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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations (“MD&A”) should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this document. In addition to historical information, the MD&A contains forward-looking statements that involve risks and uncertainties. These forward-looking statements include, but are not limited to, those matters discussed under the heading “Forward-looking Statements.” Our actual results could differ materially from those anticipated by these forward‐looking statements due to various factors, including, but not limited to, those set forth under Item 1A. Risk Factors of this Form 10-K and elsewhere in this document.

Overview

We are a leading provider of networking solutions that enable next-generation networks focused on reliability, availability, scalability and cybersecurity. Our portfolio supports customers operating in the cloud, on-premise or in hybrid environments providing rapid return on their investment as well as investment protection with best-in-class technical performance. As cyber-attacks increase in volume and complexity, we integrate security as a key attribute in our solutions that further enable our customers to continue to adapt to market trends in cloud, internet of things and the ever increasing need for more data, building upon our strong global footprint and leadership in application and network infrastructure. Our customers include leading service providers (cloud, telecommunications, multiple system operators, cable), government organizations, and enterprises.

Our product portfolio seeks to address many of the cyber protection challenges and solution requirements. The portfolio consists of six secure application solutions; Thunder Application Delivery Controller (“ADC”), Lightning Application Delivery Controller (“Lightning ADC”), Thunder Carrier Grade Networking (“CGN”), Thunder Threat Protection System (“TPS”), Thunder SSL Insight (“SSLi”) and Thunder Convergent Firewall (“CFW”) and intelligent management, and automation tools; Harmony Controller and aGalaxy TPS. Our products are offered in a variety of form factors and payment models, including physical appliances and perpetual and subscription-based software licenses, as well as pay-as-you-go licensing models and FlexPool, a flexible consumption-based software model.

We derive revenue from sales of products and related support services. Products revenue is generated primarily by sales of hardware appliances with perpetual licenses to our embedded software solutions. We also derive revenue from licenses to, or subscription services for, software-only versions of our solutions. We generate services revenue primarily from sales of maintenance and support contracts. Our customers predominantly purchase maintenance and support in conjunction with purchases of our products. In addition, we also derive revenue from the sale of professional services.

We sell our products globally to service providers and enterprises that depend on data center applications and networks to generate revenue and manage operations efficiently. In 2019, we changed the way we present revenue by customer vertical. We now report two customer verticals: service providers and enterprises, compared to service providers, enterprises and web giants in prior years. Our previously reported revenue from web giants is primarily accounted for now in enterprise revenue. Additionally, we changed the way we present customer revenue by geographic region. We now report customer revenues in four geographic regions: the Americas, Japan, Asia Pacific (excluding Japan) and EMEA. Our previously reported customer revenues of our United States and Latin America regions are now included in the Americas geographic region. We believe this new geographic and vertical view aligns with how we manage the business and maps our product portfolio to customer verticals. The revenue by vertical percentages from prior years included in this report have been revised to conform with current year presentation.

Our end-customers operate in a variety of industries, including telecommunications, technology, industrial, retail, financial, gaming, education and government. Since inception, our customer base has grown rapidly. As of December 31, 2020, we had sold products to more than 7,290 end-customers worldwide.

We sell substantially all of our solutions through our high-touch sales organization as well as distribution channel partners, including distributors, value-added resellers and system integrators, and fulfill nearly all orders globally through such partners. We believe this sales approach allows us to obtain the benefits of channel distribution, such as expanding our market coverage, while still maintaining face-to-face relationships with our end-customers. We outsource the manufacturing of our hardware products to original design manufacturers. We perform quality assurance and testing at our San Jose, Taiwan and Japan distribution centers, as well as at our manufacturers’ locations.

During 2020, 43% of our total revenue was generated from the Americas, 30% from Japan and 27% from other geographical regions. During 2019, 42% of our total revenue was generated from the Americas, 28% from Japan and 30% from

other geographical regions. During 2018, 48% of our total revenue was generated from the Americas, 24% from Japan and 28% from other geographical regions. Our enterprise customers accounted for 39%, 42% and 43% of our total revenue during 2020, 2019 and 2018, respectively. Our service provider customers accounted for 61%, 58% and 57% of our total revenue during 2020, 2019 and 2018, respectively.

As a result of the nature of our target market and the current stage of our development, a substantial portion of our revenue comes from a limited number of large customers and service providers, in any period. Purchases from our ten largest end-customers accounted for 41%, 36% and 37% of our total revenue for 2020, 2019 and 2018, respectively. Sales to these large end-customers have typically been characterized by large but irregular purchases with long sales cycles. The timing of these purchases and the delivery of the purchased products are difficult to predict. Consequently, any acceleration or delay in anticipated product purchases by or deliveries to our largest customers could materially impact our revenue and operating results in any quarterly period. This may cause our quarterly revenue and operating results to fluctuate from quarter to quarter and make them difficult to predict.

As of December 31, 2020, we had $83.3 million of cash and cash equivalents and $74.9 million of marketable securities. Cash provided by operating activities was $55.3 million in 2020 compared to $0.4 million of cash used in operating activities in 2019.

We intend to continue to invest for long-term growth. We have invested and expect to continue to invest in our product development efforts to deliver new products and additional features in our current products to address customer needs. In addition, we may expand our global sales and marketing organizations, expand our distribution channel partner programs and increase awareness of our solutions on a global basis. Our investments in growth in these areas may affect our short-term profitability.

Results of Operations

A summary of our consolidated statements of operations for the year ended December 31, 2020, 2019 and 2018 are as follows (dollars in thousands):

Years Ended December 31,

Amount Percent of Total Revenue Amount Percent of Total Revenue Amount Percent

Revenue:

Cost of revenue:

Operating expenses:

Non-operating income (expense):

* not meaningful

Years Ended December 31,

Amount Percent of Total Revenue Amount Percent of Total Revenue Amount Percent

Revenue:

Cost of revenue:

Operating expenses:

Non-operating income (expense):

* not meaningful

Revenue

Our products revenue primarily consists of revenue from sales of our hardware appliances upon which our software is installed. Such software includes our ACOS software platform plus one or more of our ADC, CGN, TPS, SSLi or CFW solutions. Purchase of a hardware appliance includes a perpetual license to the included software. We recognize products revenue upon transfer of control, generally at the time of shipment, provided that all other revenue recognition criteria have been met. As a percentage of revenue, our products revenue may vary from quarter to quarter based on, among other things, the timing of orders and delivery of products, cyclicality and seasonality, changes in currency exchange rates and the impact of significant transactions with unique terms and conditions.

We generate services revenue from sales of post contract support (“PCS”), which is bundled with sales of products and professional services. We offer tiered PCS services under renewable, fee-based PCS contracts, primarily including technical support, hardware repair and replacement parts, and software upgrades on a when-and-if-available basis. We recognize services revenue ratably over the term of the PCS contract, which is typically one year, but can be up to seven years.

Our adoption of ASC 606, Revenue from Contracts with Customers, in January 2018 resulted in a $2.6 million increase in products revenue in 2018. See Note 2 Revenue, of the notes to consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

A summary of our total revenue is as follows (dollars in thousands):

Years Ended December 31,

Amount Percent of Total Revenue Amount Percent of Total Revenue Amount Percent

Revenue:

Revenue by geographic region:

Years Ended December 31,

Amount Percent of Total Revenue Amount Percent of Total Revenue Amount Percent

Revenue:

Revenue by geographic region:

2020 Revenue Compared to 2019 Revenue

Total revenue increased by $12.9 million, or 6%, in 2020 compared to 2019. This increase was due to a $8.0 million increase in products revenue and a $4.9 million increase in services revenue.

Products revenue increased $8.0 million, or 7%, in 2020 compared to 2019 primarily driven by higher demand from our service provider and enterprise customers in the Americas, and from higher demand from service provider customers in Japan.

Services revenue increased $4.9 million, or 5%, in 2020 compared to 2019. The increase was primarily attributable to the increase in PCS sales in connection with our increased installed customer base in Japan.

During 2020, $98.2 million, or 43% of total revenue, was generated from the Americas, which represents a 9% increase compared to 2019. The increase was primarily due to higher products revenue driven by an increase in demand from our service provider customers.

During 2020, $67.1 million, or 30% of total revenue, was generated from Japan, which represents a 13% increase compared to 2019. The increase was mainly due to increased revenue from our service provider customers.

During 2020, $29.8 million, or 13% of total revenue, was generated from the Asia Pacific region excluding Japan, which represents a 17% decrease compared to 2019. The decrease was driven by lower revenues from our service provider and enterprise customers.

During 2020, $30.6 million, or 14% of total revenue, was generated from EMEA, which represented an 11% increase compared to 2019. The increase was primarily due to higher products revenue driven by an increase in demand from our enterprise customers.

2019 Revenue Compared to 2018 Revenue

Total revenue decreased by $19.6 million, or 8%, in 2019 compared to 2018. This decrease was due to a $22.8 million decrease in products revenue, partially offset by a $3.2 million increase in services revenue. The decrease in products revenue was primarily driven by lower demand from our service provider and enterprise customers in the Americas, partially offset by an increase in product revenues in Japan.

Products revenue decreased $22.8 million, or 16%, in 2019 compared to 2018 primarily driven by lower demand from our service provider and enterprise customers in the Americas, partially offset by increased revenues in Japan.

Services revenue increased $3.2 million, or 4%, in 2019 compared to 2018. The increases were primarily attributable to the increase in PCS sales in connection with our increased installed customer base.

During 2019, $89.9 million, or 42% of total revenue, was generated from the Americas, which represents a 20% decrease compared to 2018. The decrease was primarily due to lower product revenue driven by lower demand from our service provider and enterprise customers in the Americas.

During 2019, $59.5 million, or 28% of total revenue, was generated from Japan, which represents a 8% increase compared to 2018. The increase was mainly due to increased revenue from our enterprise customers in Japan.

During 2019, $35.7 million, or 17% of total revenue, was generated from the Asia Pacific region excluding Japan, which represents a 3% decrease compared to 2018. The decrease was driven primarily by lower revenues from our enterprise customers in Asia Pacific.

During 2019, $27.5 million, or 13% of total revenue, was generated from EMEA, which remained relatively constant compared to 2018.

Cost of Revenue, Gross Profit and Gross Margin

Cost of Revenue

Cost of products revenue is primarily comprised of cost of third-party manufacturing services and cost of inventory for the hardware component of our products. Cost of products revenue also includes warehouse personnel costs, shipping costs, inventory write-downs, certain allocated facilities and information technology infrastructure costs, and expenses associated with logistics and quality control.

Cost of services revenue is primarily comprised of personnel costs for our technical support, training and professional service teams. Cost of services revenue also includes the costs of inventory used to provide hardware replacements to end- customers under PCS contracts and certain allocated facilities and information technology infrastructure costs.

A summary of our cost of revenue is as follows (dollars in thousands):

Years Ended December 31, Increase (Decrease)

Cost of revenue:

Years Ended December 31, Increase (Decrease)

Cost of revenue:

Gross Margin

Gross margin may vary and be unpredictable from period to period due to a variety of factors. These may include the mix of revenue from each of our regions, the mix of our products sold within a period, discounts provided to customers, inventory write-downs and foreign currency exchange rates.

Our sales are generally denominated in U.S. dollars, however, in Japan they are denominated in Japanese yen.

Any of the factors noted above can generate either a favorable or unfavorable impact on gross margin.

A summary of our gross profit and gross margin is as follows (dollars in thousands):

Years Ended December 31,

Amount Gross Margin Amount Gross Margin Amount Gross Margin

Gross profit:

Years Ended December 31,

Amount Gross Margin Amount Gross Margin Amount Gross Margin

Gross profit:

2020 Gross Margin Compared to 2019 Gross Margin

Products gross margin increased by 2.1% in 2020 compared to 2019 primarily driven by changes in product and geographic mix.

Services gross margin decreased by 1.0% in 2020 compared to 2019 primarily due to higher personnel related support costs.

2019 Gross Margin Compared to 2018 Gross Margin

Products gross margin decreased by 1.0% in 2019 compared to 2018 primarily driven by changes in product and geographic mix.

Services gross margin decreased by 0.6% in 2019 compared to 2018 primarily due to higher personnel related support costs.

Operating Expenses

Our operating expenses consist of sales and marketing, research and development, general and administrative, and restructuring expenses. The largest component of our operating expenses is personnel costs which consist of wages, benefits, bonuses, and, with respect to sales and marketing expenses, sales commissions. Personnel costs also include stock-based compensation.

A summary of our operating expenses is as follows (dollars in thousands):

Years Ended December 31, Increase (Decrease)

Operating expenses:

* not meaningful

Years Ended December 31, Increase (Decrease)

Operating expenses:

* not meaningful

Sales and Marketing

Sales and marketing expenses are our largest functional category of operating expenses and primarily consist of personnel costs. Sales and marketing expenses also include the cost of marketing programs, trade shows, consulting services, promotional materials, demonstration equipment, depreciation and certain allocated facilities and information technology infrastructure costs. Prior to the adoption of ASC 606, we expensed sales commissions associated with the acquisition of customer contracts as incurred in the period the contract was acquired. Upon the adoption of ASC 606 in January 2018, $8.4 million of our sales commission expenses from prior periods has been deferred and will be recognized over an expected benefit

period as required by ASC 340-40, Other Assets and Deferred Costs - Contracts with Customers. See Note 2 Revenue, of the notes to consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

The $15.1 million decrease in sales and marketing expenses in 2020 compared to 2019 was primarily due to a 12% decrease in headcount, resulting in a $9.6 million decrease in salary and benefit expenses, a $4.1 million decrease in travel and entertainment and a $1.1 million decrease in marketing expenses.

The $10.4 million decrease in sales and marketing expenses in 2019 compared to 2018 was primarily due to a 14% decrease in headcount, resulting in a $7.0 million decrease in salary and benefit expenses, a $0.9 million decrease in travel and entertainment and $0.8 million decrease in depreciation.

In 2021, we expect sales and marketing expenses to remain at 2020 levels as we continue to actively control costs.

Research and Development

Research and development efforts are focused on new product development and on developing additional functionality for our existing products. These expenses primarily consist of personnel costs, and, to a lesser extent, prototype materials, depreciation and certain allocated facilities and information technology infrastructure costs. We expense research and development costs as incurred.

The $3.8 million decrease in research and development expenses in 2020 compared to 2019 was primarily due to a decrease in salary and benefit expenses, partially offset by an increase in facility expense.

The $3.3 million decrease in research and development expenses in 2019 compared to 2018 was primarily due to a decrease in salary and benefit expenses.

In 2021, we expect research and development expenses to remain at 2020 levels as we continue to actively control costs.

General and Administrative

General and administrative expenses primarily consist of personnel costs, professional services and office expenses. General and administrative personnel costs include executive, finance, human resources, information technology, facility and legal related expenses. Professional services primarily consist of fees for outside accounting, tax, legal, recruiting and other administrative services.

The $1.9 million decrease in general and administrative expenses in 2020 compared to 2019 was primarily due to a decrease in consulting and contractor fees, partially offset by an increase in business operations and facility expenses.

The $15.9 million decrease in general and administrative expenses in 2019 compared to 2018 was primarily due to $10.1 million lower legal fees, $1.4 million lower audit-related costs, $1.7 million lower contractor and consultant expense (all related to the 2018 litigation settlement, investigation and restatement efforts), $1.0 million lower commission and bonus, $2.3 million reduction in general IT expenses and $0.4 million lower recruiting costs.

In 2021, we expect general and administrative expenses to remain at 2020 levels as we continue to actively control costs.

Restructuring Expense

In October 2019, we began implementing a restructuring plan in our ongoing efforts to reduce operating costs and focus on advanced technologies. The restructuring plan resulted in a reduction of approximately 5% of our workforce and the closure and consolidation of certain U.S. and international office facilities. The restructuring was completed by the end of the second fiscal quarter of 2020. We recorded restructuring expenses of $2.5 million in the fourth quarter of 2019, which included the following (in thousands):

Interest Expense

In the past, interest expense has primarily consisted of interest expense and amortization of debt issuance costs. We elected to allow our credit facility to expire in November 2019 without renewal. Should we seek additional sources of funding we may incur increased interest expense and amortization of debt issuance costs.

Interest expense was immaterial in 2020, 2019 and 2018.

Interest and Other Income, Net

Interest income consists primarily of interest income earned on our cash and cash equivalents and marketable securities. Other income (expense), net consists primarily of foreign currency exchange gains and losses.

Interest and other income, net, had a favorable change of $0.5 million, or 53%, in 2020 compared to 2019 primarily driven by a $1.4 million increase in foreign exchange gain, partially offset by a $0.9 million decrease in interest income.

Interest and other income, net, had an unfavorable change of $0.4 million, or 28%, in 2019 compared to 2018 primarily driven by a $0.7 million increase in foreign exchange loss, partially offset by a $0.4 million increase in interest income.

Provision for Income Taxes

We recorded an income tax provision of $1.3 million, $1.4 million and $1.1 million for the years ended December 31, 2020, 2019 and 2018, respectively, which primarily consisted of foreign income taxes.

We currently maintain a valuation allowance on federal and state deferred tax assets, and we will continue to maintain a valuation allowance against all of our U.S. and certain foreign deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of this allowance.

See Note 11 Income Taxes, of the note to consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further details regarding the Company’s taxes.

Liquidity and Capital Resources

As of December 31, 2020, we had cash and cash equivalents of $83.3 million, including $5.4 million held outside the United States in our foreign subsidiaries, and $74.9 million of marketable securities. We currently do not have any plans to repatriate our earnings from our foreign operations. As of December 31, 2020, we had working capital of $134.5 million, accumulated deficit of $272.2 million and total stockholders’ equity of $116.0 million.

We plan to continue to invest for long-term growth, and our investment may increase. We believe that our existing cash and cash equivalents and marketable securities will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, the expansion of sales and marketing activities, the timing and extent of spending to support development efforts, the introduction of new and enhanced

product and service offerings and the continuing market acceptance of our products. In the event that additional financing is required from outside sources, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition could be adversely affected.

On May 17, 2020, we entered into a Common Stock Repurchase and Option Exchange Agreement (the “Repurchase Agreement”) with Lee Chen, the Company’s founder and its former Chairman, President and Chief Executive Officer. Pursuant to the Repurchase Agreement, we repurchased 2.2 million shares of common stock from Mr. Chen for approximately $13.3 million. The common shares repurchased are held in treasury and accounted for under the cost method.

On September 17, 2020, we issued a press release announcing that our Board of Directors had approved a stock repurchase program of up to $50 million of its common stock over a period of twelve months. During the year ended December 31, 2020, we repurchased a total of 2.7 million shares for a total cost of $19.2 million under this program and as of December 31, 2020 we had $30.8 million available to repurchase shares. Our stock repurchase program does not obligate us to acquire any specific number of shares. Shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act. To date, all repurchases under this program have occurred in the open market.

In addition, as described in Note 8 Commitments and Contingencies, in the notes to consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K, we may be currently, or may be from time to time, involved in ongoing litigation. Any adverse settlements or judgments in any litigation could have a material adverse impact on our results of operations, cash balances and cash flows in the period in which such events occur.

Statements of Cash Flows

The following table summarizes our cash flow related activities (in thousands):

Years Ended December 31,

Cash provided by (used in):

Net increase (decrease) in cash and cash equivalents $ 37,539 $ 5,121 $ (5,946)

Cash Flows from Operating Activities

Our cash provided by operating activities is driven primarily by sales of our products and management of working capital investments. Our primary uses of cash from operating activities have been for personnel-related expenditures, manufacturing costs, marketing and promotional expenses and costs related to our facilities. Our cash flows from operating activities will continue to be affected principally by the extent to which we increase spending on our business and our working capital requirements.

During the year ended December 31, 2020, cash provided by operating activities was $55.3 million, consisting of net income of $17.8 million, non-cash charges of $24.7 million and a favorable net change in operating assets and liabilities of $12.8 million. Our non-cash charges consisted primarily of stock-based compensation expense of $12.3 million and depreciation and amortization expenses of $11.3 million. The net change in our operating assets and liabilities primarily reflects cash inflows from the changes in deferred revenue of $7.5 million, accrued liabilities and other of $3.9 million, accounts receivable of $2.3 million and prepaid expenses and other assets of $1.1 million, partially offset by cash outflows from changes in accounts payable of $2.7 million.

The unfavorable change in accounts payable was due to the timing of payments to our vendors.

During the year ended December 31, 2019, cash used in operating activities was $0.4 million, consisting of net loss of $17.8 million, non-cash charges of $26.2 million and an unfavorable net change in operating assets and liabilities of $8.8 million. Our non-cash charges consisted primarily of stock-based compensation expense of $16.5 million and depreciation and

amortization expenses of $10.0 million. The net change in our operating assets and liabilities primarily reflects an outflow from the changes in accrued liabilities and other of $5.9 million and inventory of $5.6 million, partially offset by an inflow from changes in deferred revenue of $3.2 million.

The unfavorable change in accrued liabilities and other was driven by an increase in lease liabilities associated with the lease of the San Jose corporate office. The unfavorable change in inventory was due to build up of inventory and timing of shipments, partially offset by increased reserves. The favorable change in deferred revenues was primarily driven by increased bookings.

During the year ended December 31, 2018, cash used in operating activities was $2.7 million, consisting of net loss of $27.6 million which includes payments for our internal investigation costs of $8.6 million, non-cash charges of $25.0 million and an unfavorable net change in operating assets and liabilities of $0.1 million. Our non-cash charges consisted primarily of stock-based compensation expense of $17.0 million and depreciation and amortization expenses of $7.9 million. The net change in our operating assets and liabilities primarily reflects an inflow from the changes in deferred revenue of $7.3 million and accrued and other liabilities of $3.1 million, offset primarily by an outflow from the changes in accounts receivable of $6.1 million, prepaid expenses and other assets of $2.4 million and inventory of $1.5 million.

The favorable change in deferred revenue was primarily driven by the increase in the sale of subscription and support. The favorable change in accrued and other liabilities was primarily due to higher accrued bonuses and commissions, increased value added tax accrual due to timing of payments, and an increase in legal fees accrual. The unfavorable change in accounts receivable was attributed to timing of billing and cash collections. The unfavorable change in prepaid and other assets was mainly driven by the increase in deferred sales commissions due to higher deferred revenue and higher average commission rate. The unfavorable change in inventory was due to the timing of shipments.

Cash Flows from Investing Activities

During the year ended December 31, 2020, cash provided by investing activities was $5.2 million, consisting of proceeds from sales and maturities of marketable securities of $66.8 million, partially offset by purchases of marketable securities of $58.0 million and property and equipment of $3.6 million.

During the year ended December 31, 2019, cash used in investing activities was $0.3 million, consisting of purchases of property and equipment of $4.3 million, marketable securities of $71.6 million, partially offset by proceeds from sales and maturities of marketable securities of $75.7 million.

During the year ended December 31, 2018, cash used in investing activities was $6.9 million, consisting of purchases of property and equipment of $2.8 million, marketable securities of $86.8 million and investment of $1.0 million, partially offset by proceeds from sales and maturities of marketable securities of $83.7 million.

Cash Flows from Financing Activities

During the year ended December 31, 2020, cash used in financing activities was $22.9 million consisting primarily of $32.5 million of cash used to repurchase our common stock, partially offset by $9.6 million of cash proceeds from common stock issuances under our equity incentive plans.

During the year ended December 31, 2019, cash provided by financing activities was $5.8 million consisting primarily of proceeds from common stock issuances under our equity incentive plans.

During the year ended December 31, 2018, cash used in financing activities was $3.6 million consisting primarily of proceeds from common stock issuances under our equity incentive plans.

Contractual Obligations

Our contractual obligations consist of operating leases.

The following table summarizes our contractual obligations as of December 31, 2020 (in thousands):

Total Less Than 1 Year 1 to 3 Years 3 to 5 Years More than 5 years

The contractual obligations table above excludes $4.6 million of tax liabilities related to uncertain tax positions because we are unable to make a reasonably reliable estimate of the timing of settlement, if any, of these future payments.

Off-Balance Sheet Arrangements

As of December 31, 2020, we did not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities that are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

We believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated financial statements.

Inventory

Inventory consists primarily of finished goods and related component parts and is stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or estimated net realizable value. We evaluate inventory for excess and obsolete products, based on management’s assessment of future demand and market conditions. Inventory write-downs, once established, are not reversed as they establish a new cost basis for the inventory. Inventory write downs are included as a component of cost of products revenue in the consolidated statements of operations.

Revenue Recognition

We derive revenue from two sources: (i) products revenue, which includes hardware, perpetual software license and subscription revenue; and (ii) services revenue, which includes post contract support (“PCS”), professional services, and training. A substantial portion of our revenue is from sales of our products and services through distribution channel partners, such as resellers and distributors. Revenue is recognized, net of applicable taxes, upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to be entitled to receive in exchange for those products or services. We apply the following five-step revenue recognition model:

•Identification of the contract, or contracts, with a customer

•Identification of the performance obligations in the contract

•Determination of the transaction price

•Allocation of the transaction price to the performance obligations in the contract

•Recognition of revenue when, or as, performance obligations are satisfied.

PCS revenue includes arrangements for software support and technical support for our products. PCS is offered under renewable, fee-based contracts, which includes technical support, hardware repair and replacement parts, bug fixes, patches, and unspecified upgrades on a when-and-if available basis. Revenue for PCS services is recognized on a straight-line basis over

the service contract term, which is typically one year, but can be up to five years as there is no discernible pattern of transfer related to these promises. Billed but unearned PCS revenue is included in deferred revenue.

Professional service revenue primarilyconsists of the fees we earn related to installation and consulting services. We recognize revenue from professional services upon delivery or completion of performance. Professional service arrangements are typically short term in nature and are largely completed within 30 to 90 days from the start of service. Revenue is recognized for training when the training course is delivered.

Contracts with Multiple Performance Obligations

Most of our contracts with customers, other than renewals of PCS, contain multiple performance obligations with a combination of products and PCS. Products and PCS generally qualify as distinct performance obligations. Our hardware includes embedded ACOS software, which together deliver the essential functionality of our products. For contracts which contain multiple performance obligations, we allocate revenue to each distinct performance obligation based on the standalone selling price (“SSP”). Judgment is required to determine the SSP for each distinct performance obligation. We use a range of amounts to estimate SSP for products and PCS sold together in a contract to determine whether there is a discount to be allocated based on the relative SSP of the various products and PCS.

If we do not have an observable SSP, such as when we do not sell a product or service separately, then SSP is estimated using judgment and considering all reasonably available information such as market conditions and information about the size and/or purchase volume of the customer. We generally use a range of amounts to estimate SSP for individual products and services based on multiple factors including, but not limited to the sales channel (reseller, distributor or end-customer), the geographies in which our products and services are sold, and the size of the end-customer.

We account for multiple contracts with a single partner as one arrangement if the contractual terms and/or substance of those agreements indicate that they may be so closely related that they are, in effect, parts of a single contract.

We may occasionally accept returns to address customer satisfaction issues even though there is generally no contractual provision for such returns. We estimate returns for sales to customers based on historical returns rates applied against current-period shipments. Specific customer returns and allowances are considered when determining our sales return reserve estimate.

Our policy applies to the accounting for individual contracts. However, we have elected a practical expedient to apply the guidance to a portfolio of contracts or performance obligations with similar characteristics so long as such application would not differ materially from applying the guidance to the individual contracts (or performance obligations) within that portfolio.

Consequently, we have chosen to apply the portfolio approach when possible, which we do not believe will happen frequently. Additionally, we will evaluate a portfolio of data, when possible, in various situations, including accounting for commissions, rights of return and transactions with variable consideration.

We report revenue net of sales taxes. We include shipping charges billed to customers in revenue and the related shipping costs are included in cost of product revenue.

Recent Accounting Pronouncements

Refer to Note 1 Description of Business and Summary of Significant Accounting Policies, in the notes to consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for information related to recent accounting pronouncements.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Risk

Our consolidated results of operations, financial position and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. Historically, the majority of our revenue contracts are denominated in U.S. dollars, with the most significant exception being Japan where we invoice primarily in Japanese yen. Our costs and expenses are generally denominated in the currencies where our operations are located, which is primarily in the Americas, EMEA and, to a lesser extent, Japan and the Asia Pacific region. We have a hedging program with respect to foreign currency risk. Revenue resulting from selling in local currencies and costs and expenses incurred in local currencies are exposed to foreign currency exchange rate fluctuations, which can affect our revenue and operating income. As exchange rates vary, operating income may differ from expectations.

The functional currency of our foreign subsidiaries is the U.S. dollar. At the end of each reporting period, monetary assets and liabilities are remeasured to the functional currency using exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are remeasured at historical exchange rates. Gains and losses related to remeasurement are recorded in interest and other income, net in the consolidated statements of operations. A significant fluctuation in the exchange rates between our subsidiaries’ local currencies, especially the Japanese yen, British Pound and Euro, and the U.S. dollar could have an adverse impact on our consolidated financial position and results of operations.

We recorded $0.7 million and $1.4 million of net foreign exchange losses during the years ended December 31, 2018 and 2019, respectively. In the year ended December 31, 2020, we recorded an immaterial foreign exchange gain. The effect of a hypothetical 10% change in our exchange rate would not have a significant impact on our consolidated results of operations.

Interest Rate Sensitivity

Our exposure to market risk for changes in interest rates relates primarily to our marketable securities. Our marketable securities are comprised of certificates of deposit, corporate securities, U.S. Treasury and agency securities, commercial paper and asset-backed securities. We do not enter into investments for trading or speculative purposes. At December 31, 2020, our investment portfolio included marketable securities with an aggregate fair market value and amortized cost basis of $74.9 million and $74.8 million, respectively. The effect of a hypothetical 10% change in interest rates would not have had any impact on our interest expense.

The following table presents the hypothetical fair values of our marketable securities assuming immediate parallel shifts in the yield curve of 50 basis points (“BPS”), 100 BPS and 150 BPS as of December 31, 2020 (in thousands):

Fair Value as of

Item 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements

Page

Report of Independent Registered Public Accounting Firm - Armanino LLP 65

Consolidated Balance Sheets as of December 31, 2020 and 2019 69

Notes to Consolidated Financial Statements 74

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of A10 Networks, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheet of A10 Networks, Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019 and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for the two years ended December 31, 2020, and the related notes (collectively referred to as the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the two years ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842).

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting 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 audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Revenue Recognition — Refer to Note 1 to the Consolidated Financial Statements

Critical Audit Matter Description

The Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services.

Significant judgment is exercised by the Company in determining revenue recognition for these customer agreements, and includes the following:

•Determination of multiple performance obligations and the transaction price allocated to each distinct performance obligation based on the relative standalone selling price

•Determination whether the identified performance obligations are distinct

•Estimation and utilization of a variety of complex assumptions in estimating standalone selling prices, including market conditions, estimates on the size and/or volume of the customer, and geographical factors

Given these factors, the related audit effort in evaluating management’s judgments in determining revenue recognition for these customer agreements was extensive and required a high degree of auditor judgment.

How the Critical Audit Matter Was Addressed in the Audit

Our principal audit procedures related to the Company’s revenue recognition for these customer agreements included the following:

•We tested the design and operating effectiveness of controls relating to the revenue recognition process, including controls related to the process of identifying distinct performance obligations, in determining standalone selling prices and in allocating the transaction price to the distinct performance obligations

•We selected a sample of customer agreements and performed the following procedures:

◦Obtained and read contract source documents for each selection, including master agreements, and other documents that were part of the agreement

◦Tested management’s identification of all distinct performance obligations, including management’s allocation of the transaction price to each distinct performance obligation

◦Tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized

◦Assessed the accuracy and completeness of the underlying data used in management's determination of the relative standalone selling prices

◦Assessed the terms in the customer agreement and evaluated the appropriateness of management’s application of their accounting policies, along with their use of estimates, in the determination of revenue recognition

/s/ Armanino LLP

San Jose, California

March 8, 2021

We have served as the Company’s auditor since 2019.

Report of Independent Registered Public Accounting Firm

To the Stockholdersand the Board of Directors of A10 Networks, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows of A10 Networks, Inc. and subsidiaries (the “Company”) for the year ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the results of its operations and its cash flows for the year ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Principle

As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for revenue from contracts with customers in 2018 due to the adoption of Accounting Standards Update No. 2014-09 Revenue from Contracts with Customers (Topic 606) using the modified retrospective approach.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's 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 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 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 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 financial statements. We believe that our audit provides a reasonable basis for our opinion.

/S/ DELOITTE & TOUCHE LLP

San Jose, California

March 15, 2019 (date of initial issuance)

We have served as the Company’s auditor since 2011. In 2019, we became the predecessor auditor.

A10 NETWORKS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

ASSETS

Current assets:

Prepaid expenses and other current assets 12,390 15,067

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Commitments and contingencies (Note 8)

Stockholders' equity:

Accumulated other comprehensive income 98 251

Total liabilities and stockholders' equity $ 290,811 $ 274,053

See accompanying notes to consolidated financial statements.

A10 NETWORKS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

Years Ended December 31,

Revenue:

Cost of revenue:

Operating expenses:

Restructuring expense — 2,530 —

Non-operating income (expense):

Net income (loss) per share:

Weighted-average shares used in computing net income (loss) per share:

See accompanying notes to consolidated financial statements.

A10 NETWORKS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

Years Ended December 31,

Other comprehensive income (loss), net of tax:

Unrealized gain (loss) on marketable securities (153) 395 (21)

See accompanying notes to consolidated financial statements.

A10 NETWORKS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

Shares Amount

Stock-based compensation expense — — — 17,038 — — 17,038

Unrealized loss on marketable securities, net of tax — — — — (21) — (21)

Stock-based compensation expense — — — 16,529 — — 16,529

Unrealized loss on marketable securities, net of tax — — — — 395 — 395

Stock-based compensation expense — — — 12,473 — — 12,473

Unrealized gain on marketable securities, net of tax — — — — (153) — (153)

See accompanying notes to consolidated financial statements.

A10 NETWORKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Years Ended December 31,

Cash flows from operating activities:

Provision for doubtful accounts and sales returns (78) (190) 212

Changes in operating assets and liabilities:

Other — — 99

Net cash provided by (used in) operating activities 55,286 (426) (2,694)

Cash flows from investing activities:

Purchase of investment — — (1,000)

Net cash provided by (used in) investing activities 5,202 (251) (6,876)

Cash flows from financing activities:

Repurchases of common stock (32,540) — —

Other — (1) (77)

Net cash provided by (used in) financing activities (22,949) 5,798 3,624

Net increase (decrease) in cash and cash equivalents 37,539 5,121 (5,946)

Supplemental Disclosures:

Cash paid for income taxes, net of refunds $ 1,032 $ 934 $ 517

Cash paid for interest $ 4 $ 262 $ 100

Non-cash investing and financing activities:

Inventory transfers to property and equipment $ 1,112 $ 1,193 $ 1,176

Purchases of property and equipment included in accounts payable $ 58 $ 10 $ 58

See accompanying notes to consolidated financial statements.

Notes to Consolidated Financial Statements

1. Description of Business and Summary of Significant Accounting Policies

Description of Business

A10 Networks, Inc. (together with our subsidiaries, the “Company”, “we”, “our” or “us”) was incorporated in California in 2004 and reincorporated in Delaware in March 2014. We are headquartered in San Jose, California and have wholly-owned subsidiaries throughout the world including Asia and Europe.

We are a leading provider of secure application solutions and services that enable a new generation of intelligently connected companies with the ability to continuously improve cyber protection and digital responsiveness across dynamic Information Technology (“IT”) and network infrastructures. Our product portfolio seeks to address many of the cyber protection challenges and solution requirements. The portfolio consists of six secure application solutions; Thunder Application Delivery Controller (“ADC”), Lightning Application Delivery Controller (“Lightning ADC”), Thunder Carrier Grade Networking (“CGN”), Thunder Threat Protection System (“TPS”), Thunder SSL Insight (“SSLi”) and Thunder Convergent Firewall (“CFW”), and two intelligent management and automation tools; Harmony Controller and aGalaxy TPS. Our solutions are available in a variety of form factors, such as optimized hardware appliances, bare metal software, containerized software, virtual appliances and cloud-native software.

Basis of Presentation

The accompanying consolidated financial statements include those of A10 Networks, Inc. and its subsidiaries, and have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). All intercompany accounts and transactions have been eliminated in consolidation.

Reclassifications

Certain prior year amounts have been reclassified to conform to current year presentation in the consolidated revenues by geographic region in Note 12 Geographic Information, in the notes to consolidated financial statements. We have combined in the “Americas” region, revenues from the United States with revenues from Latin America.

A portion of the prior period balance for Additional paid-in capital on the Company’s consolidated balance sheet as of December 31, 2019 has been reclassified to Treasury stock, at cost, to conform to the current period presentation. This reclassification did not have a material impact on the previously reported financial statements.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Those estimates and assumptions affect revenue recognition and deferred revenue, the allowance for doubtful accounts, the sales return reserve, the valuation of inventory, the fair value of marketable securities, contingencies and litigation, accrued liabilities, deferred commissions and the determination of fair value of stock-based compensation. These estimates are based on information available as of the date of the consolidated financial statements; therefore, actual results could differ from management’s estimates.

Significant Accounting Policies

Cash and Cash Equivalents

Cash and cash equivalents include bank deposits and short-term, highly liquid investments purchased with an original maturity of 90 days or less. Our cash equivalents consist of money market funds.

Marketable securities

We classify our investments in debt securities as available-for-sale and record these investments at fair value. We may sell these investments at any time before their maturities. Accordingly, we classified our securities, including those with maturities exceeding twelve months, as current assets and included in marketable securities in the consolidated balance sheets.

Unrealized gains and losses are reported in accumulated other comprehensive income (loss), net of taxes, in the consolidated statements of stockholders’ equity. Realized gains and losses are determined based on the specific identification method. Realized gains and losses and other-than-temporary impairment charges, if any, on marketable securities are reported in interest and other income, net as incurred in the consolidated statements of operations.

We regularly review our investment portfolio to identify and evaluate investments that have indicators of possible impairment. Investments are considered impaired when a decline in fair value is judged to be other-than-temporary. If the cost of an individual investment exceeds its fair value, we evaluate, among other factors, general market conditions, the duration and extent to which the fair value is less than cost, and our intent and ability to hold the investment. Once a decline in fair value is determined to be other-than-temporary, we will record an impairment charge and establish a new cost basis in the investment.

Fair Value Measurement

Our financial instruments consist of cash, cash equivalents, marketable securities, accounts receivable and accounts payable. Our cash equivalents are measured and recorded at fair value on a recurring basis. Marketable securities are comprised of certificates of deposit, corporate securities, U.S. Treasury and agency securities, commercial paper and asset-backed securities and are measured at fair value on a recurring basis. Accounts receivable and accounts payable are stated at their carrying value, which approximates fair value due to the short time to the expected receipt or payment.

Financial instruments recorded at fair value are measured and classified using the three-level valuation hierarchy as described below:

Level 1 —observable inputs for identical assets or liabilities, such as quoted prices in active markets.

Level 2 —inputs other than the quoted prices in active markets that are observable either directly or indirectly.

Level 3 —unobservable inputs in which there is little or no market data, which requires us to develop our own assumptions when pricing the financial instruments.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at invoice amounts, net of allowances for doubtful accounts. We evaluate the collectability of our accounts receivable based on known collection risks and historical experience. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations to us (for examples, bankruptcy filings or substantial downgrading of credit ratings), we record a specific reserve for bad debts against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we record reserves for bad debts based on the length of time the receivables are past due and our historical experience of collections and write-offs.

Inventory

Inventory is stated at the lower of cost or net realizable value. Inventory cost is determined using first-in, first-out method. We evaluate inventory for excess and obsolete products, based on management’s assessment of future demand and market conditions. Inventory write-downs, once established, are not reversed as they establish a new cost basis for the inventory. Inventory write downs are included as a component of cost of products revenue in the consolidated statements of operations.

Property and Equipment, Net

Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Depreciation on property and equipment, excluding leasehold improvements, ranges from one to three years.

Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful lives of the assets or the remaining lease term. Amortization on leasehold improvements ranges from one to seven years.

Leases

The Company determines if an arrangement is a lease at inception. For leases where the Company is the lessee, right-of-use (“ROU”) assets represent the Company’s right to use the underlying asset for the term of the lease and are included within other non-current assets in the consolidated balance sheets, and the lease liabilities represent an obligation to make lease payments arising from the lease and are recorded within accrued liabilities and other non-current liabilities in the consolidated balance sheets. Lease liabilities are recognized at the lease commencement date based on the present value of the future lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available at the commencement date of the underlying lease arrangement to determine the present value of lease payments. The ROU asset is determined based on the lease liability initially established and reduced for any prepaid lease payments and any lease incentives received. The lease term to calculate the ROU asset and related lease liability includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise the option. The Company’s lease agreements generally do not contain any material variable lease payments, residual value guarantees or restrictive covenants.

The Company elected the package of practical expedients permitted under the transition guidance, which allowed for the carry-forward of the Company’s historical lease classification and assessment on whether a contract is or contains a lease. The Company elected to not apply the new standard’s recognition requirements to leases with an initial term of 12 months or less and instead elected to recognize lease payments in the consolidated statements of operations on a straight-line basis over the lease term.

Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense while expense for financing leases is recognized as depreciation expense and interest expense using the accelerated interest method of recognition. The Company accounts for lease components and non-lease components as a single lease component.

Goodwill

Goodwill represents the excess of purchase consideration over the fair values of assets acquired and liabilities assumed in a business combination. Goodwill is not amortized but is reviewed for possible impairment annually in the fourth quarter or more frequently if impairment indicators arise. We have identified a single reporting unit for the purpose of our goodwill impairment tests, and the fair value of our reporting unit has been determined by our enterprise value. We may elect to utilize a qualitative assessment to determine whether it is more likely than not that the fair value of our reporting unit is less than its carrying value. If, after assessing the qualitative factors, we determine that it is more likely than not that the fair value of our reporting unit is less than its carrying value, an impairment analysis will be performed. We compare the fair value of our reporting unit with its carrying amount and if the carrying value of the reporting unit exceeds its fair value, an impairment loss will be recognized for the amount by which the carrying amount of a reporting unit exceeds its fair value up to the amount of goodwill. We did not identify impairment of goodwill for any periods presented. See the Recently Adopted Accounting Pronouncements section below for a discussion on the adoption of ASU 2017-04 in January 2020, which simplifies the goodwill impairment review process.

Intangible Assets

Intangible assets are recorded at fair value and amortized on a straight-line basis over their estimated useful lives, which range from 5 to 11 years. We evaluate our intangible assets for impairment at least annually and when indicators of impairment may exist. There were no impairment charges to our intangible assets during the years ended December 31, 2020, 2019 and 2018.

Impairment of Long-Lived Assets

We evaluate our property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of our long-lived assets may not be recoverable. Recoverability of an asset group is measured by comparison of its carrying amount to the expected future undiscounted cash flows that the asset group is expected to generate. If it is determined that an asset group is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset group exceeds its fair value.

Revenue Recognition

We recognize revenue, net of applicable taxes, when we transfer control of promised goods or services to our customers in an amount that reflects the consideration to which we expect to be entitled to in exchange for those goods or services.

•Identification of the contract, or contracts, with a customer

•Identification of the performance obligations in the contract

•Determination of the transaction price

•Allocation of the transaction price to the performance obligations in the contract

•Recognition of revenue when, or as, performance obligations are satisfied.

PCS revenue includes arrangements for software support and technical support for our products. PCS is offered under renewable, fee-based contracts, which include technical support, hardware repair and replacement parts, bug fixes, patches, and unspecified upgrades on a when-and-if available basis. Revenue for PCS services is recognized on a straight-line basis over the service contract term, which is typically one year, but can be up to five years as there is no discernible pattern of transfer related to these promises. Billed but unearned PCS revenue is included in deferred revenue.

Contracts with Multiple Performance Obligations

We report revenue net of sales taxes. We include shipping charges billed to customers in revenue and the related shipping costs are included in cost of product revenue.

Deferred Contract Acquisition Costs

We capitalize certain contract acquisition costs consisting of incremental sales commissions incurred to obtain customer contracts. Deferred commissions related to product revenues are recognized upon transfer of control to customers. Deferred commissions related to services revenue are recognized as the related performance obligations are met. Deferred commissions that will be recognized during the succeeding 12-month period are recorded as prepaid expenses and other current assets, and the remaining portion is recorded as other non-current assets. Amortization of deferred commissions is included in sales and marketing expense in the consolidated statements of operations.

Research and Development Costs

Research and development efforts are focused on new product development and on developing additional functionality for our existing products. These expenses consist of personnel costs, and to a lesser extent, prototype materials, depreciation and certain allocated facilities and information technology costs. We expense research and development costs as incurred.

Capitalization of Internally Developed Software to be Marketed and Sold

In the first quarter of 2020, we began capitalizing software engineering labor costs related to certain long-term projects that are expected to take more than a year to complete. We account for the capitalization of labor costs under ASC Topic 985-20, Software to be Sold, Leased or Marketed. During the year ended December 31, 2020, capitalized labor costs totaled $1.6 million and is included in property and equipment in the consolidated balance sheets.

Stock-Based Compensation

Stock-based compensation expense is measured on the grant date based on the fair value of the award and recognized on a straight-line basis over the requisite service period, reduced for actual forfeitures. The fair values of restricted stock units (“RSUs”) are estimated using our stock price on the grant date. The fair value of options and employee stock purchase rights is estimated using the Black-Scholes model on the grant date. The Black-Scholes model determines the fair value of share-based payment awards based on assumptions including expected term, stock price volatility, and risk-free interest rate. The fair value of market performance-based restricted stock units (“PSUs”) is valued using the Monte Carlo simulation model, which uses the stock price, expected volatility and risk-free interest rate to determine the fair value.

Warranty Costs

Our appliance hardware and software generally carry a warranty period of 90 days. Estimates of future warranty costs are based on historical returns and the application of the historical return rates to our in-warranty installed base. Warranty costs to repair or replace items sold to customers have been insignificant for the years ended December 31, 2020, 2019 and 2018.

Foreign Currency

The functional currency of our foreign subsidiaries is the U.S. dollar. Transactions denominated in non-functional currencies are remeasured to the functional currency at the average exchange rate for the period. Non-functional currency monetary assets and liabilities are remeasured to the functional currency using the exchange rate in effect at the balance sheet date, and non-monetary assets and liabilities are remeasured at historical exchange rates. Gains and losses related to remeasurement are recorded in interest and other income, net in the consolidated statements of operations.

Income Taxes

We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our consolidated financial statements or in our tax returns. Estimates and judgments occur in the calculation of certain tax liabilities and in the determination of the recoverability of certain deferred income tax assets, which arise from temporary differences and carryforwards. Deferred income tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. We regularly assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe, based upon the weight of available evidence, that it is more likely than not that all or a portion of deferred tax assets will not be realized, a valuation allowance is established through an adjustment to income tax expense.

The factors used to assess the likelihood of realization of our deferred tax assets include our forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. Assumptions represent our best estimates and involve inherent uncertainties and the application of our judgment.

We account for uncertainty in income taxes recognized in our consolidated financial statements by regularly reviewing our tax positions and benefits to be realized. We recognize tax liabilities based upon our estimate of whether, and the extent to which, additional taxes will be due when such estimates are more-likely-than-not to be sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained upon examination by taxing authorities. The provision for income taxes excludes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties.

Advertising Costs

Advertising costs are expensed when incurred. Advertising costs were $0.4 million, $0.5 million and $0.7 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Segment Information

An operating segment is a component of an enterprise for which its discrete financial information is available and its operating results are regularly reviewed by our chief operating decision maker for resource allocation decisions and performance assessment. Our chief operating decision maker is our Chief Executive Officer.

Our Chief Executive Officer reviews financial information presented on a consolidated basis for purposes of allocating resources and assessing performance of the Company. Accordingly, we have one reportable segment and one operating segment.

Vendor Business Concentration

We rely on third parties to manufacture our hardware appliances and we purchase raw materials from third-party vendors. We outsource substantially all of our manufacturing services to three independent manufacturers. In addition, we purchase certain strategic component inventory which is consigned to our third-party manufacturers. Other hardware components included in our products are sourced from various suppliers by our manufacturers and are principally industry standard parts and components that are available from multiple vendors.

Concentration of Credit Risk and Significant Customers

Financial instruments that potentially subject us to concentrations of credit risk consist of cash, cash equivalents, marketable securities and accounts receivable. Our cash, cash equivalents and marketable securities are held and invested in high-credit quality financial instruments by recognized financial institutions and are subject to minimum credit risk.

Our accounts receivable are unsecured and represent amounts due to us based on contractual obligations of our customers. We mitigate credit risk in respect to accounts receivable by performing periodic credit evaluations based on a number of factors, including past transaction experience, evaluation of credit history and review of the invoicing terms of the contract. We generally do not require our customers to provide collateral to support accounts receivable.

Significant customers, including distribution channel partners and direct customers (“end-customers”), are those which represent 10% or more of our total revenue for each period presented or our gross accounts receivable balance as of each respective balance sheet date.Revenues from our significant customers as a percentage of our total revenue are as follows:

Years Ended December 31,

Customer A (a distribution channel partner) * * 14%

Customer B (a distribution channel partner) * 12% 10%

Customer C (a distribution channel partner) * 14% *

Customer D (a distribution channel partner) 10% * *

* represents less than 10% of total revenue

As of December 31, 2020, two customers accounted for 17% and 10% of our total gross accounts receivable. As of December 31, 2019, two customers accounted for 17% and 12% of our total gross accounts receivable.

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), as subsequently amended, which supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition. This ASU requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which requires the capitalization of incremental customer acquisition costs and amortization of these costs over the contract period or estimated customer life which resulted in the recognition of a deferred commission asset on our consolidated balance sheet. The Company adopted ASU No. 2014-09 and its related amendments (collectively “ASC 606”) on January 1, 2018 using the modified retrospective method. See Note 2 Revenue, for disclosure on the impact of adopting this standard.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), and subsequent amendments to the initial guidance, in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under prior generally accepted accounting principles. ASU No. 2016-02, as amended, requires that a lessee recognize a liability to make lease payments (the lease liability) and a right-of-use asset (“ROU”) representing its right to use the underlying asset for the lease term on the balance sheet. The Company adopted the standard effective January 1, 2019, using the modified retrospective method, which resulted in the recognition of right-of-use assets of approximately $6.0 million and lease liabilities for operating leases of approximately $6.8 million on the Company’s consolidated balance sheets, with no material impact to its consolidated statements of operations. See Note 5 Leases, for further information regarding the impact of the adoption of ASU No. 2016-02 on the Company's consolidated financial statements.

Effective January 1, 2020, the Company adopted ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), as amended, using a modified retrospective approach, with certain exceptions allowed. The standard amends the guidance for measuring and recording credit losses on financial assets measured at amortized cost by replacing the incurred-loss model with an expected-loss model. This new standard also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through net income rather than by reducing the carrying amount under the current, other-than-temporary-impairment model. The adoption of ASU 2016-13 did not have a significant impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350)—Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating the requirement to compare the implied fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test referenced in Accounting Standards Codification (“ASC”) 350, Intangibles - Goodwill and Other (“ASC 350”). As a result, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the impairment loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for annual reporting periods beginning after December 15, 2019, including any interim impairment tests within those annual periods, with early application permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. In January 2020, the Company adopted ASU 2017-04, and the adoption did not have a material impact on the Company’s consolidated financial statements.

In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (“SAB”) No. 118. These amendments add SEC guidance to the FASB Accounting Standards Codification regarding the Tax Cuts and Jobs Act pursuant to the issuance of SAB 118. The amendments are effective upon addition to the FASB Codification and did not have a material impact on the Company’s consolidated financial statements.

Effective January 1, 2020, the Company adopted ASU No. 2018-13, Fair Value Measurement (Topic 820 - Changes to the Disclosure Requirements for the Fair Value Measurement) (“ASU 2018-13”). Under ASU 2018-13, entities will no longer

be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The guidance is effective for all entities for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years. The adoption of ASU 2018-13 did not have a significant impact on the Company’s consolidated financial statements.

In November 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this update improve consistent application of and simplify U.S. GAAP for Topic 740 by clarifying and amending existing guidance for, among other items, intra-period allocation, reporting tax law changes and losses in interim periods, state and local taxes not fully based on income and recognition of deferred tax liability related to certain transactions. There is also new guidance related to consolidated group reporting and tax impacts resulting from business combinations. The guidance is effective for public entities for fiscal years beginning after December 15, 2020 and for interim periods within those fiscal years. The Company adopted this guidance effective January 1, 2021 and does not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial statements.

In October 2020, the FASB issued ASU No. 2020-10, Codification Improvements. The amendments in this ASU improve the consistency of the codification and reorganize the guidance into appropriate sections providing less opportunities for disclosures to be missed. The amendments in this update do not change GAAP and are not expected to result in a significant change in practice. The amendments in this ASU are effective for fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company adopted this guidance on January 1, 2021 and does not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial statements.

2. Revenue

ASC 606 Adoption Impact

On January 1, 2018, the Company adopted ASC 606 applying the modified retrospective method. The Company recognized the cumulative effect of initially applying the new guidance as an adjustment to the opening balance of accumulated deficit as of the adoption date. The Company applied ASC 606 to all contracts that were not completed at the date of initial application. Comparative information for prior periods has not been restated and continues to be reported under the accounting standards in effect for those periods. In connection with the adoption of ASC 606, the Company also adopted ASC No. 340-40, Other Assets and Deferred Costs - Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with a customer. Collectively, ASC No. 606 and ASC No. 340-40 are referred to as the “new standard.”

Adoption of the new standard resulted in changes to the Company’s accounting policies for revenue recognition, commissions expense and deferred commissions as discussed below. The Company recorded a reduction to opening accumulated deficit of $12.4 million as of January 1, 2018 due to the cumulative impact of adopting the new standard as follows:

•A decrease in total deferred revenue of $4.0 million primarily due to the removal of the limitation on contingent revenue that would have accelerated revenue recognition for certain of our historical revenue contracts; and

•Recognition of a deferred commissions asset of $8.4 million on our consolidated balance sheet due to the requirement under the new standard to recognize incremental customer acquisition costs in our consolidated statement of operations as the related performance obligations are met as compared to the previous recognition to expense as incurred.

Impact on the Consolidated Financial Statements

The following table summarize the impact of ASC 606 on the Company’s Consolidated Statement of Operations for the year ended December 31, 2018:

Selected Consolidated Statement of Operations Line Items

Basic and diluted net loss per share $ (0.38) $ (0.43)

Contract Balances

The following table reflects contract balances with customers (in thousands):

As of As of

Balance Sheet Line Reference December 31, 2020 December 31, 2019

The Company receives payment from customers based upon billing cycles. Invoice payment terms typically range from 30 to 90 days.

Accounts receivable are recorded when the right to consideration becomes unconditional.

Contract assets include amounts related to the Company’s contractual right to consideration for performance obligations not yet billed, and are included in prepaid and other current assets in the Company’s Consolidated Balance Sheets. The contract assets amount was immaterial as of December 31, 2020 and 2019.

Deferred revenue primarily consists of amounts that have been invoiced but not yet recognized as revenue and consists of performance obligations pertaining to support and subscription services. During the years ended December 31, 2020 and 2019, the Company recognized revenue of $61.8 million and $63.2 million, respectively, related to deferred revenue at the beginning of the period.

Deferred revenue consisted of the following (in thousands):

Deferred revenue:

Deferred Contract Acquisition Costs

As of December 31, 2020, the current and non-current portions of deferred contract acquisition costs totaled $5.3 million and $3.7 million, respectively, and the related amortization was $6.5 million for the year ended December 31, 2020. As of December 31, 2019, the current and non-current portions of deferred contract acquisition costs totaled $6.2 million and $3.3 million, respectively, and the related amortization was $7.4 million for the year ended December 31, 2019.

For the years ended December 31, 2020, 2019 and 2018, the Company had no impairment loss in relation to the costs capitalized and no asset impairment charges related to contract assets.

Remaining Performance Obligations

Remaining performance obligations represent contracted revenues that are non-cancellable and have not yet been recognized due to unsatisfied or partially satisfied performance obligations, which include deferred revenues and amounts that will be invoiced and recognized as revenues in future periods.

The Company expects to recognize revenue on the remaining performance obligations as follows (in thousands):

3. Restructuring

In October 2019, the Company implemented a restructuring plan (the “2019 restructuring plan”) in its ongoing efforts to reduce operating costs and focus on advanced technologies. Expense related to the 2019 restructuring plan was accrued for in 2019, which resulted in a reduction of approximately 5% of the Company’s workforce and the closure and consolidation of certain U.S. and international office facilities. The Company recorded restructuring expenses of $2.5 million in the fourth quarter of 2019, which included the following (in thousands):

The 2019 restructuring plan was completed prior to June 30, 2020 and as of December 31, 2020, the Company’s restructuring accrual was fully paid.

4. Marketable Securities and Fair Value Measurements

Marketable Securities

Marketable securities, classified as available-for-sale, consisted of the following (in thousands):

During the years ended December 31, 2020 and 2019, the Company did not reclassify any amount to earnings from accumulated other comprehensive income (loss) related to unrealized gains or losses.

The following table summarizes the cost and estimated fair value of marketable securities based on stated effective maturities as of December 31, 2020 (in thousands):

Amortized Cost Fair Value

All available-for-sale securities are classified as current because they are available for use in current operations.

Marketable securities in an unrealized loss position consisted of the following (in thousands):

Less Than 12 Months 12 Months or More Total

Certificates of deposit $ — $ — $ — $ — $ — $ —

U.S. Treasury and agency securities — — — — — —

Commercial paper — — — — — —

Asset-backed securities — — — — — —

Less Than 12 Months 12 Months or More Total

Certificates of deposit $ — $ — $ — $ — $ — $ —

U.S. Treasury and agency securities — — — — — —

Commercial paper — — — — — —

Asset-backed securities — — — — — —

Based on evaluation of securities that have been in a continuous loss position, the Company determined all gross unrealized losses on its marketable securities as of December 31, 2020 were temporary in nature and related primarily to interest rate shifts rather than changes in the underlying credit quality of the securities in a loss position. The Company has the ability to hold these investments until maturity, or for at least the foreseeable future. As such, no decline has been deemed to be other-than-temporary by the Company.

Fair Value Measurements

The following is a summary of the Company’s cash, cash equivalents and marketable securities measured at fair value on a recurring basis (in thousands):

Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total

There were no transfers between Level 1 and Level 2 fair value measurement categories during the years ended December 31, 2020 and 2019.

5. Leases

The Company leases various facilities in the United States, Asia and Europe under non-cancellable operating lease arrangements that expire on various dates through July 2027. These arrangements require the Company to pay certain operating expenses, such as taxes, repairs and insurance, and contain renewal and escalation clauses.

The table below presents the Company’s right-of-use assets and lease liabilities as of December 31, 2020 (in thousands):

Operating leases

Right-of-use assets:

Other non-current assets $ 28,240

Total right-of-use assets $ 28,240

Lease liabilities:

Accrued liabilities $ 5,260

Other non-current liabilities 23,498

Total operating lease liabilities $ 28,758

The aggregate future lease payments for the Company’s operating leases as of December 31, 2020 were as follows (in thousands):

Total lease payments 31,609

Less: imputed interest (2,851)

Present value of lease liabilities $ 28,758

The components of lease costs were as follows (in thousands):

Operating lease costs $ 6,548

Short-term lease costs 254

Total lease costs $ 6,802

Average lease terms and discount rates for the Company’s operating leases were as follows (in thousands):

Weighted-average remaining term (in years) 6.2

Weighted-average discount rate 3.14 %

Supplemental cash flow information for the Company’s operating leases were as follows (in thousands):

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases $ 6,291

Right-of-use assets obtained in exchange for new lease liabilities $ 868

Corporate Headquarters Lease

On May 2, 2019, the Company entered into a sublease agreement (the “Sublease”) with Marvell Semiconductor, Inc. (“Sublandlord”) for its corporate headquarters and research and development space located at 2300 Orchard Parkway, San Jose, California, 95131 (the “Premises”). The term of the Sublease is approximately eight years and began on December 1, 2019, the date the Company commenced business operations at the Premises. The Sublease provides for monthly base rent of approximately $262,000 per month for the first year with annual increases thereafter. The total base rent through the end of the term of the Sublease will total approximately $33.8 million. In addition to base rent, the Company will also be responsible for operating and other facility expenses. The Company has accounted for the lease under ASC 842 and recorded a right-of-use asset of $30.0 million included in other non-current assets and recorded lease liabilities of $3.3 million and $26.7 million, included in accrued liabilities and other non-current liabilities, respectively, in the consolidated balance sheets as of December 31, 2019.

6. Other Balance Sheet Accounts Details

Allowance for Doubtful Accounts

The following table presents the changes in the Company’s allowance for doubtful accounts (in thousands):

Allowance for doubtful accounts, beginning balance $ 52 $ 319

Increase (decrease) of provision 78 (72)

Allowance for doubtful accounts, ending balance $ 41 $ 52

Inventory

Inventory consisted of the following (in thousands):

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):

Deferred contract acquisition costs 5,345 6,231

Prepaid expenses and other current assets $ 12,390 $ 15,067

Property and Equipment, Net

Property and equipment, net, consisted of the following (in thousands):

(in years)

Construction in progress 1,677 —

Property and equipment, net $ 7,888 $ 7,656

Depreciation expense on property and equipment was $4.2 million, $5.0 million and $6.4 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Intangible Assets

Purchased intangible assets, net, consisted of the following (in thousands):

Cost Accumulated Amortization Net Cost Accumulated Amortization Net

Amortization expense related to purchased intangible assets was $1.4 million for each of the years ended December 31, 2020, 2019 and 2018. Purchased intangible assets will be amortized over a remaining weighted average useful life of 0.6 years.

Future amortization expense for purchased intangible assets as of December 31, 2020 is as follows (in thousands):

Fiscal Year

Other non-current assets

Other non-current assets consisted of the following (in thousands):

Deferred contract acquisition costs 3,714 3,297

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

Accrued compensation and benefits $ 19,725 $ 12,227

Other Non-Current Liabilities

Other non-current liabilities consisted of the following (in thousands):

Total other non-current liabilities $ 24,357 $ 28,754

7. Credit Facility

In November 2016, the Company entered into a loan and security agreement (the “2016 Credit Facility”) with Silicon Valley Bank (“SVB”) as the lender. The 2016 Credit Facility provided a three-year, $25.0 million revolving credit facility, which included a maximum of $25.0 million letter of credit sub-facility. Loan advances under the revolving facility were available up to the full $25.0 million when the balance of the Company’s cash, cash equivalents and marketable securities minus outstanding revolving loans and letters of credit equaled or exceeded $50.0 million. If this “net cash” fell below $50.0 million, loan advances were determined based on a borrowing base equal to a specified percentage of the value of the Company’s eligible accounts receivable. Loans bore interest, at the Company’s option, at (i) the prime rate reported in The Wall Street Journal, minus 0.50% or (ii) a LIBOR rate determined in accordance with the 2016 Credit Facility, plus 2.50%. Over the term of the 2016 Credit Facility, the Company paid customary closing fees, commitment fees and letter of credit fees related to the facility.

In September 2018, the Company entered into an amendment with SVB to reduce the unused revolving credit facility fee on the 2016 Credit Facility from 0.4% to 0.3%.

The Company’s obligations under the 2016 Credit Facility were secured by substantially all of the Company’s assets, excluding intellectual property. The 2016 Credit Facility required the Company to maintain compliance with customary affirmative and negative covenants, including compliance with an adjusted quick ratio of not less than 1.50:1.00, and restricted the Company’s ability to pay cash dividends or make other distributions on our common stock.

The Company elected to allow the 2016 Credit Facility to expire without renewal on the maturity date of November 1, 2019. There were no outstanding loans or advances as of the maturity date. The Company currently has no plans to enter into any new borrowing facilities.

8. Commitments and Contingencies

Legal Proceedings

Litigation

From time to time, we may be party or subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. Some of these proceedings involve claims that are subject to substantial uncertainties and unascertainable damages. We make a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Unless otherwise specifically disclosed in this note, we have determined that no provision for liability nor disclosure is required related to any claim against us because: (a) there is not a reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claim; (b) a reasonably possible loss or range of loss cannot be estimated; or (c) such estimate is immaterial.

On March 22, 2018, the Company, and certain of its current and former executive officers, were named as defendants in a putative class action lawsuit filed in the United States District Court for the Northern District of California, captioned Shah v. A10 Networks, Inc. et al., 3:18-cv-01772-VC (the “Securities Action”). On August 31, 2018, the court appointed a lead plaintiff. On October 5, 2018, the lead plaintiff filed an amended complaint. The amended complaint named the same

defendants as the initial complaint, in addition to one of the Company’s former executive vice presidents. The amended complaint asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The Company and individual defendants filed motions to dismiss the amended complaint. On February 21, 2019, the court granted the motions to dismiss with leave to amend within 21 days. The lead plaintiff did not file an amended complaint by the Court-ordered deadline. Instead, on March 21, 2019, the lead plaintiff filed a notice of appeal in the United States Court of Appeals for the Ninth Circuit. On April 5, 2019, the clerk of court suspended briefing on the appeal and ordered that, by April 26, 2019, appellants shall either move for voluntary dismissal or show cause why the appeal should not be dismissed for lack of jurisdiction. On April 25, 2019, appellants moved to voluntarily dismiss the appeal without prejudice, and that motion was granted on May 1, 2019. The district court entered final judgment dismissing lead plaintiff’s claims on May 8, 2019. The lead plaintiff subsequently filed a notice of appeal on June 6, 2019. The parties filed a stipulated motion to voluntarily dismiss the appeal on October 7, 2019, with each side to bear its own costs. The Court of Appeals granted the stipulated motion to dismiss on October 10, 2019.

On May 30, 2018, certain of our current and former directors and officers were named as defendants in a putative shareholder derivative lawsuit filed in the United States District Court for the Northern District of California, captioned Moulton v. Chen et al., 3:18-cv-03223-VC (the “Derivative Action”). We were also named as a nominal defendant. The complaint in the Derivative Action alleged breaches of fiduciary duties and other related claims in connection with purported misrepresentations related to internal controls and revenues and alleged failures to ensure that financial statements were made in accordance with generally accepted accounting principles. Plaintiff sought unspecified damages allegedly sustained by the Company, restitution, and other relief. On July 11, 2018 the Derivative Action was stayed until a motion to dismiss in the Securities Action was granted with prejudice or denied in whole or in part. Following dismissal of the Securities Action, the plaintiff voluntarily dismissed his claims on June 7, 2019.

Investigations

The U.S. Securities and Exchange Commission (“SEC”) conducted a private investigation into possible violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), and 13(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, 13a-14, 13a-15, and 13b2-1 thereunder. The Company cooperated with the SEC regarding this investigation. The SEC staff informed the Company on September 6, 2019 that it had concluded its investigation and did not intend to recommend an enforcement action to the SEC.

Lease Commitments

The Company leases various operating spaces in the United States, Asia and Europe under non-cancelable operating lease arrangements that expire on various dates through July 2027. These arrangements require us to pay certain operating expenses, such as taxes, repairs and insurance, and contain renewal and escalation clauses. The Company recognizes rent expense under these arrangements on a straight-line basis over the term of the lease.

The Company has open purchase commitments with third-party contract manufacturers with facilities in Taiwan to supply nearly all of our finished goods inventories, spare parts, and accessories. These purchase orders are expected to be paid within one year of the issuance date.

The following table summarizes our non-cancelable operating leases as of December 31, 2020 (in thousands):

Years Ending December 31, Operating Leases and Other Contractual Obligation

Rent expense was $6.7 million, $4.8 million and $4.5 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Guarantees and Indemnifications

In the normal course of business, we provide indemnifications to customers against claims of intellectual property infringement made by third parties arising from the use of our products. Other guarantees or indemnification arrangements include guarantees of product and service performance, and standby letters of credit for lease facilities and corporate credit cards. We have not recorded a liability related to these indemnifications and guarantee provisions and our guarantees and indemnification arrangements have not had any significant impact on our consolidated financial statements to date.

ATEN US Equity

ATEN · 10-K · period ended 2020-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item 8. Financial Statements and Supplementary Data

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ATEN · 10-K · period ended 2020-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item 8. Financial Statements and Supplementary Data

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