CASA SYSTEMS, INC. The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and related notes and other financial information included elsewhere in this Annual Report on Form 10-K. 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 Annual Report on Form 10-K, particularly in the section titled "Risk Factors." For discussion comparing the period endedDecember 31, 2020 toDecember 31, 2019 , please refer to our Annual Report on Form 10-K, filed with theSEC onFebruary 25, 2021 .
Overview
With our physical, virtual and cloud-native 5G infrastructure and customer premise networking equipment solutions, we help our CSP customers transform and expand their public and private high-speed data and multi-service communications networks so they can meet the growing demand for bandwidth and new services. Our core and edge convergence technology enables CSPs 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 regardless of access technology. 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 extend network coverage or increase network capacity. Our solutions are commercially deployed in over 70 countries by more than 475 customers, including regional service providers as well as some of the world's largest Tier 1 CSPs, serving millions of subscribers.
COVID-19 Pandemic
The ongoing COVID-19 pandemic presents various risks to us, not all of which we are able to fully evaluate or even to foresee at the current time, and which could have a material effect upon the estimates and judgments relied upon by management in preparing these consolidated financial statements. While we remain fully operational, during the year endedDecember 31, 2021 , the effects of the ongoing COVID-19 pandemic on the global supply chain had a significant adverse effect on our financial results. In particular, certain of our products utilize components whose availability was significantly exceeded by global demand. As a result, throughout 2021, and increasingly during the second half of the year, we began to see shortages of supply that resulted in our inability to fulfill certain customer orders within normal lead times. This adversely impacted our revenue and operating results for the year endedDecember 31, 2021 . Additionally, shipping bottlenecks and delays negatively affected our ability to timely fulfill customer orders, thereby delaying our ability to consummate sales and recognize revenue. We have also seen, in some cases, significant increases in shipping costs. While we continue to work with our supply chain, contract manufacturers, logistics partners and customers to minimize the extent of such impacts, we expect the effects of global supply chain issues to continue and cannot predict when such effects will subside. This may prevent us from being able to fulfill our customers' orders in a timely manner or at all, which could lead to one or more of our customers cancelling their orders. At this time, we are neither able to estimate the extent of these impacts nor predict whether our efforts to minimize or contain them will be successful. We intend to continue to monitor our business very closely for any effects of COVID-19 for as long as necessary. In addition to the negative impact on our business from global supply chain constraints related to COVID-19, we saw certain benefits that included decreases in certain operating expenses, such as travel and trade show expense, and benefited from certainU.S. government tax relief measures, discussed further below, during the years endedDecember 31, 2021 and 2020. We expect these benefits to gradually diminish as the various geographies in which we operate begin to recover from the pandemic. For the year endedDecember 31, 2021 , we were able to benefit from the Coronavirus Aid, Relief and Economic Security Act, or the CARES Act, that was signed into law onMarch 27, 2020 . The CARES Act, among other things, includes tax provisions relating to refundable payroll tax credits, deferment of employer'sSocial Security payments, net operating loss utilization and carryback periods, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property, or QIP. For the year endedDecember 31, 2021 , we recognized a reduction to cost of goods sold of$0.6 million and a reduction in operating expenses of$4.3 million , in 51 -------------------------------------------------------------------------------- connection with a payroll tax credit under the CARES Act. For the years endedDecember 31, 2021 and 2020, we recognized an income tax benefit of$7.1 million and$23.5 million , respectively (see Note 10 to our accompanying financial statements) due to the net operating loss carryback provisions of the CARES Act. We will continue to evaluate the impact of the CARES Act on our financial position, results of operations, and cash flows. Due to the above circumstances and as described generally in this Annual Report on Form 10-K, our results of operations for the years endedDecember 31, 2021 and 2020 are not necessarily indicative of the results to be expected in future years. Management cannot predict the full impact of the ongoing 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 temporarily accelerate or 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 or delivery schedules. For the year endedDecember 31, 2021 , we did see certain delays in our supply chain that adversely impacted delivery schedules to our customers. If COVID-19 were to have such effects in the future, there would likely be a material adverse impact on our financial results, liquidity and capital resource needs. This uncertainty makes it challenging for management to estimate the future performance of our business, particularly in the near to medium term and the impact of COVID-19 could have a material adverse impact on our results of operations in the near to medium term. Our Business Model We derive revenue from sales of our products and services. Prior to the year endedDecember 31, 2020 , the majority of our product revenue came from sales of our broadband products, particularly our C100G CCAP solution to cable operators worldwide. In the years endedDecember 31, 2021 and 2020, sales of our wireless and fixed telco products to mobile network operators and diversified CSPs globally comprised a majority of our revenue. We generate service revenue primarily from sales of maintenance and support services, which end customers typically purchase in conjunction with our products, and, to a lesser extent, from sales of professional services and extended warranty services. We offer end-to-end physical, virtual and cloud-native communications network infrastructure and customer premise network solutions that enable our customers to provide fixed and wireless ultra-broadband services to consumers and enterprises. We market and sell our products and services through our direct global sales force, supported by sales agents, and through resellers. A majority of our revenue is derived from direct sales, which generate higher gross margins than sales made through resellers. Our sales organization includes systems engineers with deep technical expertise that provide pre-sales technical support. These systems engineers also assist with post-sales support. Our resellers receive an order from an end customer prior to placing an order with us, and we confirm the identification of or are aware of the end customer prior to accepting such orders. We use sales agents to assist our direct global sales force in the sales process with certain customers primarily located inLatin America andAsia-Pacific . If a sales agent is engaged in the sales process, we receive the order directly from and sell the products and services directly to the end customer, and we pay a commission to the sales agent, calculated as a percentage of the related customer payment. Each of our sales teams is responsible for a geographic territory and/or has responsibility for a number of major direct end-customer accounts. We have a diverse, global customer base and our revenue by geographic region fluctuates from period to period based on the timing of customer projects. The percentages of our revenue derived from customers in each geographic region were as follows: Year Ended December 31, 2021 2020 2019 Revenue by geographic region: North America 55.1 % 42.3 % 49.6 % Latin America 6.9 % 8.9 % 8.5 % Europe, Middle East and Africa 7.6 % 9.1 % 13.5 % Asia-Pacific 30.4 % 39.7 % 28.4 % Total 100.0 % 100.0 % 100.0 % The increase in percentage of revenues in theNorth America region from the year endedDecember 31, 2020 to the year endedDecember 31, 2021 is attributed to the increased wireless sales to our Tier 1 customers. 52 -------------------------------------------------------------------------------- The decrease in percentage of revenues in theAsia-Pacific region from the year endedDecember 31, 2020 to the year endedDecember 31, 2021 is attributed to the decline of wireless and fixed telco device shipments due to supply chain issues.
Our growth strategy focuses on the following key areas:
Continue to Innovate and
We believe that we offer market-leading broadband infrastructure products today. We intend to continue to enhance our existing products and develop new products in both our current and adjacent markets. For example, we have invested in and launched virtual CCAP solutions and distributed access architecture solutions to allow our cable customers to densify their networks, providing higher bandwidth, which enhances user experience. Additionally, we have been investing in, and have been recognizing revenue from, our core, access and customer premise technology products for 4G/LTE and 5G wireless networks.
Further Penetrate Existing Customers
Our customers often deploy our products in a specific region or for a specific application, which may only account for a portion of their overall network infrastructure needs. We plan to expand our footprint within the networks of existing customers as they realize the technological and financial benefits of our solutions, as well as sell our new products to them as they offer new broadband services to their subscribers.
Expand our Customer Base by Expanding the Breadth of Solutions Sold to Customers
We intend to sell additional products and solutions to our growing installed base of CSPs, particularly as they increasingly offer converged services to their subscribers. While we initially focused on providing broadband solutions for cable service providers due to our founders' experience in the cable industry, since our IPO we have expanded our products to include wireless and fixed telco solutions that we sell to cable operators, mobile network operators and diversified communications service providers globally.
Invest in Our Platform through Selective Acquisitions
We may selectively pursue acquisitions that are consistent with our overall growth strategy. For example, onJuly 1, 2019 , we acquired NetComm for cash consideration of approximately$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 ). This acquisition has enabled us to expand our customer base, enhance our global footprint, extend our product portfolio to the customer premise networking technology and further diversify our revenue sources. As discussed in further detail below, the NetComm acquisition had a material impact on our business and is expected to have a material impact on our future performance.
Key Components of Our Results of Operations
Revenue
We generate product revenue from sales of next-generation physical, virtual and cloud-native architectures for cable broadband, fixed-line broadband and wireless broadband networks. Our products enable our service provider customers to cost-effectively deliver ultra-broadband services to their consumer and enterprise customers. Our acquisition of NetComm onJuly 1, 2019 expanded our product offerings to include fixed wireless access, fixed broadband and FTTdp devices. The results for the years endedDecember 31, 2021 and 2020 included a full year of incremental revenues as compared to the year endedDecember 31, 2019 , which included such revenues only for the six-month period fromJuly 1, 2019 throughDecember 31, 2019 . We generate service revenue from sales of initial maintenance and support services contracts, which are typically purchased by end customers in conjunction with our products, and from our customers' subsequent annual renewals of those contracts. We offer maintenance and support services under renewable, fee-based contracts, which include telephone support and unspecified software upgrades and updates provided on a when-and-if-available basis. To a lesser extent, we generate service revenue from sales of professional services, such as installation and configuration, and extended warranty services. 53 -------------------------------------------------------------------------------- The sale of our products generally includes a 90-day warranty on the software and a one-year warranty on the hardware component of the products, which includes repair or replacement of the applicable hardware. We record a warranty accrual for the initial software and hardware warranty included with our product sales and do not defer revenue. In addition, in conjunction with customers' renewals of maintenance and support services contracts, we offer an extended warranty for periods typically of one to three years for agreed-upon fees, which we record as service revenue.
Cost of Revenue
Our cost of product revenue consists primarily of the costs of procuring goods, such as CCAP chassis, cable access products, line cards embedded with Field Programmable Gate Arrays, or FPGAs, and components for our fixed wireless access and FTTdp devices. In addition, cost of product revenue includes salary and benefit expenses, including stock-based compensation, for manufacturing and supply-chain management personnel, allocated facilities-related costs, estimated warranty costs, third-party logistics costs, estimated costs associated with excess and obsolete inventory and amortization expense related to certain acquired intangible assets.
Our cost of service revenue includes salary and benefit expenses, including stock-based compensation, for our maintenance and support services and professional services personnel, fees incurred for subcontracted professional services provided to our customers, and allocated facilities-related costs.
Gross Profit
Our product gross profit and gross margin have been, and may in the future be, influenced by several factors, including changes in the volume of our software products sold, product configuration, sales of capacity expansions, geographic location of our customers, pricing due to competitive pressure, estimated warranty costs, inventory obsolescence, and favorable and unfavorable changes in inventory production volume and component costs. As some products mature, the average selling prices of those products may decline. In addition, gross margins on customer premise devices are lower than on our legacy broadband hardware products. Our service gross profit and gross margin have been, and may in the future be, influenced by the amount and timing of renewals of maintenance and support services contracts by customers, pricing due to competitive pressure and, to a lesser extent, the amount of professional services ordered by customers and performed by us. To the extent that software products increase as a percentage of revenue in 2022, we would expect that our gross margin will increase for the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 .
Operating Expenses
Our operating expenses consist of research and development and selling, general and administrative expenses.
Research and Development Expenses
Research and development expenses consist primarily of salary and benefit expenses, including stock-based compensation, for our employees engaged in research, design and development activities. Research and development expenses also include project-specific engineering services purchased from external vendors, prototype costs, depreciation expense, amortization of purchased intellectual property, allocated facilities-related costs and travel expenses.
We expect that our research and development costs may increase in the near term as we continue to make investments to enhance our existing products, develop new products and technologies, including our new wireless and fixed telco solutions, and in the event that any expense reductions related to COVID-19 cease.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include salary and benefit expenses, including stock-based compensation, for employees and costs for contractors engaged in sales, marketing, general and administrative activities. Selling, general and administrative expenses also include commissions, calculated as a percentage of the related customer payment, to sales agents that assist us in the sales process with certain customers primarily located in theLatin America andAsia-Pacific regions. These sales agent commissions fluctuate from period to period based on the amount and timing of sales to the customers subject to sales agent commissions. Selling, general and administrative expenses also include marketing activities, such as travel expenses, trade shows, marketing programs and promotional materials, amortization expense related to certain acquired intangible assets, professional services, such as legal and accounting fees, as well as allocated facilities-related costs. 54 -------------------------------------------------------------------------------- We expect that our selling, general and administrative expenses may increase in the near term as we continue to make investments in our sales and marketing organizations, expand our marketing programs and efforts to increase the market awareness and sales of our products and services, and in the event that any expense reductions related to COVID-19 cease.
Other Income (Expense), Net
Other income (expense), net consists of interest income from our investments in short-term financial instruments, such as certificates of deposit and money market mutual funds, and interest expense associated with our term loan and revolving credit facilities and debt maintenance costs related to our revolving credit facility. Other income (expense), net also includes realized and unrealized gains and losses from foreign currency transactions and interest and penalties associated with uncertain tax positions. We hedge certain significant transactions denominated in currencies other than theU.S. dollar, and we expect to continue to do so to minimize our exposure to foreign currency fluctuations.
Provision for (Benefit from) Income Taxes
We are subject to income taxes inthe United States and the foreign jurisdictions in which we do business. These foreign jurisdictions have statutory tax rates different from those inthe United States . Our effective tax rates will vary depending on the relative proportion of foreign toU.S. income, the utilization of foreign tax credits and research and development tax credits, changes in corporate structure, the amount and timing of certain employee stock-based compensation transactions, changes in the valuation of our deferred tax assets and changes in tax laws and interpretations. We plan to regularly assess the likelihood of outcomes that could result from the examination of our tax returns by theU.S. Internal Revenue Service and other tax authorities to determine the adequacy of our income tax reserves and expense. Should actual events or results differ from our then-current expectations, charges or credits to our provision for income taxes may become necessary. Any such adjustments could have a significant effect on our results of operations. For taxable years beginning afterJanuary 1, 2018 , taxpayers are subjected to the global intangible low-taxed income provisions, or GILTI provisions. The GILTI provisions require us to currently recognize inU.S. taxable income, a deemed dividend inclusion of foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary's tangible assets. The ability to benefit from a deduction and foreign tax credits against a portion of the GILTI income may be limited under the GILTI rules as a result of the utilization of net operating losses, foreign sourced income, and other potential limitations within the foreign tax credit calculation. For the years endedDecember 31, 2021 , 2020 and 2019, we recorded an income tax charge of$2.6 million ,$3.5 million and$0.9 million , respectively, related to GILTI. We have made an accounting policy election, as allowed by theSEC and FASB, to recognize the impacts of GILTI within the period incurred. Therefore, noU.S. deferred taxes are provided on GILTI inclusions of future foreign subsidiary earnings. EffectiveJanuary 1, 2022 , the Tax Cuts and Jobs Act of 2017 requires us to capitalize, and subsequently amortize R&D expenses over five years for research activities conducted in theU.S. and over fifteen years for research activities conducted outside of theU.S. This will result in a material increase to ourU.S. income tax liability and net deferred tax assets and a material decrease to our cash flows provided from operations. Furthermore, since we provide for a full valuation allowance against outU.S. deferred tax assets, this will have an adverse effect on our effective tax rate. The actual impact will depend on multiple factors, including the amount of R&D expenses incurred and whether the research activities are performed within or outside of theU.S. 55 --------------------------------------------------------------------------------
Results of Operations
The following tables set forth our consolidated results of operations in dollar amounts and as a percentage of total revenue for the periods shown:
Year Ended December 31,
2021 2020 2019
(in thousands)
Revenue:
Product $ 353,942 $ 346,083 $ 241,377
Service 47,383 47,163 40,920
Total revenue 401,325 393,246 282,297
Cost of revenue(1):
Product 208,451 187,706 113,059
Service 4,694 4,941 6,706
Total cost of revenue 213,145 192,647 119,765
Gross profit 188,180 200,599 162,532
Operating expenses:
Research and development(1) 84,362 84,370 83,331
Selling, general and administrative(1) 85,563 92,016 88,320
Total operating expenses 169,925 176,386
171,651
Income (loss) from operations 18,255 24,213 (9,119 ) Other income (expense), net (14,761 ) (14,464 ) (15,296 ) Income (loss) before provision for (benefit from) income taxes 3,494 9,749 (24,415 ) Provision for (benefit from) income taxes 287 (15,052 ) 23,791 Net income (loss)$ 3,207 $ 24,801 $ (48,206 )
(1) Includes stock-based compensation expense related to stock options, stock
appreciation rights and restricted stock units granted to employees and
non-employee consultants as follows:
Year Ended December 31,
2021 2020 2019
(in thousands)
Cost of revenue $ 137 $ 153 $ 216
Research and development expense 2,665 2,447 1,569
Selling, general and administrative expense 12,017 10,555 8,036
Total stock-based compensation expense
56
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Year Ended December 31,
2021 2020 2019
(as a percentage of total revenue)
Revenue:
Product 88 % 88 % 86 %
Service 12 12 14
Total revenue 100 100 100
Cost of revenue:
Product 52 48 40
Service 1 1 2
Total cost of revenue 53 49 42
Gross profit 47 51 58
Operating expenses:
Research and development 21 21 30
Selling, general and administrative 21 23 31
Total operating expenses 42 45 61
Income (loss) from operations 5 6 (3 )
Other income (expense), net (4 ) (4 ) (5 )
Income (loss) before provision for (benefit
from) income taxes 1 2 (9 )
Provision for (benefit from) income taxes 0 (4 ) 8
Net income (loss) 1 % 6 % (17 )%
Percentages in the table above are based on actual values. As a result, some totals may not sum due to rounding.
Year Ended
Revenue
Year Ended December 31,
2021 2020 Change
% of % of
Amount Total Amount Total Amount %
(dollars in thousands)
Revenue:
Product $ 353,942 88.2 % $ 346,083 88.0 % $ 7,859 2.3 %
Service 47,383 11.8 % 47,163 12.0 % 220 0.5 %
Total revenue $ 401,325 100.0 % $ 393,246 100.0 % $ 8,079 2.1 %
Revenue by geographic region:
North America $ 221,302 55.1 % $ 166,177 42.3 % $ 55,125 33.2 %
Latin America 27,841 6.9 % 34,926 8.9 % (7,085 ) (20.3 )%
Europe, Middle East and Africa 30,378 7.6 % 35,933 9.1 % (5,555 ) (15.5 )%
Asia-Pacific 121,804 30.4 % 156,210 39.7 % (34,406 ) (22.0 )%
Total revenue $ 401,325 100.0 % $ 393,246 100.0 % $ 8,079 2.1 %
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Year Ended December 31, Change
2021 2020 Amount %
Product revenue:
Wireless $ 170,233 $ 111,255 $ 58,978 53.0 %
Fixed telco 66,017 96,904 (30,887 ) (31.9 )%
Cable 117,692 137,924 (20,232 ) (14.7 )%
Total product revenue 353,942 346,083 7,859 2.3 %
Service revenue
Wireless 5,538 7,348 (1,810 ) (24.6 )%
Fixed telco 5,034 1,924 3,110 161.6 %
Cable 36,811 37,891 (1,080 ) (2.9 )%
Total service revenue 47,383 47,163 220 0.5 %
Total revenue $ 401,325 $ 393,246 $ 8,079 2.1 %
The increase in product revenue was primarily attributed to continued increased
demand for our wireless products, with partial offset due to supply chain
delays. The increase in wireless revenue was partially offset by decreased
revenue from our fixed telco and cable product lines, both of which have been
adversely affected by supply chain delays and decreased demand. Fixed telco
revenue was also adversely impacted by reduced revenue from a Tier 1 customer
that has recently completed its infrastructure buildout.
The overall increase in service revenue was primarily due to increased support
renewals and steady sales of fixed telco services, partially offset by a decline
in wireless service revenue. The decline in wireless services was partially
driven by a decline in professional services projects.
Cost of Revenue and Gross Profit
Year Ended
December 31, Change
2021 2020 Amount %
(dollars in thousands)
Cost of revenue:
Product $ 208,451 $ 187,706 $ 20,745 11.1 %
Service 4,694 4,941 (247 ) (5.0 )%
Total cost of revenue $ 213,145 $ 192,647 $ 20,498 10.6 %
Year Ended December 31,
2021 2020 Change
Gross Gross Gross
Amount Margin Amount Margin Amount Margin (bps)
(dollars in thousands)
Gross profit:
Product $ 145,491 41.1 % $ 158,377 45.8 % $ (12,886 ) (470 )
Service 42,689 90.1 % 42,222 89.5 % 467 60
Total gross profit $ 188,180 46.9 % $ 200,599 51.0 % $ (12,419 ) (410 )
The increase in cost of product revenue was primarily attributed to increased
revenue and supply chain issues, including increased shipping charges and prices
of our component parts. The overall product gross margin decline was also due to
the mix of products sold, with lower margin wireless products comprising a
larger percentage of total revenue.
The decrease in cost of service revenue and increase in service gross profit was
primarily due to a decrease in utilization of third-party professional services
as we have increasingly relied on in-house resources.
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Research and Development
Year Ended
December 31, Change
2021 2020 Amount %
(dollars in thousands)
Research and development $ 84,362 $ 84,370 $ (8 ) 0.0 %
Percentage of revenue 21.0 % 21.5 %
Research and development expense was consistent for the years ended December 31,
2021 and 2020. Personnel costs increased by $0.2 million , resulting from an
increase in salaries and benefits expenses of $2.8 million during the year ended
December 31, 2021 as compared with the year ended December 31, 2020 , due to a
non-recurring reduction realized from a cash flow hedge in 2020, as well as an
increase in average headcount in 2021, partially offset by a reduction in
payroll tax expenses due to a CARES Act credit of $2.6 million during the year
ended December 31, 2021 . Professional services increased $0.4 million during the
year ended December 31, 2021 . Allocated facilities and depreciation costs
increased by $0.4 million driven by increased average headcount. Offsetting
these increases were expenses for purchases of research and development
materials during the year ended December 31, 2021 , which were approximately $1.1
million less than for the year ended December 31, 2020 .
Selling, General and Administrative
Year Ended
December 31, Change
2021 2020 Amount %
(dollars in thousands)
Selling, general and administrative
(7.0 )% Percentage of revenue 21.3 % 23.4 % The decrease in selling, general and administrative expense was primarily driven by a$2.5 million decrease in depreciation expense as assets that became fully depreciated were not replaced, a decrease of$1.8 million in professional services, and a decrease of$0.6 million in other taxes. Personnel costs decreased by$1.4 million for the year endedDecember 31, 2021 , driven by a$3.9 million decrease in commissions, a$0.5 million decrease in travel due to COVID-19, and a$1.6 million decrease in payroll taxes due to a CARES Act credit during the year endedDecember 31, 2021 , partially offset by increases in salaries and benefits expenses of$3.2 million , due to a non-recurring reduction realized from a cash flow hedge in 2020, as well as increased average headcount in 2021, and increased stock-based compensation of$1.5 million . Other Income (Expense), Net Year Ended December 31, Change 2021 2020 Amount % (dollars in thousands) Other income (expense), net$ (14,761 ) $ (14,464 ) $ (297 ) 2.1 % Percentage of revenue (3.7 )% (3.7 )% The change in other income (expense), net was primarily due to a$2.6 million increase in foreign exchange losses due to fluctuations in the Australian dollar and the China Renminbi exchange rates and a$0.6 million decrease in interest income due to lower interest rates for the year endedDecember 31, 2021 , partially offset by a$1.9 million decrease in interest expense due to decreases in both the outstanding principal balance and the interest rate on our term loan facility. In addition, a liability for uncertain tax positions was reversed in 2021 due to statue expiration. Upon release of the underlying liability, associated interest and penalty accruals were also reversed, resulting in a decrease in interest expense of$1.0 million , and an increase in other income of$1.0 million for a total decrease in other expense of$2.0 million .
Provision for (Benefit from) Income Taxes
59
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Year Ended
December 31, Change
2021 2020 Amount %
(dollars in thousands)
Provision for (benefit from) income taxes
8.2 % (154.4 )%
The change in the provision for (benefit from) income taxes was primarily due to
the impact of the CARES Act which included changes in the valuation allowance
recorded against our net U.S. deferred tax assets partially offset by changes in
the impact of foreign research and development activities. The change in the
provision for (benefit from) income taxes was also impacted by changes in the
jurisdictional mix of earnings period over period.
Liquidity and Capital Resources
Our principal sources of liquidity have been and continue to be our cash and equivalents and cash flows from operations.
OnJuly 1, 2019 , we acquired 100% of the equity interests in NetComm for cash consideration of$162.0 million AUD ($112.7 million USD , based on an exchange rate of USD$0.700 per AUD$1.00 onJuly 1, 2019 ). In addition, we recognized advisory fee expenses of$1.5 million , which became due and payable upon the closing of the acquisition. The following tables set forth our cash and cash equivalents and working capital as ofDecember 31, 2021 , 2020 and 2019 as well as our net cash flows for the years endedDecember 31, 2021 , 2020 and 2019: As of December 31, 2021 2020 2019 (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents$ 154,703 $ 157,455 $ 113,638 Working capital 264,157 251,573 213,977 Year Ended December 31, 2021 2020 2019 (in thousands) Consolidated Cash Flow Data: Net cash provided by (used in) operating activities$ 33,598 $ 53,642 $ (39,022 ) Net cash used in investing activities (5,326 ) (5,585 ) (118,022 ) Net cash used in financing activities (29,395 ) (6,303 ) (9,527 )
As of
We believe our existing cash and cash equivalents 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. From our inception throughDecember 31, 2021 , our board of directors has declared a special dividend on five separate occasions and has approved cash payments to the holders of our stock options, stock appreciation rights, or SARs, and restricted stock units, or RSUs, as equitable adjustments in connection with these special dividends. No dividend payments were made during the years endedDecember 31, 2021 , 2020, and 2019, however, equitable adjustment payments totaled$0.1 million ,$0.7 million and$2.6 million in the years endedDecember 31, 2021 , 2020 and 2019, respectively. As of December 60 -------------------------------------------------------------------------------- 31, 2021, there were less than$0.1 million of equitable adjustment payments that had been approved by our board of directors that had not yet been paid to the holders of our stock options, SARs and RSUs. The remaining equitable adjustment payments were fully paid inJanuary 2022 . We do not anticipate declaring cash dividends in the foreseeable future. Any future determination to declare dividends will be subject to the discretion of our board of directors and applicable law, and will depend on various factors, including our results of operations, financial condition, prospects and any other factors deemed relevant by our board of directors. Cash Flows Operating Activities Our primary source of cash from operating activities has been from cash collections from our customers. We expect cash inflows from operating activities to be affected by increases in sales and timing of collections and by purchases and shipments of inventory. Our primary uses of cash from operating activities have been for inventory purchases, personnel costs and investment in sales and marketing and research and development. We expect cash outflows from operating activities to increase as a result of further investment in research and development and sales and marketing 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 year endedDecember 31, 2021 , cash provided by operating activities was$33.6 million , primarily resulting from our net income of$3.2 million , net non-cash expenses of$31.7 million and net cash used by changes in our operating assets and liabilities of$1.3 million . The net cash used by changes in our operating assets and liabilities during the year endedDecember 31, 2021 was primarily due to a$12.0 million decrease in accounts payable due to timing of payments, a$9.9 million increase in prepaid income taxes, a$4.2 million decrease in accrued income taxes and a$2.0 million increase in prepaid expenses and other assets. These uses of cash were partially offset by a decrease in inventory of$14.1 million due to shipments to fill existing orders as well as supply chain constraints to procure our products, an$8.2 million decrease in accounts receivable due to timing of collections from customers, a$2.4 million increase in deferred revenue due to timing of orders during the year and a$2.1 million increase in accrued expenses due to the timing of payments.
Investing Activities
Other than the NetComm acquisition onJuly 1, 2019 , our investing activities consist 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 included expansion of and improvements to our facilities. As our business expands, we expect that we will continue to invest in these areas. Net cash used in investing activities during the year endedDecember 31, 2021 was$5.3 million and consisted of purchases of property and equipment of$3.9 million and purchases of software licenses of$1.4 million .
Financing Activities
Net cash used in financing activities during the year endedDecember 31, 2021 was$29.4 million and consisted of debt principal repayments of$16.3 million , repurchases of common stock of$8.8 million , and payment of taxes on behalf of our employees related to net share settlement of equity awards of$6.5 million , partially offset by proceeds from the exercise of stock options of$2.3 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 . 61
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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 ofDecember 31, 2021 and 2020, we had borrowings of$278.2 million and$288.0 million , respectively, outstanding under the term loan facility. As ofDecember 31, 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. The outstanding borrowings under the revolving credit facility were repaid in full onOctober 25, 2021 , and the revolving credit facility matured onDecember 20, 2021 . As ofDecember 31, 2020 , we had also used$1.5 million of availability under the revolving credit facility for two stand-by letters of credit, one which served as collateral to one of our customers pursuant to contractual obligations and one which served as collateral for operating leases inAustralia . Upon maturity of the revolving credit facility onDecember 20, 2021 , we entered into two new letters of credit, backed by cash collateral of$2.1 million , to serve as collateral for these obligations. 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 was 1.75% per annum for Eurodollar rate loans and 0.75% per annum for base rate loans, subject to reduction based on our maintaining 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. 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 ofDecember 31, 2021 and 2020, the interest rate on our borrowings under the term loan facility was 5.00% per annum, which was based on a one-month and six-month Eurodollar rate, respectively, at the applicable floor of 1.00% per annum plus the applicable margin of 4.00% per annum for Eurodollar rate loans. The revolving credit facility also required 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 . 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. In accordance with these provisions, a mandatory prepayment of$6.8 million was paid onApril 2, 2021 . Based on results for the year endedDecember 31, 2021 , no mandatory prepayment will be required in 2022. 62 -------------------------------------------------------------------------------- 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, which expired onDecember 20, 2021 , 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.
Tax Cuts and Jobs Act
Of our total cash and cash equivalents of$157.8 million as ofDecember 31, 2021 ,$122.1 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 a result, applicableU.S. corporate income taxes have been provided on substantially all of our accumulated earnings of foreign subsidiaries. Beginning in 2018, the TCJA also required a minimum tax on certain future earnings generated by foreign subsidiaries while providing future tax-free repatriation of such earnings through a 100% dividends-received deduction. While the intent of TCJA was to provide for a territorial tax system, effective for taxable years beginning afterJanuary 1, 2018 , taxpayers are subjected to the Global Intangible Low-Taxed Income, or GILTI, provisions. The GILTI provisions require us to currently recognize inU.S. taxable income, a deemed dividend inclusion of foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary's tangible assets. For the years endedDecember 31, 2021 and 2020 we recorded income tax charges of$2.6 million and$3.5 million , respectively, related to GILTI.
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 years endedDecember 31, 2021 and 2020, we repurchased 1.7 million and 1.2 million shares of our common stock for approximately$8.8 million and$3.0 million , before commissions, respectively. As ofDecember 31, 2021 , approximately$61.4 million remained authorized for repurchases of our common stock under the stock repurchase program. The stock repurchase program has no expiration date, does not require us to purchase a minimum number of shares, and may be suspended, modified or discontinued at any time without prior notice.
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of financial condition and results of operations is based on our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, which have been prepared in accordance with accounting principles generally accepted inthe United States of America , or GAAP. In preparing our consolidated financial statements, we make estimates, assumptions and judgments that can have a significant effect on our reported revenue, results of operations and net income or loss, as well as on the value of certain assets and liabilities on our balance sheet during and as of the reporting periods. These estimates, assumptions and judgments are necessary because future events and their effects on our results and the value of our assets cannot be determined with certainty and are made based on our historical experience and on other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. These estimates may change as new events occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time. As the use of estimates is inherent in the financial reporting process, actual results could differ from those estimates. While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
EffectiveJanuary 1, 2019 , we adopted ASC Topic 606, Revenue from Contracts with Customers, or ASC 606, using the modified retrospective transition method. We applied this method to contracts that were not complete as of the date of initial application. The following is a summary of new and/or revised significant accounting policies affected by our adoption of ASC 606, which relate primarily to revenue and cost recognition. 63 -------------------------------------------------------------------------------- We generate revenue from sales of our products, along with associated maintenance, support and extended hardware warranty services, and, to a lesser extent, from sales of professional services. Maintenance and support services include telephone support, bug fixes and unspecified software upgrades and updates provided on a when-and-if-available basis and/or extended hardware warranty.
In our consolidated statements of operations and comprehensive income (loss), we classify revenue from sales of cable, wireless and fixed telco products as product revenue, and revenue from maintenance and support and professional services as service revenue.
In accordance with ASC 606, we recognize revenue when a customer obtains control of promised products or services. The amount of revenue recognized reflects the consideration that we expect to be entitled to receive in exchange for these products or services. To achieve the core principle of this standard, we apply the following five steps: 1) Identify the contract with a customer - We consider binding contracts and/or purchase orders to be customer contracts, provided collection is probable. We assess collectability based on a number of factors that generally include information supplied by credit agencies, references and/or analysis of customer accounts and payment history. We combine contracts with customers if those contracts were negotiated as a single deal or contain price dependencies. 2) Identify the performance obligations in the contract - We identify performance obligations as products and services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the product or service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the products or services is separately identifiable from other promises in the contract. 3) Determine the transaction price - We determine the transaction price based on the consideration to which we expect to be entitled in exchange for transferring products or services to the customer. We include variable consideration in the transaction price if, in our judgment, it is probable that no significant future reversal of cumulative revenue under the contract will occur. 4) Allocate the transaction price to performance obligations in the contract - We allocate the transaction price to performance obligations based on a relative standalone selling price, or SSP. 5) Recognize revenue when or as we satisfy a performance obligation - We recognize revenue from product sales upon delivery to the customer, which is generally when control of the asset has passed to the customer. Support revenue is generally recognized over the contract period once the associated product's control has been passed to the customer. Finally, for professional services, we recognize revenue for the fee-based arrangements upon completion of the service and receipt of acceptance, if applicable.
Performance Obligations
The majority of our contracts with customers contain multiple performance obligations including products and maintenance services, and on a limited basis, professional services. For these contracts, we account for individual performance obligations separately if they are considered distinct. We consider our cable, wireless and fixed telco products, maintenance services and professional services as distinct performance obligations. When multiple performance obligations exist in a customer contract, we allocate the transaction price to the separate performance obligations on a relative SSP basis. We determine SSP using our judgment and based on the best evidence available which may include the selling price of products when sold on a standalone basis to similar customers in similar circumstances, or in the absence of standalone sales, taking into consideration our historical pricing practices by customer type, selling method (i.e., resellers or direct), and geographic-specific market factors.
Product revenue
Some of our cable, wireless and fixed telco products have both software and
non-software (i.e., hardware) components that function together to deliver the
products' essential functionality. In these instances, our hardware generally
cannot be used apart from the embedded software and is considered one distinct
performance obligation. We recognize revenue for both new and existing customers
at a point in time when control of the products is transferred to the customer,
which is typically when title and risk of loss have transferred and the right to
payment is enforceable. We also earn revenue from the sale of perpetual software
licenses and/or software-enabled capacity expansions. Revenue on perpetual
software licenses and software-enabled capacity expansions for existing
customers are also distinct performance obligations as they are separately
identifiable and provide additional bandwidth capacity on hardware products
already purchased by the customer. We recognize revenue on perpetual software
licenses and software-enabled capacity expansions when control is transferred,
which is typically as the software entitlements are made available to the
customer.
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When customer contracts require acceptance of product and services, we consider
the nature of the acceptance provisions to determine if they are substantive or
considered perfunctory to determine if these acceptance provision impact the
timing of revenue recognition. When acceptance provisions are considered
substantive, we will defer revenue on all performance obligations in the
contract subject to acceptance until acceptance has been received. We do not
defer revenue when acceptance provisions are deemed perfunctory.
Maintenance and Support Services and Professional Services Revenue
Other than for certain of our CPE products, we generally sell our products with maintenance and support services, a distinct performance obligation that includes the stand-ready obligation to provide telephone support, bug fixes and unspecified software upgrades and updates provided on a when-and-if-available basis and/or extended hardware warranty. After the initial sale, customers may purchase annual renewals of support contracts. Our telephone support and unspecified upgrades and updates are delivered over time and we therefore recognize revenue ratably over the contract term, which is typically one year, but can be as long as five years. We also generate revenue from sales of professional services, such as installation, configuration and training. Professional services are a distinct performance obligation since our products are functional without these services and can generally be performed by the customer or a third party. We generally recognize fee-based professional services delivered at a point in time as the professional services are completed and upon receipt of acceptance if applicable. The sale of our products generally includes a 90-day warranty on the software and a one-year warranty on the hardware component of the products, which includes repair or replacement of the applicable hardware. We include these warranties to ensure the products perform in accordance with our specifications and are therefore not a performance obligation. We record a warranty accrual for the initial software and hardware warranty included with product sales and do not defer revenue. Resellers and Sales Agents We market and sell our products through its direct global sales force, supported by sales agents, and through resellers. Our resellers receive an order from an end customer prior to placing an order with us, and we confirm the identification of or are aware of the end customer prior to accepting such order. We invoice the reseller an amount that reflects a reseller discount and record revenue based on the amount of the discounted transaction value. Aside from wireless and fixed telco hardware products, our resellers do not stock inventory received from us. When we transact with a reseller, the contract is with the reseller and not with the end customer. Whether we transact business with and receive the order from a reseller or directly from an end customer, our revenue recognition policy and resulting pattern of revenue recognition for the order are the same. We have assessed whether we are the principal (i.e., reports revenues on a gross basis) or agent (i.e., reports revenues on a net basis) by evaluating whether we have control of the good or service before it is transferred to the customer. As we control the promised good or service before transferring it to the customer, we act as the principal in the transaction. Accordingly, we report revenues on a gross basis. We also use sales agents that assist in the sales process with certain customers primarily located in theLatin America andAsia-Pacific regions. Sales agents are not resellers. If a sales agent is engaged in the sales process, we receive the order directly from and sell the products and services directly to the end customer, and we pay a commission to the sales agent, calculated as a percentage of the related transaction value. Accounting considerations related to sales agent commissions are discussed in the "Costs to Obtain or Fulfill a Contract" section below.
Costs to Obtain or Fulfill a Contract
We capitalize commission expenses paid to internal sales personnel and sales agent commissions that are incremental to obtaining customer contracts, for which we recognize the related revenue over a future period greater than 12 months. We incur these costs on initial sales of product, professional services and maintenance and support contract renewals. We defer these costs and amortize them over the period of benefit, which we generally consider to be the contract term or length of the longest delivery period as contract capitalization costs in the consolidated balance sheets. We defer these costs and amortize them over the period of benefit, which we generally consider to be the contract term. We elected to use the practical expedient, allowing us to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period would have been one year or less.
Commissions paid relating to maintenance and support contract renewals of twelve months or less are expensed as incurred as commissions paid on renewals are commensurate with commissions paid on initial sales transactions. Costs to
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obtain a contract for professional services contracts are expensed as incurred
in accordance with the practical expedient as the contractual period of our
professional services contracts are one year or less. We periodically review the
carrying amount of capitalized contract costs to determine whether events or
changes in circumstances have occurred that could impact the period of benefit.
Deferred Revenue
We record amounts billed in excess of revenue recognized as deferred revenue. Deferred revenue includes customer deposits, amounts billed for maintenance and support services contracts in advance of services being performed, amounts for trade-in right liabilities and amounts related to contracts that have been deferred as a result of not meeting the required revenue recognition criteria as of the end of the reporting period. We report deferred revenue expected to be recognized as revenue more than one year subsequent to the balance sheet date within long-term liabilities in the consolidated balance sheets. We defer recognition of direct costs, such as cost of goods and services, until recognition of the related revenue. We classify such costs as current assets if the related deferred revenue is classified as current and as non-current assets if the related deferred revenue is classified as non-current.
Other Revenue Recognition Policies
Our customary payment terms are generally 90 days or less. We have elected to apply the practical expedient that allows an entity to not adjust the promised amount of consideration in customer contracts for the effect of a significant financing component when the period between the transfer of product and services and payment of the related consideration is less than one year. If we provide extended payment terms that represent a significant financing component, we adjust the amount of promised consideration for the time value of money using an appropriate discount rate and recognize interest income separate from the revenue recognized on contracts with customers. During the years endedDecember 31, 2021 , 2020 and 2019, we recorded less than$0.1 million ,$0.1 million and$0.2 million , respectively, in interest income in our consolidated statements of operations and comprehensive income (loss) related to customers that were determined to have a significant financing component. In limited instances, we have offered future rebates to customers based on a fixed or variable percentage of actual sales volumes over specified periods. The future rebates earned based on the customer's purchasing from us in one period may be used as credits to be applied by them against accounts receivable due to the Company in later periods. We account for these future rebates as variable consideration and reduce the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will occur when the variable consideration is resolved. We estimate the reduction of the transaction price based on historical activity and other relevant factors and recognize it when we recognize revenue for the transfer of goods and services to the customer on which the future rebate was earned. Other forms of contingent revenue or variable consideration are infrequent.
We exclude any taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction (e.g., sales, use and value added taxes) from our transaction price.
We record billings to customers for reimbursement of out-of-pocket expenses, including travel, lodging and meals as revenue, and we record the associated costs incurred by us for those items as cost of revenue. We account for revenue related to the reimbursement of out-of-pocket costs as variable consideration. We account for any shipping and handling activities as a fulfilment cost rather than an additional promised service. We record shipping and handling billed to customers as an offset to cost of revenue.
Inventories
We value inventories the lower of cost or market value. We compute cost using
the first-in first-out convention. Inventories are composed of hardware and
related component parts of finished goods. We establish provisions for excess
and obsolete inventories after evaluating historical sales, future demand,
market conditions, expected product life cycles, and current inventory levels to
reduce such inventories to their estimated net realizable value. We make such
provisions in the normal course of business and charge them to cost of revenue
in our consolidated statements of operations and comprehensive income (loss).
We include deferred inventory costs within inventory in our consolidated balance
sheets. Deferred inventory costs represent the cost of products that have been
delivered to the customer for which revenue associated with the arrangement has
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been deferred as a result of not meeting all of the required revenue recognition
criteria, such as receipt of customer acceptance. Until the revenue recognition
criteria are met, we retain the right to return of the underlying inventory. We
recognize deferred inventory costs as cost of revenue in our consolidated
statements of operations and comprehensive income (loss) when the related
revenue is recognized.
Goodwill represents the excess purchase price over the estimated fair value of net assets acquired as of the acquisition date. We test goodwill for impairment on an annual basis and between annual tests when impairment indicators are identified, and goodwill is written down when impaired. We recognized goodwill in connection with the acquisition of NetComm onJuly 1, 2019 . We perform our annual goodwill impairment test during the fourth quarter. For our annual goodwill impairment test, we operate under one reporting unit and the fair value of our reporting unit has been determined based on our enterprise value. As part of the annual goodwill impairment test, we have the option to perform a qualitative assessment to determine whether further impairment testing is necessary. Examples of events and circumstances that might indicate that the reporting unit's fair value is less than its carrying amount include macro-economic conditions such as deterioration in the entity's operating environment or industry or market considerations; entity-specific events such as increasing costs, declining financial performance, or loss of key personnel; or other events such as a sustained decrease in the stock price on either an absolute basis or relative to peers. If, as a result of our qualitative assessment, we determine that it is more likely than not (i.e., greater than 50% chance) that the fair value of our reporting unit is less than our carrying amount, the quantitative impairment test will be required. Otherwise, no further testing will be required. We completed our qualitative assessment and concluded that as ofDecember 31, 2021 , it is not more likely than not that the fair value of our reporting unit is less than our carrying amount. We amortize our acquired intangible assets subject to amortization using the straight-line method over their estimated useful lives, ranging from 3 to 10 years. Purchased software licenses are classified as intangible assets and are amortized using the straight-line method over their estimated useful lives, typically ranging from 3 to 4 years. We evaluate the recoverability of intangible assets periodically, by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired. We considered potential impairment indicators of acquired intangible assets atDecember 31, 2021 and noted no indicators of impairment.
Product Warranties
Substantially all of our products are covered by a warranty for software and hardware for periods ranging from 90 days to one year. In addition, in conjunction with customers' renewals of maintenance and support contracts, we offer an extended warranty for periods typically of one to three years for agreed-upon fees. In the event of a failure of a hardware product or software covered by these warranties, we must repair or replace the software or hardware or, if those remedies are insufficient, provide a refund at our discretion. Our warranty reserve, which is included in accrued expenses and other current liabilities in our consolidated balance sheets, reflects estimated material, labor and other costs related to potential or actual software and hardware warranty claims for which we expect to incur an obligation. We base our estimates of anticipated rates of warranty claims and the costs associated therewith are primarily on historical information and future forecasts. We periodically assess the adequacy of the warranty reserve and adjust the amount as necessary. If the historical data used to calculate the adequacy of the warranty reserve are not indicative of future requirements, additional or reduced warranty reserves may be required.
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 temporary differences between the financial statement and tax basis of assets and liabilities, as measured by enacted tax rates anticipated to be in effect when these differences reverse. This method also requires the recognition of future tax benefits to the extent that realization of such benefits is more likely than not. Deferred tax expense or benefit is the result of changes in the deferred tax assets and liabilities. We 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 the deferred tax assets will not be realized, we establish a valuation allowance through a charge to income tax expense. We evaluate the potential for recovery of deferred tax assets by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies. As ofDecember 31, 2021 , we determined that it is more likely than not that our netU.S. deferred tax assets will not be realized, and thus recognized a valuation allowance of$28.2 against our netU.S deferred tax assets that are not expected to be realized, an increase of$3.7 during the year endedDecember 31, 2021 . Additionally, as ofDecember 31, 2021 , we 67 -------------------------------------------------------------------------------- determined that it is more likely than not that a portion of our net foreign deferred tax assets will not be realized, and thus recognized a valuation allowance of$1.3 against our net foreign deferred tax assets that are not expected to be realized, an increase of$1.3 during the year endedDecember 31, 2021 (see Note 10 to our accompanying financial statements). We record a liability for potential payments of taxes to various tax authorities related to uncertain tax positions and other tax matters. We base the recorded liability on a determination of whether and how much of a tax benefit in our tax filings or positions is more likely than not to be realized. The amount of the benefit that may be recognized in the financial statements is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. To the extent that the assessment of such tax positions changes, we record the change in estimate in the period in which the determination is made. We establish a liability, which is included in long term accrued income taxes in our consolidated balance sheets, for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These liabilities are established when we believe that certain positions might be challenged despite our belief that the tax return positions are fully supportable. We adjust the recorded liability in light of changing facts and circumstances. Our provision for income taxes includes the impact of the recorded liability and changes thereto. We recognize interest and penalties related to uncertain tax positions within other income (expense) in our consolidated statements of operations and comprehensive income (loss). We include accrued interest and penalties in long term accrued income taxes in our consolidated balance sheets. For taxable years beginning afterJanuary 1, 2018 , taxpayers are subjected to the GILTI provisions. The GILTI provisions require us to currently recognize inU.S. taxable income a deemed dividend inclusion of foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary's tangible assets. The ability to benefit from a deduction and foreign tax credits against a portion of the GILTI income may be limited under the GILTI rules as a result of the utilization of net operating losses, foreign sourced income, and other potential limitations within the foreign tax credit calculation. During the years endedDecember 31, 2021 , 2020 and 2019, we recorded an income tax charge of$2.6 million ,$3.5 million and$0.9 million , respectively, related to GILTI. We have made an accounting policy election, as allowed by theSEC and FASB, to recognize the impacts of GILTI within the period incurred. Therefore, noU.S. deferred taxes are provided on GILTI inclusions of future foreign subsidiary earnings. Stock-Based Compensation We measure stock options and other stock-based awards granted to employees and directors based on the fair value on the date of the grant and recognize compensation expense of those awards, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. Generally, we issue stock options with only service-based vesting conditions and record the expense for these awards using the straight-line method. We classify stock-based compensation expense in our consolidated statements of operations and comprehensive income (loss) in the same manner in which the award recipient's payroll costs are classified or in which the award recipient's service payments are classified. We recognize compensation expense for only the portion of awards that are expected to vest. In developing a forfeiture rate estimate, we have considered our historical experience to estimate pre-vesting forfeitures for service-based awards. The impact of a forfeiture rate adjustment will be recognized in full in the period of adjustment, and if the actual forfeiture rate is materially different from our estimate, we may be required to record adjustments to stock-based compensation expense in future periods. We estimate the fair value of each stock option grant on the date of grant using the Black-Scholes option pricing model. We were a private company untilDecember 14, 2017 and lack sufficient company-specific historical and implied volatility information for our stock. Therefore, for all option granted in 2020 or before, we estimated our expected stock volatility based on the historical volatility of publicly traded peer companies. Beginning with options granted in 2021, we estimate our expected stock volatility using a weighted-average calculation based on the historical volatility of the Company and publicly traded peer companies and expect to continue to do so until such time as we have adequate historical data regarding the volatility of our own traded stock price. The expected term of our stock options has been determined utilizing the "simplified" method for awards that qualify as "plain-vanilla" options. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to theU.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that we do not have a history of declaring or paying cash dividends, except for the special cash dividends declared inNovember 2014 ,June 2016 ,December 2016 ,May 2017 andNovember 2017 and in those circumstances the board of directors approved cash dividends to be paid to holders of our stock options, stock appreciation rights and restricted stock units upon vesting as an equitable adjustment to the holders of such instruments. 68 -------------------------------------------------------------------------------- We have also granted SARs to certain employees, which require us to pay in cash upon exercise an amount equal to the product of the excess of the per share fair market value of our common stock on the date of exercise over the exercise price, multiplied by the number of shares of common stock with respect to which the SAR is exercised. Because these awards may require us to settle the awards in cash, we account for them as a liability in our consolidated balance sheets. We recognize the liability related to these awards, as well as related compensation expense over the period during which services are rendered until completed. We estimate changes in the fair value of the SAR liability using the Black-Scholes option pricing model and record them in our consolidated statements of operations and comprehensive income (loss). After vesting is completed, we will continue to remeasure the fair market value of the liability until the award is either exercised or canceled, with changes in the fair value of the liability recorded in our consolidated statements of operations and comprehensive income (loss).
Emerging Growth Company Status
The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, provides that an "emerging growth company" can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. However, we have elected not to "opt out" of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we will adopt the new or revised standard at the time private companies adopt the new or revised standard, provided that we continue to be an emerging growth company. The JOBS Act provides that our decision to take advantage of the extended transition period for complying with new or revised accounting standards is irrevocable.
Recent Accounting Pronouncements
Refer
to the "Summary of Significant Accounting Policies" footnote within our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for our analysis of recent accounting pronouncements that are applicable to our business.
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