CALIX, INC 10-Q

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, or the Exchange Act. 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, 2020. 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 the leading global provider of cloud and software platforms, systems and services that focus on the access network, the portion of the network that governs available bandwidth and determines the range and quality of services that can be offered to subscribers. These cloud and software platforms enable broadband service providers, or BSPs, of all types and sizes to innovate and transform their businesses. Our BSP customers are empowered to utilize real-time data and insights from Calix platforms to simplify their businesses and deliver experiences that excite their subscribers. These insights enable BSPs to grow their brand through increased subscriber acquisition, loyalty and revenue and to reduce their operating costs, thereby increasing the value of their businesses and contributions to their communities. We market our cloud and software platforms, systems and services to BSPs globally through our direct sales force as well as select resellers. Our customers range from smaller, regional BSPs to some of the world’s largest BSPs. We have enabled approximately 1,600 BSP customers purchasing directly and through partners to deploy passive optical, Active Ethernet and point-to-point Ethernet fiber access networks. 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 of all types such as wireless internet service providers, fiber overbuilders, cable MSOs, municipalities and electric cooperatives in the United States and internationally. Our growth is also highly dependent on the speed and willingness of customers to adopt these platforms. 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, non-availability of products due to supply chain challenges, including component and labor shortages and increasing lead times as well as disruptions as a result of 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. 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 October 2, 2021, 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 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 as well as our customer success organization, changes in product warranty and incurrence of retrofit costs, amortization of intangibles, asset write-offs, support fees for silicon-related development work for our products and inventory write-downs. Given the ongoing supply chain disruptions related to component shortages, longer lead times as a result of increased global demand for certain components and disruptions and related to the COVID-19 pandemic, we see continued product supply delays and related challenges, which we expect to persist in the foreseeable future. Similarly, challenges in 19 Table of Contents supply chain logistics have persisted due to greater global demand for transport services as well as labor shortages and resulted in increases in our global freight charges as we have elected to ship by air in order to meet delivery commitments to our customers and as air freight rates have increased from prior year 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 our revenue declines. Our gross profit and gross margin fluctuate based on timing of factors such as 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 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, new product introductions or upgrades to existing products, 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; investments in marketing programs; 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. During the third quarter of 2021, we recognized a discrete tax benefit of $162.0 million based on our reassessment of the amount of our U.S. federal and state deferred tax assets that are more likely than not to be realized, primarily as a result of actual and projected increases in U.S. profitability in the current and future periods. 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, particularly as variants of the coronavirus continue to spread around the world. In March 2020, we instituted office closures, travel restrictions and a work-from-anywhere policy for substantially all our employees due to shelter-in-place mandates. In July 2021, we reopened our U.S. offices to fully-vaccinated employees, who choose to work in the office, and visitors as well as lifted certain travel restrictions. The spread of COVID-19 has had a prolonged impact on our supply chain operations due to restrictions, reduced capacity and limited availability from suppliers on whom we rely for sourcing components and materials and from third-party partners on whom we rely 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 Wi-Fi, 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 and managing global logistics and transport services for our products due to shortages and delays. The prolonged impact of COVID-19 could exacerbate these constraints or cause further supply chain disruptions. 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, 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, 2020. During the third quarter of 2021, we recognized an income tax benefit of $ 162.0 million offset by current income taxes, based on our reassessment of the amount of our U.S. federal and other state deferred tax assets that are more likely than not to be realized, primarily as a result of actual and projected increases in U.S. profitability in the current and future periods. As a result, we determined that the following policy is a critical accounting policy and estimate: 20 Table of Contents Income Taxes We evaluate our tax positions and estimate our current tax exposure along with assessing temporary differences that result from different book to tax treatment of items not currently deductible for tax purposes. These differences result in deferred tax assets and liabilities on our Consolidated Balance Sheets, which are estimated based upon the difference between the financial statement and tax bases of assets and liabilities using the enacted tax rates that will be in effect when these differences reverse. In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in our Consolidated Statements of Comprehensive Income become deductible expenses under applicable income tax laws or loss or credit carryforwards are utilized. Accordingly, realization of our deferred tax assets is dependent on future taxable income against which these deductions, losses and credits can be utilized. We must assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not more likely than not, we must establish a valuation allowance. Management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. Prior to the third quarter of 2021, we maintained a 100% valuation allowance against all deferred tax assets, because there was insufficient positive evidence to overcome the existing negative evidence, primarily consisting of several years of consecutive reported pre-tax losses, such that it was not more likely than not that the deferred tax assets were realizable. In the third quarter of 2021, we had reported positive operating performance for five consecutive quarters and continued to maintain a cumulative three-year pre-tax profit. In addition, we expect continued positive operating performance into the foreseeable future to allow for utilization of all operating loss and substantially all tax credit carryforwards prior to their expiration. After considering these factors, we determined that the positive evidence overcame any negative evidence and concluded that it was more likely than not that a substantial portion of our U.S. federal and certain other state deferred tax assets were realizable. We currently maintain a valuation allowance of $28.7 million for certain U.S. federal and California state deferred tax assets. Other than the change above, there have been no significant changes in our critical accounting policies and estimates for the nine months ended October 2, 2021. Recent Accounting Pronouncements There have been no additional accounting pronouncements or changes in accounting pronouncements during the nine months ended October 2, 2021 as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the year ended December 31, 2020 that are significant or potentially significant to us. Results of Operations Comparison of the Three and Nine Months Ended October 2, 2021 and September 26, 2020 Revenue The following table sets forth our revenue (dollars in thousands): Three Months Ended Nine Months Ended October 2, 2021 September 26, 2020 Variance in Dollars Variance in Percent October 2, 2021 September 26, 2020 Variance in Dollars Variance in Percent Revenue: Systems $ 163,076 $ 142,294 $ 20,782 15 % $ 475,931 $ 347,644 $ 128,287 37 % Services 9,155 8,214 941 11 % 27,044 23,569 3,475 15 % $ 172,231 $ 150,508 $ 21,723 14 % $ 502,975 $ 371,213 $ 131,762 35 % Percent of total revenue: Systems 95 % 95 % 95 % 94 % Services 5 % 5 % 5 % 6 % 100 % 100 % 100 % 100 % Our revenue increased by $21.7 million and $131.8 million for the three and nine months ended October 2, 2021, respectively, as compared to the corresponding periods in 2020 mostly due to higher systems revenue of $20.8 million and $128.3 million, as compared to the corresponding periods in 2020. Services revenue increased by $0.9 million and $3.5 million compared to the corresponding periods in 2020. The increase in systems revenue was primarily due to higher revenue from our small, regional customers and, to a lesser extent, our medium-sized customers, as service providers adopt our All Platform offerings and seek 21 Table of Contents to provide a better Wi-Fi experience, partially offset by a decrease in revenue to large customers. The increase in services revenue was due to the continued ramp in our service offerings aligned with cloud and software products for our customers. For the three and nine months ended October 2, 2021, revenue generated in the United States was $136.3 million and $414.2 million, or 79% and 82% of our total revenue, respectively, compared to $129.2 million and $326.1 million, or 86% and 88% of our total revenue, respectively, for the same periods in 2020. International revenue was $35.9 million and $88.7 million, or 21% and 18% of our total revenue, respectively, for the three and nine months ended October 2, 2021, as compared to $21.3 million and $45.2 million, or 14% and 12% of our total revenue, respectively, for the same periods in 2020. One customer represented 10% of our total revenue for the three months ended October 2, 2021. No customer accounted for more than 10% of our total revenue for the nine months ended October 2, 2021. Another customer, Lumen Technologies, Inc. (formerly CenturyLink, Inc.), accounted for more than 10% of our total revenue, representing 12% and 14% of our total revenue for the three and nine months ended September 26, 2020, respectively. 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 October 2, 2021 September 26, 2020 Variance in Dollars Variance in Percent October 2, 2021 September 26, 2020 Variance in Dollars Variance in Percent Cost of revenue: Systems $ 76,339 $ 68,889 $ 7,450 11 % $ 218,675 $ 176,318 $ 42,357 24 % Services 6,399 5,644 755 13 % 18,946 16,891 2,055 12 % $ 82,738 $ 74,533 $ 8,205 11 % $ 237,621 $ 193,209 $ 44,412 23 % Our cost of revenue increased by $8.2 million and $44.4 million for the three and nine months ended October 2, 2021, respectively, as compared with the corresponding periods in 2020. The $7.5 million and $42.4 million increases in our systems cost of revenue were less than the percentage increase in revenue compared with the corresponding periods in 2020. This was due to continued growth in our All Platform offerings along with favorable customer and product mix, the increasing spread between fixed costs in relation to revenue growth and a refund for previously paid U.S. import tariffs due to the subsequent export of tariffed products. This was partially offset by increased costs due to higher prices for transportation and components due to shortages. The increase in services cost of revenue for the three and nine months ended October 2, 2021 compared with the corresponding periods in 2020 was mainly due to increased personnel costs as we made further investments in our customer success organization. The following table sets forth our gross profit and gross margin (dollars in thousands): Three Months Ended Nine Months Ended October 2, 2021 September 26, 2020 Variance in Dollars Variance in Percent October 2, 2021 September 26, 2020 Variance in Dollars Variance in Percent Gross profit: Systems $ 86,737 $ 73,405 $ 13,332 18 % $ 257,256 $ 171,326 $ 85,930 50 % Services 2,756 2,570 186 7 % 8,098 6,678 1,420 21 % $ 89,493 $ 75,975 $ 13,518 18 % $ 265,354 $ 178,004 $ 87,350 49 % Gross margin: Systems 53.2 % 51.6 % 54.1 % 49.3 % Services 30.1 % 31.3 % 29.9 % 28.3 % Overall 52.0 % 50.5 % 52.8 % 48.0 % Gross profit increased to $89.5 million and $265.4 million for the three and nine months ended October 2, 2021, respectively, from $76.0 million and $178.0 million during the corresponding periods in 2020 due to higher gross margin for both systems and services. The increase in systems gross margin for the three and nine months ended October 2, 2021 compared to the corresponding periods in 2020 was mainly due to continued growth in our All Platform offerings along with favorable product and customer mix as well as a credit for previously paid tariffs due to product re-export. This was partially offset by increased costs due to higher prices for transportation and components due to shortages. Services gross margin increased for the three and nine months ended October 2, 2021 compared to the corresponding periods in 2020 as our service revenue mix shifted away from low gross margin deployment services to higher gross margin services aligned with our platform offerings. 22 Table of Contents 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 October 2, 2021 September 26, 2020 Variance in Dollars Variance in Percent October 2, 2021 September 26, 2020 Variance in Dollars Variance in Percent Sales and marketing expenses $ 31,144 $ 23,079 $ 8,065 35 % $ 88,905 $ 65,046 $ 23,859 37 % Percent of total revenue 18 % 15 % 18 % 18 % Sales and marketing expenses for the three months ended October 2, 2021 increased by $8.1 million compared with the corresponding period in 2020 primarily due to increases in personnel expenses of $4.3 million, mainly related to investments in sales headcount and higher sales incentive compensation, marketing expenses of $0.9 million, travel expenses of $0.8 million, stock-based compensation of $0.8 million and outside services expenses of $0.4 million. Sales and marketing expenses for the nine months ended October 2, 2021 increased by $23.9 million compared with the corresponding period in 2020 primarily due to increases in personnel expenses of $16.2 million, mainly related to investments in sales headcount and higher sales incentive compensation, marketing expenses of $2.7 million, stock-based compensation of $2.0 million, software costs of $1.4 million and outside services expenses of $1.3 million. We expect to increase our investments in sales and marketing as a percentage of revenue in order to extend our market reach and grow our business in support of our key strategic initiatives. Research and Development Expenses The following table sets forth our research and development expenses (dollars in thousands): Three Months Ended Nine Months Ended October 2, 2021 September 26, 2020 Variance in Dollars Variance in Percent October 2, 2021 September 26, 2020 Variance in Dollars Variance in Percent Research and development expenses $ 25,727 $ 20,378 $ 5,349 26 % $ 75,807 $ 61,970 $ 13,837 22 % Percent of total revenue 15 % 14 % 15 % 17 % Percentage of systems gross profit 30 % 28 % 29 % 36 % Research and development expenses for the three months ended October 2, 2021 increased by $5.3 million as compared with the corresponding period in 2020 mainly due to increases in outside services expenses of $2.3 million, personnel expenses of $1.8 million, stock-based compensation of $0.6 million and depreciation and amortization of $0.3 million. Research and development expenses for the nine months ended October 2, 2021 increased by $13.8 million as compared with the corresponding period in 2020 mainly due to increases in outside services expenses of $7.1 million, personnel expenses of $5.3 million, stock-based compensation of $1.7 million and depreciation and amortization of $1.0 million. These increases were partially offset by lower facilities expenses of $1.4 million. We expect to slightly increase our investments in research and development as a percentage of systems gross profit to expand the functionality and capabilities of our platforms. General and Administrative Expenses The following table sets forth our general and administrative expenses (dollars in thousands): Three Months Ended Nine Months Ended October 2, 2021 September 26, 2020 Variance in Dollars Variance in Percent October 2, 2021 September 26, 2020 Variance in Dollars Variance in Percent General and administrative expenses $ 14,631 $ 10,768 $ 3,863 36 % $ 41,320 $ 32,630 $ 8,690 27 % Percent of total revenue 8 % 7 % 8 % 9 % 23 Table of Contents General and administrative expenses for the three months ended October 2, 2021 increased by $3.9 million as compared with the corresponding period in 2020 mainly due to increases in stock-based compensation of $1.6 million, personnel expenses of $1.1 million and outside services of $0.9 million. General and administrative expenses for the nine months ended October 2, 2021 increased by $8.7 million as compared with the corresponding period in 2020 mainly due to increases in stock-based compensation of $4.3 million, personnel expenses of $2.4 million, unallocated-facilities expenses of $1.8 million and outside services expenses of $1.0 million. Beginning in the third quarter of 2020, we changed our facility allocation to align with our work-from-anywhere initiative, and consequently, most of our facilities expenses are retained in general and administrative expenses. These increases were partially offset by a decrease in our bad debt expense of $1.2 million. We expect our general and administrative expenses to decline as a percentage of revenue over time as revenue continues to grow. Restructuring Charges Responding to changes and trends 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, for the nine months ended September 26, 2020. 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. Income Taxes The following table sets forth our income taxes (dollars in thousands): Three Months Ended Nine Months Ended October 2, 2021 September 26, 2020 Variance in Dollars Variance in Percent October 2, 2021 September 26, 2020 Variance in Dollars Variance in Percent Income taxes $ (159,982) $ 149 $ (160,131) (107,470) % $ (159,625) $ 626 $ (160,251) (25,599) % Effective tax rate (917.2) % 0.7 % (271.1) % 6.3 % During the third quarter of 2021, we recognized an income tax benefit of $162.0 million offset by current income taxes, based on our reassessment of the amount of our U.S. federal and other state deferred tax assets that are more likely than not to be realized, primarily as a result of actual and projected increases in U.S. profitability in the current and future periods. In performing our analysis, we used the most updated plans and estimates that we currently use to manage the underlying business and calculated the ability to utilize our deferred tax assets. We continue to maintain a valuation allowance of $28.7 million on certain U.S. federal and California state deferred tax assets that we believe are not more likely than not to be realized in future periods. As of September 26, 2020, the total expense was primarily related to foreign activity. In 2020, based on a review of the positive and negative evidence, we concluded that the deferred tax assets were not more likely than not to be realized, which resulted in an immaterial domestic provision as the deferred tax assets were fully offset with the valuation allowance. Our income taxes may be subject to fluctuation during the year and in future years as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as actual results differing from our estimates of pre-tax earnings in the various jurisdictions in which we operate, which could impact the recognition of our 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. 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 flow generated from operations and various borrowing arrangements. As of October 2, 2021, we had cash, cash equivalents and marketable securities of $188.7 million, which consisted of deposits held at banks and major financial institutions and highly liquid marketable securities such as U.S. government agency securities and commercial paper. Operating Activities Net cash provided by operating activities was $44.2 million for the nine months ended October 2, 2021 and consisted of net income of $218.5 million partially offset by non-cash charges of $132.6 million and cash flow decreases of $41.7 million 24 Table of Contents reflected in the net change in assets and liabilities. Non-cash charges consisted of the reversal of the valuation allowance on certain deferred tax assets of $162.0 million offset by stock-based compensation of $18.1 million and depreciation and amortization of $11.4 million. Cash flow decreases resulting from the net change in assets and liabilities primarily consisted of an increase in inventory of $22.9 million to support revenue growth and to mitigate supply chain shortages and disruptions and an increase in accounts receivable of $22.5 million, due to product shipment timing. In addition, there was an increase in prepaid expenses and other assets of $9.8 million mainly due to advance payments to our supply chain partners for deposits, expedite fees and component surcharges, capitalized sales commissions and deposits for our ConneXions conference, and a decrease in total accrued liabilities of $11.6 million, mainly related to incentive compensation payouts, rebate redemptions and a reduction of customer advance payments. These changes were partially offset by an increase in accounts payable of $18.3 million due to increased inventory purchases and an increase in deferred revenue of $6.7 million due to Calix Cloud subscriptions, support contracts and extended warranties. During the nine months ended September 26, 2020, 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 in our liability for components at certain suppliers, and a decrease in prepaid expenses and other assets of $3.7 million, due to amortization of the right-of-use asset. Investing Activity For the nine months ended October 2, 2021, cash used in investing activities of $82.8 million consisted of net purchases of marketable securities of $75.5 million and capital expenditures of $7.3 million, consisting primarily of purchases of test equipment and computer equipment. 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. Financing Activities Net cash provided by financing activities of $18.0 million for the nine months ended October 2, 2021 primarily consisted of proceeds from the issuance of common stock related to our equity plans. 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 and proceeds from the issuance of common stock related to our equity plans of $14.1 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. Working Capital and Capital Expenditure Needs Our material cash commitments include non-cancelable firm purchase commitments, normal recurring trade payables, compensation-related and expense accruals, operating leases and revenue-share obligations. 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. 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% (3.75% as of October 2, 2021), in each case largely based on a fixed charge coverage ratio measured at the end of each fiscal quarter. As of October 2, 2021, we had no outstanding borrowings and had full availability of $35.0 million. In March 2018, and as amended in December 2020, we entered into an agreement with a vendor to develop a certain software product and related enhancements pursuant to which we are obligated to make revenue-share payments under the program, subject to aggregate fixed revenue-share payments of $15.8 million. The payments are based on a revenue-share rate applied to revenue from the developed product and the corresponding hardware sales through March 2024. If the aggregate revenue-share payments are not achieved by the end of that period, a true-up payment will be due. 25 Table of Contents We believe, based on our current operating plan and expected operating cash flows, that our existing cash, cash equivalents and marketable securities 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 borrowing, 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. Contractual Obligations and Commitments Our principal commitments as of October 2, 2021 consisted of our contractual obligations under non-cancelable outstanding purchase obligations, operating lease obligations for office space and a revenue share obligation. The following table summarizes our contractual obligations as of October 2, 2021 (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) $ 221,017 $ 195,876 $ 17,545 $ 7,596 $ — Operating lease obligations (2) 16,767 4,007 8,207 4,515 38 Revenue share obligation (3) 14,649 3,120 11,529 — — $ 252,433 $ 203,003 $ 37,281 $ 12,111 $ 38 (1) Represents outstanding purchase commitments to be delivered by our third-party manufacturers or other vendors. 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) Future minimum operating lease obligations in the table above primarily include payments for our office locations, which expire at various dates through 2026. 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. (3) Represents remaining payments related to a revenue-share obligation, including imputed interest associated with developed software product and related enhancements, by an engineering service provider. The schedule reflects our expected revenue-share and true-up payments based on our revenue projections for the developed products over a sales period through March 2024. If the minimum revenue-share payments are not achieved by the end of that period, a true-up payment will be due. 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 discussion regarding our outstanding liability. Off-Balance Sheet Arrangements As of October 2, 2021 and December 31, 2020, we did not have any off-balance sheet arrangements.