CALIX, INC. The Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"). All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts and projections about the industry in which we operate and the beliefs and assumptions of our management. In some cases, forward-looking statements can be identified by the use of words such as "believe," "could," "expect," "may," "estimate," "continue," "anticipate," "intend," "should," "plan," "predict," "will," "would," "project," "potential," or the negative thereof or other comparable terminology. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business and industry and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict, including those identified in the Risk Factors discussed in Item 1A, in the discussion below, as well as in other sections of this Annual Report on Form 10-K. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. All forward-looking statements and reasons why results may differ included in this report are made as of the date hereof, and we assume no obligation to update these forward-looking statements or reasons why actual results might differ. Overview We are the leading global provider of cloud and software platforms, systems and services that focus on the access network, the portion of the network that governs available bandwidth and determines the range and quality of services that can be offered to subscribers. These cloud and software platforms enable CSPs of all types and sizes to innovate and transform their businesses. Our CSP customers are empowered to utilize real-time data and insights from Calix platforms to simplify their businesses and deliver experiences that excite their subscribers. These insights enable CSPs to grow their businesses through increased subscriber acquisition, loyalty and revenue, thereby increasing the value of their businesses and contributions to their communities. We market our cloud and software platforms, systems and services to CSPs globally through our direct sales force as well as select resellers. Our customers range from smaller, regional CSPs to some of the world's largest CSPs. We have enabled approximately 1,600 CSP customers purchasing directly and through partners to deploy passive optical, Active Ethernet and point-to-point Ethernet fiber access networks. In the third quarter of 2020, we completed an underwritten public offering of 3,220,000 shares of our common stock at$20.00 per share, including a full exercise by the underwriters of their option to purchase an additional 420,000 shares of common stock, for net proceeds of$60.1 million after deducting the underwriting discount and estimated expenses payable by us. Beginning in 2018,the United States enacted a series of tariffs on certain goods manufactured inChina . As a result of these tariffs, we incurredU.S. tariff and tariff-related costs of$2.8 million in 2020,$6.2 million in 2019 and$3.2 million in 2018. In order to mitigate the impact of the tariffs enacted bythe United States , we undertook a broad plan to realign our global supply chain by moving substantially all of our production outside ofChina in addition to other supply chain improvements in the first half of 2019. As a result of the tariffs imposed on a broader list of products inSeptember 2019 , we expanded the scope of our global supply chain realignment plan, which was substantially completed in 2020. Our revenue increased to$541.2 million in 2020 from$424.3 million in 2019 and$441.3 million in 2018. Our revenue and potential revenue growth will depend on our ability to sell and license our cloud and software platforms, systems and services to strategically aligned customers of all types such as wireless internet service providers, fiber overbuilders, cable MSOs, municipalities and electric cooperatives inthe United States and internationally. Revenue fluctuations result from many factors, including, but not limited to: increases or decreases in customer orders for our products and services, market, financial or other factors that may delay or materially impact customer purchasing decisions, non-availability of products due to supply chain challenges, including disruptions as a result of the COVID-19 pandemic, contractual terms with customers that result in delayed revenue recognition and varying budget cycles and seasonal buying patterns of our customers. More specifically, our customers tend to spend less in the first quarter as they are finalizing their annual budgets, and in certain regions, customers are challenged by winter weather conditions that inhibit fiber deployment in outside infrastructure. Our revenue is also dependent upon our customers' timing of purchases, capital expenditure plans and decisions to upgrade their network or adopt new technologies, including adoption of our software and cloud platform solutions, as well as our ability to grow our customer base. Cost of revenue is strongly correlated to revenue and tends to fluctuate due to all of the above factors that may cause revenue fluctuations. Factors that impacted our cost of revenue in 2020, and that we expect will impact cost of revenue in future periods, also include: changes in the mix of products delivered, customer location and regional mix, changes in the cost of our 28 -------------------------------------------------------------------------------- Table of Contents inventory, including higher costs due to materials shortages including components, supply constraints or unfavorable changes in trade policies, investments to support expansion of cloud and customer support offerings, changes in product warranty and incurrence of retrofit costs, tariffs and associated costs to mitigate the impact of tariffs, amortization of intangibles, asset write-offs, silicon support fees and inventory write-downs. In particular, given the recent supply chain disruptions due to the COVID-19 pandemic, we have seen increases in our global freight charges as we have elected to ship by air in order to meet delivery commitments to our customers as well as air freight rates have increased from prior year levels. Cost of revenue also includes fixed expenses related to our internal operations, which could increase our cost of revenue as a percentage of revenue if there are declines in revenue. Our gross profit and gross margin fluctuate based on timing of factors such as changes in customer mix and changes in the mix of products demanded and sold (and any related write-downs of existing inventory) and have in the past been negatively impacted by increases in mix of revenue towards professional services, increases in mix of revenue from channel sales rather than direct sales or other unfavorable customer or product mix, shipment volumes and any related volume discounts, changes in our product and services costs, pricing decreases or discounts, new product introductions or upgrades to existing products, customer rebates and incentive programs due to competitive pressure or materials shortages, supply constraints, investments to support expansion of cloud and customer support offerings, tariffs or unfavorable changes in trade policies. Our operating expenses fluctuate based on the following factors among others: changes in headcount and personnel costs, which comprise a significant portion of our operating expenses; variable compensation due to fluctuations in shipment volumes or level of achievement against performance targets; timing of research and development expenses, including investments in innovative solutions and new customer segments, prototype builds and outsourced development resources; asset write-offs; investments in our business and information technology infrastructure; and fluctuations in stock-based compensation expenses due to timing of equity grants or other factors affecting vesting. We had net income of$33.5 million in 2020 and net losses of$17.7 million in 2019 and$19.3 million in 2018. As ofDecember 31, 2020 , we had an accumulated deficit of$669.1 million as a result of losses in previous years. Further, as a result of factors contributing to the fluctuations described above among other factors, many of which are outside our control, our quarterly operating results fluctuate from period to period. Comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. COVID-19 Pandemic We are subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict as coronavirus continues to spread around the world. The availability of vaccines has been limited, and there are no assurances as to when the pandemic will be contained. SinceMarch 2020 , we have instituted office closures, travel restrictions and a mandatory work-from-home policy for substantially all of our employees. The spread of COVID-19 has had a prolonged impact on our supply chain operations due to restrictions, reduced capacity and limited availability from suppliers whom we rely on for sourcing components and materials and from third-party partners whom we rely on for manufacturing, warehousing and logistics services. Although demand for our products has been strong in the short-term as subscribers seek more bandwidth and better Wi-Fi, customers' purchasing decisions over the long-term may be impacted by the pandemic and its impact on the economy, which could in turn impact our revenue and results of operations. Furthermore, our supply chain continues to face constraints primarily due to challenges in sourcing components and materials for our products, including due to plant closures. The prolonged impact of COVID-19 could exacerbate these constraints or cause further supply chain disruptions. In the second quarter of 2020, we transitioned to a work-from-anywhere culture, and many of our employees elected to work remotely on a permanent basis. This operating model reduces our physical facilities requirements, and consequently, we established and implemented a restructuring plan to align our business to a work-from-anywhere culture and incurred facilities-related restructuring charges of$5.1 million . Furthermore, in the second quarter of 2020, we realigned our product portfolio to reduce and consolidate certain legacy product lines as customers accelerated their interest in our all-platform offerings. These actions resulted in a charge of$1.8 million related to our reduction and consolidation of legacy product lines and severance-related charges of$1.2 million . Critical Accounting Policies and Estimates Our financial statements are prepared in accordance withU.S. generally accepted accounting principles. These accounting principles require us to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. We base our estimates, assumptions and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. To the extent there are material differences between these estimates and actual results, our financial statements may be affected. We evaluate our estimates, assumptions and judgments on an ongoing basis. 29 -------------------------------------------------------------------------------- Table of Contents We believe the following critical accounting policies affect our significant judgments and estimates used in the preparation of our financial statements. Revenue Recognition We derive revenue from contracts with customers primarily from the following and categorize our revenue as follows: •Systems include revenue from the sale of access and premises systems, software platform licenses and cloud-based software subscriptions. •Services include revenue from professional services, customer support, software- and cloud-based maintenance, extended warranty subscriptions, training and managed services. Revenue is recognized when a performance obligation is satisfied, which occurs when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Specifically, revenue from software platform licenses, which provides the customer with a right to use the software as it exists, is generally recognized upfront when product is made available to the customer. Revenue from cloud-based software subscriptions, customer support, maintenance, extended warranty subscriptions and managed services is generally recognized ratably over the contract term. Revenue from professional services and training is recognized as the services are delivered. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account. A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Our hardware products contain both software and non-software components that function together to deliver the products' essential functionality and therefore constitutes a single performance obligation as the promise to transfer the individual software and non-software components is not separately identifiable and, therefore, not distinct. Our contracts may include multiple performance obligations. For such arrangements, we allocate the contract's transaction price to each performance obligation using the relative stand-alone selling price of each distinct good or service in the contract. We generally determine stand-alone selling prices based on the prices charged to customers or our best estimate of stand-alone selling price. Our estimate of stand-alone selling price is established considering multiple factors including, but not limited to, geographies, market conditions, competitive landscape, internal costs, gross margin objectives, characteristics of targeted customers and pricing practices. The determination of estimated stand-alone selling price is made through consultation with and formal approval by management, taking into consideration the go-to-market strategy. For certain revenue arrangements involving delivery of both systems and professional services, each is considered a distinct performance obligation. Systems revenue is recognized at a point in time when management has determined that control over systems has transferred to the customer, which is generally when legal title has transferred to the customer. For the same revenue arrangements, management believes that the output of the associated professional services is transferred to the customer over time. As such, professional services revenue is recognized over the period in which the services are provided using a cost input measure. We recognize revenue when control of the systems and services has been transferred to the customer, which may be earlier than system installation or customer acceptance, in accordance with the agreed-upon specifications in the contract. Inventory Valuation Inventory, which primarily consists of finished goods purchased from CMs or ODMs, is stated at the lower of cost (determined by the first-in, first-out method) and net realizable value. Inbound shipping costs and tariffs are included in the cost of inventory. In addition, we, from time to time, procure component inventory primarily as a result of manufacturing discontinuation of critical components by suppliers. We regularly monitor inventory quantities on-hand and record write-downs for excess and obsolete inventory based on our estimate of demand for our products, potential obsolescence of technology, product life cycle and whether pricing trends or forecasts indicate that the carrying value of inventory exceeds our estimated selling price. These factors are impacted by market and economic conditions, technology changes and new product introductions and require estimates that may include elements that are uncertain. Actual demand may differ from forecasted demand and may have a material effect on gross profit. If inventory is written down, a new cost basis is established that cannot be increased in future periods. The sale of previously reserved inventory has not had a material impact on our gross margin. Recent Accounting Pronouncements Not Yet Adopted There have been no additional accounting pronouncements or changes in accounting pronouncements that are significant or potentially significant to us. 30 -------------------------------------------------------------------------------- Table of Contents Results of Operations for Years EndedDecember 31, 2020 and 2019 Revenue The following table sets forth our revenue (dollars in thousands): Years Ended December 31, 2020 vs 2019 Change 2020 2019 $ % Revenue: Systems$ 508,552 $ 393,231 $ 115,321 29 % Services 32,687 31,099 1,588 5 %$ 541,239 $ 424,330 $ 116,909 28 % Percent of total revenue: Systems 94 % 93 % Services 6 % 7 % 100 % 100 % Our revenue is principally derived inthe United States . Revenue generated inthe United States represented approximately 87% of our total revenue in 2020 and 86% in 2019. Our revenue increased by$116.9 million during 2020 compared with 2019 mostly due to higher systems revenue of$115.3 million . Services revenue increased$1.6 million in 2020 compared with 2019. The increase in systems revenue was primarily due to higher revenue from our small, regional customers and, to a lesser extent, our large-sized customers, as service providers accelerated some deployments to respond to increased demand for network capacity and relieve network capacity constraints as well as provide a better Wi-Fi experience. The increase in services revenue was due to the continued ramp in our service offerings aligned with cloud and software products partially offset by lower professional services related to CAF deployments. Lumen accounted for more than 10% of our total revenue in 2020 and 2019. See Note 12 "Revenue from Contracts with Customers" to the Consolidated Financial Statements set forth in this report for more details on concentration of revenue for the periods presented. Cost of Revenue, Gross Profit and Gross Margin The following table sets forth our cost of revenue (dollars in thousands): Years Ended December 31, 2020 vs 2019 Change 2020 2019 $ % Cost of revenue: Systems$ 251,638 $ 211,309 $ 40,329 19 % Services 22,582 25,096 (2,514) (10) %$ 274,220 $ 236,405 $ 37,815 16 % Cost of revenue increased by$37.8 million during 2020 as compared with 2019. The$40.3 million increase in systems cost of revenue was less than the percentage increase in revenue compared with 2019 and was due to continued growth in our All Platform offerings along with favorable customer and product mix. The increase in costs of revenue in 2020 as compared to 2019 includes a charge of$1.8 million related to our reduction and consolidation of legacy product lines taken in the second quarter of 2020. The$2.5 million decrease in services cost of revenue was mainly due to improved mix towards our higher gross margin support services versus lower gross margin deployment services. The following table sets forth our gross profit and gross margin (dollars in thousands): Years Ended December 31, 2020 vs 2019 Change 2020 2019 $ % Gross profit: Systems$ 256,914 $ 181,922 $ 74,992 41 % Services 10,105 6,003 4,102 68 %$ 267,019 $ 187,925 $ 79,094 42 % Gross margin: Systems 50.5 % 46.3 % Services 30.9 % 19.3 % 49.3 % 44.3 % 31
-------------------------------------------------------------------------------- Table of Contents Gross profit increased by$79.1 million to$267.0 million during 2020 from$187.9 million during 2019. Gross margin increased to 49.3% during 2020 from 44.3% during 2019. During 2020 and 2019, systems gross margin was negatively impacted byU.S. tariff and tariff-related costs of$2.8 million and$6.2 million , or 55 and 160 basis points, respectively, and intangible asset amortization of$2.6 million and$1.0 million , or 50 and 25 basis points, respectively. Excluding the impact ofU.S. tariff and tariff-related costs and intangible assets amortization, systems gross margin was 51.6% and 48.1% for 2020 and 2019, respectively. This increase of 350 basis points was mainly due to continued growth in our all-platform offerings along with favorable product and customer mix. Services gross margin increased in 2020 primarily due to lower personnel costs as our service revenue mix shifts away from low gross margin deployment services to higher gross margin software maintenance and services aligned with our platform offerings. Operating Expenses Sales and Marketing Expenses Sales and marketing expenses consist of personnel costs, employee sales commissions, marketing programs and events, software tools and travel-related expenses. The following table sets forth our sales and marketing expenses (dollars in thousands): Years EndedDecember 31 ,
2020 vs 2019 Change
2020 2019 $ %
Sales and marketing $ 94,185 $ 82,553 $ 11,632 14 %
Percent of total revenue 17 % 19 %
Sales and marketing expenses increased by $11.6 million during 2020 compared
with 2019 primarily due to higher personnel expenses of $12.2 million , mainly
related to investments in sales headcount and higher sales incentive
compensation expense, higher marketing expenses of $2.3 million and higher
stock-based compensation of $0.9 million . These increases were partially offset
by a decrease in travel expenses of $4.9 million .
We expect to increase our investments in sales and marketing in absolute dollars
in order to extend our market reach and grow our business in support of our key
strategic initiatives.
Research and Development Expenses
Research and development expenses include personnel costs, outside contractor
and consulting services, depreciation on lab equipment, costs of prototypes and
overhead allocations. The following table sets forth our research and
development expenses (dollars in thousands):
Years Ended December 31, 2020 vs 2019 Change
2020 2019 $ %
Research and development $ 85,258 $ 81,184 $ 4,074 5 %
Percent of total revenue 16 % 19 %
The increase in research and development expenses of $4.1 million during
2020 compared with 2019 was primarily due to higher outside services expenses of
$5.2 million , higher personnel expenses of $1.8 million , primarily related to
incentive compensation expense, and higher stock-based compensation of $0.8
million . These increases were partially offset by lower facilities expenses of
$2.1 million , decreases in depreciation and amortization expense of $0.6
million , lower travel expenses of $0.6 million and lower equipment expenses of
$0.4 million .
We expect to increase our investments in research and development in absolute
dollars to expand the functionality and capabilities of our platforms.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel costs related
to our executive, finance, human resources, information technology and legal
organizations, outside consulting services, insurance, allocated facilities and
fees for professional services. Professional services consist of outside audit,
legal, accounting and tax services. The following table sets forth our general
and administrative expenses (dollars in thousands):
Years Ended December 31, 2020 vs 2019 Change
2020 2019 $ %
General and administrative $ 44,444 $ 37,115 $ 7,329 20 %
Percent of total revenue 8 % 9 %
32-------------------------------------------------------------------------------- Table of Contents The increase in general and administrative expenses of$7.3 million during 2020 compared with 2019 was primarily due to increased amortization and subscription expenses of$4.1 million , primarily related to our cloud-based ERP system that went live in January of 2020, personnel expenses of$2.8 million , primarily related to the capitalization of internal resources related to our cloud-based ERP implementation that lowered personnel expenses in 2019 as well as an increase in incentive compensation expense in 2020, stock-based compensation of$1.0 million and bad debt allowance of$0.8 million . These increases were partially offset by lower professional services fees of$1.4 million . Restructuring Charges Responding to changes caused by the COVID-19 pandemic, we initiated a restructuring plan inJune 2020 to accelerate our all-platform future and to align with a work-from-anywhere culture. We incurred restructuring charges of$6.3 million , consisting of facilities-related charges and severance and other termination related benefits. See Note 4, "Balance Sheet Details" of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. Loss on Asset Retirement During 2019, we recognized a charge of$2.5 million relating to the retirement of an asset consisting of licensed software. Please refer to Note 4 "Balance Sheet Details" of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. Interest and Other Expense, Net The following table sets forth our interest and other expense, net (dollars in thousands): Years Ended December 31, 2020 vs 2019 Change 2020 2019 $ %
Interest and other expense, net
$ (1,431) 127 % Interest and other expense increased by$1.4 million in 2020 compared with 2019 mainly due to higher interest expense related to the line of credit being outstanding for nearly six months more than in 2019 and foreign currency losses due to the weakening of theU.S. dollar to the Chinese Renminbi and higher interest expense related to the early settlement our financing agreements in 2020. Provision for Income Taxes The provision for income taxes primarily consist of state and foreign income taxes. The following table sets forth our provision for income taxes (dollars in thousands): Years Ended December 31, 2020 vs 2019 Change 2020 2019 $ % Provision for income taxes$ 800 $ 1,162 $ (362) (31) % Effective tax rate 2.3 % (7.0) % The provision for income taxes decreased by$0.4 million from$1.2 million in 2019 to$0.8 million in 2020. The decrease was primarily due to a decrease in accrued withholding taxes related to the anticipated repatriation of foreign subsidiary earnings. As ofDecember 31, 2020 , we had unrecognized tax benefits of$23.5 million , none of which would affect our effective tax rate if recognized. 2019 Compared to 2018 For a comparison of our results of operations for the years endedDecember 31, 2019 and 2018, see Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year endedDecember 31, 2019 filed with theSEC onFebruary 21, 2020 . Liquidity and Capital Resources We have funded our operations and investing activities primarily through cash generated from operations, borrowings on our line of credit, financing arrangements for certain lab equipment and consulting services and sales of our common stock. As ofDecember 31, 2020 , we had cash, cash equivalents and marketable securities of$133.8 million . This includes$3.0 million of cash primarily held by our foreign subsidiaries. As ofDecember 31, 2020 , our liability for taxes that would be payable as a result of repatriation of undistributed earnings of our foreign subsidiaries tothe United States was not significant and limited to withholding taxes considering our existing net operating loss carryovers. 33 -------------------------------------------------------------------------------- Table of Contents The following table presents the cash inflows and outflows by activity during 2020 and 2019 (in thousands): Years Ended December 31, 2020 2019 Net cash provided by operating activities$ 51,409 $ 4,654 Net cash used in investing activities (60,801) (13,353) Net cash provided by financing activities 42,147 5,971 Operating Activities Our operating activities provided cash of$51.4 million in 2020 and$4.7 million in 2019. The increase in net cash provided by operating activities during 2020 as compared to 2019 was due primarily to a favorable change in our net operating results of$58.6 million after adjustment of non-cash charges partially offset by a$11.9 million net cash outflow resulting from changes in operating assets and liabilities. In 2020, cash outflows from changes in operating assets and liabilities primarily consisted of increases in accounts receivable of$22.9 million due to higher sales in the fourth quarter of 2020 as compared to 2019 and in inventory of$12.1 million to support revenue growth. Cash inflows from changes in operating assets and liabilities primarily consisted of increases in accrued liabilities of$11.9 million due to higher incentive compensation, inventory held at suppliers and warranty costs, in deferred revenue of$3.6 million due to support contracts, software maintenance and Calix Cloud subscriptions, in other long-term liabilities of$2.9 million due to accrued payroll taxes and restructuring charges, and in accounts payable of$2.2 million , primarily due to timing of inventory purchases. Non-cash charges primarily consisted of stock-based compensation of$14.0 million , depreciation and amortization of$13.7 million and asset retirements and write-downs of$3.9 million . Investing Activities In 2020 cash used in investing activities of$60.8 million consisted of net purchases of marketable securities of$53.0 million and capital expenditures of$7.8 million , primarily related to purchases of test equipment and computer equipment. Financing Activities In 2020, net cash provided by financing activities of$42.1 million primarily consisted of proceeds from our common stock offering of$60.1 million , proceeds from the issuance of common stock under our employee stock purchase plans of$9.1 million and from stock option exercises of$9.0 million . These inflows were partially offset by the re-payment of our line of credit of$30.0 million and payments related to financing arrangements of$5.8 million . 2019 Compared to 2018 For a discussion of our liquidity and capital resources and our cash flow activities for the years endedDecember 31, 2019 and 2018, see Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSEC onFebruary 21, 2020 . Working Capital and Capital Expenditure Needs In the third quarter of fiscal 2020, we completed an underwritten public offering of 3,220,000 shares of our common stock at$20.00 per share, including a full exercise by the Underwriters of their option to purchase an additional 420,000 shares of Common Stock, for net proceeds of$60.1 million after deducting the underwriting discount and expenses paid by us. We believe this additional cash position will allow us to invest in future growth needs. Our material cash commitments include non-cancelable firm purchase commitments, contractual obligations under the BofA Loan Agreement, normal recurring trade payables, compensation-related and expense accruals, operating leases and minimum revenue-share obligations. We believe that our outsourced approach to manufacturing provides us significant flexibility in both managing inventory levels and financing our inventory. In the event that our revenue plan does not meet our expectations, we may be required to curtail or eliminate expenditures to mitigate the impact on our working capital. InJanuary 2020 , we terminated ourSilicon Valley Bank loan and security agreement and entered into a new loan and security agreement withBank of America, N.A . The BofA Loan Agreement provides for a revolving facility up to a principal amount of up to$35.0 million , including a$10.0 million sublimit for letters of credit. The BofA Loan Agreement matures, and all outstanding amounts become due and payable, inJanuary 2023 . The BofA Loan Agreement is secured by substantially all of our assets, including our IP. Loans under the credit facility bear interest at a rate per annum equal to either LIBOR (customarily defined) plus an applicable margin between 1.5% to 2.0% or Prime Rate (customarily defined) plus an applicable margin between 0.5% to 1.0%, in each case largely based on a fixed charge coverage ratio measured at the end of each fiscal quarter. The availability of borrowings under the BofA Loan Agreement is subject to certain conditions and requirements, including among others, if at any time our availability is less than$5.0 million , we must maintain a minimum fixed charge coverage ratio, 34 -------------------------------------------------------------------------------- Table of Contents of 1.0 to 1.0. As ofDecember 31, 2020 , we were in compliance with these requirements, had no outstanding borrowings and had the full availability of$35.0 million . Our interest rate on the line of credit was 3.75% as ofDecember 31, 2020 . InMarch 2018 , we entered into an agreement with a vendor to develop software products pursuant to which we would become obligated, if the vendor delivered software that meets our technical requirements for commercial sale, to make minimum revenue-share payments of$15.8 million over the subsequent three years. The payments are based on a revenue-share rate applied to revenue from developed product sales subject to a minimum and a maximum aggregate amount over the three-year sales period. We had our first sale inAugust 2019 . Revenue-share payments are paid quarterly in arrears, and we began making payments in the fourth quarter of 2020. InDecember 2020 , we amended the agreement to increase the revenue-share rate, limit the revenue-share payments to$15.8 million and extend the revenue-share period untilMarch 2024 . During 2018, we entered into financing arrangements to purchase lab equipment for approximately$5.1 million . In the fourth quarter of 2020, we paid$1.4 million to settle the remainder of the balance. From 2019 to 2020, in connection with our ERP implementation, we entered into financing arrangements for consulting services of$3.8 million . In the fourth quarter of 2020, we paid$1.4 million to settle the remainder of the balance. We believe, based on our current operating plan and expected operating cash flows, that our existing cash, cash equivalents and marketable securities, along with available borrowings under our BofA Loan Agreement, will be sufficient to meet our anticipated cash needs for at least the next twelve months. If we are unable to execute on our current operating plan or continue to generate operating income and positive cash flows, our liquidity, results of operations and financial condition will be adversely affected, and we may need to seek other sources of liquidity, including the sale of additional equity or incremental borrowings, to support our working capital needs. In addition, we may choose to seek other sources of liquidity even if we believe we have generated sufficient cash flows to support our operational needs. There is no assurance that any other sources of liquidity may be available to us on acceptable terms or at all. If we are unable to generate sufficient cash flows or obtain other sources of liquidity, we will be forced to limit our development activities, reduce our investment in growth initiatives and institute cost-cutting measures, all of which may adversely impact our business and potential growth. Contractual Obligations and Commitments Our principal commitments as ofDecember 31, 2020 consisted of our contractual obligations under non-cancelable outstanding purchase obligations, operating lease obligations for office space and a revenue share obligation. The following table summarizes our contractual obligations as ofDecember 31, 2020 (in thousands): Payments Due by Period Less Than 1 More Than 5 Total Year 1-3 Years 3-5 Years Years Non-cancelable purchase commitments (1)$ 123,660 $ 123,660
$ - $ - $ - Operating lease obligations (2)
18,653 3,935 7,729 6,947 42
Revenue share obligation (3) 15,314 2,925 8,342 4,047 -
$ 157,627 $ 130,520 $ 16,071 $ 10,994 $ 42
(1) Represents outstanding purchase commitments to be delivered by our
third-party manufacturers or other vendors. See Note 6 "Commitments and
Contingencies" of the Notes to Consolidated Financial Statements included in
this Annual Report on Form 10-K for further discussion regarding our outstanding
purchase commitments.
(2) Future minimum operating lease obligations in the table above include
primarily payments for our office locations, which expire at various dates
through 2026. See Note 6 "Commitments and Contingencies" of the Notes to
Consolidated Financial Statements included in this Annual Report on Form 10-K
for further discussion regarding our operating leases.
(3) Represents remaining payments related to a revenue-share obligation,
including imputed interest associated with developed software product and
related enhancements by an engineering service provider. The schedule reflects
our expected revenue-share payments based on our revenue projections for the
developed products over a sales period through March 2024 . If the minimum
revenue-share payments are not achieved by the end of that period, a true-up
payment will be due. See Note 4 "Balance Sheet Details" of the Notes to
Consolidated Financial Statements included in this Annual Report on Form 10-K
for further discussion regarding our outstanding liability.
Off-Balance Sheet Arrangements
As of December 31, 2020 and 2019, we did not have any off-balance sheet
arrangements.
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