What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-14 compared with 2021-02-17 · 205 added, 132 removed, 355 unchanged (49% of the section changed)

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We and our partners connect the items via a miniature radio chip embedded in the item or in its packaging, reading and delivering each item’s identity, location and authenticity.

To date, we have enabled connectivity to nearly 50 billion items, enabling businesses and consumers to derive timely information from those connected items.

To date, we have enabled connectivity to more than 60 billion items, enabling businesses and consumers to derive timely information from those connected items.

Our platform uses RAIN, a type of radio-frequency identification, or RFID, technology we pioneered.

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For our endpoint IC business, forecasting was already difficult without Covid-19, because we sell our ICs to inlay partners and therefore have limited visibility to end-user demand.

The myriad uncertainties that Covid-19 has introduced, especially at retail end users contending with store closures and reduced customer traffic, have exacerbated that forecasting difficulty.

Covid-19’s impact has been further complicated by countries reopening at different rates, with some seemingly able to manage subsequent outbreaks and others not.

Covid-19 has also caused uncertain long-term shifts, mostly negative, in other industries important to us besides retail apparel, such as aviation and sports.

Even in supply chain and logistics, or SC&L, which has seen shipment volumes surge, end users have been reticent to deploy new technologies.

Consequently, Covid-19 negatively impacted our 2020 endpoint IC demand.

Additionally, a lthough we introduced our new Impinj M700 in 2020 and it was in full production by the end of 2020, we saw a slower demand ramp relative to our expectations.

Due to overall endpoint IC demand decline , we remain uncertain of its impact in 2021 or beyond.

For our systems business, Covid-19 delayed pilots and deployments.

These delays were due in some cases to businesses being closed by local regulations and in others by reduced or deferred capital expenditures.

The delays impacted our 2020 operating results and we expect those impacts will persist into 2021.

Some end users have accelerated their investments in business-process modernization technologies like RAIN during the pandemic, but even in those cases , Covid-19 can delay deployments for reasons of health and safety, product and labor availability, and store closures.

Consequently, although we see evidence of continued demand for RAIN systems, the extent to which adoption will rebound in 2021 and the degree to which it withstands the negative impacts of Covid-19, remain unclear.

From an operations standpoint, Covid-19 caused some of our suppliers to temporarily shut down, operate at reduced capacity, or both.

For the most part we navigated these closures and capacity shortfalls successfully.

We also navigated shipping challenges due to reduced transport capacity, albeit with higher shipping costs.

Most of our facilities and employees are in Seattle, where government restrictions to slow Covid-19’s spread have impacted our business, albeit modestly.

Almost all our employees, except for those essential few who must be in the office, are working from home.

We are striving to minimize Covid-19’s impact on our operations.

However, our first priority is, and will continue to be, our employees’ health and safety.

Covid-19’s travel restrictions have also adversely affected our business, again modestly, by slowing new-product launches and typical sales activities.

There can be no assurance that Covid-19’s impact on our employees or business activities in 2021 will remain modest.

We may experience issues due to necessary changes in our business practices, to governmental action, or to difficulties responding to unanticipated events like a natural disaster.

Increased remote working may result in privacy, data security and fraud risks.

Our understanding of the legal and regulatory requirements, as well as the guidance from authorities, related to Covid-19 may be subject to future challenge, particularly as guidance evolves in response to future Covid-19 developments.

Despite Covid-19, we have continued investing in research and development and the long-term opportunities RAIN offers.

Although we plan to continue making these investments in 2021, depending on the business impact from Covid-19, we may choose to slow or suspend our investments, for example in research and development, potentially impairing our ability to meet our long-term strategic objectives.

While the effects of Covid-19 and our responses to it negatively impacted our results of operations, cash flows and financial position for 2020, the uncertainty over its duration and the severity of its epidemiological, economic and operational impacts mean we cannot reasonably estimate the magnitude of its financial impact.

The extent to which Covid-19 impacts our results will depend on future developments that are unpredictable, including actions we and others need to take to contain its spread and reduce its impact on public health.

The myriad uncertainties that Covid-19 introduced, and continues introducing, especially at retail end users, has exacerbated that forecasting difficulty.

Covid-19’s impact has been further complicated by countries vaccinating and reopening at different rates and with varying levels of effectiveness, as well as the impacts of various Covid-19 variants.

Covid-19 also caused long-term shifts, many negative, in other industries important to us, such as aviation and sports.

Even in supply chain and logistics, or SC&L, which saw shipment volumes surge in the depths of Covid-19, end users had been reticent to deploy new technologies.

We built endpoint IC inventory through much of 2020, anticipating tight 200mm wafer foundry capacity ahead of our transition to our 300mm M700 product family.

W e introduced our new Impinj M700 in 2020 and, although it was in production by the end of 2020, we initially saw a slower demand ramp than we expected.

Beginning in fourth-quarter 2020 , demand for all our endpoint ICs, including our M700, i ncreased dramatically .

Worldwide IC wafer demand also increased , leading to wafer shortfalls in many industries, including ours.

In first-quarter 2021, we consumed the inventory we built in 2020 at a pace that exceeded our first-quarter 2021 wafer supply and post-processing capacity.

In the second and third quarter s we moderate d that inventory burndown, stretching our IC supply to our partners and market but constraining our ability to fully capitalize on the increased endpoint IC demand , while also expanding and maturing additional post-processing capacity.

Despite that moderation, by end of third-quarter 2021 we had mostly consumed that prebuilt inventory.

This trend continued in fourth-quarter 2021 with demand for our endpoint IC inventory exceeding our ability to meet that demand.

For our systems business, Covid-19 delayed pilots and deployments throughout 2021.

These delays were due in some cases to businesses being closed by local regulations and in others by businesses reducing or deferring capital expenditures.

Some end users accelerated their investments in business-process modernization technologies like RAIN during the pandemic, but even in those cases, Covid-19 delayed deployments for reasons of health and safety, product and labor availability, and store closures.

We also saw our distributors normalize their inventory to match Covid-19 demand levels.

Although we built additional systems inventory during 2021, like with endpoint ICs, supply constraints limited our ability to accumulate inventory sufficient to meet demand.

We saw increased systems demand but packaging delays and packaging price increases causing short supply of our reader ICs, low inventory levels at our distributors, and price increases and component shortfalls for analog, specialized logic, and memory chips constraining reader and gateway supply.

Consequently, like for our endpoint ICs, our ability to capitalize on the increased systems demand is constrained.

Our business operations have also been affected by Covid-19.

Government restrictions in the early days of the pandemic caused us to mostly close our offices in early 2020.

Today, except for a small number of employees who need to be in our offices to fulfill their roles, almost all our employees continue to work from home.

As we evaluate how to safely reopen our offices, our first priority is protecting our employees’ health and safety, and we will prioritize health and safety over a rapid office return.

Recently, a resurgence of Covid-19 in geographies where our manufacturing subcontractors are located has caused governments to reinstitute mandatory factory staff reductions, facility closures or both, periodically impacting our endpoint IC and systems production and our ability to ship products.

Covid-19 travel restrictions adversely affected our business by slowing new-product launches and typical sales activities, and those activities remain restricted.

We previously anticipated that second half 2021 would bring a return to some semblance of travel and sales normalcy, but for the most part our anticipations were not met.

Moreover, there can be no assurance that Covid-19’s impact on our employees or business activities will return to normal in the first-half of 2022.

Our compliance with legal and regulatory requirements related to Covid-19 may subject us to future challenges, particularly as requirements evolve.

Despite ongoing uncertainties related to Covid-19, we continue investing in research and development and long-term RAIN opportunities.

Although we plan to continue making these investments into 2022, we may, depending on the business environment, choose to slow or suspend our investments, potentially impairing our ability to meet our long-term strategic objectives.

Covid-19 negatively impacted our results of operations, cash flows and financial position in 2020.

It caused supply and travel disruptions in 2021.

We expect it to continue disrupting our business in 2022, in ways that are difficult for us to fully predict.

Given the ongoing uncertainty over Covid-19’s epidemiological, economic and operational impacts we cannot reasonably estimate the extent or duration of Covid-19’s continuing impact on our business.

The extent to which Covid-19 impacts our future results will depend on developments that are inherently unpredictable, including the emergence of new Covid-19 variants and actions we and others take in response to Covid-19 .

For more information on Covid-19’s impact on our business, please refer to Part I, Item 1A (Risk Factors) of this report.

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We have invested in, and plan to continue investing in, research and development to enhance and extend our platform, including enhancing existing products, introducing new products and tightening the platform linkages between our products.

Although we sell our products into nearly all verticals, relying significantly on our partner channel, we are today focusing particular attention on retail self-checkout and loss prevention and SC&L portal and conveyor opportunities.

Most of our investments precede any sales benefit from the investment, and in some instances we may never see a benefit.

The potential causes of the latter are many, including the market not being receptive to our product or sales approach, late or failed product development, personnel departures or other causes.

We sometimes enter into arrangements with end users, suppliers or channel partners for them to fund a portion of our investment, but even in those instances the results of our investments remain uncertain, and in some cases we may be required to refund the investment if the development is unsuccessful or the market opportunity fails to materialize.

Although we sell our products into many end markets, relying significantly on our partner channel, we are today focusing particular attention on retail self-checkout and loss prevention and SC&L portal and conveyor opportunities.

Most of our investments precede any sales benefits from the investments and, in some instances, we may never see any benefits if the market is not receptive to our product or sales approach, product development is late or fails, or for other causes.

We sometimes enter into arrangements with end users, suppliers or channel partners for them to fund a portion of our investment, but even in those instances the results of our investments remain uncertain, and in some instances, we may be required to refund the investment if the development is unsuccessful or the market opportunity fails to materialize.

In some instances, we delay or cancel investments without or until we obtain such funding.

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Market Adoption

Our financial performance depends on the pace and scope of end-user adoption of our products in multiple industries, but especially in retail which is our largest market.

Our financial performance depends on the pace and scope of end-user adoption of our products in multiple industries, but especially in retail apparel, which is our largest market.

Covid-19 has had, and we expect it to continue to have, a materially adverse impact on the retail industry.

Covid-19 may also accelerate an ongoing shift in consumer shopping away from physical stores, which could adversely impact demand for endpoint ICs by retailers.

T he extent to which Covid-19 materially impacts the retail industry is unclear, as is the extent to which it will impact our product sales.

Covid-19 may also accelerate an ongoing shift in consumer shopping away from physical stores, which could adversely affect demand for endpoint ICs by retailers.

The extent to which Covid-19 materially impacts the retail industry is unclear, as is the extent to which it will impact our product sales.

Other industries that are potential future drivers of RAIN adoption have also been impacted by Covid-19, although the long-term impact on our business is unclear.

For example, the aviation industry, which had proposed widespread luggage tagging, has been negatively impacted by Covid-19.

By contrast, SC&L has experienced increased demand which could positively impact our financial performance if such industry further adopts RAIN technology.

By contrast, SC&L has experienced increased demand which could positively impact our financial performance if SC&L further adopts RAIN.

See the section captioned “Covid-19” for additional information.

The pace and scope of end-user adoption, slowed by Covid-19, remains uncertain, potentially causing large fluctuations in our operating results.

For a historical example of the potential impact of those fluctuations, in 2015 and 2016 several major retailers commenced deployments that significantly increased our endpoint IC sales, lengthening our product lead times.

In 2017 we invested in endpoint IC inventory to reduce those lead times, but in second-half 2017 the endpoint IC growth rate slowed, we believe was due primarily to delays in new deployments at several large retailers.

The pace and scope of end-user adoption, slowed in 2020 by Covid-19, remains uncertain today, potentially causing large fluctuations in our operating results.

For a first historical example of the potential impact of those fluctuations, in 2015 and 2016 several major retailers commenced deployments that significantly increased our endpoint IC sales, lengthening our product lead times.

In 2017 we invested in endpoint IC inventory to reduce those lead times, but in second-half 2017 the endpoint IC growth rate slowed, we believe due primarily to delays in new deployments at several large retailers.

That decelerating growth rate engendered an endpoint IC channel inventory correction that negatively impacted our operating results for several subsequent quarters.

For another historical example, in late 2018 and in 2019 a large north American logistics provider deployed significant quantities of our gateway products, positively impacting our operating results for several quarters, and then transitioning to an operational phase in first-half 2020.

For a second historical example, in late 2018 and in 2019 a large North American logistics provider purchased and deployed significant quantities of our gateways, positively impacting our operating results for several quarters, then transitioned to an operational phase in first-half 2020, reducing our gateway sales.

For a third historical example, in first-quarter 2020 we saw high endpoint IC demand as our inlay partners built inventory ahead of Covid-19, followed by several quarters of depressed demand as those same inlay partners consumed that inventory, followed by high demand in 2021 as those same inlay partners deliver into recovering end-user opportunities.

Given the uncertainties in our market, we cannot be certain that RAIN adoption will continue;

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that we will not experience future product inventory shortfalls or overages;

or that Covid-19 will not materially impact our business.

We also cannot be certain that we will be able to maintain or grow our market share for any of our products, whether because of insufficient inventory, Covid-19, competitors copying our products, competition generally or for a host of other reasons, many of which are outside our control.

Regardless of the uneven pace of retail, SC&L and other industry adoption, we believe the underlying, long-term trend is continued RAIN adoption and as a result we have continued to invest in new products.

In our endpoint IC business, in 2020 we introduced our new Impinj M700, which offers significant performance advantages and we believe will foster adoption.

In our systems business, in 2020 we introduced our new Impinj R700 reader, which likewise offers significant performance advantages, and we believe will also foster adoption.

Despite us being in full production with both products by the end of 2020, Covid-19 has impacted demand and the speed with which we were able ramp up production, and the pace of adoption has been slower than we had anticipated.

or that Covid-19 will not materially impact our business going forward.

We also cannot be certain that we will be able to maintain or grow our market share for any of our products, whether because of insufficient inventory, Covid-19, competitors copying our products, insufficient wafer or other product supply, competition generally or for a host of other reasons, many of which are outside our control.

In our endpoint IC business, in 2020 we introduced our new Impinj M700, which offers significant performance

advantages over other endpoint ICs on the market and which we believe will foster adoption.

In our systems business, in 2020 we introduced our new Impinj R700 reader and in 2021 our new Impinj E710, E510 and E310 reader ICs, which likewise offer significant performance advantages over other readers and reader ICs on the market and which we believe will also foster adoption.

Market adoption could be impacted by product availability.

See further discussion of product availability under “Inventory Supply”.

We sell our products through partners and distributors and have limited ability to determine end-user demand.

Consequently, we may incorrectly forecast that demand or not identify market shifts in a timely fashion, potentially affecting our business adversely.

If RAIN market adoption, and adoption of our products specifically, does not meet our expectations or if we are unable to meet partner or end-user volume or performance expectations, because of the impact of Covid-19 or otherwise, then our operating results and growth prospects will be adversely affected.

If RAIN market adoption, and adoption of our products specifically, does not meet our expectations or if we are unable to meet partner or end-user volume or performance expectations, because of the impact of Covid-19, recovering demand, or otherwise, then our operating results and growth prospects will be adversely affected.

If we reduce prices to win opportunities, then our gross margins may be negatively affected.

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From 2010 to 2021, our endpoint IC sales volumes increased at a compounded annual growth rate of 27%.

However, the pace and scope of RAIN adoption has been uneven and unpredictable.

For example, our endpoint IC unit sales volumes increased significantly in 2016, declined in second-half 2017 and in first-half 2018, returned to growth in second-half 2018 and in 2019 (the latter albeit not at the same pace as in 2016), and then declined again in second- and third-quarter 2020 due to Covid-19.

Short-term demand will remain unpredictable in scope and timing.

However, the pace has been uneven and unpredictable.

For example, our endpoint IC unit sales volumes increased significantly in 2016, declined in second-half 2017 and in first-half 2018, returned to growth in second-half 2018 and in 2019 (the latter albeit not at the same pace as in 2016), declined again in second- and third-quarter 2020 due to Covid-19, and recovered in fourth-quarter 2020, and in 2021.

We expect short-term demand to remain unpredictable in scope and timing.

Longer term, we believe our endpoint IC opportunity will continue to grow, but we cannot predict whether historical annual growth rates are indicative of the pace of future growth.

Additionally, Covid-19 may cause end users to eliminate or significantly reduce or delay spending on RAIN-based solutions, impacting endpoint IC growth.

Our systems business relies disproportionally on large-scale deployments at discrete end users.

Our systems business, at least for our readers and gateways, relies disproportionally on large-scale deployments at discrete end users.

The timing of those large deployments causes large variability in our systems revenue.

For example, we generated 14% of total 2019 revenue from a North American logistics provider in connection with a project-based gateway deployment and we did not have a comparable new project-base revenue in 2020 .

Notably, Covid-19 has caused delays in some of our pending global system deployments as SIs , VARs and their end users’ business locations are temporarily closed, impacting our ability to replace project-based revenue in a timely fashion .

For example, we generated 14% of total 2019 revenue from a large North American SC&L provider in connection with a project-based gateway deployment.

We did not have comparable new project-based revenue in 2020.

As another example, in second-quarter 2021, we generated 13% of our quarterly revenue from a project-based gateway deployment for RAIN-based loss-prevention at a large European retailer .

Finally, although we promote our platform as an integrated offering, we sell our products individually, and end users often use only certain of our products.

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Our product ASPs fluctuate based on competitive pressures and the discounting we offer to win opportunities, but generally decline over time.

We expect that trend to continue.

Historically, we have been able to implement manufacturing and quality improvements that effectively reduce the per-unit cost of most of our products, as well as introduce newer and lower-cost products, but the timing of these cost reductions and product introductions fluctuates and may not materialize in any given quarter or year.

Historically, we have been able to compensate these ASP declines by reducing the per-unit cost of most of our products, by reducing supplier costs and implementing manufacturing and quality improvements, as well as by introducing newer and lower-cost products, but the timing of these cost reductions and new-product introductions fluctuates and may not materialize in any given quarter or year.

In the second half of 2021, due to wafer and component supply shortfalls at many of our suppliers, we began to experience increasing rather than decreasing costs for both endpoint ICs and systems.

In October 2021, we began raising prices to offset the impact of those increased costs.

If we are unable to successfully increase our prices or if our customers choose competitors’ products due to our higher prices, then our product margins, operating results or both may suffer.

In the near term, we expect margins to be volatile based on product mix and the timing of our price changes.

We typically renegotiate pricing with most of our endpoint IC OEMs with an effective date of the first quarter of the calendar year, reducing both revenue and gross margins in the first quarter compared to prior periods.

The impact tends to decline in subsequent quarters as we reduce costs and, to the extent we can migrate our customers to newer, lower-cost products, adjust product mix.

Endpoint IC volumes also tend to be lower in the fourth quarter than in the third quarter.

Historically, the impact tends to decline in subsequent quarters as we reduce costs and, to the extent we can migrate our customers to newer, lower-cost products, adjust product mix.

Endpoint IC volumes also tend to be historically lower in the fourth quarter than in the third quarter.

We may not see these historical trends hold in 2022 due to the price increases noted above, and ongoing demand and supply impacts from Covid-19.

System sales tend to be stronger in the fourth quarter of the calendar year , and less strong in the first quarter.

We believe this seasonality is due to the availability of residual funding for capital expenditures prior to the end of many customers’ fiscal years.

While, over the longer term, we expect these seasonal trends to continue, quarter-to-quarter variability in our revenue can be caused by a number of factors including uncertainty in demand and supply as a result of Covid-19, the timing of large deployments, competitor product availability as well as supply constraints, any or all of which can mask seasonality in any given year.

These risks and uncertainties, as well as other risks and uncertainties that could cause our actual results to differ significantly from management’s expectations, are described in greater detail in the sections of this report captioned “Covid-19” and in Part II, Item 1A (Risk Factors).

Like for our endpoint ICs, we may not see these historical trends hold in 202 2 due to the price increases noted above and ongoing demand and supply impacts from Covid-19.

These risks and uncertainties, as well as other risks and uncertainties, including but not limited to the impacts of Covid-19, can cause our actual results to differ significantly from our expectations, as described in greater detail in the sections of this report captioned “—Covid-19” and in Part I, Item 1A (Risk Factors).

Inventory Supply

From time to time we experience inventory overages or shortages, either due to us mis-estimating customer or end-user demand, constrained supplier manufacturing capacity or our product availability, fluctuations in our market, including competitor product availability, or the global economy, changes in regulations or tariffs or for a host of other reasons.

From time to time, we experience inventory overages or shortages, either due to us mis-estimating customer or end-user demand;

constrained supplier manufacturing capacity or product availability;

fluctuations in our market, including competitor product availability or in the global economy;

changes in regulations or tariffs;

or for a host of other reasons.

These inventory dynamics can impact some or all of our products.

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Low inventory levels can affect our ability to meet customer demand, lengthen lead times and potentially causing us to miss opportunities, lose market share and/or damage customer relationships, also adversely affecting our business.

For example, in 2010 we experienced wafer shortages from TSMC relative to our submitted endpoint IC wafer purchase orders because of high worldwide demand for semiconductor foundry capacity.

For example, in 2010 we experienced wafer shortages relative to our submitted endpoint IC wafer purchase orders because of high worldwide demand for semiconductor foundry capacity.

These shortages adversely affected our ability to meet our customers’ demand and, in some cases, caused customers to cancel orders, qualify alternative suppliers or purchase from our competitors.

Our existing ICs use 200mm and 300mm wafers, with most of our volume still at 200mm, and some semiconductor industry analysts predict 200mm wafer demand to remain high throughout at least 2021.

In 2021, we again experienced wafer shortages due to both significant worldwide demand from multiple industries and semiconductor foundries wafer shortfalls .

In 2020, we anticipated a 2021 200mm shortfall and, in the depths of the pandemic, both built 200mm wafer inventory and accelerated our investment in 300mm M700 post-processing capacity.

Regardless, the worldwide semiconductor wafer supply imbalance exceeded our prior expectations.

We focused our 2021 efforts on moderating our 200mm wafer supply, accelerating and maturing our 300mm post-processing capacity, and maximizing our total unit volumes to best support our inlay partners and capture the market opportunity.

Looking forward, our foundry partner has signaled tight wafer availability, at least in the older-generation semiconductor nodes we use, well into 2022.

We therefore continue our focus in 2022 on wafer availability, expanding and maturing our 300mm post-processing capacity, and total unit volumes in light of anticipated strong endpoint IC demand against that constrained wafer supply.

We have wafer supply commitments similar to fourth-quarter levels through at least mid-2022, but our supply in subsequent periods is less certain.

Any inability to obtain sufficient wafer supply at reasonable prices or at all would negatively impact our operating results and prospects.

In our systems business, we experienced lengthened packaging lead times for our reader ICs, which negatively impacted our ability to meet reader IC demand for 2021.

We expect those lengthened lead times, and our ability to meet demand, to stabilize in first-half 2022.

At the same time, we anticipate reader IC cost increases, at least for several quarters.

We have also experienced and expect to continue experiencing shortages and price increases for the electronic and other components our subcontractors use to build our readers and gateways, impacting current and future reader and gateway availability and costs.

Results of Operations

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Year ended December 31, 2021 compared with year ended December 31, 2020

Revenue and gross profit increased due primarily to higher endpoint IC and systems revenue.

Gross margin increased due primarily to prior-year excess and obsolescence charges as well as current-year sales of fully reserved inventory and increased product margins.

The increased product margins were primarily driven by the increase in endpoint IC margin due to product mix.

Loss from operations decreased due primarily to increased gross profit offset by increased operating expenses.

The increase in operating expenses was primarily due to increased stock-based compensation expense, increased research and development and sales and marketing personnel expenses and increased non-settlement related legal fees.

Year ended December 31, 2020 compared with year ended December 31, 2019

Revenue and gross profit decreased due primarily to lower systems revenue, partially offset by higher endpoint IC revenue.

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The increase in operating expenses was primarily due to increased stock-based compensation expense, litigation-settlement and related costs incurred in second-quarter 2020, and increased research and development personnel expenses, partially offset by decreased sales and marketing personnel expenses.

Year ended December 31, 2019 compared with year ended December 31, 2018

Revenue and gross profit increased from increased endpoint IC and systems revenue.

Gross margin increased primarily due to revenue mix with systems revenue representing a larger portion of our total revenue, and from leverage derived from comparable overhead costs on increased revenue, partially offset by higher excess and obsolescence charges.

Loss from operations decreased due to increased gross profit, partially offset by increased operating expenses.

The increase in operating expenses was due to increased stock-based compensation expense and higher product development costs, partially offset by decreased restructuring costs and decreased personnel expenses .

Year Ended December 31,

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Year ended December 31, 2021 compared with year ended December 31, 2020

Endpoint IC revenue increased $36.9 million, due primarily to a $44.5 million increase in shipment volumes, offset by a $7.6 million decrease due to lower ASPs.

The increase in shipment volumes was due, in part, to prior year volumes being low, a result of Covid-19 which negatively impacted several markets we sell to, including retail, our largest endpoint IC market, as well as growth in our customers’ underlying business.

The ASP decrease was due to our annual price negotiations as discussed above under “ —Factors Affecting Our Performance—Seasonality” and product mix with a higher contribution from our M700 product line which has a lower ASP, both of which were slightly offset by higher contribution from industrial and specialized products.

Systems revenue increased $14.4 million, due primarily to increases of $12.2 million in reader revenue, $1.4 million in gateway revenue and $629,000 in NRE revenue.

Reader revenue increased primarily due to higher shipment volumes and ASPs, gateway revenue increased primarily due to higher ASPs;

and NRE revenue increased due to timing of revenue recognition.

For more information, see the sections captioned “—Factors Affecting Our Performance—Covid-19” and “Risk Factors—Risks Relating to Our Platform, Products and Technologies—Covid-19 has adversely affected our business, and the magnitude and duration of future Covid-19 effects on our financial position, results of operations, cash flows and business prospects are uncertain.”

Year ended December 31, 2020 compared with year ended December 31, 2019

Endpoint IC revenue increased $4.7 million, due primarily to a $7.0 million increase in shipment volumes, partially offset by a $2.3 million decrease due to lower ASPs.

The ASP decrease was due primarily to our annual price negotiations as discussed above under “—Factors Affecting Our Performance—Seasonality”, partially offset by favorable product mix.

The increase in shipment volumes was due primarily to growth in our customers’ underlying business before Covid-19 negatively impacted global retail apparel sales starting second-quarter 2020 and subsequent demand recovery in fourth-quarter 2020.

The increase in shipment volumes was due primarily to growth in our customers’

underlying business before Covid-19 negatively impacted global retail apparel sales starting second-quarter 2020 and subsequent demand recovery in fourth-quarter 2020.

Systems revenue decreased $18.6 million, due primarily to decreases of $14.8 million in gateway revenue and $5.2 million in reader revenue, partially offset by a $1.3 million increase in reader IC revenue.

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reader IC revenue increased primarily due to higher shipment volumes.

For more information, see the sections captioned “—Factors Affecting Our Performance—Covid-19” and “Risk Factors—Covid-19 has adversely affected our business, and the magnitude and duration of future Covid-19 effects on our financial position, results of operations, cash flows and business prospects are uncertain.”

Year ended December 31, 2019 compared with year ended December 31, 2018

Endpoint IC revenue increased $12.7 million, due primarily to a $19.5 million increase in shipment volumes, partially offset by a $3.6 million decrease due to lower ASPs and $3.2 million from the one-time product exchange we completed in the first quarter 2018.

The ASP decrease was due primarily to our annual price negotiation as discussed above and, to a lesser extent, product mix.

Systems revenue increased $17.5 million, due primarily to increases of $16.5 million in gateway revenue and $3.2 million in reader revenue.

These gateway and reader revenue increases were due primarily to increased shipment volumes, with gateway revenue favorably impacted by the North American logistics provider in connection with a project-based gateway deployment described above .

The systems revenue increases were partially offset by a $2.1 million decrease in reader IC revenue due to both lower shipment volumes and ASPs.

Gross Profit and Gross Margin

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Cost of revenue also includes charges for excess and obsolescence and warranty costs.

Our gross margin varies from period to period based on mix of endpoint IC and systems revenue, underlying product margins driven by changes in ASPs or costs, as well as from inventory excess and obsolescence charges.

Our gross margin varies from period to period based on mix of endpoint IC and systems, underlying product margins driven by changes in ASPs or costs, as well as from inventory excess and obsolescence charges.

Year ended December 31, 2021 compared with year ended December 31, 2020

Cost of revenue increased $17.5 million, due primarily to increased endpoint IC and systems revenue.

Gross margin increased 5.1%, due to inventory excess and obsolescence charges that had an unfavorable net gross margin impact of 2.2% in 2020, sales of fully reserved inventory that had a positive 1.5% impact in 2021, and increased underlying product margins primarily related to favorable endpoint IC product mix with an increasing mix of M700 and higher contribution from industrial and specialized products.

Year ended December 31, 2020 compared with year ended December 31, 2019

Cost of revenue decreased $5.1 million, due primarily to decreased systems revenue partially offset by increased endpoint IC revenue.

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Inventory excess and obsolescence charges had an unfavorable net gross-margin impact of 2.2% in 2020.

Year ended December 31, 2019 compared with year ended December 31, 2018

Cost of revenue increased $14.5 million, due primarily to increased revenue of both endpoint ICs and systems and to a lesser extent higher excess and obsolescence charges.

Gross margin increased 0.9% due primarily to revenue mix w ith systems revenue comprising a larger portion of our total revenue, as well as from leverage derived from comparable overhead costs on increased revenue, partially offset by higher excess and obsolescence charges .

Inventory excess and obsolescence charges had an unfavorable net gross-margin impact of 1.7% in 2019.

Operating Expenses

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Research and development

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;

prototype materials;

other new-product development costs, including external consulting and service costs;

R esearch and development expense comprises primarily personnel expenses (salaries, benefits and other employee related costs) and stock-based compensation expense for our product-development personnel;

product development costs which include external consulting and service costs, prototype materials and other new-product development costs;

and an allocated portion of infrastructure costs which include occupancy, depreciation and software costs.

We expect research and development expense to increase in absolute dollars in future periods as we focus on new product development and introductions.

however, we will continue to monitor the impacts of Covid-19 on our business and may adjust our research and development investment strategy as appropriate.

Year ended December 31, 2021 compared with year ended December 31, 2020

Research and development expense increased $9.7 million, due primarily to increases of $4.2 million in personnel expenses from higher headcount, $3.9 million in stock-based compensation expense from PSUs and an increased number of stock options and RSUs and $1.2 million in product development costs as a result of fluctuations in the timing of development activities and $589,000 in infrastructure costs from increased software costs.

Research and development expense increased $15.5 million, due primarily to increases of $6.9 million in stock-based compensation expense primarily related to PSU grant timing, and to a lesser extent, an increased number of equity grants outstanding.

Other major factors driving the increase included $4.6 million in personnel

expenses from higher headcount;

9 million in product-development costs;

and $1.1 million in infrastructure costs from increased software costs.

Year ended December 31, 2020 compared with year ended December 31, 2019

Research and development expense increased $4.7 million, due primarily to increases of $2.8 million in stock-based compensation expense from PSUs and an increased number of stock options and RSUs, $778,000 in product development costs as a result of fluctuations in the timing of development activities, $554,000 in personnel expenses from a change in headcount mix and $463,000 in infrastructure costs.

Research and development expense increased $9.7 million, due primarily to increases of $4.2 million in personnel expenses from higher headcount, $3.9 million in stock-based compensation expense from PSUs and an increased number of equity grants outstanding and $1.2 million in product development costs as a result of fluctuations in the timing of development activities and $589,000 in infrastructure costs from increased software costs.

Sales and Marketing

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and an allocated portion of infrastructure costs which include occupancy, depreciation and software costs.

We expect sales and marketing expense to remain approximately constant on an absolute dollar basis, except for incentive sales compensation which fluctuates as a function of revenue and travel-related expense which depends on Covid-19’s travel restrictions.

In addition, we will continue to monitor the impacts of Covid-19 on our business and may adjust our sales and marketing expense as appropriate .

We expect sales and marketing expense to remain approximately constant on an absolute dollar basis, except for incentive sales compensation which fluctuates as a function of revenue.

Expenses associated with our sales and marketing activities related to marketing events requiring travel will continue to fluctuate depending on current and future Covid-19 travel restrictions.

Year ended December 31, 2021 compared with year ended December 31, 2020

Sales and marketing expense increased $5.6 million, due primarily to increases of $3.5 million in stock-based compensation expense primarily related to PSU grant timing, and an increased number of equity grants outstanding.

Other major factors driving the increase included $2.2 million in personnel expenses from higher salaries and benefits, and commissions as a result of our increased revenue.

Year ended December 31, 2020 compared with year ended December 31, 2019

Sales and marketing expense decreased $4.0 million, due primarily to decreases of $3.3 million in personnel expenses from lower commission expense and, to a lesser extent, lower headcount, and $1.3 million from travel related expense due to Covid-19.

These decreases were partially offset by a $516,000 increase in infrastructure costs from increased software costs.

Year ended December 31, 2019 compared with year ended December 31, 2018

Sales and marketing expense in 2019 remained comparable to 2018;

we had a decrease of $1.3 million in personnel expense due to lower headcount and bonus expense partially offset by higher commission expense, and decreases of $354,000 in infrastructure costs and $312,000 in travel related expense.

These decreases were offset by a $1.8 million increase in stock-based compensation expense from PSUs and an increased number of stock options and RSUs.

General and Administrative

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and an allocated portion of infrastructure costs which include, occupancy, depreciation and software costs.

We will continue to monitor the impacts of Covid-19 on our business and may adjust our general and administrative expense as appropriate .

Year ended December 31, 2021 compared with year ended December 31, 2020

General and administrative expense increased $10.8 million due primarily to increases of $5.4 million in the litigation settlement and related costs described above, $3.1 million in stock-based compensation expense from PSUs and an increased number of stock options and RSUs , $1.3 million in non-settlement related legal fees and $723,000 in personnel expenses from higher headcount.

General and administrative expense increased $1.2 million due primarily to increases of $3.6 million in stock-based compensation expense primarily related to PSU grant timing, and an increased number of equity grants outstanding.

Other major factors comprising the increase included $3.1 million in professional services primarily

related to non-settlement related legal fees offset by decreases of $5.8 million in settlement and related costs incurred in 2020.

Year ended December 31, 2020 compared with year ended December 31, 2019

General and administrative expense increased $1.8 million, due primarily to an increase of $2.3 million in stock-based compensation from PSUs and an increased number of stock options and RSUs, partially offset by a $455,000 decrease in personnel expenses from lower bonus expense.

Our professional service fees in 2019 remained comparable to 2018 with higher non-settlement related legal fees offset by no third-party investigation costs in 2019 in connection with the complaint filed by a former employee .

General and administrative expense increased $10.8 million due primarily to increases of $5.4 million in the litigation settlement and related costs, $3.1 million in stock-based compensation expense from PSUs and an increased number of equity grants outstanding, $1.3 million in non-settlement related legal fees and $723,000 in personnel expenses from higher headcount.

Induced Conversion Expense

Year Ended December 31,

(in thousands)

Induced conversion expense

In November 2021, we completed a privately negotiated repurchase of $76.4 million principal amount of the 2019 Convertible Notes (“2019 Note Repurchase”).

The 2019 Notes Repurchase transaction was accounted for as an induced conversion in accordance with Accounting Standards Codification 470-20, Debt with Conversion and Other Options (ASC 470-20).

As a result of the induced conversion, we recorded $11.3 million in induced conversion expense which is included in the Consolidated Statements of Operations for the year ended December 31, 2021.

The induced conversion expense represents the fair value of the consideration issued upon conversion in excess of the fair value of the securities issuable under the original terms of the 2019 Convertible Notes.

For further information on the 2019 Notes, please refer to Note 7 to our consolidated financial statements included elsewhere in this report .

Restructuring costs

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Restructuring costs

On February 13, 2018, we initiated a restructuring plan to align our strategic and financial objectives and optimize our resources for long-term growth, including a reduction-in-force affecting approximately 9% of our employees, subleasing unused office space and closing some remote offices.

The restructuring was substantially complete as of June 30, 2018.

As a result of the restructuring, we recorded a $3.7 million restructuring charge in 2018.

On February 2, 2021, we restructured our go-to-market organization to strategically align our global sales, product, partner development and marketing teams.

As part of the restructuring, we eliminated approximately seven full-time positions in our go-to-market organization, representing about 2% of our workforce.

We incurred restructuring charges of $1.7 million for employee termination benefits as well as $50,000 in other associated legal costs for the year ended December 31, 2021 .

We substantially completed our restructuring by June 30, 2021.

For further information on this restructuring, please refer to Note 17 to our condensed consolidated financial statements included elsewhere in this report.

Other Income, Net

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Year ended December 31, 2021 compared with year ended December 31, 2020

Other income, net decreased $592,000, due primarily to a lower interest rate on our short-term investments.

Other income, net decreased $625,000, due primarily to a lower interest rate on our short-term and long-term investments.

Year ended December 31, 2020 compared with year ended December 31, 2019

Other income, net increased $434,000, due primarily to increased interest income from higher average short-term-investments in 2019 compared to 2018.

Other income, net decreased $592,000, due primarily to a lower interest rate on our short-term investments.

Interest Expense

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Interest expense

Interest expense comprises primarily cash interest, amortization of debt issuance costs and debt discount on our long-term debt.

Interest expense comprises primarily cash interest, amortization of debt issuance costs and debt discount on our debt.

In August 2020, the FASB issued guidance on debt with conversion and other options, or ASU 2020-06.

On January 1, 2021, we adopted ASU 2020-06 using the modified retrospective transition method, accounting for the 2019 Notes on a whole-instrument basis.

Our condensed consolidated financial statements for the year ended December 31, 2021 use the new standard and we no longer record amortization of debt discount.

We have not adjusted the comparative prior reporting period.

Year ended December 31, 2021 compared with year ended December 31, 2020

Interest expense increased $3.6 million, due primarily to an increase in amortization of debt discount related to our subordinated convertible notes, or the 2019 Notes.

Interest expense decreased $2.9 million, due primarily to the fact we no longer record amortization of debt discount as noted above, and to a lesser extent, the impact of the partial repurchase of $76.4 million principal amount of the 2019 convertible senior notes in November 2021.

For further information on the 2019 Notes, please refer to Note 7 to our consolidated financial statements included elsewhere in this report .

Year ended December 31, 2020 compared with year ended December 31, 2019

Interest expense increased $391,000 primarily due to higher average outstanding borrowings under our senior credit facility in 2019 compared to 2018.

Interest expense increased $3.6 million, due primarily to an increase in amortization of debt discount related to our subordinated convertible notes, or the 2019 Notes.

For further information on the 2019 Notes, please refer to Note 7 to our consolidated financial statements included elsewhere in this report.

Loss on Debt Extinguishment

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(in thousands)

Income tax benefit (expense)

Income tax expense

We are subject to federal and state income taxes in the United States and foreign jurisdictions.

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Year ended December 31, 2020 compared with year ended December 31, 2019

Income tax benefit for 2018 was primarily due to the enactment-date effects of the Tax Cuts and Jobs Act of 2017 that included adjusting deferred tax assets and liabilities.

Income tax expense remained comparable to the prior period.

Non-GAAP Financial Measures

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settlement and related costs;

induced conversion expense;

other income, net;

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In second-quarter 2020, we revised our definition of adjusted EBITDA to exclude litigation settlement costs for the class-action and derivative lawsuits, including related costs.

In fourth-quarter 2021, we revised our definition of adjusted EBITDA to exclude the expense incurred in connection with the November 2021 induced conversion of our 2019 Notes.

We have excluded these costs and expenses because we do not believe they reflect our core operations and us excluding them enables more consistent evaluation of our operating performance.

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Loss on debt extinguishment

Income tax expense (benefits)

Income tax expense

Stock-based compensation

Restructuring costs

Investigation costs

Settlement and related costs

Induced conversion expense

Adjusted EBITDA

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depreciation;

investigation costs;

restructuring costs;

settlement and related costs;

induced conversion expense;

amortization of debt discount related to the equity component of our convertible notes;

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Excluding settlement and related costs did not impact non-GAAP net income (loss) previously reported for prior periods preceding the revision .

In fourth-quarter 2021, we revised our definition of non-GAAP net income (loss) to exclude the expense incurred in connection with the November 2021 induced conversion of our 2019 Notes.

GAAP requires that certain convertible debt instruments that may be settled in cash on conversion be accounted for as separate liability and equity components in a manner that reflects our non-convertible debt borrowing rate.

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As a result, we believe that excluding this non-cash interest expense attributable to the debt discount in calculating our non-GAAP net income (loss) is useful because this interest expense is not indicative of our ongoing operational performance .

On January 1, 2021, we adopted ASU 2020-06 using the modified retrospective transition method, accounting for the 2019 Notes on a whole-instrument basis.

Our condensed consolidated financial statements for the year ended December 31, 2021 use the new standard and we no longer record amortization of debt discount.

The following table presents a reconciliation of net loss to non-GAAP net income (loss):

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Restructuring costs

Investigation costs

Amortization of debt discount

Prepayment penalty on debt extinguishment

Induced conversion expense

Settlement and related costs

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General and administrative expense

Restructuring costs (benefits)

Restructuring costs

Total operating expenses

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Other income (expense), net

Induced conversion expense

Interest expense

1 unchanged sentence

Loss before income taxes

Income tax benefit (expense)

Income tax expense

Net loss per share — basic and diluted

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As of December 31, 2021, we had cash, cash equivalents and short-term investments of $193.3 million, comprising cash deposits held at major financial institutions and short-term investments in a variety of securities, including U.S.

government agencies, treasury bills, corporate notes and bonds, commercial paper and money market funds.

government agencies, treasury bills, corporate notes and bonds, commercial paper, asset-backed securities, and money market funds.

As of December 31, 2021, we had working capital of $220.3 million.

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We believe, based on our current operating plan, that our existing cash, cash equivalents and short-term investments will be sufficient to meet our anticipated cash needs for at least the next 12 months.

Over the longer term, we plan to continue investing to enhance and extend our platform.

If available funds are insufficient to fund our future activities or execute on our strategy, we may raise additional capital through equity, equity-linked and debt financing, to the extent such funding sources are available.

Alternatively, we may be required to reduce expenses to manage liquidity;

however, any such reductions could adversely impact our business and competitive position.

Sources of Funds

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We intend to use the remainder of the net proceeds for general corporate purposes.

In November 2021, we completed a privately negotiated repurchase of $76.4 million principal amount of the 2019 Convertible Notes (“2019 Note Repurchase”).

The 2019 Notes Repurchase transaction was accounted for as an induced conversion in accordance with Accounting Standards Codification 470-20, Debt with Conversion and Other Options (ASC 470-20).

In connection with the induced conversion, we paid approximately $183.6 million in cash, and paid accrued and unpaid interest thereon.

For further information on the terms of this debt, please refer to Note 7 to our consolidated financial statements included elsewhere in this report.

In November 2021, we issued the 2021 Notes in an aggregate principal amount of $287.5 million.

The 2021 Notes are our senior unsecured obligations.

The 2021 Notes bear interest at a fixed rate of 1.125% per year, payable semi-annually in arrears on May 15 and November 15 of each year, beginning on May 15, 2022.

The 2021 Notes will be convertible into cash, shares of our common stock or a combination thereof, at our election.

The 2021 Notes will mature on May 15, 2027, unless earlier repurchased, redeemed, or converted in accordance with the terms of the indenture for the 2021 Notes .

The net proceeds from issuing the 2021 Notes were approximately $278.4 million after deducting initial debt issuance costs, and fees and expenses.

We used approximately $183.6 million of the net proceeds for the cash repurchase of approximately $76.4 million aggregate principal amount of the 2019 Notes through individual privately negotiated transactions concurrent with the offering of the 2021 Notes described in the section “ Partial Repurchase of the Convertible Senior Notes – 2019 ” as described in Note 7 to our consolidated financial statements included elsewhere in this report.

We will use the remainder of the net proceeds from the offering for general corporate purposes.

For further information on the terms of this debt, please refer to Note 7 to our consolidated financial statements included elsewhere in this report.

Historical Cash Flow Trends

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Operating Cash Flows

For the year ended December 31, 2021, we generated $6.5 million of net cash from operating activities.

The net cash proceeds were driven primarily by $51.3 million of net loss adjusted for non-cash items, partially offset by $288,000 of working capital contribution.

For the year ended December 31, 2020, we used $16.9 million of net cash from operating activities.

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The w orking capital contribution was primarily due to lower cash usage in inventory purchases, partially offset by lower cash collections in accounts receivable due to timing of when amounts became due.

For the year ended December 31, 2018, we used $11.8 million of net cash from operating activities.

The net cash usage was driven primarily by $20.6 million of net loss adjusted for non-cash items , offset by $8.8 million of working capital contribution.

The working capital contribution was primarily due to higher cash collection in accounts receivable due to timing of when amounts be came due and lower cash usage in inventory purchases.

Investing Cash Flows

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For the year ended December 31, 2019, we used $13.1 million of net cash from investing activities.

The net cash usage was driven primarily by investments and equipment purchases of $51.7 million and $6.4 million, partially offset by investment maturities of $52.4 million.

The net cash usage was driven primarily by investments and equipment purchases of $72.4 million and $2.4 million, respectively, partially offset by investment maturities of $61.7 million.

Financing Cash Flows

For the year ended December 31, 2021, we generated $112.4 million of net cash from financing activities.

The net cash proceeds were driven primarily by $278.4 million net proceeds from issuing the 2021 Notes.

This amount was offset by $183.6 million for the cash repurchase of approximately $76.4 million aggregate principal amount of the 2019 Notes through individual privately negotiated transactions concurrent with the offering of the 2021 Notes described in the section “ Partial Repurchase of the Convertible Senior Notes – 2019 ” as described in Note 7 to our consolidated financial statements included elsewhere in this report.

Other major factors included $17.6 million from exercised stock options and our employee stock purchase plan.

For the year ended December 31, 2020, we generated $9.9 million of net cash from financing activities.

The net cash proceeds were driven primarily by $10.2 million from exercised stock options and our employee stock purchase plan.

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These proceeds were partially offset by repayments of indebtedness of $28.2 million of principal under our senior credit facility and $10.1 million of premium we paid for the capped call transactions.

For the year ended December 31, 2018, we generated $15.7 million of net cash from financing activities.

The net cash proceeds were driven primarily by $16.4 million in term loan borrowings, net of debt issuance costs and $2.7 million from exercised stock options and our employee stock purchase plan.

These proceeds were partially offset by repayments of indebtedness of $2.5 million of principal under our senior credit facility and payments of $0.9 million for finance-lease obligations.

Contractual Obligations

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Purchase commitments (2)

(1) 2019 Notes include $986,000 of interest payments.

2021 Notes include $17.9 million of interest payments.

(2) Purchase commitments comprise primarily non-cancelable commitments to purchase $9.9 million of inventory as of December 31, 2020, as well as non-cancelable software license agreements with vendors.

(2) Purchase commitments comprise primarily non-cancelable commitments to purchase $54.4 million of inventory as of December 31, 2021, non-cancelable software license agreements with vendors, and equipment purchases.

Off-Balance Sheet Arrangements

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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.

We recognize a ny variable consideration, which primarily comprises sales incentives, as a reduction of revenue at the time of revenue recognition.

We estimate s ales 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.

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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.

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.

We had sales of fully reserved inventory , which had a favorable net impact of 1.5 % on our gross margin for 2021 and recorded inventory excess and obsolescence charges which had an unfavorable net impact of 2 .

7 % on our gross margin for 20 20 and 201 9 , respectively.

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.

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We determine the fair value of RSUs based on the closing price of our common stock at the date of grant.

We determine the fair value of MSUs by using a Monte Carlo simulation in estimating the fair value at grant date and recognize compensation cost over the implied service period.

We determine the fair value of stock options at the date of grant by using the Black-Scholes option-pricing model.

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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.

In 2019, w e began grant ing RSUs with performance conditions, or PSUs, replac ing 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.

In 2021, we began granting RSUs with market and service conditions, or MSUs to certain executives.

The MSUs are eligible to vest based on our total stockholder return (“TSR”) relative to the TSR of the constituents comprising the S&P Semiconductor Select Industry Index over two measurement periods.

Half of the MSUs are eligible to vest based on our relative TSR during the period from January 1, 2021 through December 31, 2022, and half of the MSUs are eligible to vest based on our relative TSR during the period from January 1, 2021 through December 31, 2023.

We use a Monte Carlo simulation in estimating the fair value at grant date and recognize compensation cost over the implied service period.

The aggregate grant-date fair value of these shares was estimated to be $6.4 million using the Monte Carlo simulation valuation method.

Recent Accounting Pronouncements

For information on recent accounting pronouncements, please refer to Note 2 in our consolidated financial statements included elsewhere in this report.

We are an emerging growth company under the JOBS Act.

The JOBS Act provides that an emerging growth company can delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies, unless we otherwise irrevocably elect not to avail itself of this exemption.

While we have not made such an irrevocable election, we have not delayed the adoption of any applicable accounting standards.

Subject to certain conditions set forth in the JOBS Act, if, as an “emerging growth company,” we choose to rely on certain exemptions provided for in the JOBS Act we may not be required to, among other things, (1) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404, (2) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (3) comply with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis) and (4) disclose certain executive compensation related items such as the correlation between executive compensation and performance, and comparisons of the CEO’s compensation to median employee compensation.

These exemptions apply for a period of five years following the completion of our 2016 initial public offering or until we are no longer an “emerging growth company,” whichever is earlier.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis