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CASA SYSTEMS, INC.

(CASA)
  Report
Delayed Nasdaq  -  04:00 2022-09-23 pm EDT
3.210 USD   -4.18%
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CASA SYSTEMS INC Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

08/04/2022 | 05:00pm EDT
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." For discussion comparing the
periods ended June 30, 2021 and June 30, 2020, please refer to our Quarterly
Report on Form 10-Q filed with the SEC on July 30, 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.

Global and Macroeconomic Considerations

COVID-19 Pandemic


The ongoing COVID-19 pandemic presents various risks to us, which could continue
to have a material effect upon the estimates and judgments relied upon by
management in preparing these condensed consolidated financial statements. While
we remain fully operational, during the three and six months ended June 30,
2022, the effects of the 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, during the three months ended June 30, 2022, we
continued 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 three and six months ended June 30, 2022.
Additionally, shipping bottlenecks and delays further 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 if or 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.

For the three and six months ended June 30, 2021, we were able to benefit from
the CARES Act that was signed into law on March 27, 2020. The CARES Act, among
other things, includes tax provisions relating to refundable payroll tax
credits, deferment of employer's Social 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 (QIP). For the three and six months ended June 30, 2021, we
recognized a reduction to cost of goods sold of $0.3 million and $0.6 million,
respectively and a reduction in operating expenses of $2.1 million and $4.3
million, respectively, in connection with a payroll tax credit under the CARES
Act. We will continue to evaluate the impact of the CARES Act on our financial
position, results of operations, and cash flows.

Rising Inflation and Interest Rates


Further, supply chain disruption and other economic conditions have led to a
recent rise in inflation, which has caused increases in the costs to produce our
products, much of which we were not immediately able to pass on to our customers
due

                                       25
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to fixed price agreements. Increased inflation may result in decreased demand
for our products and services, increased operating costs (including our labor
costs), reduced liquidity and limitations on our ability to access credit or
otherwise raise debt and equity capital. In addition, the U.S. Federal Reserve
has raised, and may again raise interest rates in response to concerns about
inflation. Increases in interest rates, especially if coupled with reduced
government spending and volatility in financial markets, may have the effect of
further increasing economic uncertainty and heightening these risks. In an
inflationary environment, due to our fixed price agreements, we may be unable to
raise the sales prices of our products and services at or above the rate at
which our costs increase. We also may experience lower than expected sales and
potential adverse impacts on our competitive position if there is a decrease in
consumer spending or a negative reaction to our pricing for new customers.

In addition, inflation has led to recent increases in interest rates. Because
our outstanding debt bears interest at variable interest rates, this will result
in increased future debt service costs. Continued increases in interest rates
will further increase the cost of servicing our outstanding indebtedness and may
make refinancing our outstanding indebtedness not economically viable.

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, inflation and interest rates for as long as necessary.

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 six months
ended June 30, 2022 are not necessarily indicative of the results to be expected
in future periods. 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 continue to be
affected, which could cause further disruptions to our ability to meet customer
demand or delivery schedules and continued cost increases. For the three and six
months ended June 30, 2022, we did see certain delays in our supply chain that
adversely impacted delivery schedules to our customers and cost increases that
adversely impacted our gross margins. If COVID-19 were to have such effects in
the future, there would likely be further material adverse impacts 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,
rising inflation, increased interest rates and general economic uncertainty
could have a material adverse impact on our results of operations in the near to
medium term.

                                       26
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Results of Operations

The following tables set forth our consolidated results of operations in dollar amounts and as percentages of total revenue for the periods shown:


                                              Three Months Ended June 30,            Six Months Ended June 30,
                                               2022                 2021              2022               2021
                                                    (in thousands)                        (in thousands)
Revenue:
Product                                   $        59,141       $      80,469     $     111,686       $   174,267
Service                                            11,695              12,261            23,549            22,740
Total revenue                                      70,836              92,730           135,235           197,007
Cost of revenue(1):
Product                                            42,882              46,117            79,110            93,143
Service                                             1,319               1,098             2,811             2,309
Total cost of revenue                              44,201              47,215            81,921            95,452
Gross profit                                       26,635              45,515            53,314           101,555
Operating expenses:
Research and development(1)                        22,813              20,295            45,486            41,901
Selling, general and administrative(1)             21,970              21,583            44,299            43,463
Total operating expenses                           44,783              41,878            89,785            85,364
(Loss) income from operations                     (18,148 )             3,637           (36,471 )          16,191
Other expense, net                                 (2,569 )            (3,648 )          (6,478 )          (8,127 )
(Loss) income before (benefit from)
provision for income taxes                        (20,717 )               (11 )         (42,949 )           8,064
(Benefit from) provision for income
taxes                                              (4,020 )             3,182             6,332             5,508
Net (loss) income                         $       (16,697 )     $      (3,193 )   $     (49,281 )     $     2,556




(1) Includes stock-based compensation expense related to stock options; SARs;
RSUs; and PSUs, granted to employees, directors and non-employee consultants as
follows:

                                                 Three Months Ended June 30,           Six Months Ended June 30,
                                                  2022                2021              2022               2021
                                                       (in thousands)                       (in thousands)
Cost of revenue                               $          26       $          33     $         61       $         66
Research and development expense                        694                 543            1,289              1,414
Selling, general and administrative expense           2,159               3,518            4,157              6,067

Total stock-based compensation expense $ 2,879 $ 4,094 $ 5,507 $ 7,547





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                                                Three Months Ended June 30,                   Six Months Ended June 30,
                                               2022                     2021                2022                     2021
                                            (as a percentage of total revenue)           (as a percentage of total revenue)
Revenue:
Product                                              83.5 %                  86.8 %               82.6 %                  88.5 %
Service                                              16.5                    13.2                 17.4                    11.5
Total revenue                                       100.0                   100.0                100.0                   100.0
Cost of revenue:
Product                                              60.5                    49.7                 58.5                    47.3
Service                                               1.9                     1.2                  2.1                     1.2
Total cost of revenue                                62.4                    50.9                 60.6                    48.5
Gross profit                                         37.6                    49.1                 39.4                    51.5
Operating expenses:
Research and development                             32.2                    21.9                 33.6                    21.3
Selling, general and administrative                  31.0                    23.3                 32.8                    22.1
Total operating expenses                             63.2                    45.2                 66.4                    43.3
(Loss) income from operations                       (25.6 )                   3.9                (27.0 )                   8.2
Other expense, net                                   (3.6 )                  (3.9 )               (4.8 )                  (4.1 )
(Loss) income before (benefit from)
provision for income taxes                          (29.2 )                     -                (31.8 )                   4.1
(Benefit from) provision for income
taxes                                                (5.7 )                   3.4                  4.7                     2.8
Net (loss) income                                   (23.6 )%                 (3.4 )%             (36.4 )%                  1.3 %



Percentages in the table above are based on actual values. As a result, some totals may not sum due to rounding.


Three Months Ended June 30, 2022 Compared to the Three Months Ended June 30,
2021

                                                Three Months Ended June 30,
                                            2022                          2021                        Change
                                   Amount       % of Total       Amount       % of Total       Amount          %
                                                                (dollars in thousands)
Revenue:
Product                           $ 59,141             83.5 %   $ 80,469             86.8 %   $ (21,328 )      (26.5 )%
Service                             11,695             16.5 %     12,261             13.2 %        (566 )       (4.6 )%
Total revenue                     $ 70,836            100.0 %   $ 92,730            100.0 %   $ (21,894 )      (23.6 )%
Revenue by geographic region:
North America                     $ 32,037             45.2 %   $ 48,501             52.3 %   $ (16,464 )      (33.9 )%
Europe, Middle East and Africa       4,886              6.9 %      6,577              7.1 %      (1,691 )      (25.7 )%
Asia-Pacific                        28,185             39.8 %     29,693             32.0 %      (1,508 )       (5.1 )%
Latin America                        5,728              8.1 %      7,959              8.6 %      (2,231 )      (28.0 )%
Total revenue                     $ 70,836            100.0 %   $ 92,730            100.0 %   $ (21,894 )      (23.6 )%




                                       28
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                            Three Months Ended June 30,                Change
                             2022                 2021           Amount          %
Product revenue:
Wireless                $       27,100       $       33,323     $  (6,223 )     (18.7 )%
Fixed telco                     15,939               16,137          (198 )      (1.2 )%
Cable                           16,102               31,009       (14,907 )     (48.1 )%
Total product revenue           59,141               80,469       (21,328 )     (26.5 )%
Service revenue:
Wireless                         1,410                1,684          (274 )     (16.3 )%
Fixed telco                      1,187                1,043           144        13.8 %
Cable                            9,098                9,534          (436 )      (4.6 )%
Total service revenue           11,695               12,261          (566 )      (4.6 )%
Total revenue           $       70,836       $       92,730     $ (21,894 )     (23.6 )%


Product revenues during the three months ended June 30, 2022 were adversely
affected by supply chain delays across all of our markets. Wireless and cable
revenues also decreased significantly due to decreased orders from certain Tier
1 customers in the period, as well as timing of certain orders.

Service revenues remained relatively consistent period over period.

Cost of Revenue and Gross Profit

                            Three Months Ended June 30,               Change
                             2022                 2021           Amount        %
                                          (dollars in thousands)
Cost of revenue:
Product                 $       42,882       $       46,117     $ (3,235 )     (7.0 )%
Service                          1,319                1,098          221       20.1 %
Total cost of revenue   $       44,201       $       47,215     $ (3,014 )     (6.4 )%



                              Three Months Ended June 30,
                             2022                     2021                        Change
                                   Gross                    Gross                        Gross
                      Amount      Margin       Amount      Margin       Amount        Margin (bps)
                                                 (dollars in thousands)
Gross profit:
Product              $ 16,259        27.5 %   $ 34,352        42.7 %   $ (18,093 )           (1,520 )
Service                10,376        88.7 %     11,163        91.0 %        (787 )             (230 )
Total gross profit   $ 26,635        37.6 %   $ 45,515        49.1 %   $ (18,880 )           (1,150 )




The decrease in cost of product revenue and the decrease in gross margin was
partially due to product mix, with a lower proportion of higher margin software
product revenue in the three months ended June 30, 2022 as compared to the three
months ended June 30, 2021. The decrease in gross margin was also partially
attributable to an increase in inventory reserves of $4.2 million period over
period.


Cost of service revenue and service gross margin remained relatively consistent
period over period.

Research and Development

                               Three Months Ended June 30,               Change
                                2022                 2021          Amount        %
                                             (dollars in thousands)
Research and development   $       22,813       $       20,295     $ 2,518       12.4 %
Percentage of revenue                32.2 %               21.9 %




                                       29
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The increase in research and development expense was primarily due to a $1.9
million increase in personnel costs, driven by the impact of a reduction in
payroll taxes due to a CARES Act credit of $1.3 million during the three months
ended June 30, 2021, which did not repeat in 2022, increased salaries and bonus
of $0.7 million due to increased headcount and annual salary increases in 2022
and increased stock-based compensation of $0.1 million. In addition, there was
an increase in purchases of research and development materials of $0.8 million,
offset by a decrease in depreciation of $0.3 million during the three months
ended June 30, 2022 as compared to the three months ended June 30, 2021.

Selling, General and Administrative

                                              Three Months Ended June 30,                 Change
                                               2022                 2021           Amount           %
                                                              (dollars in thousands)
Selling, general and administrative       $       21,970       $       21,583     $     387           1.8 %
Percentage of revenue                               31.0 %               23.3 %




Selling, general and administrative expense remained fairly consistent over the
three months ended June 30, 2022 compared to the same period in 2021. During the
three months ended June 30, 2022, personnel costs increased $0.5 million, driven
by the impact of a reduction in payroll taxes due to a CARES Act credit of $0.8
million during the three months ended June 30, 2021, which did not repeat in
2022, increased salaries and benefits of $0.6 million due to increased headcount
and annual salary increases, an increase of $0.5 million in travel expenses and
increased commissions expense of $0.5 million, net of a decrease of $1.4 million
in stock-based compensation expense and a decrease of $0.5 million in bonus
expense. Professional fees also increased $0.6 million during the three months
ended June 30, 2022. These increases were partially offset by decreased
depreciation expense of $0.2 million, decreased other taxes of $0.2 million and
decreased facilities expenses of $0.4 million during the three months ended June
30, 2022 as compared to the three months ended June 30, 2021.

Other Income (Expense), Net

                                  Three Months Ended June 30,                Change
                                  2022                  2021           Amount         %
                                                 (dollars in thousands)
Other income (expense), net   $      (2,569 )       $      (3,648 )    $ 1,079       (29.6 )%
Percentage of revenue                  (3.6 )%               (3.9 )%




The change in other income (expense), net was primarily due to a $1.0 million
decrease in foreign exchange losses attributable to fluctuations in the
Australian dollar and the China Renminbi exchange rates. Interest income also
increased $0.2 million due to higher investment balances and increased interest
rates in the three months ended June 30, 2022 as compared to the three months
ended June 30, 2021 and interest expense decreased $0.2 million due to the
reversal of interest expense accrued related to income tax reserves. These
increases were partially offset by a decrease in other income of $0.3 million,
which was the result of a COVID related grant in China during the three months
ended June 30, 2021, which did not repeat in the three months ended June 30,
2022.

Provision for Income Taxes

                                               Three Months Ended June 30,                 Change
                                                 2022                2021          Amount           %
                                                                (dollars in thousands)

(Benefit from) provision for income taxes $ (4,020 ) $ 3,182 $ (7,202 ) (226.3 )%



The change in (benefit from) provision for income taxes for the three months
ended June 30, 2022 compared to the three months ended June 30, 2021 was
primarily due to the increase in our year-to-date losses and our expected losses
year-over-year as well as changes in the jurisdictional mix of earnings.

                                       30
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Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021

                                                 Six Months Ended June 30,
                                            2022                           2021                        Change
                                  Amount        % of Total       Amount        % of Total       Amount          %
                                                                (dollars in thousands)
Revenue:
Product                          $ 111,686             82.6 %   $ 174,267             88.5 %   $ (62,581 )      (35.9 )%
Service                             23,549             17.4 %      22,740             11.5 %         809          3.6 %
Total revenue                    $ 135,235            100.0 %   $ 197,007            100.0 %   $ (61,772 )      (31.4 )%
Revenue by geographic region:
North America                    $  61,331             45.4 %   $ 111,651             56.7 %   $ (50,320 )      (45.1 )%
Europe, Middle East and Africa      11,166              8.3 %      12,931              6.6 %      (1,765 )      (13.6 )%
Asia-Pacific                        52,883             39.1 %      59,892             30.4 %      (7,009 )      (11.7 )%
Latin America                        9,855              7.2 %      12,533              6.3 %      (2,678 )      (21.4 )%
Total revenue                    $ 135,235            100.0 %   $ 197,007            100.0 %   $ (61,772 )      (31.4 )%



                          Six Months Ended June 30,               Change
                            2022               2021         Amount          %
Product revenue:
Wireless                $      48,156       $   73,011     $ (24,855 )     (34.0 )%
Fixed telco                    27,654           31,022        (3,368 )     (10.9 )%
Cable                          35,876           70,234       (34,358 )     (48.9 )%
Total product revenue         111,686          174,267       (62,581 )     (35.9 )%
Service revenue:
Wireless                        2,885            2,275           610        26.8 %
Fixed telco                     2,711            2,649            62         2.3 %
Cable                          17,953           17,816           137         0.8 %
Total service revenue          23,549           22,740           809         3.6 %
Total revenue           $     135,235       $  197,007     $ (61,772 )     (31.4 )%


Product revenues during the six months ended June 30, 2022 were adversely
affected by supply chain delays across all of our markets. Wireless and cable
revenues also decreased significantly due to decreased orders from certain Tier
1 customers in the period, as well as timing of certain orders.

Service revenues remained relatively consistent period over period.

Cost of Revenue and Gross Profit

                            Six Months Ended June 30,                Change
                            2022                2021           Amount          %
                                          (dollars in thousands)
Cost of revenue:
Product                 $      79,110       $      93,143     $ (14,033 )     (15.1 )%
Service                         2,811               2,309           502        21.7 %
Total cost of revenue   $      81,921       $      95,452     $ (13,531 )     (14.2 )%



                               Six Months Ended June 30,
                             2022                     2021                         Change
                                   Gross                     Gross                        Gross
                      Amount      Margin       Amount       Margin       Amount        Margin (bps)
                                                 (dollars in thousands)
Gross profit:
Product              $ 32,576        29.2 %   $  81,124        46.6 %   $ (48,548 )           (1,740 )
Service                20,738        88.1 %      20,431        89.8 %         307               (170 )
Total gross profit   $ 53,314        39.4 %   $ 101,555        51.5 %   $ (48,241 )           (1,210 )




                                       31
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The decrease in cost of product revenue and the decrease in gross margin were
both due to lower sales volume during the six months ended June 30, 2022 as
compared to the six months ended June 30, 2021, as well as a change in the
product mix, with a lower proportion of higher margin software product revenue
in the six months ended June 30, 2022 as compared to the six months ended June
30, 2021. The decrease in gross margin was also due to an increase in inventory
reserves of $4.2 million period over period.

Cost of service revenue and service gross margin remained relatively consistent
period over period.

Research and Development

                               Six Months Ended June 30,              Change
                               2022                2021          Amount        %
                                           (dollars in thousands)
Research and development   $      45,486       $      41,901     $ 3,585       8.6 %
Percentage of revenue               33.6 %              21.3 %


The increase in research and development expense was primarily due to a $3.6
million increase in personnel costs, driven by the impact of a reduction in
payroll taxes due to a CARES Act credit of $2.6 million during the six months
ended June 30, 2021, which did not repeat in 2022, and increased salaries,
benefits and bonuses of $1.3 million due to increased headcount and annual
salary increases in 2022, net of decreased stock-based compensation of $0.1
million. In addition, there was an increase in purchases of research and
development materials of $0.4 million and allocated facilities costs of $0.3
million, offset by a decrease in depreciation of $0.7 million during the six
months ended June 30, 2022 as compared to the six months ended June 30, 2021.

Selling, General and Administrative

                                              Six Months Ended June 30,                  Change
                                              2022                2021            Amount           %
                                                              (dollars in thousands)

Selling, general and administrative $ 44,299 $ 43,463

    $      836           1.9 %
Percentage of revenue                              32.8 %              22.1 %


The increase in selling, general and administrative expense was primarily due to
an increase in personnel costs of $1.3 million, driven by the impact of a
reduction in payroll taxes due to a CARES Act credit of $1.6 million during the
six months ended June 30, 2021, which did not repeat in 2022, increased salaries
and benefits of $1.1 million due to increased headcount and annual salary
increases, an increase of $0.7 million in travel expenses and increased
commissions expense of $0.9 million, net of a decrease of $1.9 million in
stock-based compensation expense and a decrease of $1.0 million in bonus
expense. Trade show expense increased $0.6 million and professional fees also
increased $0.3 million during the six months ended June 30, 2022. These
increases were partially offset by decreased depreciation expense of $0.4
million, decreased other taxes of $0.4 million and decreased facilities expenses
of $0.7 million during the six months ended June 30, 2022 as compared to the six
months ended June 30, 2021.

Other Income (Expense), Net

                                 Six Months Ended June 30,                Change
                                  2022                2021          Amount         %
                                               (dollars in thousands)
Other income (expense), net   $     (6,478 )      $     (8,127 )    $ 1,649       (20.3 )%
Percentage of revenue                 (4.8 )%             (4.1 )%


The change in other income (expense), net was primarily due to a $1.5 million
decrease in foreign exchange losses due to fluctuations in the Australian dollar
and the China Renminbi exchange rates and a $0.4 million decrease in interest
expense due to reversals of income tax reserves, partially offset by a $0.4
million decrease in other income, which was the result of a COVID related grant
in China during the six months ended June 30, 2021, which did not repeat in the
six months ended June 30, 2022.

                                       32
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(Benefit from) provision for Income Taxes

                                               Six Months Ended June 30,                 Change
                                                2022               2021           Amount           %
                                                               (dollars in thousands)

(Benefit from) provision for income taxes $ 6,332 $ 5,508

$ 824 15.0 %



The change in the (benefit from) provision for income taxes for the six months
ended June 30, 2022 compared to the six months ended June 30, 2021 was primarily
due to the new requirement to capitalize and amortize all research and
development expenditures for U.S. tax purposes, which became effective under the
TCJA as of January 1, 2022. This new requirement results in significant
forecasted U.S. current income tax for the year and the corresponding deferred
tax asset created is offset by a full valuation allowance. The increase in the
year-to-date provision for income taxes was partially offset by increased losses
incurred year-over-year including the impact of losses generated in our foreign
jurisdictions. We maintain a valuation allowance against our net deferred tax
assets as June 30, 2022.

Liquidity and Capital Resources


Our principal sources of liquidity have been and continues to be our cash and
cash equivalents and cash flows from operations. The following tables set forth
our cash and cash equivalents and working capital as of June 30, 2022 and
December 31, 2021 and our cash flows for the six months ended June 30, 2022 and
2021:

                                   June 30,       December 31,
                                     2022             2021
                                          (in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents          $ 195,832     $      154,703
Working capital                      256,757            264,157



                                                            Six Months Ended June 30,
                                                            2022                2021
                                                                 (in thousands)
Consolidated Cash Flow Data:
Net cash provided by operating activities               $      9,610       $       26,715
Net cash used in investing activities                         (2,110 )             (2,914 )
Net cash provided by (used in) financing activities           35,303        

(12,822 )

As of June 30, 2022, we had cash, cash equivalents and restricted cash of $198.9 million and net accounts receivable of $67.8 million.

Cash Flows

Operating Activities


Our primary source of cash from operating activities has been cash collections
from our customers. We expect cash flows from operating activities to be
affected by changes 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,
as well as increases in personnel costs as we continue to grow our business by
enhancing our existing products and introducing new products.

During the six months ended June 30, 2022, cash provided by operating activities
was $9.6 million, primarily resulting from net cash provided by changes in our
operating assets and liabilities of $44.1 million and net non-cash adjustments
of $14.8 million, partially offset by our net loss of $49.3 million. Net cash
provided by changes in our operating assets and liabilities during the six
months ended June 30, 2022 was primarily due to a $17.6 million decrease in
accounts receivable due to collections during the period; a $21.4 million
decrease in prepaid income taxes; a $3.8 million increase in accrued income
taxes; a $2.2 million decrease in inventory; a $1.2 million decrease in prepaid
expenses; and a $23.0 million increase in deferred revenue due to the timing of
revenue recognition. These sources of cash were partially offset by a $13.9
million decrease in accounts payable due to timing of vendor payments; and a
$11.4 million decrease in accrued expenses due to the timing of certain accrual
payments.

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Investing Activities


Our investing activities have consisted primarily of expenditures for lab and
computer equipment and software to support the development of new 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 six months ended June 30, 2022
was $2.1 million, consisting of purchases of property and equipment and software
licenses.

Financing Activities

Net cash provided by financing activities during the six months ended June 30,
2022 was $35.3 million, which was mainly due to the $39.5 million received from
the SPA with Verizon Ventures LLC on April 18, 2022, net of issuance costs of
$0.1 million, combined with proceeds from the exercises of stock options of $0.3
million. These amounts were partially offset by employee taxes paid related to
net share settlement of equity awards of $1.6 million, primarily due to certain
RSUs that vested during the six months ended June 30, 2022; repurchases of
treasury stock of $1.2 million; and debt principal repayments of $1.5 million.

Term Loan and Revolving Credit Facilities


On December 20, 2016, we entered into a credit agreement with JPMorgan Chase
Bank, N.A., as administrative agent, various lenders and JPMorgan Chase Bank,
N.A. and Barclays Bank PLC, as joint lead arrangers and joint bookrunners,
providing for:

a term loan facility, or the Term Loan of $300.0 million; and

a revolving credit facility of up to $25.0 million in revolving credit loans and letters of credit.


As of June 30, 2022 and December 31, 2021, we had borrowings of $276.7 million
and $278.2 million, respectively, outstanding under the Term Loan. On December
20, 2021, the revolving credit facility matured.

Borrowings under the Term Loan 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) the JPMorgan 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 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 interest rates payable under the Term
Loan 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 of
June 30, 2022, the interest rate on the Term Loan was 6.25% per annum, which was
based on a three-month Eurodollar rate of 2.25% per annum plus the applicable
margin of 4.00% per annum for Eurodollar rate loans. As of December 31, 2021,
the interest rate on the Term Loan was 5.00% per annum, which was based on a
one-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.

The Term Loan matures on December 20, 2023 and is subject to amortization in
equal quarterly installments, which commenced on March 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 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.

In addition, we are required to make mandatory prepayments under the Term Loan
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.

                                       34
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The Term Loan is 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 Term Loan contains customary affirmative and negative covenants,
including certain restrictions which are currently in effect based upon our
total net leverage ratio, such as our ability to pay dividends and repurchase
outstanding shares. As of June 30, 2022 and December 31, 2021, we were in
compliance with all applicable covenants of the Term Loan.

Tax Cuts and Jobs Act


Of our total cash and cash equivalents of $198.9 million as of June 30, 2022,
$110.4 million was held by our foreign subsidiaries. The TCJA established a
modified territorial system requiring a mandatory deemed repatriation tax on
undistributed earnings of foreign subsidiaries. As of June 30, 2022, we had
$27.9 million of undistributed earnings in China that are not indefinitely
reinvested. The remaining unremitted earnings of our foreign subsidiaries are
either indefinitely reinvested or could be remitted with an immaterial tax cost.

The TCJA included a provision requiring companies to capitalize all of their
research and development costs incurred in tax years beginning after 2021. As a
result, research and development costs can no longer be expensed as incurred for
tax purposes, and must be capitalized and amortized, 5 years for domestic
research and 15 years for international. While it is possible that Congress may
retroactively defer, modify or repeal this provision, any such actions would be
accounted for in the period of enactment. Absent such Congressional action, this
change in tax law will result in significant cash tax payments and have a
material adverse effect on our liquidity.

Securities Purchase Agreement with Verizon Ventures LLC


On April 18, 2022, we entered into an SPA with Verizon Ventures LLC providing
for the private placement of an aggregate of 9.3 million shares of our common
stock, par value $0.001 per share, at a price of $4.24 per share, for an
aggregate purchase price of approximately $39.5 million.

We filed a resale registration statement with the SEC on May 17, 2022, and intend to use the net proceeds from the private placement for general corporate purposes.


Stock Repurchase Program

On February 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 six months ended June 30, 2022, we repurchased approximately 0.2 million
shares for a total cost of approximately $1.2 million. During the six months
ended June 30, 2021 we did not repurchase any shares. As of June 30, 2022,
approximately $60.2 million remained authorized for repurchases of our common
stock under the stock repurchase program. However, based on our net leverage
ratio at June 30, 2022, as described in Note 9 of the above notes to the
condensed consolidated financial statements, our ability to repurchase shares is
currently restricted. 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.

We believe our existing cash and cash equivalents and anticipated cash flows
from future operations 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.

Contractual Obligations and Commitments


Our material contractual obligations include our term loan, operating leases and
purchase agreements with our contract manufacturers and suppliers. 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 ended
December 31, 2021.

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Critical Accounting Policies and Significant Judgments and Estimates


We prepare our condensed consolidated financial statements in accordance with
generally accepted accounting principles in the 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 adoption of ASU 2021-08, 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 ended December
31, 2021.

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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