 Table of Contents We may redeem the 2019 Notes for cash, at our option, on or after December 20, 2023, if the last reported sale price of our common stock has been at least 130 % of the conversion price at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period at a redemption price equal to 100% of the principal amount of the 2019 Notes being redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date. Holders of the 2019 Notes who convert their 2019 Notes in connection with certain corporate events that constitute a make-whole fundamental change (as defined in the indenture) are, under certain circumstances, entitled to an increase in the conversion rate. Additionally in the event of a corporate event constituting a fundamental change (as defined in the indenture), holders of the 2019 Notes may require us to repurchase all or a portion of their 2019 Notes at a repurchase price equal to 100 % of the principal amount of the 2019 Notes being repurchased, plus any accrued and unpaid interest to, but excluding, the repurchase date. Certain convertible debt instruments that may be settled in cash on conversion are required to be separated into a liability and an equity component. The total proceeds are first allocated to the liability component based on the fair value of a similar debt instrument without the conversion option. The remaining proceeds are allocated to the equity component and recognized in additional paid-in capital. Accordingly, we separated the 2019 Notes into a liability and an equity component. We determined the fair value of the liability component to be $ 52.5 million calculated as the present value of future cash flows discounted at the borrowing rate for a similar nonconvertible debt instrument based on the expected term. We determined the borrowing rate to be 9.90 % based on the market rates for nonconvertible debt instruments issued by other companies with publicly available credit ratings considered to be comparable to us. We recognized the excess of the principal amount of the 2019 Notes over the initial carrying amount of the liability component as a debt discount of $ 33.8 million and are amortizing it to interest expense over the expected term of the 2019 Notes using the effective interest rate method. We recorded the equity component of $ 33.8 million as additional paid-in capital, calculated as the difference between the total proceeds of $ 86.3 million and the initial carrying amount of the liability component. We will not remeasure the equity component as long as it continues to meet the conditions for equity classification. As of December 31, 2020 , the “if-converted value” exceeded the principal amounts by $ 18.3 million based on the closing price of our common stock of $ 41.87 while the 2019 Notes were not yet convertible. We allocated the 2019 Notes total issuance costs of $ 2.8 million between liability and equity in the same proportion as the allocation of our total proceeds to liability and equity components. We amortize the issuance costs attributable to the liability component of $ 1.7 million to interest expense over the respective term of the 2019 Notes using the effective interest rate method. We netted the issuance costs attributable to the equity component of $ 1.1 million against the respective equity component in additional paid-in capital. The effective interest rate on the liability component of the 2019 Notes for the year ended December 31, 2020 is 10.21 %. Accrued interest related to the 2019 Notes as of December 31, 2020 and 2019 were not material. Accrued interest is recorded in accrued liabilities in our consolidated balance sheet. The following table presents the interest expense related to the 2019 Notes for the periods presented (in thousands): Year Ended December 31, 2020 2019 2018 Amortization of debt discount $ 3,566 $ 140 $ — Amortization of debt issuance costs 115 4 — Cash interest expense 1,732 72 — Total interest expense $ 5,413 $ 216 $ — Our estimated fair value of the 2019 Notes was $ 118.7 million and $ 87.0 million as of December 31, 2020 and 2019, respectively, which we determined through consideration of quoted market prices. The fair value is classified as Level 2, as defined in Note 2. 78 Table of Contents The following table presents the outstanding principal amount and carrying value of the 2019 Notes as of the date presented (in thousands): December 31, 2020 December 31, 2019 Outstanding principal amount $ 86,250 $ 86,250 Unamortized debt discount and debt issuance costs ( 31,694 ) ( 35,374 ) Carrying value $ 54,556 $ 50,876 In connection with the issuance of the 2019 Notes, we entered into privately negotiated capped-call transactions with certain financial counterparties. The capped-call transactions are generally designed to reduce the potential dilution to our common stock upon any conversion or settlement of the 2019 Notes, or to offset any cash payments we are required to make in excess of the principal amount upon conversion of the 2019 Notes, as the case may be, with such reduction or offset subject to a cap based on the cap price. If, however, the market price per share of our common stock exceeds the cap price of the capped-call transactions, then our stock would experience some dilution and/or the capped call would not fully offset the potential cash payments, in each case, to the extent then-market price per share of our common stock exceeds the cap price. The initial cap price of the capped call transactions is $ 54.20 per share, which represents a 100 % premium over the last reported sale price of our common stock of $ 27.10 per share on December 11, 2019 subject to certain adjustments under the terms of the capped call transactions. The capped call transactions expire over 40 consecutive scheduled trading days ending on December 11, 2026 . The capped-call transactions meet the criteria for classification in equity, are not accounted for as derivatives, and are not remeasured each reporting period. We paid $ 10.1 million for the capped-call transactions , which we recorded as a reduction to additional paid-in-capital within shareholders’ equity. Senior Credit Facility On December 16, 2019, we used $ 24.0 million of the net proceeds from the 2019 Notes to repay in full our senior credit facility, which was terminated pursuant to its terms. In connection with this repayment, we recorded $ 576,000 of loss on debt extinguishment, comprised of $ 470,000 prepayment penalty and $ 106,000 write-off of unamortized debt issuance costs. We also paid accrued interest on our senior credit facility, which was not material. Note 8. Stockholders’ Equity Preferred Stock Our board of directors has the authority to fix the designations, powers, preferences and rights, and the qualifications, limitations or restrictions thereof, of any wholly unissued series of preferred stock, and to increase or decrease the number of shares in any series of preferred stock, subject to limitations prescribed by law or by our certificate of incorporation. There was no preferred stock issued and outstanding as of December 31, 2020 or 2019 . Common Stock As of December 31, 2020, we had authorized 495,000,000 shares of voting $ 0.001 par value common stock. Each holder of the common stock is entitled to one vote per common share . At its discretion, the board of directors may declare dividends on shares of common stock, subject to the prior rights of our preferred stockholders. Upon liquidation or dissolution, holders of common stock will receive distributions only after preferred stock preferences have been satisfied. 79 Table of Contents The following shares of common stock have been reserved for future issuance as of the date presented (in thousands): December 31, 2020 Option awards outstanding 3,061 Restricted stock units outstanding 1,087 Common stock reserved under equity incentive plans 1,194 Common stock reserved under employee stock purchase plan 618 Total 5,960 Note 9. Stock-Based Awards 2016 Equity Incentive Plan In June 2016, our board of directors adopted and our stockholders approved the 2016 Equity Incentive Plan, or the 2016 Plan, which became effective in July 2016 at which time the 2010 Equity Incentive Plan, or the 2010 Plan, was terminated. Our 2000 Stock Plan was terminated in March 2010. The number of shares of common stock reserved for issuance under the 2016 Plan may increase on January 1 of each year, beginning on January 1, 2017 and ending on and including January 1, 2026, by the lower of (1) 1,825,000 shares; (2) 5 % of the total number of shares of common stock outstanding on December 31 of the preceding calendar year; and (3) a lesser number of shares determined by our board of directors. The 2016 Plan provides for the grant of incentive or non-qualified stock options, restricted stock, restricted stock units, stock appreciation rights and performance shares or performance units to employees, non-employee directors, and consultants. All options granted under the 2000 Stock Plan, the 2010 Plan and the 2016 Plan have a maximum 10 -year term and generally vest and become exercisable over four years of continued employment or service as defined in each option agreement. We generally grant stock options with exercise prices that equal the fair value of the common stock on the date of grant. As allowed under the 2016 Plan, there are a few exceptions to this vesting schedule, which provide for vesting at different rates or based on achievement of performance targets. We utilize newly issued shares to satisfy option exercises. Stock Options The following table summarizes option award activity for the year ended December 31, 2020 (in thousands, except per share data and years): Number of Underlying Shares Weighted-Average Exercise Price Per Share Weighted-Average Remaining Contractual Life (Years) Total Intrinsic Value Outstanding at December 31, 2019 3,262 $ 20.70 7.98 $ 22,033 Granted 656 27.30 Exercised ( 615 ) 12.63 Forfeited or expired ( 242 ) 22.95 Outstanding at December 31, 2020 3,061 23.56 7.55 56,174 Vested and exercisable at December 31, 2020 1,519 $ 21.36 6.86 $ 31,272 We estimate t he fair value of options granted at the date of grant using the Black-Scholes option-pricing model with the following assumptions for the periods presented: 80 Table of Contents Year Ended December 31, 2020 2019 2018 Risk-free interest rate 0.3% – 1.7% 1.4% – 2.6% 2.3% – 3.1% Expected dividends yield None None None Expected volatility 64.3% – 70.3% 60.8% - 64.3% 57.7% - 66.1% Weighted-average expected term 6.08 6.08 6.04 Weighted-average fair value of options granted $ 16.56 $ 18.31 $ 11.85 We determined that it was not practicable to calculate the volatility of our share price because we do not have an extensive public trading history for shares of our common stock . Therefore, we estimated our volatility based on a combination of our historical volatility since becoming a publicly traded company and reported market value data for a group of publicly-traded entities that we believe are relatively comparable after consideration of their size, stage of lifecycle, profitability, growth and risk and return on investment. To determine the expected term, we generally apply and have historically applied the simplified approach in which the expected term of an award is presumed to be the mid-point between the vesting date and the expiration date of the options as we do not have sufficient historical exercise data to provide a reasonable basis for an estimate of expected term. The total intrinsic value of options exercised during 2020, 2019 and 2018 was $ 10.2 million, $ 10.0 million and $ 4.3 million, respectively. The total grant date fair value of options vested was $ 11.7 million, $ 14.8 million and $ 6.0 million during 2020 , 2019 and 2018, respectively. As of December 31, 2020, our total unrecognized stock-based compensation cost related to unvested stock options was $ 21.9 million, which we will recognize over the weighted-average remaining requisite service period of 2.4 years. Restricted Stock Units The following table summarizes activity for restricted stock units, RSUs, including RSUs with performance conditions, or PSUs, for the year ended December 31, 2020 (in thousands, except per share data): Number of Underlying Shares Weighted-Average Grant Date Fair Value RSUs PSUs RSUs PSUs Outstanding at December 31, 2019 509 252 $ 33.77 $ 17.88 Granted 557 251 27.80 27.84 Vested ( 180 ) ( 243 ) 32.19 17.88 Forfeited ( 50 ) ( 9 ) 35.00 17.96 Outstanding at December 31, 2020 836 251 $ 30.07 $ 27.84 We granted PSUs in 2019 and 2020 under our annual bonus program to our senior executives and other bonus-eligible employees. The number of annual PSUs that ultimately vest depends on us attaining a financial metric for the fiscal year as well as on the employee’s continued employment through the vesting date. The compensation committee and board of directors certified achievement of the financial metric for PSUs granted in 2019, vesting 243,000 shares in first-quarter 2020. Based upon attainment of the financial metric for 2020, we expect approximately 240,000 shares to vest in first-quarter 2021. We record compensation expense for each period based on our estimate of the most probable number of PSUs that will vest, and we recognize the expense over the related service period. The stock-based compensation expense we recognized for PSUs was $ 5.7 million and $ 3.4 million for the year ended December 31, 2020 and 2019 The total fair value of RSUs vested was $ 5.0 million during 2020 and $ 1.5 million during both 2019 and 2018. The total fair value of PSUs vested was $ 7.5 million during 2020. The fair value of the outstanding RSUs will be recorded as stock-based compensation expense over the vesting period. As of December 31, 2020, there was $ 22.0 million of total unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over a weighted average period of 3.0 years. As of December 31, 2020, there was $ 1.9 million of total unrecognized compensation cost related to PSUs, which is expected to be recognized in less than one year . 81 Table of Contents Employee Stock Purchase Plan In 2016, we adopted the 2016 Employee Stock Purchase Plan, or the ESPP, which became effective in July 2016. Under the ESPP, eligible employees can authorize payroll deductions for amounts up to 15 % of their eligible compensation. A participant may purchase a maximum of 4,000 shares each six-month period or some lesser number of shares as determined by the IRS rules. The offering periods generally start on the first trading day on or after February 20 and August 20 of each year. Participants in an offering period will be granted the right to purchase common shares at a price per share that is 85 % of the least of the fair market value of the shares at (1) the first day of the offering period and (2) the end of each purchase period within the offering period. The number of shares reserved for the ESPP may increase each year, beginning on January 1, 2017 and continuing through and including January 1, 2036, by the least of: (1) 1 % of the total number of shares of common stock outstanding on the first day of such year; (2) 365,411 shares of common stock; and (3) such amount as determined by our board of directors. As of December 31, 2020, the total unrecognized stock-based compensation related to the ESPP was $ 0.2 million and will be recognized on a straight-line basis over the weighted-average remaining service period of less than one year . We estimate t he fair value of the ESPP granted at the start of the offering period using the Black-Scholes option-pricing model with the following assumptions for the periods presented: Year Ended December 31, 2020 2019 2018 Risk-free interest rate 0.1% – 1.6% 1.9% – 2.5% 2.4 % Expected term 0.5 Years 0.5 years 0.3 years Expected volatility 46.9% – 91.0% 66.5% – 72.3% 75.9 % Stock-Based Compensation Expense The following table presents the detail of stock-based compensation expense amounts included in our consolidated statements of operations for the periods presented (in thousands): Year Ended December 31, 2020 2019 2018 Cost of revenue $ 1,015 $ 772 $ 469 Research and development expense 10,314 6,427 3,663 Sales and marketing expense 5,981 6,003 4,166 General and administrative expense 8,365 5,284 3,019 Total stock-based compensation expense $ 25,675 $ 18,486 $ 11,317 Note 10. Leases The following table presents the components of lease expense in our consolidated statements of operations for the periods presented (in thousands): Year Ended December 31, 2020 2019 Operating lease costs (a) Single lease costs $ 4,121 $ 4,170 Variable lease costs 1,738 1,623 Sublease income (b) ( 1,902 ) ( 1,796 ) Total operating lease costs $ 3,957 $ 3,997 (a) Includes short-term lease costs, which are immaterial. (b) Sublease income is related to unused office space that was sublet as part of the restructuring in fiscal 2018 where we continue to have the primary obligations. 82 Table of Contents The following table presents supplemental cash flow information related to operating leases for the periods presented (in thousands): Year Ended December 31, 2020 2019 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows used $ 4,755 $ 4,617 The following table presents weighted-average remaining lease term and weighted-average discount rate related to operating leases as of: 2020 2019 Weighted-average remaining lease term (years) 5.3 6.1 Weighted-average discount rate 6.9 % 6.8 % The following table presents future lease payments under operating leases as of December 31, 2020 (in thousands): Operating Leases Lease Payments Sublease Income Net 2021 $ 4,790 $ ( 1,414 ) $ 3,376 2022 4,650 ( 1,457 ) 3,193 2023 3,263 ( 123 ) 3,140 2024 3,219 — 3,219 2025 3,315 — 3,315 Thereafter 3,413 — 3,413 Total lease payments $ 22,650 $ ( 2,994 ) $ 19,656 Less: Imputed interest ( 3,743 ) Present value of lease liabilities 18,907 Less: Current portion of lease liabilities ( 3,641 ) Lease liabilities, net of current portion $ 15,266 Note 11. Commitments and Contingencies Indemnifications In the normal course of business, we may enter into agreements that require us to indemnify either customers or suppliers for specific risks. While we cannot estimate our maximum exposure under these indemnification provisions, to date they have not had a material impact on our consolidated results of operations or financial condition. Litigation From time to time, we are subject to various legal proceedings or claims that arise in the ordinary course of business. We accrue a liability when management believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. For the year ended December 31, 2020, we recorded and paid $ 5.4 million of our estimated settlement of the federal securities class action to general and administrative expenses described further below. As of December 31, 2020. and 2019 , we did no t have accrued contingency liabilities. The following is a description of our significant legal proceedings. Although we believe that resolving these claims, individually or in aggregate, will not have a material adverse impact on our financial statements, these matters are subject to inherent uncertainties. 83 Table of Contents Federal Securities Class Actions On August 7, 2018, a class-action complaint for violation of the federal securities laws was filed in the U.S. District Court for the Central District of California against us, our chief executive officer and former chief operating officer. Captioned Schultz v. Impinj, Inc., et al , the complaint, purportedly brought on behalf of all purchasers of our common stock from May 7, 2018 through and including August 2, 2018, asserted claims that our quarterly statement filed on Form 10-Q for first-quarter 2018 and a concurrent press release made false or misleading statements about our business prospects and financial condition. The complaint sought monetary damages, costs and expenses. On October 3, 2018, the plaintiff voluntarily dismissed this complaint. On August 27, 2018, a second class-action complaint for violation of the federal securities laws was filed in the U.S. District Court for the Western District of Washington against us, our chief executive officer, former chief operating officer and former chief financial officer. Captioned Montemarano v. Impinj, Inc., et al ., the complaint, purportedly brought on behalf of all purchasers of our common stock from May 4, 2017 through and including August 2, 2018, asserted claims that we made false or misleading statements in our financial statements, press releases and conference calls during the purported class period in violation of Section 10(b) of the Securities Exchange Act of 1934, as amended, or the Securities Exchange Act. The complaint sought monetary damages, costs and expenses. On October 2, 2018, a third class-action complaint for violation of the federal securities laws was filed in the U.S. District Court for the Western District of Washington against us, our chief executive officer, former chief operating officer and former chief financial officer. Captioned Employees’ Retirement System of the City of Baton Rouge and Parish of East Baton Rouge v. Impinj, Inc., et al ., the complaint, purportedly brought on behalf of all purchasers of our common stock from November 3, 2016 through and including February 15, 2018, asserted claims that we made false or misleading statements about customer demand for our products and inventory in SEC filings, press releases and conference calls in violation of Section 10(b) of the Securities Exchange Act. The complaint sought monetary damages, costs and expenses. On January 14, 2019, the U.S. District Court for the Western District of Washington consolidated the Montemarano and Baton Rouge actions and appointed the Employees’ Retirement System of the City of Baton Rouge and Parish of East Baton Rouge as lead plaintiff. On February 13, 2019, lead plaintiff filed a consolidated amended complaint. The consolidated amended complaint alleged that from July 21, 2016 through February 15, 2018, we made false or misleading statements about customer demand and the capability of our products and platform in violation of Section 10(b) of the Securities Exchange Act. On March 19, 2019, we filed a motion to dismiss the consolidated amended complaint, and on October 4, 2019, the court entered an order granting in part and denying in part the motion. The court dismissed the Section 10(b) claim against our former chief operating officer, dismissed product-capability-related allegations against our former chief financial officer, and dismissed allegations that defendants made false or misleading statements concerning increasing demand prior to first-quarter 2017. The court denied the motion as to all other claims and defendants. On July 9, 2020, following a private settlement mediation with the lead plaintiff in the federal securities class actions and plaintiff in the New York State securities class action discussed below, the parties in both actions executed a stipulation of settlement that resolved the claims asserted in both actions. The settlement provided for a payment to the plaintiff class of $ 20.0 million. Our insurers contributed $ 14.6 million to the settlement, and we contributed the remaining settlement amount of $ 5.4 million. Accordingly, we recorded a provision of $ 5.4 million related to our estimated settlement amount to general and administrative expenses for the three months ended June 30, 2020, which was paid during the three months ended September 30, 2020. On July 29, 2020, the court entered an order preliminarily approving the settlement. On November 20, 2020, following a final approval hearing the previous day, the court entered an order approving the settlement and such matter is now closed. 84 Table of Contents New York State Securities Class Action On January 31, 2019, a fourth class-action complaint for violation of the federal securities laws was filed in the Supreme Court of the State of New York for the County of New York against us, our chief executive officer, former chief operating officer, former chief financial officer, members of our board of directors and the underwriters of our July 2016 initial public stock offering, or IPO, and December 2016 secondary public offering, or SPO. Captioned Plymouth County Retirement System v. Impinj, Inc., et al. , the complaint, purportedly brought on behalf of purchasers of our stock pursuant to or traceable to our IPO and SPO, alleged that we made false or misleading statements in the registration statements and prospectuses in those offerings concerning demand for our products and inventory in violation of Section 11 of the Securities Act of 1933. On April 9, 2019, the New York Supreme Court entered an order staying the action and requiring the parties to update the court every 90 days as to the status of the pending federal securities class actions discussed above. As discussed above in connection with the federal securities class action, on July 9, 2020, the parties in both this action and the federal securities class actions executed a stipulation of settlement that resolved the claims in both actions. On November 20, 2020, the U.S. District Court for the Western District of Washington entered an order approving the settlement. Pursuant to the terms of the settlement, the parties in this action filed stipulation discontinuing this action with prejudice. The New York State court, significantly hampered by COVID-19, has not yet entered an order discontinuing the action with prejudice. Shareholder Derivative Actions On October 26, 2018, two shareholder derivative actions were filed in the U.S. District Court for the District of Delaware against our chief executive officer, former chief operating officer, former chief financial officer and certain of our directors. We were a nominal defendant. On November 8, 2018, a third shareholder derivative action was filed in this same court against the same defendants. Captioned Weiss v. Diorio, et al ., Fotouhi v. Diorio, et al ., and De la Fuente v. Diorio, et al. , the derivative complaints, purportedly brought on behalf of us, alleged that the defendants breached their fiduciary duties to us and allegedly made false or misleading statements and omissions of material fact in violation of Section 14(a) of the Securities Exchange Act regarding our business and operations. The derivative actions included claims for, among other things, unspecified damages in favor of us, corporate actions to purportedly improve our corporate governance, and an award of costs and expenses to the derivative plaintiffs, including attorneys’ fees. On January 28, 2019, the Delaware federal court entered a stipulated order that stayed these derivative actions until resolution of the pending federal securities class actions described above. On July 10, 2020, following a private settlement mediation, the parties in this action executed a stipulation of settlement to settle and resolve the claims asserted in this consolidated derivative action. The settlement required us to implement certain corporate governance changes and the payment of up to $ 900,000 to plaintiffs’ counsel for attorneys’ fees and expenses. Our insurers have agreed to contribute up to $ 900,000 to plaintiffs’ counsel for attorneys’ fees and expenses. The proposed settlement is subject to preliminary and, following notice to shareholders, final approval by the U.S. District Court for the District of Delaware. On August 5, 2020, at the court’s request, the parties filed supplemental briefing in respect of their joint motion for preliminary approval of the settlement. The court has not yet entered an order preliminarily approving the settlement. Patent Infringement Claims and Counterclaims Impinj Patent Infringement Claims Against NXP On June 6, 2019, we filed a patent infringement lawsuit against NXP USA, Inc., a Delaware corporation and subsidiary of NXP Semiconductors N.V., or NXP, in the U.S. District Court for the Northern District of California, or the Court. The original complaint alleged that certain NXP integrated circuit products infringe 26 of our U.S. patents. At the order of the Court, we filed an amended complaint limited to eight of the original 26 patents. We subsequently elected to go forward with asserting infringement of six of those eight patents. We are seeking, among other things, past damages, including lost profits, but no less than a reasonable royalty; enhanced damages for willful infringement; and reasonable attorneys’ fees and costs for infringement of the asserted patents. We are also seeking an injunction against NXP making, selling, using, offering for sale or importing the RAIN RFID integrated circuit product NXP introduced in 2017. Defendants responded to our complaint on September 30, 2019 citing numerous defenses including denying infringement, claiming our asserted patents are invalid, and that the infringed patents were licensed on a royalty-free basis under Impinj’s commitments to GS1 EPCglobal. 85 Table of Contents In February 2020, NXP filed inter partes review, or IPR, petitions with the Patent Trial and Appeal Board for the U.S. Patent and Trademark Office, or PTAB, against 12 of the originally-asserted 26 patents, including the six patents asserted in the Amended Complaint. In August and September of 2020, the PTAB declined to institute a review of four of the six patents at issue. On September 24, 2020, the Court lifted the stay on two of the patents in suit, and based on a schedule set by the Court on October 22, 2020, the case is proceeding with a claim construction hearing scheduled for March 24, 2021. Also on October 22, 2020, the Court continued the stay on infringement claims on two additional patents pending determinations on IPRs on two allegedly related patents, and we removed without prejudice the two patents against which the PTAB instituted IPRs. NXP Patent Infringement Claims Against Impinj On October 4, 2019, NXP USA, Inc. and NXP, filed a patent infringement lawsuit against us in the U.S. District Court for the District of Delaware. The complaint alleges that certain of our products infringe eight U.S. patents owned by NXP or NXP USA, Inc. The plaintiffs are seeking, among other things, past damages adequate to compensate them for our alleged infringement of each of the patents-in-suit, and reasonable attorneys’ fees and costs. They are also seeking an injunction against us, enjoining continuing acts of infringement of the patents-in-suit. We have denied that we are infringing any of the patents, and we have asserted that we are licensed under four of them and that all eight are invalid. We have also filed IPR petitions with the PTAB against six of the eight patents. On September 23, 2020, the District of Delaware granted Impinj’s motion to transfer the case to the U.S. District Court for the Western District of Washington in Seattle. On December 3, 2020, we moved to amend our answer to include counterclaims that certain NXP integrated circuit products infringe eight of our U.S. patents, all of which were initially included in our California litigation and are therefore beyond the statutory period for any further IPR review at the PTAB. On December 11, 2020, we also moved to stay the case with respect to six of the eight patents in suit pending final resolution of petitions that we filed for IPR review by the PTAB. On February 12, 2021, the Court denied our motion to amend our answer to include counterclaims but granted our motion to stay the case as to the six patents with respect to which we filed for IPR review. As of the date of this report, there is no schedule in this case. On December 7, 2020, Impinj Radio Frequency Technology (Shanghai) Co., Ltd., or Impinj Shanghai, was served with patent infringement lawsuits filed in the Intellectual Property Court in Shanghai, China, or Shanghai Intellectual Property Court, in which NXP asserts that certain of our products infringe three Chinese patents owned by NXP, which closely correspond to three of the eight U.S. patents NXP has already asserted in U.S. District Court described above. Impinj Shanghai has objected to the jurisdiction of the Shanghai Intellectual Property Court and has filed a motion to stay the proceedings. Impinj Shanghai also filed invalidity requests against the three Chinese patents before the China National Intellectual Property Administration. As of the date of this report, there is no schedule in the cases in China. Obligations with Third-Party Manufacturers We manufacture products with third-party manufacturers. We are committed to purchase $ 9.9 million of inventory as of December 31, 2020. Note 12. Deferred Revenue Deferred revenue, comprising individually immaterial amounts for extended warranty, enhanced maintenance and advanced payments on nonrecurring engineering services contracts, represents contracted revenue that has not yet been recognized. Deferred revenue as of December 31, 2020 includes a $ 6.0 million advance payment for a system order that we expect to deliver and recognize as revenue in 2021. The following table presents the changes in deferred revenue for the periods presented (in thousands): 86 Table of Contents Year Ended December 31, 2020 2019 Balance at beginning of period $ 764 $ 834 Deferral of revenue 7,139 718 Recognition of deferred revenue ( 815 ) ( 788 ) Balance at end of period $ 7,088 $ 764 During 2020 , we recognized $ 0.5 million of revenue, which was included in deferred revenue as of December 31, 2019 . During 2019 , we recognized $ 0.6 million of revenue, which was included in deferred revenue as of December 31, 2018 . Note 13. Segment Reporting We have one reportable and operating segment: the development and sale of our products and services. Our reportable segment has been identified based on how our chief operating decision-maker manages our business, makes operating decisions and evaluates our operating performance. Our chief executive officer acts as the chief operating decision-maker and reviews financial and operational information on an entity-wide basis. We have one business activity and there are no segment managers who are held accountable for operations, operating results or plans for levels or components. Accordingly, we have determined that we have a single reporting segment and operating unit structure. Information by Revenue Categories Our chief executive officer reviews information about revenue categories, including endpoint ICs and systems. We define systems as reader ICs, readers, gateways and software. The following table presents our revenue categories for the periods presented (in thousands): Year Ended December 31, 2020 2019 2018 Endpoint ICs $ 102,326 $ 97,657 $ 84,974 Systems 36,597 55,179 37,659 Total revenue $ 138,923 $ 152,836 $ 122,633 Information by Geography The following table summarizes our long-lived assets, which consist of property and equipment, less accumulated depreciation (in thousands): December 31, 2020 December 31, 2019 United States $ 10,114 $ 11,719 Malaysia 5,751 4,669 Others 666 1,054 Total $ 16,531 $ 17,442 Revenue presented in the following table is based on the location of the value-added resellers, inlay manufacturers, reader OEMs, distributors or end users who purchased products and services directly from us. For sales to our resellers and distributors, their location may be different from the locations of the ultimate end users. The following table presents our sales by geography for the periods presented (in thousands): Year Ended December 31, 2020 2019 2018 Americas $ 30,962 $ 53,260 $ 30,636 Asia Pacific 98,483 89,012 79,290 Europe, Middle East and Africa 9,478 10,564 12,707 Total revenue $ 138,923 $ 152,836 $ 122,633 87 Table of Contents Total revenue in the United States, included in Americas, was $ 27.6 million, $ 50.2 million and $ 29.5 million for the years ended December 31, 2020, 2019 and 2018, respectively. Total revenue in China (including Hong Kong), included in Asia Pacific, was $ 79.3 million, $ 70.8 million and $ 64.3 million for the years ended December 31, 2020, 2019 and 2018, respectively. No sales to countries other than the United States and China accounted for more than 10% of revenue for the years ended December 31, 2020, 2019 and 2018. Note 14. Net Loss per Share For the periods presented, the following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net loss per share (in thousands, expect per share amounts): Year Ended December 31, 2020 2019 2018 Numerator: Net loss $ ( 51,923 ) $ ( 22,987 ) $ ( 35,231 ) Denominator: Weighted-average shares outstanding — basic and diluted 22,819 21,847 21,334 Net loss per share — basic and diluted $ ( 2.28 ) $ ( 1.05 ) $ ( 1.65 ) The following presents the outstanding shares of our common stock equivalents excluded from the computation of diluted net loss per share as of the dates presented because their effect would have been antidilutive (in thousands) : Year Ended December 31, 2020 2019 2018 Stock options 3,061 3,262 3,614 Restricted stock units and restricted stock units with performance conditions 1,087 761 32 Employee stock purchase plan shares 73 69 168 Since we expect to settle the principal amount of the outstanding 2019 Notes in cash, we use the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. For the 2019 Notes, the conversion spread for the notes has a dilutive impact on diluted net income per share when the average market price of our common stock during each reporting period exceeds $ 34.55 per share . There was no conversion spread for the 2019 Notes during 2020 or 2019. Note 15. Related-Party Transactions We have a consulting agreement with a limited liability company owned by Cathal Phelan, a member of our board of directors, pursuant to which Mr. Phelan provides advisory and consulting services. The term of the consulting agreement began in May 2020 through December 2020, which was extended by an additional 12 months to December 2021 as mutually agreed upon by Mr. Phelan and us. We recognized and paid $ 430,000 of consulting fee expense to Mr. Phelan, or the limited liability company owned by Mr. Phelan, for the year ended December 31, 2020. Additionally, we granted 60,000 shares of stock options to Mr. Phelan on September 21, 2020 in connection with these consulting services, with 1/24th of the shares subject to the option vesting on October 21, 2020 and 1/24th of the shares subject to the option vesting on each month thereafter, subject to Mr. Phelan remaining a service provider. Note 16. Retirement Plans In 2001, we adopted a salary deferral 401(k) plan for our employees. The plan allows employees to contribute a percentage of their pretax earnings annually, subject to limitations imposed by the Internal Revenue Service. The plan also allows us to make a matching contribution, subject to certain limitations. To date, we have not made any contributions to the plan. 88 Table of Contents Note 17. Subsequent Events On February 2, 2021, we committed to executing a restructuring plan in our go-to-market organization to strategically align our global sales, product, partner development and marketing teams. As part of the plan, we expect to eliminate approximately nine full-time positions within our go-to-market organization, representing about 3 % of our workforce. We expect to incur restructuring charges of between approximately $ 1.0 million and $ 1.5 million for employee termination benefits and related costs as well as $ 0.1 million in other associated costs for legal expenses. All of the restructuring charges are expected to result in cash expenditures. The restructuring charges are expected to be recorded in the first and second quarters of 2021, when the activities comprising the plan are expected to be substantially completed . 89 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.