CASA SYSTEMS, INC. The following discussion of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in the section titled "Risk Factors."
Overview
Our solutions are conceived, designed, and built to enable our broadband service provider customers to offer high bandwidth data services to their subscribers, and help them as they transform their networks to meet the growing demand for bandwidth and the introduction of new services. We offer physical, virtual and cloud-native 5G infrastructure and customer premise networking equipment for public and private high-speed data and multi-service communications networks. Our core and edge convergence technology enables communications service providers and enterprises to cost-effectively and dynamically increase network speed, add bandwidth capacity and new services, reduce network complexity, and reduce operating and capital expenditures. We offer scalable solutions that can meet the evolving bandwidth needs of our customers and their subscribers. Our first installation in a service provider's network frequently involves deploying our broadband products in only a portion of the provider's network and, for our cable products, with only a fraction of the capacity of our products enabled at the time of initial installation. Over time, our customers have generally expanded the use of our solutions to other areas of their networks to increase network capacity. Capacity expansions are accomplished either by deploying additional systems, line cards, or the sale of additional channels through the use of software. Sales of software-based capacity expansions generate higher gross margins than hardware-based deployments. OnJuly 1, 2019 , we completed the acquisition ofNetComm Wireless Limited , or NetComm, a global leader in the development of fixed wireless and fiber-to-the-distribution-point broadband solutions. The combined company now offers a broad, highly competitive product portfolio of 4G and 5G core, edge and customer premise equipment for public and private services provider and enterprise networks.
COVID-19 Pandemic
The emergence of the coronavirus disease in 2019, or COVID-19, around the world, and particularly inthe United States andChina , and the accompanying responses of governments and businesses to the pandemic present various risks to us, not all of which we are able to fully evaluate or even to foresee at the current time. While the COVID-19 pandemic did not significantly adversely affect our financial results, business operations or liquidity in the quarter endedSeptember 30, 2020 , economic and health conditions inthe United States and across most of the globe changed rapidly during, and are continuing to change after the end of the quarter. Globally to date, all aspects of our business remain fully operational, our work from home contingency plans have been implemented and are operating successfully. The pandemic has resulted in increased demand for certain of our products, and resulting order volumes have created additional pressure on our supply chain. To date, while the increased demand has not resulted in any material delays to our production cycle, we continue to work with our supply chain and contract manufacturers in an effort to ensure continued availability of all anticipated inventory requirements. However, we cannot at this time predict whether, or to what extent, our efforts will be successful. Additionally, we saw decreases in certain operating expenses, such as travel and trade show expense, during the three months endedSeptember 30, 2020 due to the COVID-19 pandemic that we cannot ensure will be maintained. We intend to continue to monitor our business very closely for any effects of COVID-19 for as long as necessary on an ongoing basis. Due to the above circumstances and as described generally in this Quarterly Report on Form 10-Q, our results of operations for the three and nine months endedSeptember 30, 2020 are not necessarily indicative of the results to be expected for the full year. Management cannot predict the full impact of the COVID-19 pandemic on our sales channels, supply chain, manufacturing and distribution, or on economic conditions generally, including the effects on our current and potential customers, who may curtail spending on investments in current and/or new technologies, delay new equipment evaluations and trials, and possibly delay payments based on liquidity concerns, all of which could have a material impact on our business in the future. Similarly, our supply chain and our contract manufacturers could be affected, which could cause disruptions to our ability to meet customer demand. Although we have not been materially impacted to date, we cannot predict the extent to which this may impact the future results of our operations. If COVID-19 were to cause such impacts in the future, there would likely be a material adverse impact on our financial results, liquidity and capital resource needs. Thus, the ultimate extent of the effects of the COVID-19 pandemic on the Company is highly uncertain and dependent upon future developments, and such effects could exist for an extended period of time even after the pandemic might end. 29 --------------------------------------------------------------------------------
Results of Operations
The following tables set forth our consolidated results of operations in dollar amounts and as percentage of total revenue for the periods shown:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(in thousands) (in thousands)
Revenue:
Product $ 93,741 $ 71,319 $ 239,627 $ 140,196
Service 12,006 10,497 33,093 29,208
Total revenue 105,747 81,816 272,720 169,404
Cost of revenue(1):
Product 51,947 40,578 130,602 60,983
Service 1,206 2,024 3,741 5,404
Total cost of revenue 53,153 42,602 134,343 66,387
Gross profit 52,594 39,214 138,377 103,017
Operating expenses:
Research and development(1) 21,823 24,158 63,722 60,823
Selling, general and administrative(1) 21,630 23,823 67,731 61,318
Total operating expenses 43,453 47,981 131,453 122,141
Income (loss) from operations 9,141 (8,767 ) 6,924 (19,124 )
Other income (expense), net (3,269 ) (5,343 ) (10,750 ) (11,761 )
Income (loss) before provision for
(benefit from) income taxes 5,872 (14,110 ) (3,826 ) (30,885 )
Provision for (benefit from) income
taxes 2,399 (5,612 ) (5,433 ) (8,339 )
Net income (loss) $ 3,473 $ (8,498 ) $ 1,607 $ (22,546 ) (1) Includes stock-based compensation expense related to stock options, stock
appreciation rights, restricted stock units and performance-based stock units
granted to employees, directors and non-employee consultants as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(in thousands) (in thousands)
Cost of revenue $ 45 $ 47 $ 115 $ 171
Research and development expense 592 673 1,679 1,316
Selling, general and administrative expense 2,845 2,171 7,704 5,963
Total stock-based compensation expense $ 3,482 $
2,891 $ 9,498 $ 7,450
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Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(as a percentage of total revenue)
Revenue:
Product 88.6 % 87.2 % 87.9 % 82.8 %
Service 11.4 12.8 12.1 17.2
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue:
Product 49.1 49.6 47.9 36.0
Service 1.1 2.5 1.4 3.2
Total cost of revenue 50.3 52.1 49.3 39.2
Gross profit 49.7 47.9 50.7 60.8
Operating expenses:
Research and development 20.6 29.5 23.4 35.9
Selling, general and administrative 20.5 29.1 24.8 36.2
Total operating expenses 41.1 58.6 48.2 72.1
Income (loss) from operations 8.6 (10.7 ) 2.5 (11.3 )
Other income (expense), net (3.1 ) (6.5 ) (3.9 ) (6.9 )
Income (loss) before provision for
(benefit from) income taxes 5.6 (17.2 ) (1.4 ) (18.2 )
Provision for (benefit from) income
taxes 2.3 (6.9 ) (2.0 ) (4.9 )
Net income (loss) 3.3 % (10.4 )% 0.6 % (13.3 )%
Percentages in the table above are based on actual values. As a result, some totals may not sum due to rounding.
Three Months EndedSeptember 30, 2020 Compared to the Three Months EndedSeptember 30, 2019 Three Months Ended September 30, 2020 2019 Change Amount % of Total Amount
% of Total Amount %
(dollars in thousands)
Revenue: Product$ 93,741 88.6 %$ 71,319 87.2 %$ 22,422 31.4 % Service 12,006 11.4 % 10,497 12.8 % 1,509 14.4 % Total revenue$ 105,747 100.0 %$ 81,816 100.0 %$ 23,931 29.2 % Revenue by geographic region: North America$ 38,464 36.4 %$ 33,241 40.6 %$ 5,223 15.7 % Europe, Middle East and Africa 6,047 5.7 % 8,315 10.2 % (2,268 ) (27.3 )% Asia-Pacific 48,903 46.2 % 34,130 41.7 % 14,773 43.3 % Latin America 12,333 11.7 % 6,130 7.5 % 6,203 101.2 % Total revenue$ 105,747 100.0 %$ 81,816 100.0 %$ 23,931 29.2 % Three Months Ended September 30, Change 2020 2019 Amount % Product revenue: Wireless $ 26,825$ 20,698 $ 6,127 29.6 % Fixed telecom 34,005 17,459 16,546 94.8 % Cable 32,911 33,162 (251 ) -0.8 % Total product revenue 93,741 71,319 22,422 31.4 % Service revenue 12,006 10,497 1,509 14.4 % Total revenue $ 105,747$ 81,816 $ 23,931 29.2 % 31
-------------------------------------------------------------------------------- For the three months endedSeptember 30, 2020 , our Wireless and Fixed telecom product revenues increased by$6,127 and$16,546 , respectively. The increase in product revenue was due, in part, to the COVID-19 pandemic and the ensuing shift in demand for bandwidth which generated increased demand for our Wireless and Fixed telecom access devices. Additional increases resulted from sales of new products and sales to new customers.
The increase in service revenue was primarily due to an increase in support renewal attach rates as well as lower discounts.
The increase in revenue in theAsia-Pacific region is driven by the aforementioned increase in Wireless and Fixed telecom revenues, and our high concentration of customers in that region. RegardingLatin America , the increase in revenue is due to revenue from a significant cable system upgrade by one of our largest customers in that region.
Cost of Revenue and Gross Profit
Three Months Ended September 30, Change
2020 2019 Amount %
(dollars in thousands)
Cost of revenue:
Product $ 51,947 $ 40,578 $ 11,369 28.0 %
Service 1,206 2,024 (818 ) (40.4 )%
Total cost of revenue $ 53,153 $ 42,602 $ 10,551 24.8 %
Three Months Ended September 30,
2020 2019 Change
Gross Gross Gross
Amount Margin Amount Margin Amount Margin (bps)
(dollars in thousands)
Gross profit:
Product $ 41,794 44.6 % $ 30,741 43.1 % $ 11,053 150
Service 10,800 90.0 % 8,473 80.7 % 2,327 930
Total gross profit
180
The increase in gross margin resulted from the combined net impact of product
mix changes and the impact of purchase accounting adjustments in the three
months ended September 30, 2019 associated with our acquisition of NetComm on
July 1, 2019 . Our Wireless and Fixed telecom products, which are more hardware
based, generally provide lower gross margins than our cable products. Wireless
and Fixed telecom comprised approximately 65% of our total product revenue for
the three months ended September 30, 2020 , as compared to approximately 54% for
the three months ended September 30, 2019 . In addition, gross margin for the
three months ended September 30, 2019 was adversely impacted by the requirement
to recognize inventory acquired at its fair value at the date of the
acquisition, rather than at its historical cost. The result was that a one-time
charge for an additional $3.2 million in costs of revenue was recognized.
The increase in service gross margin was due to a decrease in incurred
professional services fees in addition to lower headcount in the three months
ended September 30, 2020 as compared with the three months ended September 30,
2019 .
Research and Development
Three Months Ended September 30, Change
2020 2019 Amount %
(dollars in thousands)
Research and development $ 21,823 $ 24,158 $ (2,335 ) (9.7 )%
Percentage of revenue 20.6 % 29.5 %
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-------------------------------------------------------------------------------- The decrease in research and development expense was primarily due to a$1.5 million decrease in personnel costs driven by a reduction in headcount, combined with lower employee travel in 2020 due to COVID-19, a$0.3 million decrease in purchases of research and development materials and a$0.2 million decrease in deprecation as some older assets fully depreciated.
Selling, General and Administrative
Three Months Ended September 30, Change
2020 2019 Amount %
(dollars in thousands)
Selling, general and administrative
20.5 % 29.1 %
The decrease in selling, general and administrative expense was primarily driven
by a decrease in acquisition costs of $1.8 million related to the acquisition of
NetComm on July 1, 2019 , a decrease in employee travel of $1.7 million due to
COVID-19 and a $0.6 million decrease in depreciation as some older assets fully
depreciated. These decreases were partially offset by a $1.5 million increase in
commissions due to increased revenues in the three months ended September 30,
2020 and a bad debt recovery of $0.7 million recognized in the three months
ended September 30, 2019 .
Other Income (Expense), Net
Three Months Ended September 30, Change
2020 2019 Amount %
(dollars in thousands)
Other income (expense), net $ (3,269 ) $ (5,343 ) $ 2,074 (38.8 )%
Percentage of revenue (3.1 )% (6.5 )%
The change in other income (expense), net was primarily due to a $1.5 million
decrease in interest expense due to decreases in both the outstanding principal
balance and the interest rate on our term loan facility and a $0.9 million
decrease in foreign exchange losses due to fluctuations in the Australian dollar
and the China Renminbi exchange rates, partially offset by a $0.5 million
decrease in interest income due to lower interest rates.
Provision for (benefit from) Income Taxes
Three Months Ended September 30, Change
2020 2019 Amount %
(dollars in thousands)
Provision for (benefit from) income taxes $ 2,399
40.9 % 39.8 %
The change to the income tax provision for the three months ended September 30,
2020 compared to the income tax benefit for the three months ended September 30,
2019 is primarily due to geographical mix of profits, the recognition of a
benefit from final regulations under IRC Section 163(j), as well as a full
valuation allowance against the deferred tax assets in the United States in the
three months ended September 30, 2020 .
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Nine months Ended September 30, 2020 Compared to the Nine months Ended
September 30, 2019
Nine Months Ended September 30,
2020 2019 Change
Amount % of Total Amount % of Total Amount %
(dollars in thousands)
Revenue:
Product $ 239,627 87.9 % $ 140,196 82.8 % $ 99,431 70.9 %
Service 33,093 12.1 % 29,208 17.2 % 3,885 13.3 %
Total revenue $ 272,720 100.0 % $ 169,404 100.0 % $ 103,316 61.0 %
Revenue by geographic region:
North America $ 105,995 38.9 % $ 75,140 44.3 % $ 30,855 41.1 %
Europe, Middle East and Africa 27,493 10.1 % 28,991 17.1 % (1,498 ) (5.2 )%
Asia-Pacific 118,732 43.5 % 46,693 27.6 % 72,039 154.3 %
Latin America 20,500 7.5 % 18,580 11.0 % 1,920 10.3 %
Total revenue $ 272,720 100.0 % $ 169,404 100.0 % $ 103,316 61.0 %
Nine Months Ended September 30, Change
2020 2019 Amount %
Product revenue:
Wireless $ 62,992 $ 22,353 $ 40,639 181.8 %
Fixed telecom 75,756 17,504 58,252 332.8 %
Cable 100,879 100,339 540 0.5 %
Total product revenue 239,627 140,196 99,431 70.9 %
Service revenue 33,093 29,208 3,885 13.3 %
Total revenue $ 272,720 $ 169,404 $ 103,316 61.0 %
The increase in product revenue for the nine months ended September 30, 2020 , as
compared with the nine months ended September 30, 2019 , was primarily due to the
completion of the NetComm acquisition effective July 1, 2019 . Thus, revenue for
the nine months ended September 30, 2020 includes revenue for the six months
ended June 30, 2020 of $66.6 million , comprised of $24.8 million and $41.8
million of Wireless and Fixed telecom revenue, respectively, while the prior
year period includes no NetComm revenue for the same six month period. In
addition, the COVID-19 pandemic and the ensuing shift in demand for bandwidth
has generated increased demand for our Wireless and Fixed telecom access
devices. Further, the nine months ended September 30, 2020 included higher
revenues from new products and increased sales to both new and existing
customers across our Cable, Fixed telecom and Wireless products.
The increase in service revenue for the nine months ended September 30, 2020 , as
compared with the nine months ended September 30, 2019 , was primarily due to an
increase in support renewal attach rates as well as lower discounts.
The increase in revenue in the Asia-Pacific region is primarily due to the
NetComm acquisition on July 1, 2019 , which has a high concentration of customers
in that region, as well as increased demand for our Wireless and Fixed telecom
products.
Cost of Revenue and Gross Profit
Nine Months Ended September 30, Change
2020 2019 Amount %
(dollars in thousands)
Cost of revenue:
Product $ 130,602 $ 60,983 $ 69,619 114.2 %
Service 3,741 5,404 (1,663 ) (30.8 )%
Total cost of revenue $ 134,343 $ 66,387 $ 67,956 102.4 %
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Nine Months Ended September 30,
2020 2019 Change
Gross Gross Gross
Amount Margin Amount Margin Amount Margin (bps)
(dollars in thousands)
Gross profit:
Product $ 109,025 45.5 % $ 79,213 56.5 % $ 29,812 (1,100 )
Service 29,352 88.7 % 23,804 81.5 % 5,548 720
Total gross profit
(1,010 )
The decrease in product gross margin percentage was primarily due to the
acquisition of NetComm, which sells hardware-based products that provide lower
gross margins than our historical product offerings. In addition, this decrease
is partially offset by the one-time charge described above of $3.2 million
recognized in the nine months ended September 30, 2019 associated with
accounting for the acquisition of NetComm on July 1, 2019 .
The increase in service gross margin was due to a decrease of incurred professional services fees in addition to lower headcount.
Research and Development
Nine Months Ended September 30, Change
2020 2019 Amount %
(dollars in thousands)
Research and development
23.4 % 35.9 %
The increase in research and development expense was primarily due to the
acquisition of NetComm, including a $2.2 million increase in personnel-related
costs, net of the impact of headcount reductions made in the three months ended
December 31, 2019 and reduced travel in 2020 due to COVID-19. In addition, there
was a $0.5 million increase in purchases of research and development materials
also due to the acquisition of NetComm.
Selling, General and Administrative
Nine Months Ended September 30, Change
2020 2019 Amount %
(dollars in thousands)
Selling, general and administrative
24.8 % 36.2 %
The increase in selling, general and administrative expense was primarily due to
increased personnel-related costs of $5.1 million primarily due to the
acquisition of NetComm and increased commissions resulting from increased
revenues during the nine months ended September 30, 2020 , offset by a reduction
in travel expenses due to COVID-19. Other increases primarily related to our
acquisition of NetComm including $2.9 million for professional services and $3.4
million for facilities and depreciation and amortization expenses. These
increases were partially offset by a reduction of $3.3 million in acquisition
costs related to the NetComm acquisition on July 1, 2019 , a reduction of $1.0
million in trade show expenses in 2020 as a result of COVID-19 and a $0.5
million reduction in bad debt expense.
Other Income (Expense), Net
Nine Months Ended September 30, Change
2020 2019 Amount %
(dollars in thousands)
Other income (expense), net $ (10,750 ) $ (11,761 ) $ 1,011 (8.6 )%
Percentage of revenue (3.9 )% (6.9 )%
35
-------------------------------------------------------------------------------- The change in other income (expense), net was primarily due to a$3.0 million decrease in interest income due to a decrease in our portfolio of cash equivalents balances following our acquisition of NetComm onJuly 1, 2019 , offset by a$3.0 million decrease in interest expense due to decreases in both the outstanding principal balance and the interest rate on our term loan facility. Foreign currency exchange loss (gain) resulted in an increase to other income of$1.1 million primarily due to fluctuations in the Australian dollar and the China Renminbi exchange rates. Benefit from Income Taxes Nine Months Ended September 30, Change 2020 2019 Amount % (dollars in thousands) Benefit from income taxes$ (5,433 ) $ (8,339 ) $ 2,906 (34.8 )% Effective tax rate 142.0 % 27.0 % The change in the benefit from income taxes for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 was primarily due to the recognition of the benefit from the CARES Act, the recognition of a benefit from final regulations under IRC Section 163(j), as well as the full valuation allowance against the deferred tax assets inthe United States in the three months endedSeptember 30, 2020 .
Liquidity and Capital Resources
Since our inception, we have primarily funded our operations through issuances of shares of our convertible preferred stock, our credit agreement from our term loan facility, our initial public offering and cash flows from operations. OnFebruary 21, 2019 , we entered into a definitive agreement to acquire 100% of the equity interests in NetComm. OnJuly 1, 2019 , we closed the acquisition of NetComm for cash consideration of$162.0 million Australian dollars, or AUD ($112.7 million United States dollars, or USD, based on an exchange rate of USD$0.700 per AUD$1.00 onJuly 1, 2019 ), using amounts included in restricted cash as ofJune 30, 2019 . In addition, we recognized advisory fee expenses of$1.5 million which became due and payable upon the closing of the acquisition. The following tables set forth our cash and cash equivalents and working capital as ofSeptember 30, 2020 andDecember 31, 2019 and our cash flows for the nine months endedSeptember 30, 2020 and 2019: September 30, December 31, 2020 2019 (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents$ 156,191 $ 113,638 Working capital 234,406 213,977 Nine Months Ended September 30, 2020 2019 (in thousands) Consolidated Cash Flow Data: Net cash provided by (used in) operating activities$ 51,644 $ (33,070 ) Net cash used in investing activities (4,102 ) (116,156 ) Net cash used in financing activities (5,767 ) (6,898 ) As ofSeptember 30, 2020 , we had cash and cash equivalents of$156.2 million and net accounts receivable of$66.1 million . We maintain a$25.0 million revolving credit facility, under which we have drawn$6.5 million and$1.5 million of availability was used as collateral for two stand-by letters of credit, leaving availability of$17.0 million as ofSeptember 30, 2020 . Of our total cash and cash equivalents of$156.2 million as ofSeptember 30, 2020 ,$130.7 million was held by our foreign subsidiaries. The Tax Cuts and Jobs Act, or TCJA, established a modified territorial system requiring a mandatory deemed repatriation tax on undistributed earnings of foreign subsidiaries. As ofSeptember 30, 2020 , we had$18.2 million of 36 --------------------------------------------------------------------------------
undistributed earnings in
We believe our existing cash and cash equivalents, anticipated cash flows from future operations and liquidity available from our revolving credit facility will be sufficient to meet our working capital and capital expenditure needs and debt service obligations for at least the next 12 months. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth, the timing and extent of spending on research and development efforts and other business initiatives, purchases of capital equipment to support our growth, the expansion of sales and marketing activities, expansion of our business through acquisitions or our investments in complementary products, technologies or businesses, the use of working capital to purchase additional inventory, the timing of new product introductions, market acceptance of our products and overall economic conditions. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. In the event additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all.
Cash Flows
Operating Activities
Our primary source of cash from operating activities has been from cash collections from our customers. We expect cash flows from operating activities to be affected by increases and decreases in sales volumes and timing of collections and by purchases and shipments of inventory. Our primary uses of cash from operating activities have been for personnel costs and investment in our selling, general and administrative departments and research and development. Future cash outflows from operating activities may increase as a result of further investment in research and development and selling, general and administrative requirements, and increases in personnel costs as we continue to enhance our products and introduce new products in an effort to continue to expand our business. During the nine months endedSeptember 30, 2020 , cash provided by operating activities was$51.6 million , primarily resulting from our net income of$1.6 million , net cash provided by changes in our operating assets and liabilities of$27.4 million and net non-cash adjustments of$22.6 million . The net cash provided by changes in our operating assets and liabilities during the nine months endedSeptember 30, 2020 was primarily due to a$27.5 million decrease in accounts receivable due to collections during the period; an increase in accounts payable of$13.8 million due to timing of vendor payments; a$2.5 million increase in accrued income taxes; and a$3.0 million decrease in prepaid expenses and other assets. These sources of cash were partially offset by a$9.8 million increase in prepaid income taxes due primarily to a tax refund receivable from carryback of net operating losses that became permitted upon the enactment of the CARES Act during the nine months endedSeptember 30, 2020 ; a$4.0 million decrease in deferred revenue due to the timing of revenue recognition; and a$6.6 million increase in inventory to meet future expected demand. During the nine months endedSeptember 30, 2019 , cash used in operating activities was$33.1 million , primarily resulting from our net loss of$22.5 million , net cash used in changes in our operating assets and liabilities of$12.7 million and net non-cash adjustments of$2.1 million . The net cash used in changes in our operating assets and liabilities during the nine months endedSeptember 30, 2019 was primarily due to a$25.4 million increase in inventory due to anticipated growth in our business; a$5.9 million decrease in deferred revenue due to the timing of revenue recognition; a$5.6 million decrease in accounts payable due to the timing of vendor payments; a$10.3 million decrease in accrued expenses primarily attributable to the timing of personnel-related bonus payments; and a$1.5 million increase in prepaid expenses and other assets mainly related to renewals of insurance contracts. These sources of cash were partially offset by a$33.5 million decrease in accounts receivable due to collections during the period and a$2.5 million increase in accrued income taxes.
Investing Activities
Our investing activities have consisted primarily of expenditures for lab and
computer equipment and software to support the development of new products and
increase our manufacturing capacity to meet customer demand for our products. In
addition, our investing activities include expansion of and improvements to our
facilities. As our business expands, we expect that we will continue to invest
in these areas.
37
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Net cash used in investing activities during the nine months ended
Net cash used in investing activities during the nine months endedSeptember 30, 2019 was$116.2 million and consisted of the NetComm acquisition, net of cash acquired of$109.4 million and purchases of property and equipment of$6.7 million .
Financing Activities
Net cash used in financing activities during the nine months endedSeptember 30, 2020 was$5.8 million , consisting of repurchases of common stock of$3.0 million ; employee taxes paid related to net share settlement of equity awards of$0.6 million ; dividend and equitable adjustment payments of$0.7 million ; and debt principal repayments of$8.9 million . These payments were partially offset by proceeds from the exercise of stock options of$1.0 million , and borrowings under our revolving credit facility of$6.5 million . Net cash used in financing activities during the nine months endedSeptember 30, 2019 was$6.9 million and consisted of employee taxes paid related to net share settlement of equity awards of$1.0 million , dividend and equitable adjustment payments of$2.4 million and debt principal repayments of$6.0 million , which included payments of$3.5 million to satisfy debt acquired in the acquisition of NetComm. These payments were partially offset by proceeds from the exercise of stock options of$2.5 million .
Commercial Mortgage Loan
InJuly 2015 , we entered into an$8.0 million commercial mortgage loan agreement, which matured onJuly 1, 2020 . OnJuly 1, 2020 , we paid in full the remaining$6.5 million in unpaid principal and accrued interest under the mortgage loan with funds drawn upon our revolving credit facility. The annual interest rate on the loan was 3.5%, and the loan was repayable in 60 monthly installments of principal and interest based on a 20-year amortization schedule. The loan was secured by the land and building, which are our corporate offices, purchased inMarch 2015 , and contained annual affirmative, negative and financial covenants, including maintenance of a minimum debt service ratio. The covenants were measured annually and we were in compliance with all the covenants of the mortgage loan as ofDecember 31, 2019 . As ofDecember 31, 2019 , the outstanding principal amount under the mortgage loan was$6.6 million .
Term Loan and Revolving Credit Facilities
OnDecember 20, 2016 , we entered into a credit agreement withJPMorgan Chase Bank, N.A ., as administrative agent, various lenders andJPMorgan Chase Bank, N.A . and Barclays Bank PLC, as joint lead arrangers and joint bookrunners, providing for:
• a term loan facility of
• a revolving credit facility of up to
loans and letters of credit.
As ofSeptember 30, 2020 andDecember 31, 2019 , we had borrowings of$288.8 million and$291.0 million , respectively, outstanding under the term loan facility. As ofSeptember 30, 2020 we had borrowings of$6.5 million under the revolving credit facility, which were drawn down to fund the repayment of our commercial mortgage loan. We had no outstanding borrowings under the revolving credit facility atDecember 31, 2019 . As ofSeptember 30, 2020 andDecember 31, 2019 , we had also used$1.5 million and$1.3 million under the revolving credit facility for two stand-by letters of credit, one which serves as collateral to one of our customers pursuant to a contractual obligations and one which is used as collateral for operating leases inAustralia . In addition, we may, subject to certain conditions, including the consent of the administrative agent and the institutions providing such increases, increase the facilities by an unlimited amount so long as we are in compliance with specified leverage ratios, or otherwise by up to$70.0 million . Borrowings under the facilities bear interest at a floating rate, which can be either a Eurodollar rate plus an applicable margin or, at our option, a base rate (defined as the highest of (x) theJPMorgan Chase, N.A. prime rate, (y) the federal funds effective rate, plus one-half percent (0.50%) per annum and (z) a one-month Eurodollar rate plus 1.00% per annum) plus an applicable margin. The applicable margin for borrowings under the term loan facility is 4.00% per annum for Eurodollar rate loans (subject to a 1.00% per annum interest rate floor) and 3.00% per annum for base rate loans. The applicable margin for borrowings under the revolving credit facility is 1.75% per annum for Eurodollar rate loans and 0.75% per annum for base rate loans, subject to reduction based on our maintaining of specified net leverage ratios. The interest rates payable under the facilities are subject to an increase of 2.00% per annum during the continuance of any payment default. 38 -------------------------------------------------------------------------------- For Eurodollar rate loans, we may select interest periods of one, three or six months or, with the consent of all relevant affected lenders, twelve months. Interest will be payable at the end of the selected interest period, but no less frequently than every three months within the selected interest period. Interest on any base rate loan is not set for any specified period and is payable quarterly. We have the right to convert Eurodollar rate loans into base rate loans and the right to convert base rate loans into Eurodollar rate loans at our option, subject, in the case of Eurodollar rate loans, to breakage costs if the conversion is effected prior to the end of the applicable interest period. As ofSeptember 30, 2020 , the interest rate on the term loans was 5.00% per annum, which was based on a six-month Eurodollar rate at the applicable floor of 1.00% per annum plus the applicable margin of 4.00% per annum for Eurodollar rate loans. As ofDecember 31, 2019 , the interest rate on our borrowings under the term loan facility was 5.80% per annum, which was based on a one-month Eurodollar rate of 1.80% per annum plus the applicable margin of 4.00% per annum for Eurodollar rate loans. As ofSeptember 30, 2020 , the interest rate on the revolving credit facility was 2.12% per annum, which was based on a one-month Eurodollar rate of 0.37% per annum plus the applicable margin of 1.75% per annum for Eurodollar rate loans. The revolving credit facility also requires payment of quarterly commitment fees at a rate of 0.25% per annum on the difference between committed amounts and amounts actually borrowed under the facility and customary letter of credit fees. The term loan facility matures onDecember 20, 2023 and the revolving credit facility matures onDecember 20, 2021 . The term loan facility is subject to amortization in equal quarterly installments, which commenced onMarch 31, 2017 , of principal in an annual aggregate amount equal to 1.0% of the original principal amount of the term loans of$300.0 million , with the remaining outstanding balance payable at the date of maturity. Voluntary prepayments of principal amounts outstanding under the term loan facility are permitted at any time; however, if a prepayment of principal is made with respect to a Eurodollar loan on a date other than the last day of the applicable interest period, we are required to compensate the lenders for any funding losses and expenses incurred as a result of the prepayment. Prior to the revolving credit facility maturity date, funds borrowed under the revolving credit facility may be borrowed, repaid and reborrowed, without premium or penalty. In addition, we are required to make mandatory prepayments under the facilities with respect to (i) 100% of the net cash proceeds from certain asset dispositions (including casualty and condemnation events) by us or certain of our subsidiaries, subject to certain exceptions and reinvestment provisions, (ii) 100% of the net cash proceeds from the issuance or incurrence of any additional debt by us or certain of our subsidiaries, subject to certain exceptions, and (iii) 50% of our excess cash flow, as defined in the credit agreement, subject to reduction upon our achievement of specified performance targets. The facilities are secured by, among other things, a first priority security interest, subject to permitted liens, in substantially all of our assets and all of the assets of certain of our subsidiaries and a pledge of certain of the stock of certain of our subsidiaries, in each case subject to specified exceptions. The facilities contain customary affirmative and negative covenants, including certain restrictions on our ability to pay dividends, and, with respect only to the revolving credit facility, a financial covenant requiring us to maintain a specified total net leverage ratio, in the event that on the last day of any fiscal quarter, we have utilized more than 30% of our borrowing capacity under the revolving credit facility (subject to certain exceptions). The term loan facility contains a cross-default provision, whereby, if repayment of borrowings under the revolving credit facility are accelerated due to a default of the net leverage ratio covenant, repayment of the outstanding term loan balance could also be accelerated. Because the financial covenant under the revolving credit facility only applies if outstanding utilization thereunder exceeds 30% of the total borrowing capacity on the last day of each fiscal quarter, this cross-default provision has the effect of limiting our ability to utilize more than 30% of our total borrowing capacity under the revolving credit facility of$25.0 million if both our net leverage ratio exceeds the maximum permitted by the agreement and we would not otherwise be able to reduce our outstanding utilization of the revolving credit facility to below the 30% testing threshold prior to the last day of any quarter. As ofSeptember 30, 2020 , our net leverage ratio did not exceed the maximum. As ofDecember 31, 2019 , our net leverage ratio exceeded the maximum; however, as our utilization of the revolving credit facility did not exceed the 30% testing threshold onDecember 31, 2019 , we were not in default of the revolving credit facility as a result of our net leverage ratio exceeding the maximum permitted amount. We were in compliance with all other applicable covenants of the facilities as ofSeptember 30, 2020 andDecember 31, 2019 . We do not expect to require the use of the revolving credit facility to fund operations during the next 12 months.
Stock Repurchase Program
OnFebruary 21, 2019 , we announced a stock repurchase program under which we were authorized to repurchase up to$75.0 million of our common stock. During the nine months endedSeptember 30, 2020 , we repurchased approximately 1.2 million shares for a total cost of approximately$3.0 million . During the three months endedSeptember 30, 2020 and three and nine months endedSeptember 30, 2019 , we did not repurchase any shares. As ofSeptember 30, 2020 , approximately$70.2 million remained authorized for repurchases of our common stock under the stock repurchase program. The stock repurchase program has no expiration date and does not require us to purchase a minimum number of shares, and we may suspend, modify or discontinue the stock repurchase program at any time without prior notice. 39
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Contractual Obligations and Commitments
Our material contractual obligations include our term loan facility, revolving credit facility, operating leases and purchase agreements with our contract manufacturers and suppliers. Except as discussed above regarding our repayment of the commercial mortgage loan and related draw down under our revolving credit facility and our new lease inAustralia signed subsequent toSeptember 30, 2020 , there have been no material changes to our contractual obligations and commitments from those disclosed in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 .
Critical Accounting Policies and Significant Judgments and Estimates
We prepare our condensed consolidated financial statements in accordance with generally accepted accounting principles inthe United States . The preparation of condensed consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. Other than our policies related to Derivative Instruments and Stock Compensation, as described in Note 2 of the above notes to the condensed consolidated financial statements, there have been no material changes to our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 .
Off-Balance Sheet Arrangements
As ofSeptember 30, 2020 andDecember 31, 2019 , we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, such as the use of unconsolidated subsidiaries, structured finance, special purpose entities or variable interest entities.
Recent Accounting Pronouncements
Refer to the "Summary of Significant Accounting Policies" footnote within our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for our analysis of recent accounting pronouncements that are applicable to our business.
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