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, 2019 toDecember 31, 2018 , please refer to our Annual Report on Form 10-K, filed with theSEC onFebruary 27, 2020 . Overview Our solutions are conceived, designed and built to enable our CSP customers to offer high bandwidth data services to their subscribers, and help them as they transform their networks to meet the growing demand for bandwidth and the introduction of new services. We offer physical, virtual and cloud-native 5G infrastructure and customer premise networking equipment for public and private high-speed data and multi-service communications networks. Our core and edge convergence technology enables 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. We offer scalable solutions that can meet the evolving bandwidth needs of our customers and their subscribers. Our first installation in a service provider's network frequently involves deploying our broadband products in only a portion of the provider's network and, for our cable products, with only a fraction of the capacity of our products enabled at the time of initial installation. Over time, our customers have generally expanded the use of our solutions to other areas of their networks to increase network capacity. Capacity expansions are accomplished either by deploying additional systems, line cards, or the sale of additional channels through the use of software. Sales of software-based capacity expansions generate higher gross margins than hardware-based deployments. 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 emergence of the coronavirus disease in 2019, or COVID-19, around the world, and particularly inthe United States andChina , and the accompanying responses of governments and businesses to the pandemic present various risks to us, not all of which we are able to fully evaluate or even foresee at the current time. While the COVID-19 pandemic did not significantly adversely affect our financial results, business operations or liquidity in the year endedDecember 31, 2020 , economic and health conditions inthe United States and across most of the globe changed rapidly during the year and are continuing to change after the end of the year. Globally to date, all aspects of our business remain fully operational, and our work from home contingency plans have been implemented and are operating successfully. The pandemic has resulted in increased demand for certain of our products and resulting order volumes have created additional pressure on our supply chain. To date, while the increased demand has not resulted in any material delays to our production cycle, we continue to work with our supply chain and contract manufacturers in an effort to ensure continued availability of all anticipated inventory requirements. However, we cannot at this time predict whether, or to what extent, our efforts will be successful. Additionally, we saw decreases in certain operating expenses, such as travel and trade show expense, during the year endedDecember 31, 2020 due to the COVID-19 pandemic that we cannot ensure will be maintained. We intend to continue to monitor our business very closely for any effects of COVID-19 for as long as necessary on an ongoing basis. Due to the above circumstances and as described generally in this Annual Report on Form 10-K, our results of operations for the year endedDecember 31, 2020 are not necessarily indicative of the results to be expected in future years. Management cannot predict the full impact of the COVID-19 pandemic on our sales channels, supply chain, manufacturing and distribution, or on economic conditions generally, including the effects on our current and potential customers, who may 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. Although we have not been materially adversely impacted to date, we cannot predict the extent to which this may impact our future results of operations. 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. Thus, the ultimate extent of the effects of the COVID-19 pandemic on the Company is highly uncertain and dependent upon future developments, and such effects could exist for an extended period of time even after the pandemic might end. 51
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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 year endedDecember 31, 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, 2020 2019 2018 Revenue by geographic region: North America 42.3 % 49.6 % 49.1 % Latin America 8.9 % 8.5 % 10.9 % Europe, Middle East and Africa 9.1 % 13.5 % 27.4 % Asia-Pacific 39.7 % 28.4 % 12.6 % Total 100.0 % 100.0 % 100.0 % The increase in percentage of revenues in theAsia-Pacific region from the year endedDecember 31, 2019 to the year endedDecember 31, 2020 is attributed to the full-year contribution of Netcomm wireless and fixed telco device sales.
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.
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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 year endedDecember 31, 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. 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, and estimated costs associated with excess and obsolete inventory.
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.
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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. We expect that our gross margin will decline for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 due to higher sales volumes of lower margin customer premise products and changes in the percentage of revenue attributable to our software products and capacity expansions. 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, as well as allocated facilities-related costs. 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. 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.
(Benefit from) Provision for 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 54 -------------------------------------------------------------------------------- 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, 2020 and 2019, we recorded an income tax charge of$3.5 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.
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,
2020 2019 2018
(in thousands)
Revenue:
Product $ 346,083 $ 241,377 $ 256,989
Service 47,163 40,920 40,138
Total revenue 393,246 282,297 297,127
Cost of revenue(1):
Product 187,706 113,059 74,350
Service 4,941 6,706 4,811
Total cost of revenue 192,647 119,765 79,161
Gross profit 200,599 162,532 217,966
Operating expenses:
Research and development(1) 84,370 83,331 70,974
Selling, general and administrative(1) 92,016 88,320 68,026
Total operating expenses 176,386 171,651
139,000
Income (loss) from operations 24,213 (9,119 )
78,966
Other income (expense), net (14,464 ) (15,296 ) (13,028 ) Income (loss) before (benefit from) provision for income taxes 9,749 (24,415 )
65,938
(Benefit from) provision for income taxes (15,052 ) 23,791
(7,068 )
Net income (loss) $ 24,801 $ (48,206 ) $ 73,006 (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,
2020 2019 2018
(in thousands)
Cost of revenue $ 153 $ 216 $ 249
Research and development expense 2,447 1,569 1,864
Selling, general and administrative expense 10,555 8,036 6,781
Total stock-based compensation expense
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Year Ended December 31,
2020 2019 2018
(as a percentage of total revenue)
Revenue:
Product 88 % 86 % 86 %
Service 12 14 14
Total revenue 100 100 100
Cost of revenue:
Product 48 40 25
Service 1 2 2
Total cost of revenue 49 42 27
Gross profit 51 58 73
Operating expenses:
Research and development 21 30 24
Selling, general and administrative 23 31 23
Total operating expenses 45 61 47
Income (loss) from operations 6 (3 ) 27
Other income (expense), net (4 ) (5 ) (4 )
Income (loss) before (benefit from) provision
for income taxes 2 (9 ) 22
(Benefit from) provision for income taxes (4 ) 8 (2 )
Net income (loss) 6 % (17 )% 25 %
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,
2020 2019 Change
% of % of
Amount Total Amount Total Amount %
(dollars in thousands)
Revenue:
Product $ 346,083 88.0 % $ 241,377 85.5 % $ 104,706 43.4 %
Service 47,163 12.0 % 40,920 14.5 % 6,243 15.3 %
Total revenue $ 393,246 100.0 % $ 282,297 100.0 % $ 110,949 39.3 %
Revenue by geographic region:
North America $ 166,177 42.3 % $ 139,917 49.6 % $ 26,260 18.8 %
Latin America 34,926 8.9 % 24,043 8.5 % 10,883 45.3 %
Europe, Middle East and Africa 35,933 9.1 % 38,154 13.5 % (2,221 ) (5.8 )%
Asia-Pacific 156,210 39.7 % 80,183 28.4 % 76,027 94.8 %
Total revenue $ 393,246 100.0 % $ 282,297 100.0 % $ 110,949 39.3 %
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Year Ended December 31, Change
2020 2019 Amount %
Product revenue:
Wireless $ 111,255 $ 58,234 $ 53,021 91.0 %
Fixed telco 96,904 38,734 58,170 150.2 %
Cable 137,924 144,409 (6,485 ) (4.5 )%
Total product revenue 346,083 241,377 104,706 43.4 %
Service revenue
Wireless 7,348 1,701 5,647 332.0 %
Fixed telco 1,924 773 1,151 148.9 %
Cable 37,891 38,446 (555 ) (1.4 )%
Total service revenue 47,163 40,920 6,243 15.3 %
Total revenue $ 393,246 $ 282,297 $ 110,949 39.3 %
The increase in product revenue was primarily attributed to the full-year
contribution of NetComm revenue which was also the primary factor for the
product revenue increases in the Asia-Pacific and North America geographic
regions. In addition, along with increased demand for the fixed and wireless
devices, several new products were introduced to both new and existing
customers. Also, in 2020 fixed wireless access gained market acceptance becoming
a mainstream technology. We also experienced an increase of virtualization of
fixed wireless network cores. Finally, additional revenues were driven by an
increase in new customers for both fixed and wireless technologies.
The increase in service revenue was primarily due to increased product revenues and new service agreements with certain large wireless customers.
Cost of Revenue and Gross Profit
Year Ended
December 31, Change
2020 2019 Amount %
(dollars in thousands)
Cost of revenue:
Product $ 187,706 $ 113,059 $ 74,647 66.0 %
Service 4,941 6,706 (1,765 ) (26.3 )%
Total cost of revenue $ 192,647 $ 119,765 $ 72,882 60.9 %
Year Ended December 31,
2020 2019 Change
Gross Gross Gross
Amount Margin Amount Margin Amount Margin (bps)
(dollars in thousands)
Gross profit:
Product $ 158,377 45.8 % $ 128,318 53.2 % $ 30,059 (740 )
Service 42,222 89.5 % 34,214 83.6 % 8,008 590
Total gross profit
(660 )
The increase in cost of product revenue and decrease in product gross margin was
attributed to increased revenue and sales of lower margin NetComm wireless and
fixed telco devices for the full calendar year of 2020.
The decrease in cost of service revenue and increase in service gross profit was primarily due to less utilization of third-party professional services.
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Research and Development
Year Ended
December 31, Change
2020 2019 Amount %
(dollars in thousands)
Research and development $ 84,370 $ 83,331 $ 1,039 1.2 %
Percentage of revenue 21.5 % 29.5 %
The increase in research and development expense was primarily due to the
acquisition of NetComm, including a $0.3 million increase in personnel-related
costs, net of the impact of headcount reductions made in the three months ended
December 31, 2019 and reduced employee travel in 2020 due to COVID-19. In
addition, there was an increase in purchases of research and development
materials of $1.0 million and increased professional services of $0.2 million
also due to the acquisition of Netcomm, net of a decrease in depreciation
expense of $0.5 million as fully-depreciated items were not replaced in 2020.
Selling, General and Administrative
Year Ended
December 31, Change
2020 2019 Amount %
(dollars in thousands)
Selling, general and administrative
4.2 % Percentage of revenue 23.4 % 31.3 % The increase in selling, general and administrative expense was primarily due to a$4.1 million increase in personnel-related costs, mainly from the acquisition of NetComm, in addition to increased commissions due to increased revenue, and increased variable compensation in 2020, net of the impact of headcount reductions made in the three months endedDecember 31, 2019 and reduced travel in 2020 due to COVID-19. In addition, there was an increase in facilities costs of$1.1 million and depreciation and amortization of$1.8 million also due to the NetComm acquisition. The increases were partially offset by a decrease in professional services of$0.5 million due to acquisition-related costs in 2019, decreased trade show expense of$1.7 million due to COVID-19, a$0.4 million reduction in bad debt expense and a decrease of$0.7 million in other taxes. Other Income (Expense), Net Year Ended December 31, Change 2020 2019 Amount % (dollars in thousands) Other income (expense), net$ (14,464 ) $ (15,296 ) $ 832 (5.4 )% Percentage of revenue (3.7 )% (5.4 )% The change in other income (expense) was primarily due to a$3.4 million decrease in interest income due to a decrease in our portfolio of cash equivalents following our acquisition of NetComm inJuly 2019 , offset by a$3.6 million decrease in interest expense due to decreases in both the outstanding principal and the interest rate on our term loan facility. Foreign currency exchange loss (gain) resulted in an increase to other income of$0.2 million primarily due to fluctuation in the Australian dollar and the China Renminbi exchange rates. Other income increased$0.5 million due to grants received and COVID-19 relief inAsia during 2020.
(Benefit from) Provision for Income Taxes
Year Ended
December 31, Change
2020 2019 Amount %
(dollars in thousands)
(Benefit from) provision for income taxes $ (15,052 ) $ 23,791 $ (38,843 ) (163.3 )%
Effective tax rate (154.4 )% (97.4 )%
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-------------------------------------------------------------------------------- The change in our (benefit from) provision for income taxes primarily relates to the recognition of a$23.5 million tax benefit during the year endedDecember 31, 2020 from the carryback of the 2019 and 2020 U.S. net operating losses as a result of the CARES Act enacted during the year. During the year endedDecember 31, 2019 , we recorded a valuation allowance against our netU.S. deferred tax assets resulting in tax expense of$35.2 million . The change in our (benefit from) provision for income taxes was also impacted by changes in the geographical mix of earnings and the impact of ourU.S. GILTI inclusion.
Liquidity and Capital Resources
Since our initial public offering in
OnJuly 1, 2019 , we acquired 100% of the equity interests in NetComm for cash consideration of$162.0 million Australian dollars, or AUD ($112.7 million USD , based on an exchange rate of USD$0.700 per AUD$1.00 onJuly 1, 2019 ), using amounts included in restricted cash in the consolidated balance sheet as ofJune 30, 2019 . In addition, we recognized advisory fee expenses of$1.5 million , which became due and payable upon the closing of the acquisition. The following tables set forth our cash and cash equivalents and working capital as ofDecember 31, 2020 , 2019 and 2018 as well as our net cash flows for the years endedDecember 31, 2020 , 2019 and 2018: As of December 31, 2020 2019 2018 (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents$ 157,455 $ 113,638 $ 280,587 Working capital 251,573 213,977 328,400 Year Ended December 31, 2020 2019 2018 (in thousands) Consolidated Cash Flow Data: Net cash provided by (used in) operating activities$ 53,642 $ (39,022 ) $ 98,545 Net cash used in investing activities (5,585 ) (118,022 ) (7,966 ) Net cash used in financing activities (6,303 ) (9,527 ) (68,351 ) As ofDecember 31, 2020 , we had cash and cash equivalents of$157.5 million and net accounts receivable of$94.3 million . We maintain a$25.0 million revolving credit facility, under which we have drawn$6.5 million and$1.5 million of availability was used as collateral for two stand-by letters of credit, leaving availability of$17.0 million as ofDecember 31, 2020 . 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, 2020 , 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. The dividend payments totaled$0.9 million in the year endedDecember 31, 2018 . No dividend payments were made during the years endedDecember 31, 2020 or 2019. The equitable adjustment payments totaled$0.7 million ,$2.6 million and$7.3 million in the years endedDecember 31, 2020 , 2019 and 2018, respectively. As ofDecember 31, 2020 , there were$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 59 -------------------------------------------------------------------------------- options, SARs and RSUs. These equitable adjustment payments will be paid to the holders of the applicable equity awards as they vest through 2021. 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 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, 2020 , cash provided by operating activities was$53.6 million , primarily resulting from our net income of$24.8 million and net non-cash expenses of$30.4 million , partially offset by net cash used in changes in our operating assets and liabilities of$1.5 million . The net cash used in changes in our operating assets and liabilities during the year endedDecember 31, 2020 was primarily due to an$11.7 million increase in prepaid income taxes, an$11.1 million decrease in deferred revenue due to the timing of orders during the year; and a$9.8 million increase in inventory due to manufacturing to fill existing orders and to meet anticipated future demand for our products. These outflows of cash were partially offset by a$17.0 million increase in accounts payable due to the timing of vendor payments, a$6.3 million increase in accrued expenses due to the timing of payments, a$5.3 million increase in accrued income taxes, and a$2.8 million decrease in prepaid expenses and other assets. Investing Activities Prior to the NetComm acquisition onJuly 1, 2019 , our investing activities consisted primarily of expenditures for lab and computer equipment and software to support the development of new products and increase our manufacturing capacity to meet customer demand for our products. In addition, our investing activities 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, 2020 was$5.6 million and consisted of purchases of property and equipment of$5.2 million and purchases of software licenses of$0.4 million .
Financing Activities
Net cash used in financing activities during the year endedDecember 31, 2020 was$6.3 million and consisted of debt principal repayments of$9.6 million , repurchases of common stock of$3.0 million , dividend and equitable adjustment payments of$0.7 million , and payment of taxes on behalf of our employees related to net share settlement of equity awards of$0.6 million , partially offset by borrowings under our revolving credit facility of$6.5 million and proceeds from the exercise of stock options of$1.2 million .
Commercial Mortgage Loan
InJuly 2015 , we entered into an$8.0 million commercial mortgage loan agreement, which matured onJuly 1, 2020 . OnJuly 1, 2020 , we paid in full the remaining$6.5 million in unpaid principal and accrued interest under the mortgage loan with funds drawn upon our revolving credit facility. The annual interest rate on the loan was 3.5%, and the loan was repayable in 60 monthly installments of principal and interest based on a 20-year amortization schedule. The loan was secured by the land and building, which are our corporate offices, purchased inMarch 2015 , and contained annual affirmative, negative and financial covenants, including maintenance of a minimum debt service ratio. The covenants were measured annually and we were in compliance with all the covenants of the mortgage loan as ofDecember 31, 2019 . As ofDecember 31, 2019 , the outstanding principal amount under the mortgage loan was$6.6 million . 60
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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, 2020 and 2019, we had borrowings of$288.8 million and$291.0 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. We had no outstanding borrowings under the revolving credit facility atDecember 31, 2019 . As ofDecember 31, 2020 and 2019, we had also used$1.5 million and$1.3 million , respectively, under the revolving credit facility for two stand-by letters of credit, one which serves as collateral to one of our customers pursuant to a contractual obligations and one which is used as collateral for operating leases inAustralia . In addition, we may, subject to certain conditions, including the consent of the administrative agent and the institutions providing such increases, increase the facilities by an unlimited amount so long as we are in compliance with specified leverage ratios, or otherwise by up to$70.0 million . Borrowings under the facilities bear interest at a floating rate, which can be either a Eurodollar rate plus an applicable margin or, at our option, a base rate (defined as the highest of (x) theJPMorgan Chase, N.A. prime rate, (y) the federal funds effective rate, plus one-half percent (0.50%) per annum and (z) a one-month Eurodollar rate plus 1.00% per annum) plus an applicable margin. The applicable margin for borrowings under the term loan facility is 4.00% per annum for Eurodollar rate loans (subject to a 1.00% per annum interest rate floor) and 3.00% per annum for base rate loans. The applicable margin for borrowings under the revolving credit facility is 1.75% per annum for Eurodollar rate loans and 0.75% per annum for base rate loans, subject to reduction based on our maintaining 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, 2020 , the interest rate on our borrowings under the term loan facility was 5.00% per annum, which was based on a six-month Eurodollar rate at the applicable floor of 1.00% per annum plus the applicable margin of 4.00% per annum for Eurodollar rate loans. As ofDecember 31, 2019 , the interest rate on the term loans was 5.80% per annum, which was based on a one-month Eurodollar rate at the applicable floor of 1.80% per annum plus the applicable margin of 4.00% per annum for Eurodollar rate loans. The revolving credit facility also requires payment of quarterly commitment fees at a rate of 0.25% per annum on the difference between committed amounts and amounts actually borrowed under the facility and customary letter of credit fees. The term loan facility matures onDecember 20, 2023 and the revolving credit facility matures onDecember 20, 2021 . The term loan facility is subject to amortization in equal quarterly installments, which commenced onMarch 31, 2017 , of principal in an annual aggregate amount equal to 1.0% of the original principal amount of the term loans of$300.0 million , with the remaining outstanding balance payable at the date of maturity. Voluntary prepayments of principal amounts outstanding under the term loan facility are permitted at any time; however, if a prepayment of principal is made with respect to a Eurodollar loan on a date other than the last day of the applicable interest period, we are required to compensate the lenders for any funding losses and expenses incurred as a result of the prepayment. Prior to the revolving credit facility maturity date, funds borrowed under the revolving credit facility may be borrowed, repaid and reborrowed, without premium or penalty. In addition, we are required to make mandatory prepayments under the facilities with respect to (i) 100% of the net cash proceeds from certain asset dispositions (including casualty and condemnation events) by us or certain of our subsidiaries, subject to certain exceptions and reinvestment provisions, (ii) 100% of the net cash proceeds from the issuance or incurrence of any additional debt by us or certain of our subsidiaries, subject to certain exceptions, and (iii) 50% of our excess cash flow, as defined in the credit agreement, subject to reduction upon our achievement of specified performance 61
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targets. In accordance with these provisions, a mandatory prepayment of
The facilities are secured by, among other things, a first priority security interest, subject to permitted liens, in substantially all of our assets and all of the assets of certain of our subsidiaries and a pledge of certain of the stock of certain of our subsidiaries, in each case subject to specified exceptions. The facilities contain customary affirmative and negative covenants, including certain restrictions on our ability to pay dividends, and, with respect only to the revolving credit facility, a financial covenant requiring us to maintain a specified total net leverage ratio, in the event that on the last day of any fiscal quarter, we have utilized more than 30% of our borrowing capacity under the revolving credit facility (subject to certain exceptions). The term loan facility contains a cross-default provision, whereby, if repayment of borrowings under the revolving credit facility are accelerated due to a default of the net leverage ratio covenant, repayment of the outstanding term loan balance could also be accelerated. Because the financial covenant under the revolving credit facility only applies if outstanding utilization thereunder exceeds 30% of the total borrowing capacity on the last day of each fiscal quarter, this cross-default provision has the effect of limiting our ability to utilize more than 30% of our total borrowing capacity under the revolving credit facility of$25.0 million if both our net leverage ratio exceeds the maximum permitted by the agreement and we would not otherwise be able to reduce our outstanding utilization of the revolving credit facility to below the 30% testing threshold prior to the last day of any quarter. As ofDecember 31, 2020 , our net leverage ratio did not exceed the maximum. As ofDecember 31, 2019 , our net leverage ratio exceeded the maximum; however, as our utilization of the revolving credit facility did not exceed the 30% testing threshold onDecember 31, 2019 , we were not in default on the revolving credit facility as a result of our net leverage ratio exceeding the maximum permitted amount. We were in compliance with all applicable covenants of the facilities as ofDecember 31, 2020 and with all other applicable covenants as ofDecember 31, 2019 . We do not expect to require the use of the revolving credit facility to fund operations during the next 12 months. Tax Cuts and Jobs Act Of our total cash and cash equivalents of$157.5 million as ofDecember 31, 2020 ,$122.8 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. InDecember 2017 , we recorded a charge related to a one-time deemed repatriation of accumulated earnings of foreign subsidiaries. Our accounting for the impacts of the TCJA was complete as ofDecember 31, 2018 and we had not recorded any material adjustments to the provisional amounts recorded in 2017 related to the TCJA. 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, 2020 and 2019 we recorded income tax charges of$3.5 million and$0.9 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, 2020 and 2019, we repurchased 1.2 million and 0.5 million shares of our common stock for approximately$3.0 million and$1.8 million , before commissions, respectively. As ofDecember 31, 2020 , approximately$70.2 million remained authorized for repurchases of our common stock under the stock repurchase program. The stock repurchase program has no expiration date, 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 62 -------------------------------------------------------------------------------- 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. 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. We also generate revenue from sales of additional line cards and software-based capacity expansions. 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 products, wireless and fixed telco devices 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,
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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
Our cable, wireless and fixed telco products generally have both software and non-software (i.e., hardware) components that function together to deliver the products' essential functionality. 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. 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
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.
Generally, we control the promised good or service before transferring it to the
customer and acts as the principal in the transaction. Accordingly, we report
revenues on a gross basis.
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-------------------------------------------------------------------------------- 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 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, 2020 and 2019, we recorded$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.
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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 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, 2020 , 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, 2020 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
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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, 2019 , we determined that it was more likely than not that a portion of our netU.S. deferred tax assets would not be realized, and thus recorded a valuation allowance against our net deferred tax assets. As ofDecember 31, 2020 , we maintain a valuation allowance of$24.5 million against our netU.S. deferred tax assets that are not expected to be realized, a decrease of$14.7 million during the year endedDecember 31, 2020 (see Note 10). 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. 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, 2020 and 2019, we recorded an income tax charge of$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
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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, we estimate our expected stock volatility based on the historical volatility of 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. 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.
Off-Balance Sheet Arrangements
As ofDecember 31, 2020 , 2019 and 2018, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, such as the use of unconsolidated subsidiaries, structured finance, special purpose entities or variable interest entities.
Recent Accounting Pronouncements
Refer to the "Summary of Significant Accounting Policies" footnote within our
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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