Item 2. Management’s Discussion and Analysis
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities and Exchange Act of 1934, as amended. All statements other than statements of historical facts are “forward-looking statements” for purposes of these provisions, including any projections of earnings, revenue or other financial items, any statement of or concerning the following: the plans and objectives of management for future operations, proposed new products or licensing, product development, anticipated customer demand or capital expenditures, anticipated growth and trends in our business and industry, future economic and/or market conditions or performance and assumptions underlying any of the above. In some cases, forward-looking statements can be identified by the use of terminology such as “could,” “may,” “will,” “would,” “expects,” “believes,” “intends,” “plans,” “anticipates,” “estimates,” “projects,” “predicts,” “potential,” or “continue” or the negative thereof or other comparable terminology. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including those identified in the Risk Factors discussed in Part II, Item 1A, of this report on Form 10-Q, as well as in other sections of this report and in our Annual Report on Form 10-K for the year ended December 31, 2019. All forward-looking statements and reasons why results may differ included in this Quarterly Report on Form 10-Q are made as of the date hereof, and we assume no obligation to update these forward-looking statements or reasons why actual results might differ.
Overview
We are a leading global provider of cloud and software platforms, systems and services for fiber- and copper-based network architectures and a pioneer in software defined access and cloud products focused on access networks and the subscriber. Our portfolio allows for a broad range of subscriber services to be provisioned and delivered over a single unified network. Our access systems can deliver voice and data services, advanced broadband services, mobile broadband, as well as high-definition video and online gaming. Our most recent generation of premises systems enable CSPs to address the complexity of the smart home and business and offer new services to their device enabled subscribers. We have designed all of our current platforms and related systems so that they can be monitored, analyzed, managed and supported by Calix Cloud.
We market our cloud and software platforms, systems and services to CSPs globally through our direct sales force as well as select resellers. Our customers range from smaller, regional CSPs to some of the world’s largest CSPs. We have enabled approximately 1,600 CSP customers purchasing directly and through partners to deploy passive optical, Active Ethernet and point-to-point Ethernet fiber access networks.
In the third quarter of 2020, we completed an underwritten public offering of 3,220,000 shares of our common stock, at $20.00 per share, including a full exercise by the underwriters of their option to purchase an additional 420,000 shares of common stock, for net proceeds of $60.1 million, after deducting the underwriting discount and estimated expenses payable by us.
Beginning in 2018, the United States enacted a series of tariffs on certain goods manufactured in China. As a result of these tariffs, we incurred U.S. tariff and tariff-related costs of $6.2 million in 2019 and $2.3 million the first nine months of 2020. In order to mitigate the impact of the tariffs enacted by the United States, we undertook a broad plan to realign our global supply chain by moving substantially all of our production outside of China in addition to other supply chain improvements in the first half of 2019. As a result of the tariffs imposed on a broader list of products in September 2019, we expanded the scope of our global supply chain realignment plan, which is expected to take until the end of 2020 to complete.
Our revenue and potential revenue growth will depend on our ability to sell and license our cloud and software platforms, systems and services to strategically aligned customers, including from market segments such as cable MSOs, WISPs, fiber overbuilders, municipalities and electric cooperatives, in the United States and internationally.
Revenue fluctuations result from many factors, including, but not limited to: increases or decreases in customer orders for our products and services, market, financial or other factors that may delay or materially impact customer purchasing decisions including as a result of uncertainty related to the COVID-19 pandemic, non-availability of products due to supply chain challenges including business closures, manufacturing disruptions and component shortages due to the COVID-19 pandemic, contractual terms with customers that result in delayed revenue recognition and varying budget cycles and seasonal buying patterns of our customers. More specifically, our customers tend to spend less in the first quarter as they are finalizing their annual budgets, and in certain regions, customers are challenged by winter weather conditions that inhibit fiber deployment in outside infrastructure. Our revenue is also dependent upon our customers’ timing of purchases, capital expenditure plans and decisions to upgrade their network or adopt new technologies, including adoption of our software and cloud platform solutions, as well as our ability to grow our customer base.
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Cost of revenue is strongly correlated to revenue and tends to fluctuate due to all of the above factors that may cause revenue fluctuations. Factors that impacted our cost of revenue for the three and nine months ended September 26, 2020, and that we expect will impact cost of revenue in future periods, also include: changes in the mix of products delivered, customer location and regional mix, changes in product warranty and incurrence of retrofit costs, changes in the cost of our inventory, including higher costs due to materials shortages including components, supply constraints or unfavorable changes in trade policies, investments to support expansion of cloud and customer support offerings, tariffs and associated costs to mitigate the impact of tariffs, amortization of intangibles, asset write-offs, silicon support fees and inventory write-downs. In particular, given the recent supply chain disruptions due to the COVID-19 pandemic, we have seen increases in our global freight charges as we have elected to ship by air in order to meet delivery commitments to our customers as well as air freight rates have increased from historical levels. Cost of revenue also includes fixed expenses related to our internal operations, which could increase our cost of revenue as a percentage of revenue if there are declines in revenue.
Our gross profit and gross margin fluctuate based on timing of factors such as new product introductions or upgrades to existing products, changes in customer mix and changes in the mix of products demanded and sold (and any related write-downs of existing inventory) and have in the past been negatively impacted by increases in mix of revenue towards professional services, increases in mix of revenue from channel sales rather than direct sales or other unfavorable customer or product mix, shipment volumes and any related volume discounts, changes in our product and services costs, pricing decreases or discounts, customer rebates and incentive programs due to competitive pressure or materials shortages, supply constraints, investments to support expansion of cloud and customer support offerings, tariffs or unfavorable changes in trade policies.
Our operating expenses fluctuate based on the following factors among others: changes in headcount and personnel costs, which comprise a significant portion of our operating expenses; variable compensation due to fluctuations in shipment volumes or level of achievement against performance targets; timing of research and development expenses, including investments in innovative solutions and new customer segments, prototype builds and outsourced development resources; asset write-offs; investments in our business and information technology infrastructure; and fluctuations in stock-based compensation expenses due to timing of equity grants or other factors affecting vesting.
While our net income was $9.4 million for the nine months ended September 26, 2020, we have incurred significant losses since our inception, and as of September 26, 2020, we had an accumulated deficit of $693.2 million. Further, as a result of factors contributing to the fluctuations described above among other factors, many of which are outside our control, our quarterly operating results fluctuate from period to period. Comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance.
COVID-19 Pandemic
We are subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict as coronavirus continues to spread around the world. There is still no vaccine, and treatments are limited. In March 2020, we instituted office closures, travel restrictions and a mandatory work-from-home policy for substantially all of our employees which continue today. The spread of COVID-19 has had a prolonged impact on our supply chain operations through restrictions, reduced capacity and shutdown of business activities by suppliers whom we rely on for sourcing components and materials and third-party partners whom we rely on for manufacturing, warehousing and logistics services. Although demand for our products has been strong in the short-term as subscribers seek more bandwidth and better WiFi, customers’ purchasing decisions over the long-term may be impacted by the pandemic and its impact on the economy, which could in turn impact our revenue and results of operations. Furthermore, our supply chain continues to face constraints primarily due to challenges in sourcing components and materials to manufacture our products, including due to plant closures, and future outbreaks could exacerbate these constraints or cause further supply chain disruptions. The extent to which the COVID-19 pandemic may materially impact our financial condition, liquidity or results of operations is uncertain.
In the second quarter of 2020, we made the decision to embrace a work-from-anywhere model, with many of our employees electing to work remotely on a permanent basis. This operating mode reduces our physical facilities requirements, and consequently, we established a restructuring plan to align our business to a work-from-anywhere model and incurred facilities-related restructuring charges of $5.1 million. Furthermore, in the second quarter of 2020 we realigned our product portfolio to reduce and consolidate certain legacy product lines as customers accelerated their interest in our all-platform offerings. These actions resulted in a component inventory accrual of $1.8 million and severance-related charges of $1.2 million.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with U.S. GAAP. These accounting principles require us to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Management bases its estimates,
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assumptions and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. To the extent there are material differences between these estimates and actual results, our financial statements may be affected. Our management evaluates its estimates, assumptions and judgments on an ongoing basis.
Our critical accounting policies and estimates, which are revenue recognition and inventory valuation, are described under “Critical Accounting Policies and Estimates” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2019. For the nine months ended September 26, 2020, there have been no significant changes in our critical accounting policies and estimates.
Recent Accounting Pronouncements
There have been no additional accounting pronouncements or changes in accounting pronouncements during the nine months ended September 26, 2020, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the year ended December 31, 2019, that are significant or potentially significant to us.
Results of Operations
Comparison of the Three and Nine Months Ended September 26, 2020 and September 28, 2019
Revenue
Our revenue is comprised of the following:
• Systems include revenue from the sale of access and premises systems, software platform licenses and cloud-based software subscriptions; and
• Services include revenue from professional services, customer support, software- and cloud-based maintenance, extended warranty subscriptions, training and managed services.
The following table sets forth our revenue (dollars in thousands):
Three Months Ended Nine Months Ended
September 26,
2020 September 28,
2019 Variance
in
Dollars Variance
in
Percent September 26,
2020 September 28,
2019 Variance
in
Dollars Variance
in
Percent
Revenue:
Systems $ 142,294 $ 106,060 $ 36,234 34 % $ 347,644 $ 281,253 $ 66,391 24 %
Services 8,214 8,425 (211) (3) % 23,569 22,886 683 3 %
$ 150,508 $ 114,485 $ 36,023 31 % $ 371,213 $ 304,139 $ 67,074 22 %
Percent of total revenue:
Systems 95 % 93 % 94 % 92 %
Services 5 % 7 % 6 % 8 %
100 % 100 % 100 % 100 %
Our revenue increased by $36.0 million and $67.1 million for the three and nine months ended September 26, 2020, respectively, as compared to the corresponding periods in 2019 mostly due to higher systems revenue of $36.2 million and $66.4 million, respectively. Services revenue declined $0.2 million and increased by $0.7 million, as compared to the corresponding periods in 2019, respectively. The increase in systems revenue was primarily due to higher revenue from our small, regional customers and, to a lesser extent, our large-sized customers, as service providers accelerated some deployments to respond to demand for network capacity and relieve network capacity constraints. Services revenue was relatively flat due to continued ramp in our service offerings aligned with cloud and software products offset by lower professional services related to CAF deployments.
For the three and nine months ended September 26, 2020, revenue generated in the United States was $128.2 million and $324.4 million, or 85% and 87% of our total revenue, respectively, compared to $101.0 million and $262.6 million, or 88% and 86% of our total revenue, respectively, for the same period in 2019. International revenue was $22.3 million and $46.8 million, or 15% and 13% of our total revenue, respectively, for the three and nine months ended September 26, 2020, as compared to $13.5 million and $41.5 million, or 12% and 14% of our total revenue, respectively, for the same period in 2019.
Lumen Technologies, Inc. (formerly CenturyLink, Inc.), or Lumen, accounted for more than 10% of the Company's total revenue, representing 12% and 14% for the three and nine months ended September 26, 2020, respectively, and 16% and 15%
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for the three and nine months ended September 28, 2019, respectively. Verizon accounted for 10% of total revenue for the three months ended September 28, 2019.
Cost of Revenue, Gross Profit and Gross Margin
The following table sets forth our cost of revenue (dollars in thousands):
Three Months Ended Nine Months Ended
September 26,
2020 September 28,
2019 Variance
in
Dollars Variance
in
Percent September 26,
2020 September 28,
2019 Variance
in
Dollars Variance
in
Percent
Cost of revenue:
Systems $ 68,889 $ 57,858 $ 11,031 19 % $ 176,318 $ 152,020 $ 24,298 16 %
Services 5,644 6,425 (781) (12) % 16,891 18,906 (2,015) (11) %
$ 74,533 $ 64,283 $ 10,250 16 % $ 193,209 $ 170,926 $ 22,283 13 %
Our cost of revenue increased by $10.3 million and $22.3 million for the three and nine months ended September 26, 2020, respectively, as compared with the corresponding periods in 2019. The $11.0 million and $24.3 million increases in our systems cost of revenue were less than the increases in revenue compared with the corresponding periods in 2019, and were due to continued growth in our All-Platform offerings along with favorable customer and product mix. The increase in costs of revenue for the nine months ended September 26, 2020 as compared with the corresponding period in 2019, includes a charge of $1.8 million related to our reduction and consolidation of legacy product lines taken in the second quarter of 2020. The decrease in services cost of revenue was mainly due to improved mix towards our higher gross margin support services versus lower gross margin deployment services for the three and nine months ended September 26, 2020 compared with the corresponding period in 2019.
The following table sets forth our gross profit and gross margin (dollars in thousands):
Three Months Ended Nine Months Ended
September 26,
2020 September 28,
2019 Variance
in
Dollars Variance
in
Percent September 26,
2020 September 28,
2019 Variance
in
Dollars Variance
in
Percent
Gross profit:
Systems $ 73,405 $ 48,202 $ 25,203 52 % $ 171,326 $ 129,233 $ 42,093 33 %
Services 2,570 2,000 570 29 % 6,678 3,980 2,698 68 %
$ 75,975 $ 50,202 $ 25,773 51 % $ 178,004 $ 133,213 $ 44,791 34 %
Gross margin:
Systems 51.6 % 45.4 % 49.3 % 45.9 %
Services 31.3 % 23.7 % 28.3 % 17.4 %
Overall 50.5 % 43.9 % 48.0 % 43.8 %
Gross profit increased to $76.0 million and $178.0 million for the three and nine months ended September 26, 2020, respectively, from $50.2 million and $133.2 million during the corresponding periods in 2019 primarily due to higher systems and services gross margin.
During the three and nine months ended September 26, 2020, systems gross margin was negatively impacted by U.S. tariff and tariff-related costs of $0.6 million and $2.3 million, or 45 and 65 basis points, respectively, and intangible asset amortization of $0.7 million and $2.0 million, or 45 and 60 basis points, respectively. Excluding the impact of U.S. tariff and tariff-related costs and intangible assets amortization, systems gross margin was 52.5% and 50.5% for the three and nine months ended September 26, 2020, respectively. During the three and nine months ended September 28, 2019, systems gross margin was negatively impacted by U.S. tariff and tariff-related costs of $1.1 million and $5.1 million, or 100 and 180 basis points, respectively. The intangible asset amortization for the three and nine months ended September 28, 2019, which was initiated in the third quarter of 2019, was $0.4 million, or 35 and 15 basis points, respectively. Excluding the impact of U.S. tariff and tariff-related costs and intangible assets amortization, systems gross margin was 46.8% and 47.9% for the three and nine months ended September 28, 2019, respectively. The increase in systems gross margin excluding U.S. tariff and tariff-related costs and intangible assets amortization for the three months ended September 26, 2020 compared the corresponding period in 2019, was mainly due to continued growth in our all-platform offerings along with favorable product and customer mix.
Services gross margin increased for the three months ended September 26, 2020 compared to the corresponding period in 2019 due to lower personnel costs as our service revenue mix shifts away from low gross margin deployment services to higher gross margin software maintenance and services aligned with our platform offerings.
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Operating Expenses
Sales and Marketing Expenses
The following table sets forth our sales and marketing expenses (dollars in thousands):
Three Months Ended Nine Months Ended
September 26,
2020 September 28,
2019 Variance
in
Dollars Variance
in
Percent September 26,
2020 September 28,
2019 Variance
in
Dollars Variance
in
Percent
Sales and marketing $ 23,079 $ 20,123 $ 2,956 15 % $ 65,046 $ 59,196 $ 5,850 10 %
Percent of total revenue 15 % 18 % 18 % 19 %
Sales and marketing expenses for the three months ended September 26, 2020 increased by $3.0 million as compared with the corresponding period in 2019 primarily due to higher personnel expenses of $3.3 million, mainly related to higher sales incentive compensation expense and investments in sales headcount, higher marketing expenses of $0.8 million and higher stock-based compensation of $0.3 million. These increases were partially offset by a decrease in travel expenses of $1.3 million.
Sales and marketing expenses for the nine months ended September 26, 2020 increased by $5.9 million as compared with the corresponding period in 2019 primarily due to higher personnel expenses of $6.0 million, mainly related to investments in sales headcount and higher sales incentive compensation expense, higher marketing expenses of $2.2 million and higher stock-based compensation of $0.3 million. These increases were partially offset by a decrease in travel expenses of $2.9 million.
Research and Development Expenses
The following table sets forth our research and development expenses (dollars in thousands):
Three Months Ended Nine Months Ended
September 26,
2020 September 28,
2019 Variance
in
Dollars Variance
in
Percent September 26,
2020 September 28,
2019 Variance
in
Dollars Variance
in
Percent
Research and development $ 20,378 $ 20,890 $ (512) (2) % $ 61,970 $ 60,920 $ 1,050 2 %
Percent of total revenue 14 % 18 % 17 % 20 %
Research and development expenses for the three months ended September 26, 2020 decreased by $0.5 million as compared with the corresponding period in 2019 mainly due to lower facilities expenses of $1.1 million, lower personnel expenses of $0.4 million, lower travel expenses of $0.2 million and decreases in depreciation and amortization expense of $0.2 million. These decreases were partially offset by increased outside services expenses of $1.4 million.
Research and development expenses for the nine months ended September 26, 2020 increased by $1.1 million as compared with the corresponding period in 2019 mainly due to higher outside services expenses of $2.2 million, higher personnel expenses of $1.3 million, primarily related to incentive compensation expense, and higher stock-based compensation of $0.4 million. These increases were partially offset by lower facilities expenses of $1.3 million, decreases in depreciation and amortization expense of $0.6 million, lower travel expenses of $0.5 million and lower equipment expenses of $0.4 million.
General and Administrative Expenses
The following table sets forth our general and administrative expenses (dollars in thousands):
Three Months Ended Nine Months Ended
September 26,
2020 September 28,
2019 Variance
in
Dollars Variance
in
Percent September 26,
2020 September 28,
2019 Variance
in
Dollars Variance
in
Percent
General and administrative $ 10,768 $ 9,566 $ 1,202 13 % $ 32,630 $ 27,518 $ 5,112 19 %
Percent of total revenue 7 % 8 % 9 % 9 %
General and administrative expenses for the three months ended September 26, 2020 increased by $1.2 million as compared with the corresponding period in 2019 mainly due to increased amortization and subscription expenses of $0.9 million, primarily related to our cloud-based ERP system that went live in January of 2020, and higher facilities expenses of $0.8 million. These increases were partially offset by decreases in professional services fees of $0.6 million.
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General and administrative expenses for the nine months ended September 26, 2020 increased by $5.1 million as compared with the corresponding period in 2019 mainly due to increased amortization and subscription expenses of $3.1 million, primarily related to our cloud-based ERP system that went live in January of 2020, an increase in personnel expenses of $1.9 million, primarily related to the capitalization of internal resources related to our cloud-based ERP implementation that lowered personnel expenses in 2019 as well as an increase in incentive compensation expense in 2020, and an increase in our bad debt allowance of $1.0 million. These increases were partially offset by lower professional services fees of $0.9 million.
Restructuring Charges
Responding to changes caused by the COVID-19 pandemic, we initiated a restructuring plan in June 2020 to accelerate our all-platform future and to align with a work-from-anywhere culture. We incurred restructuring charges of $6.3 million, consisting of facilities-related charges and severance and other termination related benefits. See Note 5, “ Balance Sheet Details ” of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details.
Provision for Income Taxes
The following table sets forth our provision for income taxes (dollars in thousands):
Three Months Ended Nine Months Ended
September 26,
2020 September 28,
2019 Variance
in
Dollars Variance
in
Percent September 26,
2020 September 28,
2019 Variance
in
Dollars Variance
in
Percent
Provision for income taxes $ 149 $ 610 $ (461) (76) % $ 626 $ 860 $ (234) (27) %
Effective tax rate 0.7 % (22.0) % 6.3 % (5.0) %
The effective tax rate for the three and nine months ended September 26, 2020 was determined using an estimated annual effective tax rate adjusted for discrete items, if any, that occurred during the respective periods.
Deferred tax assets are recognized if realization of such assets is more likely than not. We have established and continue to maintain a full valuation allowance against our net deferred tax assets, with the exception of certain foreign deferred tax assets, as we do not believe that realization of those assets is more likely than not.
Our effective tax rate may be subject to fluctuation during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as the mix of forecasted pre-tax earnings in the various jurisdictions in which we operate, valuation allowances against deferred tax assets, the recognition or de-recognition of tax benefits related to uncertain tax positions and changes in or the interpretation of tax laws in jurisdictions where we conduct business.
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Liquidity and Capital Resources
We have funded our operations and investing activities primarily through sales of our common stock, including an underwritten public offering in August 2020, cash generated from operations, borrowings on our line of credit and financing arrangements for certain lab equipment and consulting services. As of September 26, 2020, we had cash, cash equivalents and marketable securities of $103.8 million, which consisted of deposits held at banks held at major financial institutions and highly liquid marketable securities such as U.S. government securities.
Operating Activities
Net cash provided by operating activities was $20.9 million for the nine months ended September 26, 2020 and consisted of $23.9 million of non-cash charges and net income of $9.4 million. This was partially offset by $12.3 million of cash flow decreases reflected in the net change in assets and liabilities. Cash flow decreases resulting from the net change in assets and liabilities primarily consisted of an increase in accounts receivable of $22.6 million, due to product shipment timing. In addition, there was increase in inventory of $1.5 million to support higher revenue. These changes were partially offset by an increase in accounts payable of $5.6 million due to increased inventory purchases, an increase in accrued liabilities of $3.8 million, mainly due to an increase our liability for components at certain suppliers, and an decrease in prepaid expenses and other assets of $3.7 million, due to amortization of the right-of-use asset.
Non-cash charges primarily consisted of depreciation and amortization of $10.3 million, stock-based compensation of $9.8 million and lease restructuring charges of $3.7 million.
During the nine months ended September 28, 2019, net cash provided by operating activities was $4.0 million and consisted of $18.5 million of non-cash charges and $3.8 million of cash flow increases reflected in the net change in assets and liabilities, partially offset by a net loss of $18.2 million. Cash flow increases resulting from the net change in assets and liabilities primarily consisted of a decrease in accounts receivable of $18.5 million, mainly due to increased linearity of shipments in the third quarter of 2019 resulting in higher collections in the quarter, a decrease in inventory of $3.8 million, primarily due to the transfer of raw material inventory to a new CM, an increase in deferred revenue of $2.6 million due to increased support contracts, software maintenance and Calix Cloud subscriptions and a decrease in prepaid expenses and other assets of $0.4 million, mainly due to operating lease asset amortization. This was partially offset by a decrease in accounts payable of $16.0 million, primarily due to timing of inventory purchases, a decrease in accrued liabilities of $2.7 million, mainly related to incentive compensation payments to employees, and a decrease in other long-term liabilities of $2.8 million, mainly due to operating lease liability amortization.
Non-cash charges primarily consisted of stock-based compensation of $8.5 million, depreciation and amortization of $7.4 million and loss on asset retirements of $2.6 million.
Investing Activity
For the nine months ended September 26, 2020, we invested in purchasing marketable securities of $40.0 million and capital expenditures of $5.6 million, consisting primarily of purchases of test equipment and computer equipment.
For the nine months ended September 28, 2019, we invested in capital expenditures of $12.4 million, consisting primarily of purchases of test equipment, computer equipment and software.
Financing Activities
Net cash provided by financing activities of $41.5 million for the nine months ended September 26, 2020 mainly consisted of proceeds from our common stock offering of $60.1 million, proceeds from the issuance of common stock from stock option exercises of $7.7 million and from our employee stock purchase plans of $6.4 million. These inflows were partially offset by the re-payment of our line of credit of $30.0 million, payments related to financing arrangements of $2.3 million and payments to originate the credit line of $0.3 million.
Net cash used in financing activities of $3.4 million for the nine months ended September 28, 2019 mainly related to reduced borrowing from the line of credit of $5.7 million and payments for financing arrangements of $2.0 million, partially offset by proceeds from the issuance of common stock under our employee stock purchase plans of $4.2 million and from stock option exercises of $0.3 million.
Working Capital and Capital Expenditure Needs
In the third quarter of fiscal 2020, we completed an underwritten public offering of 3,220,000 shares of our common stock, at $20.00 per share, including a full exercise by the Underwriters of their option to purchase an additional 420,000 shares of Common Stock, for net proceeds of $60.1 million, after deducting the underwriting discount and estimated expenses payable by us. We believe this additional cash position will allow us to invest in future growth needs.
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Our material cash commitments include non-cancelable firm purchase commitments, contractual obligations under our loan and security agreement with Bank of America, or BofA Loan Agreement, normal recurring trade payables, compensation-related and expense accruals, operating leases, minimum revenue-share obligations and obligations from financing arrangements. We believe that our outsourced approach to manufacturing provides us significant flexibility in both managing inventory levels and financing our inventory. In the event that our revenue plan does not meet our expectations, we may be required to curtail or eliminate expenditures to mitigate the impact on our working capital.
In January 2020, we terminated our Silicon Valley Bank loan and security agreement and entered into a new loan and security agreement with Bank of America, N.A. The BofA Loan Agreement provides for a revolving facility up to a principal amount of up to $35.0 million, including a $10.0 million sublimit for letters of credit. The BofA Loan Agreement matures, and all outstanding amounts become due and payable, in January 2023. The BofA Loan Agreement is secured by substantially all of our assets, including our intellectual property. Loans under the credit facility bear interest at a rate per annum equal to either LIBOR (customarily defined) plus an applicable margin between 1.5% to 2.0% or Prime Rate (customarily defined) plus an applicable margin between 0.5% to 1.0%, in each case largely based on a fixed charge coverage ratio measured at the end of each fiscal quarter. The availability of borrowings under the BofA Loan Agreement is subject to certain conditions and requirements, including among others, if at any time our availability is less than $5.0 million, we must maintain a minimum fixed charge coverage ratio, of 1.0 to 1.0. As of September 26, 2020, we were in compliance with these requirements, had no outstanding borrowings and had availability of $35.0 million. Our interest rate on the line of credit was 3.75% as of the quarter ended September 26, 2020.
In March 2018, we entered into an agreement with a vendor to develop software products pursuant to which we would become obligated, if the vendor delivered software that meets our technical requirements for commercial sale, to make minimum revenue-share payments of $15.8 million over the subsequent three years. The payments are based on a revenue-share rate applied to revenue from developed product sales subject to a minimum and a maximum aggregate amount over the three-year sales period. We had our first sale in August 2019. Revenue-share payments are paid quarterly in arrears, and we began making payments in the first quarter of 2020.
During 2018, we entered into financing arrangements to purchase lab equipment for approximately $5.1 million. Each agreement is to be paid over 36 months with a weighted average interest rate of 6.2%. As of September 26, 2020, we had $1.7 million outstanding under these financing arrangements.
From 2017 to 2020, in connection with our ERP implementation, we entered into financing arrangements for consulting services of $5.5 million. The current amounts due under this agreement are to be paid over a weighted average term of 2.4 years with a weighted average interest rate of 6.3%. As of September 26, 2020, there was $1.6 million outstanding under this arrangement.
We believe, based on our current operating plan and expected operating cash flows, that our existing cash, cash equivalents and marketable securities, along with available borrowings under our BofA Loan Agreement, will be sufficient to meet our anticipated cash needs for at least the next twelve months. If we are unable to execute on our current operating plan or continue to generate operating income and positive cash flows, our liquidity, results of operations and financial condition will be adversely affected, and we may need to seek other sources of liquidity, including the sale of additional equity or incremental borrowings, to support our working capital needs. In addition, we may choose to seek other sources of liquidity even if we believe we have generated sufficient cash flows to support our operational needs. There is no assurance that any other sources of liquidity may be available to us on acceptable terms or at all. If we are unable to generate sufficient cash flows or obtain other sources of liquidity, we will be forced to limit our development activities, reduce our investment in growth initiatives and institute cost-cutting measures, all of which may adversely impact our business and potential growth.
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Contractual Obligations and Commitments
Our principal commitments as of September 26, 2020 consisted of financing arrangements, operating leases for office space and non-cancelable outstanding purchase obligations. The following table summarizes our contractual obligations at September 26, 2020 (in thousands):
Payments Due by Period
Total Less Than 1 Year 1-3 Years 3-5 Years More Than 5 Years
Non-cancelable purchase commitments (1)
$ 119,875 $ 119,875 $ — $ — $ —
Financing arrangements (2)
19,068 5,214 13,854 — —
Operating lease obligations (3)
17,948 3,712 7,068 6,540 628
$ 156,891 $ 128,801 $ 20,922 $ 6,540 $ 628
(1) Represents outstanding purchase commitments for inventory to be delivered by our third-party manufacturers. See Note 7, “ Commitments and Contingencies ” of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion regarding our outstanding purchase commitments.
(2) Represents installment payments, including interest, related to financing arrangements and estimated total minimum revenue-share obligations under the program, including imputed interest, of $15.8 million associated with the completion of developed software products and related enhancements. The schedule reflects our expected revenue-share payments based on our revenue projections for the developed products over a three-year sales period. If the minimum revenue-share payments are not achieved by the end of the three-year sales period, a true-up payment will be due.
(3) Future minimum operating lease obligations in the table above include primarily payments for our office locations, which expire at various dates through 2025. See Note 7 “ Commitments and Contingencies ” of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion regarding our operating leases.
Off-Balance Sheet Arrangements
As of September 26, 2020 and December 31, 2019, we did not have any off-balance sheet arrangements.
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