CASA SYSTEMS, INC. The following discussion of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in the section titled "Risk Factors." For discussion comparing the periods endedSeptember 30, 2021 andSeptember 30, 2020 , please refer to our Quarterly Report on Form 10-Q filed with theSEC onNovember 2, 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 nine months endedSeptember 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 endedSeptember 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 nine months endedSeptember 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 nine months endedSeptember 30, 2021 , we were able to benefit from 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 (QIP). For the nine months endedSeptember 30, 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 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
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 to
fixed price agreements. Increased inflation may result in decreased demand for
our products and services, increased operating costs
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(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 prices of our products and services commensurate with 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, because our outstanding debt bears interest at variable interest
rates, the recent increases in interest rates 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 nine months
ended September 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
nine months ended September 30, 2022 , we experienced 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. 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.
27
--------------------------------------------------------------------------------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:
Nine Months Ended September
Three Months Ended September 30, 30,
2022 2021 2022 2021
(in thousands) (in thousands)Revenue: Product$ 55,435 $ 87,752 $ 167,121 $ 262,019 Service 11,464 11,467 35,013 34,207 Total revenue 66,899 99,219 202,134 296,226 Cost of revenue(1): Product 38,421 57,372 117,531 150,515 Service 1,195 1,223 4,006 3,532 Warranty Settlement Provision 12,907 - 12,907 - Total cost of revenue 52,523 58,595 134,444 154,047 Gross profit 14,376 40,624 67,690 142,179 Operating expenses: Research and development(1) 22,059 21,578 67,545 63,479 Selling, general and administrative(1) 22,442 21,029 66,741 64,492 Total operating expenses 44,501 42,607 134,286 127,971 (Loss) income from operations (30,125 ) (1,983 ) (66,596 ) 14,208 Other expense, net (2,300 ) (4,181 ) (8,778 ) (12,308 ) (Loss) income before (benefit from) provision for income taxes (32,425 ) (6,164 ) (75,374 ) 1,900 (Benefit from) provision for income taxes (1,261 ) (5,288 ) 5,071 220 Net (loss) income$ (31,164 ) $ (876 )$ (80,445 ) $ 1,680 (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 September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (in thousands) (in thousands) Cost of revenue $ 31 $ 29 $ 92$ 95 Research and development expense 824 557 2,113 1,971 Selling, general and administrative expense 2,816 3,112 6,973 9,179
Total stock-based compensation expense $ 3,671 $
3,698 $ 9,178 $ 11,245
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Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(as a percentage of total revenue) (as a percentage of total revenue)
Revenue:
Product 82.9 % 88.4 % 82.7 % 88.5 %
Service 17.1 11.6 17.3 11.5
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue:
Product 57.4 57.8 58.1 50.8
Service 1.8 1.2 2.0 1.2
Warranty Settlement Provision 19.3 - 6.4 -
Total cost of revenue 78.5 59.1 66.5 52.0
Gross profit 21.5 40.9 33.5 48.0
Operating expenses:
Research and development 33.0 21.7 33.4 21.4
Selling, general and administrative 33.5 21.2 33.0 21.8
Total operating expenses 66.5 42.9 66.4 43.2
(Loss) income from operations (45.0 ) (2.0 ) (32.9 ) 4.8
Other expense, net (3.4 ) (4.2 ) (4.3 ) (4.2 )
(Loss) income before (benefit from)
provision for income taxes (48.5 ) (6.2 ) (37.3 ) 0.6
(Benefit from) provision for income
taxes (1.9 ) (5.3 ) 2.5 0.1
Net (loss) income (46.6 )% (0.9 )% (39.8 )% 0.6 %
Percentages in the table above are based on actual values. As a result, some totals may not sum due to rounding.
Three Months EndedSeptember 30, 2022 Compared to the Three Months EndedSeptember 30, 2021 Three Months Ended September 30, 2022 2021 Change Amount % of Total Amount % of Total Amount % (dollars in thousands) Revenue: Product$ 55,435 82.9 %$ 87,752 88.4 %$ (32,317 ) (36.8 )% Service 11,464 17.1 % 11,467 11.6 % (3 ) 0.0 % Total revenue$ 66,899 100.0 %$ 99,219 100.0 %$ (32,320 ) (32.6 )% Revenue by geographic region: North America$ 31,544 47.2 %$ 51,758 52.2 %$ (20,214 ) (39.1 )% Europe, Middle East and Africa 10,936 16.3 % 6,547 6.6 % 4,389 67.0 % Asia-Pacific 19,915 29.8 % 33,161 33.4 % (13,246 ) (39.9 )% Latin America 4,504 6.7 % 7,753 7.8 % (3,249 ) (41.9 )% Total revenue$ 66,899 100.0 %$ 99,219 100.0 %$ (32,320 ) (32.6 )% 29
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Three Months Ended September 30, Change
2022 2021 Amount %
Product revenue:
Wireless $ 19,891 $ 43,070 $ (23,179 ) (53.8 )%
Fixed telco 14,971 20,187 (5,216 ) (25.8 )%
Cable 20,573 24,495 (3,922 ) (16.0 )%
Total product revenue 55,435 87,752 (32,317 ) (36.8 )%
Service revenue:
Wireless 1,478 1,141 337 29.5 %
Fixed telco 316 825 (509 ) (61.7 )%
Cable 9,670 9,501 169 1.8 %
Total service revenue 11,464 11,467 (3 ) 0.0 %
Total revenue $ 66,899 $ 99,219 $ (32,320 ) (32.6 )%
Product revenues during the three months ended September 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 September 30, Change
2022 2021 Amount %
(dollars in thousands)
Cost of revenue:
Product $ 38,421 $ 57,372 $ (18,951 ) (33.0 )%
Service 1,195 1,223 (28 ) (2.3 )%
Warranty Settlement Provision 12,907 - 12,907 100.0 %
Total cost of revenue $ 52,523 $ 58,595 $ (6,072 ) (10.4 )%
Three Months Ended September 30,
2022 2021 Change
Gross Gross Gross
Amount Margin Amount Margin Amount Margin (bps)
(dollars in thousands)
Gross profit:
Product $ 17,014 30.7 % $ 30,380 34.6 % $ (13,366 ) (390 )
Service 10,269 89.6 % 10,244 89.3 % 25 30
Warranty Settlement
Provision (12,907 ) 0.0 % - 0.0 % (12,907 ) -
Total gross profit $ 14,376 21.5 % $ 40,624 40.9 % $ (26,248 ) (1,940 )
The decrease in cost of product revenue and the decrease in product gross margin
were due to product mix, with a lower proportion of higher margin software
product revenue in the three months ended September 30, 2022 as compared to the
three months ended September 30, 2021 .
Cost of service revenue and service gross margin remained relatively consistent period over period.
The decrease in gross margin was further driven by a warranty settlement provision of$12.9 million recorded during the three months endedSeptember 30, 2022 , which reduced the margin by 19.3%. Please refer to Note 16 "Commitments and Contingencies" of the accompanying condensed consolidated financial statements for more discussion regarding this provision. 30 --------------------------------------------------------------------------------
Research and Development
Three Months Ended September 30, Change
2022 2021 Amount %
(dollars in thousands)
Research and development $ 22,059 $ 21,578 $ 481 2.2 %
Percentage of revenue 33.0 % 21.7 %
The increase in research and development expense was primarily due to increased
personnel costs of $0.3 million , driven by increased salaries of $0.3 million
due to increased headcount and increased stock-based compensation of $0.3
million , partially offset by decreased bonus expense of $0.3 million . In
addition, there was an increase in purchases of research and development
materials of $0.3 million and an increase in facilities costs of $0.1 million
due to increased headcount. These increases were partially offset by a decrease
in depreciation of $0.3 million during the three months ended September 30, 2022
as compared to the three months ended September 30, 2021 .
Selling, General and Administrative
Three Months Ended September 30, Change
2022 2021 Amount %
(dollars in thousands)
Selling, general and administrative $ 22,442 $ 21,029 $ 1,413 6.7 %
Percentage of revenue 33.5 % 21.2 %
The increase in selling, general and administrative expense was primarily due to
increased legal and professional fees of $1.8 million and increased trade show
expenses of $0.6 million . These increases were partially offset by decreased
personnel costs of $0.4 million , driven by lower bonus and commissions,
decreased depreciation expense of $0.3 million , and decreased other taxes of
$0.2 million .
Other Expense, Net
Three Months Ended September 30, Change
2022 2021 Amount %
(dollars in thousands)
Other expense, net $ (2,300 ) $ (4,181 ) $ 1,881 (45.0 )%
Percentage of revenue (3.4 )% (4.2 )%
The change in other expense, net was primarily due to a $1.9 million decrease in
foreign exchange losses attributable to fluctuations in the Euro, Australian
dollar and the China Renminbi exchange rates. Interest income also increased
$0.7 million due to higher investment balances and increased interest rates
during the three months ended September 30, 2022 as compared to the three months
ended September 30, 2021 . Interest expense increased $0.8 million due to the
increased interest rates applied to our outstanding debt.
Benefit from Income Taxes
Three Months Ended September 30, Change
2022 2021 Amount %
(dollars in thousands)
Benefit from income taxes $ (1,261 ) $ (5,288 ) $ 4,027 (76.2 )%
The change in the benefit from income taxes for the three months ended September
30, 2022 compared to the three months ended September 30, 2021 was primarily due
to a discrete benefit of $7.1 million recorded in the three months ended
September 30, 2021 related to loss carrybacks associated with the CARES Act. The
change in the benefit from income taxes was also impacted by changes in the
jurisdictional mix of earnings period over period.
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Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September
30, 2021
Nine Months Ended September 30,
2022 2021 Change
Amount % of Total Amount % of Total Amount %
(dollars in thousands)
Revenue:
Product $ 167,121 82.7 % $ 262,019 88.5 % $ (94,898 ) (36.2 )%
Service 35,013 17.3 % 34,207 11.5 % 806 2.4 %
Total revenue $ 202,134 100.0 % $ 296,226 100.0 % $ (94,092 ) (31.8 )%
Revenue by geographic region:
North America $ 92,875 46.0 % $ 163,409 55.2 % $ (70,534 ) (43.2 )%
Europe, Middle East and Africa 22,102 10.9 % 19,478 6.6 % 2,624 13.5 %
Asia-Pacific 72,798 36.0 % 93,053 31.4 % (20,255 ) (21.8 )%
Latin America 14,359 7.1 % 20,286 6.8 % (5,927 ) (29.2 )%
Total revenue $ 202,134 100.0 % $ 296,226 100.0 % $ (94,092 ) (31.8 )%
Nine Months Ended September 30, Change
2022 2021 Amount %
Product revenue:
Wireless $ 68,047 $ 116,081 $ (48,034 ) (41.4 )%
Fixed telco 42,625 51,209 (8,584 ) (16.8 )%
Cable 56,449 94,729 (38,280 ) (40.4 )%
Total product revenue 167,121 262,019 (94,898 ) (36.2 )%
Service revenue:
Wireless 4,363 3,416 947 27.7 %
Fixed telco 3,027 3,474 (447 ) (12.9 )%
Cable 27,623 27,317 306 1.1 %
Total service revenue 35,013 34,207 806 2.4 %
Total revenue $ 202,134 $ 296,226 $ (94,092 ) (31.8 )%
Product revenues during the nine months ended September 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
Nine Months Ended September
30, Change
2022 2021 Amount %
(dollars in thousands)
Cost of revenue:
Product $ 117,531 $ 150,515 $ (32,984 ) (21.9 )%
Service 4,006 3,532 474 13.4 %
Warranty Settlement Provision 12,907 - 12,907 100.0 %
Total cost of revenue $ 134,444 $ 154,047 $ (19,603 ) (12.7 )%
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Nine Months Ended September 30,
2022 2021 Change
Gross Gross Gross
Amount Margin Amount Margin Amount Margin (bps)
(dollars in thousands)
Gross profit:
Product $ 49,590 29.7 % $ 111,504 42.6 % $ (61,914 ) (1,290 )
Service 31,007 88.6 % 30,675 89.7 % 332 (110 )
Warranty Settlement
Provision (12,907 ) 0.0 % - 0.0 % (12,907 ) -
Total gross profit $ 67,690 33.5 % $ 142,179 48.0 % $ (74,489 ) (1,450 )
The decrease in cost of product revenue and the decrease in product gross margin
were both due to lower sales volume during the nine months ended September 30,
2022 as compared to the nine months ended September 30, 2021 , as well as a
change in the product mix, with a lower proportion of higher margin software
product revenue in the nine months ended September 30, 2022 as compared to the
nine months ended September 30, 2021 . The decrease in gross margin was also due
to an increase in inventory reserves of $2.4 million period over period.
Cost of service revenue and service gross margin remained relatively consistent period over period.
The decrease in gross margin was further driven by a warranty settlement provision of$12.9 million recorded during the nine months endedSeptember 30, 2022 , which reduced the margin by 6.4%. Please refer to Note 16 "Commitments and Contingencies" of the accompanying condensed consolidated financial statements for more discussion regarding this provision. Research and Development Nine Months Ended September 30, Change 2022 2021 Amount % (dollars in thousands) Research and development$ 67,545 $ 63,479 $ 4,066 6.4 % Percentage of revenue 33.4 % 21.4 % The increase in research and development expense was primarily due to a$3.9 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 nine months endedSeptember 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. In addition, there was an increase in purchases of research and development materials of$0.7 million and allocated facilities costs of$0.4 million , partially offset by a decrease in depreciation of$0.9 million during the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 .
Selling, General and Administrative
Nine Months Ended September 30, Change
2022 2021 Amount %
(dollars in thousands)
Selling, general and administrative $ 66,741 $ 64,492 $ 2,249 3.5 %
Percentage of revenue 33.0 % 21.8 %
33-------------------------------------------------------------------------------- The increase in selling, general and administrative expense was primarily due to an increase in personnel costs of$0.9 million , driven by the impact of a reduction in payroll taxes due to a CARES Act credit of$1.6 million during the nine months endedSeptember 30, 2022 , which did not repeat in 2022, increased travel expenses of$1.0 million , offset by decreased salaries and benefits of$1.7 million driven by lower variable compensation costs. Trade show expense increased$1.1 million and legal and professional fees also increased$2.2 million during the nine months endedSeptember 30, 2022 . These increases were partially offset by decreased depreciation expense of$0.6 million , decreased other taxes of$0.6 million and decreased facilities expenses of$0.8 million during the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . Other Income (Expense), Net
Nine Months Ended September 30, Change
2022 2021 Amount %
(dollars in thousands)
Other expense, net $ (8,778 ) $ (12,308 ) $ 3,530 (28.7 )%
Percentage of revenue (4.3 )% (4.2 )%
The change in other income (expense), net was primarily due to a $3.4 million
decrease in foreign exchange losses due to fluctuations in the Euro, Australian
dollar and the China Renminbi exchange rates and a $0.8 million increase in
interest income due to higher investment balances and increased interest rates
in the nine months ended September 30, 2022 as compared to the nine months ended
September 30, 2021 . Interest expense increased $0.4 million due to the increase
in interest rates applied to our outstanding debt.
Provision for Income Taxes
Nine Months Ended September 30, Change
2022 2021 Amount %
(dollars in thousands)
Provision for income taxes $ 5,071 $ 220 $ 4,851 2205.0 %
The change in the provision for income taxes for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 was impacted by a discrete benefit of$7.1 million recorded in the nine months endedSeptember 30, 2021 related to loss carrybacks associated with the CARES Act. The change in the provision for income taxes was also impacted by the new requirement to capitalize and amortize all research and experimentation expenditures forU.S. tax purposes, which became effective under the Tax Cuts and Jobs Act ("TCJA") as ofJanuary 1, 2022 . This new requirement resulted in significant forecastedU.S. current income tax for the 2022 year and the corresponding deferred tax asset created is offset by a full valuation allowance. The change in the provision for income taxes was also impacted by changes in the jurisdictional mix of earnings and the valuation allowance maintained against our deferred tax assets.
Liquidity and Capital Resources
Our principal sources of liquidity have been and continue to be our cash and cash equivalents and cash flows from operations. The following tables set forth our cash and cash equivalents and working capital as ofSeptember 30, 2022 andDecember 31, 2021 and our cash flows for the nine months endedSeptember 30, 2022 and 2021: September 30, December 31, 2022 2021 (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents$ 193,494 $ 154,703 Working capital 234,000 264,157 34
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Nine Months Ended September 30,
2022 2021
(in thousands)
Consolidated Cash Flow Data:
Net cash provided by operating activities $ 11,663 $ 15,197
Net cash used in investing activities (3,325 ) (4,404 )
Net cash provided by (used in) financing activities 34,157 (11,905 )
As of
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 nine months endedSeptember 30, 2022 , cash provided by operating activities was$11.7 million , primarily resulting from net cash provided by changes in our operating assets and liabilities of$68.9 million and net non-cash adjustments of$23.2 million , partially offset by our net loss of$80.4 million . Net cash provided by changes in our operating assets and liabilities during the nine months endedSeptember 30, 2022 was primarily due to a$35.6 million decrease in accounts receivable due to collections during the period; a$21.0 million decrease in prepaid income taxes; a$18.0 million increase in deferred revenue due to the timing of revenue recognition; a$7.5 million increase in accrued expenses due to the timing of certain accrual payments; a$2.1 million increase in accrued income taxes; and a$1.8 million decrease in prepaid expenses. These sources of cash were partially offset by a$13.6 million decrease in accounts payable due to timing of vendor payments; and a$3.4 million increase in inventory.
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. To the extent our business expands, we expect that we will continue to invest in these areas. Net cash used in investing activities during the nine months endedSeptember 30, 2022 was$3.3 million , consisting of purchases of property and equipment and software licenses. Financing Activities Net cash provided by financing activities during the nine months endedSeptember 30, 2022 was$34.2 million , which was mainly due to the$39.5 million received from the Securities Purchase Agreement, or SPA, withVerizon Ventures LLC onApril 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$2.1 million , primarily due to certain RSUs that vested during the nine months endedSeptember 30, 2022 ; repurchases of treasury stock of$1.2 million ; and debt principal repayments of$2.3 million . 35 --------------------------------------------------------------------------------
Cash Flows from Future Operations
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. As described in Note 9 within our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, our outstanding Term Loan is scheduled to mature inDecember 2023 , and we have commenced the refinancing process. If we are unable to successfully complete a refinancing of a sufficient portion of the outstanding balance prior to maturity or otherwise satisfy our repayment obligations, there may be substantial doubt about our ability to continue as a going concern beyond the maturity date of the loan. 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.
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, or the Term Loan, of
•
a revolving credit facility of up to
As of
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) 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 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 ofSeptember 30, 2022 , the interest rate on the Term Loan was 7.12% per annum, which was based on a one-month Eurodollar rate of 3.12% per annum plus the applicable margin of 4.00% per annum for Eurodollar rate loans. As ofDecember 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 onDecember 20, 2023 and 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 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. 36 -------------------------------------------------------------------------------- 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. 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 ofSeptember 30, 2022 andDecember 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$196.6 million as ofSeptember 30, 2022 ,$101.0 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 ofSeptember 30, 2022 , we had$28.1 million of undistributed earnings inChina that were 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 thatCongress 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
OnApril 18, 2022 , we entered into a Stock Purchase Agreement, or SPA, withVerizon 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
Stock Repurchase Program OnFebruary 21, 2019 , we announced a stock repurchase program under which we were authorized to repurchase up to$75.0 million of our common stock. During the nine months endedSeptember 30, 2022 , we repurchased approximately 0.2 million shares for a total cost of approximately$1.2 million . During the nine months endedSeptember 30, 2021 we did not repurchase any shares. As ofSeptember 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 atSeptember 30, 2022 , as described in Note 9 of the above notes to our 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.
Contractual Obligations, Commitments and Contingencies
Our material contractual obligations include our term loan, operating leases and purchase agreements with our contract manufacturers and suppliers. Other than the addition of a warranty settlement provision during the three months endedSeptember 30, 2022 , as discussed above and in the notes to the accompanying condensed consolidated financial statements, there have been no material changes to our contractual obligations, commitments and contingencies from those disclosed in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 . 37 --------------------------------------------------------------------------------
Critical Accounting Policies and Significant Judgments and Estimates
We prepare our condensed consolidated financial statements in accordance with generally accepted accounting principles inthe United States . The preparation of condensed consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. Other than our adoption of ASU 2021-08, as described in Note 2 within our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, there have been no material changes to our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 .
Recent Accounting Pronouncements
Refer to the "Summary of Significant Accounting Policies" footnote within our condensed consolidated financial statements included 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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