EDGAR 10-K Filing

Company CIK: 1738177
Filing Year: 2021
Filename: 1738177_10-K_2021_0001564590-21-009841.json

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ITEM 1. BUSINESS
Item 1. Business.
Business Overview
What we do
We provide fixed wireless broadband and Wi-Fi networking infrastructure solutions for network operators, including wireless internet service providers, mobile network operators, enterprises and government agencies, communities and cities worldwide. Our scalable, reliable and high-performance solutions enable the creation of a purpose-built wireless fabric that connects people, places and things with a unified wireless fabric that spans multiple standards and frequencies of fixed wireless and Wi-Fi, all managed centrally via the cloud, deployed indoors and outdoors. Our multi-gigabit wireless fabric offers a compelling value proposition over traditional fiber and alternative wireless solutions.
Our wireless fabric includes intelligent radios, smart antennas, radio frequency, or RF, algorithms, wireless-aware switches and our on-premise or cloud-based network management software. Our embedded proprietary RF technology and software enables automated optimization of data flow at the outermost points in the network, which we refer to as the “intelligent edge.” This intelligent edge offers network operators increased performance, visibility, control and management, as well as the ability to efficiently transfer large amounts of data back to enterprise data centers for fast and efficient analysis and decision-making even in conditions characterized by a high degree of interfering signals generated both within the network or from outside sources, which we refer to as noise. Our products support licensed and unlicensed spectrum, tailored for many frequency bands. We provide deep technical and operational expertise based on years of deploying networks, resulting in ease of use of our products, and all Cambium Networks solutions are backed by our global organization that provides 24/7 support services tailored to meet the business needs of our end users.
Our solutions are deployed by wireless broadband internet service providers, mobile network operators, and managed service providers, as well as in private networks, including enterprises, petrochemical, military, state and local government, education, hospitality, rail, utility, industrial and other network operators. Our technology is used to connect a wide range of network assets, from offices, service organizations (schools, hospitality, healthcare) and industrial processes, to guest and public access via Wi-Fi to complex sensor networks. Network operators deploy our enterprise-grade solutions to take advantage of their scalability, intelligence, reliability, durability, attractive economics and ease of deployment, which offer:
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Superior outdoor scalability. Our solutions scale to greater density for outdoor applications because of their leading spectral efficiency.
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Embedded network intelligence and policy-based automation. Our solutions have embedded intelligence, utilizing software and RF algorithms that work together to optimize network performance. This intelligence allows networks to adapt and evolve as network requirements vary, environments change, and network footprints grow over time.
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Reliable wireless connectivity in congested environments. Our solutions deliver superior reliability enabled by our technology’s frequency reuse capabilities, embedded dynamic spectrum optimization and dynamic filtering abilities.
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Durability in challenging indoor and outdoor environments. Our solutions are designed to perform over time in challenging atmospheric conditions from the frigid temperatures of the far northern hemisphere to heat extremes in deserts, to the humidity of the jungles. We offer equipment that is designed and certified to operate in hazardous environments for the oil and gas industry, and meet demanding performance specifications required by the defense industry.
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High quality at attractive economics. Our solutions improve economics for network operators by supporting a large number of customer premise equipment, or CPE, per fixed wireless access point while providing enterprise-grade performance and quality. We reduce ongoing management costs through device reliability and embedded software that independently manages and resolves network performance issues.
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Ease of deployment and simplicity to scale the network. Network operators can utilize our cloud-based software to help design, install and manage their networks from cloud-to-tower-to-edge. Our cloud-based network management software offers full lifecycle management of a network through a single pane of glass, reducing the complexity of network operations and the onboarding of large numbers of devices.
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Seamless integration with ecosystem partners. We include solutions for a range of additional uses leveraging third party software and services embedded into our network management systems, including video surveillance management software, and Shared Access Spectrum, or SAS, services enabling multiple categories of users to safely share the same frequency bands, and wireless access gateway solutions, as well as third party Wi-Fi planning solutions and guest portal applications.
We market and sell our solutions through our global channel partner network, which drives a substantial majority of our revenues. We sell our solutions as one-time sales as well as a growing number of subscription-based products, with a majority of our revenues in a given period typically being generated by purchases from network operators that have previously purchased our products. Growth from these network operators is driven by expansion within existing networks and in new territories, replacement of competitor products with our solutions, deployment of new and incremental use cases and, in the case of local governments, mandates to offer fixed broadband wireless to all of their citizens.
Current trends impacting our business
Although the outbreak of COVID-19 has resulted and is likely to continue to result in disruption to our business and operations as well as the operations of our customers and suppliers, demand for wireless infrastructure projects globally remains robust, driven by remote work, learn and play from home, in part in response to the COVID-19 pandemic, and accelerated by government funding of broadband solutions. We have experienced increases in customer demand, as a result of strong demand for Point-to-Multi-Point products as the need for connectivity grows, as schools, businesses, and enterprises continue to operate remotely, and increased Point-to-Point revenues from improved federal business. In addition, we have seen a strong recovery in enterprise Wi-Fi solutions driven by improved field deployments and the transition to Wi-Fi 6 solutions. We have benefitted from investments we have made over the past few years in fixed wireless infrastructure technologies in such areas as point-to-multi-point, or PMP, including Citizens Broadband Radio Service, or CBRS, compatible products in the U.S. and in new opportunities such as gigabit wireless solutions with our 60 GHz millimeter wave products, our new enterprise Wi-Fi 6, and cloud-enabled wireless switching products. Our forthcoming 5G 28 GHz millimeter wave products are expected in 2021, further accelerating this trend as we enter markets demanding higher broadband performance, and in the U.S. the first phase of the Rural Digital Opportunity Fund, or RDOF, launched by the Federal Communications Commission, or FCC, is expected to accelerate the provision of high-speed broadband service to millions of underserved communities in the U.S. over the next ten years.
However, we expect that social distancing measures, further waves of shutdowns globally that impact the ability of our end user customers to deploy our products, and continued restrictions and even cessation in travel impacting our sales activities, and general business uncertainty will continue to negatively impact demand in several of our markets. In addition, although all of our suppliers are currently operating, reductions in production due to mandated closures of or labor restrictions at our third-party manufacturers in Mexico, China and elsewhere continue to remain a risk as COVID-19 restrictions continue.
Our supply operations remain impacted by COVID-19; for example, at least one of our mechanical suppliers has ceased operating, causing us to move production to an alternative supplier. We are working with other suppliers who have experienced component part shortages due to capacity restraints that have caused lead times for our products to increase. We expect our suppliers and third-party manufacturers to continue to be disrupted by parts and component shortages.
Our industry and market opportunities
According to Cisco Annual Internet Report (2018-2023), globally, the total number of Internet users is projected to grow from 3.9 billion in 2018 to 5.3 billion by 2023 at a compound annual growth rate (“CAGR”) of 6%. Mobile-to-Mobile connections will be the fastest-growing device and connections category, growing nearly 2.4-fold during the forecast period (19% CAGR) to 14.7 billion connections by 2023. Wi-Fi hotspots will grow four-fold from 2018 to 2023. Globally, there will be nearly 628 million public Wi-Fi hotspots by 2023, up from 169 million hotspots in 2018. We believe that growth in data traffic will be predominately driven by proliferation of connected devices, applications and sensors for both service provider and enterprise use cases. For example:
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Consumers are using connected devices to access cloud applications, stream media-rich content and connect to friends and family utilizing wireless connectivity.
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Enterprises are increasingly deploying their own wireless broadband infrastructure to provide individuals access to, and machines and other devices connectivity with, corporate networks, data centers and cloud applications.
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Industrial enterprises are using wireless broadband to help replace periodic, manual system monitoring with hundreds of wireless sensors and cameras that can monitor key production activities in real-time for safety, productivity and security. For example, wireless connectivity is allowing industrial enterprises real-time comprehensive monitoring of operations across a field of onshore facilities or offshore platforms to increase both the efficiency and safety of industrial operations.
The growing adoption of wireless networks is driving massive amounts of data that is being analyzed locally at the edge or at enterprise or cloud data centers. This requires greater wireless connectivity to capture and evaluate the data locally or to backhaul large amounts of data to a data center. Local operations centers or distant corporate data centers must also communicate with the edge devices to optimize operations. For example, when data is sent back to an operations center that identifies potential equipment
overheating, that command center can quickly transmit a data request directly to the machine to analyze and resolve the issue or to a technician to rapidly address the developing situation.
Wireline broadband through cable, DSL and optical networks provides efficient bulk bandwidth transport to densely populated metropolitan areas but can be cost prohibitive in lower-density environments and rural areas. Wireline broadband also lacks real-time adaptability required for industrial networks and faces practical limitations in delivering connectivity to constantly evolving sensor and device networks. Similarly, many existing, more affordable wireless network solutions lack the performance, scalability, reliability and support to provide enterprise-grade IT infrastructure required for critical business applications.
Both wireless internet service providers and enterprises in lower-density, non-metropolitan areas require infrastructure that delivers always-on, high-speed wireless bandwidth for the transmission of large amounts of data in a wide variety of challenging conditions such as noisy spectrum or terrain that can impede wireless broadband communications, such as bodies of water or forests. Carrier-grade wireless infrastructure, primarily used in metropolitan networks, is generally ill-suited to these deployments because the size of the deployment does not justify the high equipment expense and management costs. Many existing wireless solutions are limited by their ability to deliver real-time adaptability, scalability, efficient use of spectrum, network reliability and economical use cases:
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Limited real-time adaptability. Wireless network footprints are continually changing due to individuals moving within a network, rapidly changing environments in an industrial footprint and expanding use cases or functionality. Many fixed wireless solutions lack the software and RF technology to continually optimize performance of rapidly evolving network infrastructure and in noisy conditions.
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Lack of network scalability. Fixed wireless solutions often struggle to scale primarily because they lack end-to-end management capabilities and integrated RF algorithms in the software. Software is required to efficiently plan, synchronize and optimize large-scale deployments of wireless broadband, while mitigating self-interference. Existing solutions are typically provisioned manually and managed by spreadsheets or management tools developed by customers internally. Real-time, efficient management requires embedded software and technology capable of optimizing network performance at the edge in varying environmental conditions.
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Inefficient use of spectrum. Many existing solutions do not contain data path optimization technologies that allow for efficient use of frequency channels and available spectrum. This leads to performance degradation and limits the number of users and devices to which the network can deliver quality access.
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Lack of network reliability in areas with congested spectrum. Many existing solutions struggle with interference in high noise environments because they cannot reuse frequencies to expand available channels for traffic. These solutions also do not include software that identifies congested channels and automatically switches traffic to channels with less congestion. Inability to reuse frequencies or to recognize congested channels can degrade performance and limit available bandwidth.
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Uneconomical for certain use cases. Fixed wireless broadband solutions can be cost-prohibitive because of their inability to serve a high concentration of CPE without the deployment of a high number of fixed wireless access points. Additionally, many existing solutions fail because of a lack of software intelligence to foresee upcoming issues and an inefficient path to resolution for issues given limited services and support capabilities.
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Pressure on broadband networks from the emergence of Wi-Fi access points. As the migration to Wi-Fi 6 access points progresses, the network bottleneck is moving to the broadband provider. This is putting pressure on broadband service providers to increase symmetrical capacity in a time when adding capacity to or upgrading wireline networks is cost prohibitive. Fixed wireless is emerging as an alternative to address this capacity gap.
In addition, with the emergence of multi-gigabit fixed wireless using 60 GHz millimeter wave technology, service providers and private network operators now have a wireless alternative to fiber for highspeed broadband connectivity. Wireless for the last mile access has a significant cost advantage over fiber. The resources required to deploy mmWave technology is comparable to outdoor Wi-Fi, does not require trenching and may have a much lighter permitting process.
Our market opportunity
The majority of our revenues today come from PTP and PMP solutions. According to Sky Light Research, the PTP Microwave and Millimeter Wave market was estimated to be $3.58 billion in 2019. According to QYResearch, the PMP market was estimated to be $0.75 billion in 2019. We entered into the Wi-Fi market in 2016 and it has become a meaningful portion of our revenues. According to IDC, a market research firm, the enterprise WLAN market is estimated to be $7.0 billion in 2020. In 2018, we entered the Ethernet switching market, although to date our sales in this market have not been material. According to IDC, the non-datacenter Ethernet switching market is estimated to be $14.7 billion in 2020. Combining these served markets, our addressable market for 2020 exceeds $25.0 billion. In 2017, we introduced our cnReach, Industrial Internet of Things, or IIoT, products, and while the market remains at an early stage of development, we believe this market presents a significant commercial opportunity in the longer term.
Wide area networks, or WANs, and local area networks, or LANs, are converging. Broadband internet service providers are expanding into local area network services for enterprise and public sector which means they are expanding their service offerings to include the Wi-Fi-based LAN. Likewise, enterprise managed service providers are looking to extend their offerings to include edge
access for Wi-Fi, rather than relying on the wireline provider to trench fiber. We expect to take advantage of these trends with our cnMaestro management software that can be used to manage both the WAN back to the point of presence and the Wi-Fi in the LAN. We are able to provide Wi-Fi to our traditional fixed wireless broadband customers while penetrating the managed service provider market with fixed wireless offerings.
How our solutions work
We offer fixed wireless broadband networking infrastructure solutions differentiated by scalability, embedded intelligence, reliability, high quality at attractive economics and ease of deployment. Our enterprise-grade Wi-Fi solutions provide indoor and outdoor capabilities and leading spectral efficiency that reduces self-interference and optimizes spectral efficiency and frequency reuse across the network.
Our Point-to-Point, or PTP, solutions are typically connected to high-speed, high-bandwidth wireline networks, and provide wireless broadband backhaul to facilities or Point-to-Multipoint, or PMP, access points deployed throughout a network over distances of more than 100 kilometers and at more than 2 Gbps. Our PMP solutions extend wireless broadband access from tower mounted fixed wireless access points to CPE providing broadband access to residences and enterprises covering wide areas with a range of 10 to 30 kilometers. Our PMP solutions are increasingly used to backhaul video surveillance systems. Our cnPilot and Xirrus Wi-Fi solutions provide distributed access to individual users in indoor settings, such as office complexes, and outdoor settings, such as athletic stadiums and outdoor public Wi-Fi spots, over distances as short as two meters with high capacity. Our cnReach solutions offer narrow-band connectivity typically using licensed spectrum below 1 GHz and typically used by industrial customers connecting remote field operations supporting sensors and devices at the network edge. Our embedded proprietary RF technology and software enables automated optimization of data flow at the outermost points in the network. Our cnMatrix cloud-managed wireless-aware switching solution provides the intelligent interface between wireless and wired networks. Our cnVision solutions are purpose built wireless connectivity solutions for video surveillance and CCTV deployments and provide the necessary bandwidth to transport mission-critical video wirelessly, for the video surveillance market.
Our competitive strengths
We have a number of competitive strengths, including the following:
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Wireless fabric that enables fast and efficient scalability. Our solutions allow network operators to densify their networks with incremental fixed wireless access points that linearly scale subscriber support without compromise to quality of service.
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Advanced RF signal algorithms. Our RF algorithms drive network performance by employing technologies such as frequency reuse, congestion-based channel switching and noise filtering.
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Broad applicability of our wireless fabric. Our technology has broad application across a wide range of connectivity use cases, and our core technologies underlying the wireless fabric offer broad extensibility to new markets such as wireline switching and IIoT solutions.
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Network management software platform built for scale. Our cloud-based network management software increases ease of deployment and usage through easy provisioning, configuration, monitoring and complete network visualization, with the ability to support over 100,000 devices.
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Culture of constant innovation combined with high velocity product development and service. We pride ourselves in our strong work ethic and focus on providing innovative products and first-class service to network operators. Our employees are united by our mission to eliminate the “digital divide” by building innovative products to connect underserved and developing communities.
Our growth strategy
The key elements of our growth strategy include:
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Continued investment in wireless fabric while expanding into new markets. We are investing in our wireless fabric technology to expand the breadth of our solutions and to take advantage of new frequencies and communication standards, resulting in the launch of new products such as our 60 GHz millimeter wave products, our Wi-Fi 6 products and our switching products, among others, as well as our early launch of CBRS-compatible products.
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Expand our software capabilities. We will continue to invest in our embedded software capabilities which include GPS synchronization, dynamic optimization and filtering technologies that facilitate the intelligent edge. We continue to invest in cnMaestro, and XMS Cloud, our cloud-based network management software platforms, to improve functionality, ease of deployment and operations and to add a premium version, enabling network operators to improve quality of service.
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Drive greater penetration in our existing base. We intend to work collaboratively with key network operators to evaluate new use cases as these network operators expand their geographical footprint into new territories and increase their deployment of our products.
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Deepen and expand channel and network operator relationships. We intend to deepen and expand our relationships in our channel, which includes over 9,000 channel partners as of December 31, 2020 and received CRN Magazine’s five star rating in 2018 and 2019, which is its highest ranking awarded. We intend to invest in training and education for these channel partners while fostering new relationships with incremental channel partners. Additionally, in order to deepen and broaden our network operator relationships, we will continue to invest in our sales and marketing organization for both direct and channel engagements.
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Position portfolio to take advantage of proliferation of higher-speed wireless connectivity. As wireless networks transition from 4G to 5G technology, fixed wireless will be used more frequently in higher density environments. We intend to continue investing in and positioning our portfolio to pursue opportunities in high density environments as these markets move towards fixed wireless technology that is differentiated by reliability in congested environments.
Our technology and products
Cambium Networks Product Portfolio Summary
Network Management
cnMaestro X - Cloud-Based Management Software
cnMaestro Essentials - Cloud-Based Management Software
XMS - On Premises and Cloud-Based Wi-Fi Management Software
Wired Convergence
cnMatrix - Wireless Aware Switching
Product Platform
cnWave
PTP 820
PTP 550/670/700
PMP 450
ePMP
cnPilot/Xirrus
cnReach
Design Focus
Gbps to the edge with Terragraph meshing for urban and high density suburban markets
Licensed Microwave Backhaul
Industry Leading Sub-6 GHz Backhaul Performance
Unparalleled Scalability for Multipoint networks
Price/Performance PTP and PMP Leadership
Configurable, Cloud-managed, High performance Wi-Fi
Licensed Narrowband in rugged I/O rich package
Throughput
15 Gbps/DN
2+ Gbps
450 - 1400 Mbps
1.4 Gbps/Sector
1.2 Gbps/ Sector
1+ Gbps/AP
KB to MB
Spectrum (GHz except as noted)
57 - 66
6 - 38
71 - 86
4.4 - 5.925
7.0 - 8.50
900 MHz,
2.4, 3.5, 3.65, 5.x
2.4, 4.9,
5.x, 6.4
2.4, 5
220, 450, 700,
900 MHz
We offer a portfolio of fixed wireless broadband and Wi-Fi solutions that connect people, places and things from distances of two meters to more than 100 kilometers, delivering data rates that range from kilobytes per second to over 2 gigabytes per second, operating indoor and outdoor and utilizing licensed and unlicensed spectrum. The elements of our wireless fabric can be architected to meet a broad range of use cases and needs of network operators. Since 2012, we have shipped over 8.8 million devices. Our products are designed to support more CPE per fixed wireless access point and maximize uptime, providing an attractive total cost of ownership for network operators while delivering a reliable, scalable, flexible and easily managed platform with differentiated performance.
Our products can be categorized into our PTP backhaul, PMP distribution, Wi-Fi access, cnMatrix switching, cnWave 60 GHz solutions and cnReach IIoT solutions, with results for our cnMatrix switching, and other solutions included for reporting purposes with our Wi Fi access products and results for our cnReach IIOT solutions included with our PMP distribution results. We also offer a number of other network management and monitoring tools, such as cnMaestro, XMS Cloud, LINKPlanner, cnHeat, Swift, and cnArcher, to further improve ease of use and network performance.
Point-to-Point backhaul solutions
Our PTP solutions are deployed globally and have proven to reliably operate in formidable and demanding environments. For example, we used PTP 650 radios to establish high quality connectivity over 245 kilometers between Pikes Peak, Colorado and Cheyenne, Wyoming, delivering real-time voice, video and data. We offer PTP solutions that are designed to operate in unlicensed spectrum from 900 MHz to 5.9 GHz and in licensed spectrum from 6-38 and 71-86 GHz. In addition, our PTP700 operates in NATO Band IV from 4.4-5.9 GHz, as well as in the 7 GHz and 8 GHz bands, and meets stringent federal operating, performance and security standards.
Point-to-Multipoint distribution solutions
Our PMP portfolio is composed of the PMP, ePMP, and cnWave distribution and access solutions that enable network operators to provide high-speed wireless broadband in a wide range of applications, ranging from connecting a small network of CCTV cameras, to deploying networks on hundreds of oil pads, to providing broadband access to low-density urban and rural communities. Our PMP and ePMP solutions offer differentiated spectral efficiency, which enables high data rates and efficient utilization of RF spectrum, as well as GPS synchronization and dynamic interference filtering to optimize performance in noisy conditions. We also offer Massive Multi-User Multi-Input Multi-Output technology and proprietary beamforming sector antennas to enable densification of CPE within a network. Together, these PMP distribution solutions allow networks to scale without compromise, from a single fixed wireless access point and a handful of CPE to networks with hundreds of thousands of subscriber radios, both using the identical products and technologies. cnWave, introduced in 2020, utilizes 60 GHz spectrum, is based on the 802.11ay standard, and incorporates Facebook’s Terragraph technology to deliver Gigabit data rates to the edge.
Wi-Fi access solutions
Our cnPilot and Xirrus enterprise and service provider Wi-Fi access points are easily deployed within both new and existing wireless local area networks, including in existing networks with equipment from other manufacturers. Our products include enterprise Wi-Fi access points for both indoor and outdoor use cases, as well as internet service provider-managed home gateways. Our adaptive architecture provides controller functionality and services with high agility for the network operator.
cnMatrix Ethernet enterprise switching solutions
Our cnMatrix Ethernet enterprise switching solutions simplify network deployment and operation. When deployed with cnPilot WLAN access points and the cnMaestro management system, network operators have an affordable, feature-rich, high quality unified wired/wireless enterprise grade network. Our cnMatrix solutions incorporate policy-based automation, automated device segmentation, enhanced power management, and are cloud-managed, to enhance performance, security, and end-user satisfaction while reducing costs.
cnReach IIoT solutions
Our cnReach IIoT solutions offer connectivity for distributed sensors and controls across industrial deployments, delivering real-time monitoring, measurement and analytics to optimize system performance. Our products can be deployed in a variety of industrial verticals such as oil and gas, electrical utilities, water management, rail and transportation operations and smart cities. cnReach focuses on supervisory control and data acquisition systems, or SCADA, for process control and monitoring, providing affordable, narrowband wireless connectivity, operating below 1 GHz, to support distribution automation, substation switches, circuit control and telemetry.
cnVision video surveillance transport solutions
Our cnVision solutions are purpose built wireless connectivity solutions for video surveillance and CCTV deployments and provide the necessary bandwidth to transport mission-critical video wireless, for the video surveillance market.
cnMaestro and network management tools
Our cloud-based cnMaestro network management platform and our Xirrus XMS Cloud platform provide users with an integrated, intelligent, easy to use tool for end-to-end network management of our portfolio from the network operating center to individual CPE on a single pane of glass. cnMaestro’s interface allows users to easily onboard large numbers of new devices, configure existing devices, monitor the entire network and troubleshoot end-to-end. Our cnHeat solution is a network planning subscription service that provides a heat map coverage model display of locations that are available for fixed wireless broadband connectivity that aids in network planning. cnHeat utilized LiDAR or equivalent geospatial data to accurately model the geography being evaluated, coupled with highly accurate RF modeling, to render a visual and quantitative assessment of anticipated RF coverage and performance. cnHeat allows network operators to optimize site selection for coverage, supporting their total cost of ownership and return on investment.
LINKPlanner is a comprehensive tool, developed over the past 12 years, used to plan PTP and PMP networks. LINKPlanner allows users to visualize and analyze hypothetical network deployment scenarios to evaluate performance and reliability allowing for cost-effective expansion and deployment of their networks. cnArcher is a smartphone app that accelerates installation and deployment of our products by field technicians.
Network operators and distribution channel
We sell our solutions globally through our channel partners to wireless Internet service providers, mobile network operators, enterprises and government agencies. Wireless Internet service providers using our products are typically serving between 1,000 and more than 200,000 subscribers. Enterprises using our products are in industries such as oil and gas, agriculture, mining, utilities, transportation, surveillance, hospitality, education and general corporate enterprises. Government entities using our products include local government agencies, federal agencies and defense organizations.
Historically, over 95% of our revenues are derived from sales through our ConnectedPartner channel partner platform, which consists of over 9,000 channel partners, including over 170 distributors as of December 31, 2020.
Through our channel sales network, we sell to our global network of distributors who in turn either sell directly to network operators or supply our products to value added resellers. These channel partners provide lead generation, pre-sales support and product fulfillment. Playing a central role in the channel, distributors support us by promoting and distributing our products in target vertical markets, providing value-added support to the reseller channel by bringing core strengths in technical support and professional services, all in addition to financing, logistics, and sales and marketing support. Our distributors typically stock and manage inventory of our products.
Our ConnectedPartner program is designed to maximize global coverage while minimizing channel conflict and enhance the ability of our channel partners to succeed in the sale and deployment of our products and solutions. Channel partners registered under our ConnectedPartner program gain access to product discounts, sales and marketing tools, marketing materials, specifications sheets, case studies and solution papers to aid in the sale and deployment of our products and solutions globally. We also offer access through our ConnectedPartner program to technical product training, deal registration, account management support, business development support, webinars and events, promotions and joint marketing initiatives, and qualified lead information as well as participation in our demonstration equipment programs.
Sales and marketing
We promote the sale of our products globally in partnership with our channel partners as well as through our direct sales force. Our sales organization typically engages directly with large Internet service providers and certain enterprises even though product fulfillment generally involves our channel partners, and also provide sales support to our channel partners across the platform. Our sales organization includes field and inside sales personnel, as well as regional technical managers with deep technical expertise who are responsible for pre-sales technical support and solutions engineering for network operators, systems integrators and channel partners. As of December 31, 2020, we had 108 sales personnel located in 29 countries.
Our marketing activities consist primarily of technology conferences, web marketing, trade shows, seminars, webinars and events, public training classes, public relations, analyst relations, demand generation and direct marketing to build our brand, increase customer awareness, communicate our product advantages and generate qualified leads for our field sales force and channel partners.
Support and service
Customer support
We support our enterprise class solutions with a range of flexible service plans and 24/7 availability that provide assurance to network operators that their always-on, mission critical communications requirements will be met. We employ a team of support engineers and other support personnel to provide customer service and technical support for our products. Our support organization both supports channel partners in supporting their direct customers and provides first-line support to our direct customers. We offer multiple service options that allow network operators to select the service level that best meets their needs. Our team of support engineers and services personnel provides 24/7 technical support and customer service globally to our network operators. Technical support is also available on-line via chat and automated ticketing systems.
Training
We work closely with our channel partners and network operators to provide comprehensive product training so that they are familiar with the implementation and usage of our products. The training and certification system is administered through a learning management system that provides the user a record of their course work, exam results, current certifications and access to on demand self-directed training resources that complement instructor-led sessions scheduled frequently around the world. In 2017, we also launched Cambium College, a free education program where senior members of our design and development teams share their experience to familiarize people with the math and physics concepts involved in designing and operating a wireless broadband or Wi-Fi network.
Cambium Community Forum
To complement our customer support and training, we launched the Cambium Community Forum in 2014 as a platform where we, our network operators and our channel partners can collaborate in real-time on practical solutions to real-world deployment situations, contribute to and consult a collective online knowledge base concerning our products and best practices, and share stories and photographs of customer experiences about product installations and unique use cases of our technology. In 2019, we added discussion forums focusing on CBRS, Video Surveillance, and Wi-Fi 6. Our Community Forum is moderated by our staff with direct and active engagement by our development engineering and product management personnel. Leveraging the Community Forum, we collect network operator and channel partner feedback on potential product improvements and new product ideas, including through the administration of beta testing on our products. As of December 31, 2020, there were approximately 37,000 registered forum members on our Community Forum, including our WISP Forum.
Manufacturing and supply
We outsource the manufacturing of our products to conserve working capital, reduce our manufacturing overhead and inventory, optimize delivery lead times while maintaining high product quality and scale quickly to handle increased order volume. For certain products, we outsource both the design and manufacture of the product and distribute the product under our name on a white label basis. We require all of our primary contract manufacturers to be ISO-9001 certified.
Our third-party manufacturing partners generally procure the components needed to build and assemble our products according to our design specifications. This allows us to leverage the purchasing power of our contract manufacturing partners. For items that we design, we generally retain complete control over the bill of material, test procedures and quality assurance programs. We review, on an ongoing basis, forecasts, inventory levels, processes, capacity, yields and overall quality. Our third-party manufacturers procure components and assemble our products based on our demand forecasts. These forecasts represent our estimates of future demand for our products based on historical trends and analyses from our sales and product management functions as adjusted for overall market conditions. Generally, for our primary third-party manufacturers, we update these forecasts monthly.
Once the completed products are manufactured and tested, configured, inspected and pass quality control inspection, our contract manufacturers ship the products to our direct fulfillment facilities in Kentucky, the Netherlands and Shanghai for shipment to our distributor partners and network operators. We outsource the warehousing and delivery of our products at these fulfillment facilities to a third-party logistics provider for worldwide fulfillment. Our products are installed by network operators or by third-party service providers such as system integrators or value-added resellers on behalf of the customer.
While components and supplies are generally available from a variety of sources, we and our contract manufacturers currently depend on a single or limited number of suppliers for several components for our products. For example, some of our products are dependent upon the incorporation of components from Qualcomm Atheros and we do not have a second source for these components. In addition, we currently have a limited number of suppliers for several other components for our products. We and our contract manufacturers generally rely on purchase orders rather than long-term contracts with these suppliers, although for certain components our contract suppliers have contracts in place with component suppliers that we are able to leverage. If we need to seek a suitable second source for key components or to modify our designs to use substitute components, our ability to meet the demand for our products, and as a result our business and operating results, could suffer. As a result of increased current global demand for some components used in our products, particularly semiconductor-related components and including components provided by Qualcomm, there are some capacity shortages at foundries, who have responded by allocating existing supply among their customers, including us. Coupled with an increase in demand for our affected products, in part resulting from an increase in demand for bandwidth globally, we have experienced some supply shortages that have caused increased lead times for some of our products.
Our business has been impacted by the effects of the outbreak of respiratory illness caused by COVID-19 and worldwide government efforts to halt the outbreak through restrictions on travel and extended business closures. For example, one of our mechanical suppliers has ceased operating, causing us to move production to an alternate supplier. We are working with other suppliers who have experienced component part shortages due to capacity constraints caused by COVID-19 that have caused lead times for our products to increase. Our suppliers and manufacturers in China and elsewhere could continue to be disrupted by parts and component shortages, worker absenteeism, quarantines, office and factory closures, disruptions to ports and other shipping infrastructure, or other travel or health-related restrictions. In addition, freight and logistics constraints caused in part by restrictions imposed by governments to combat the COVID-19 pandemic have increased costs and constrained available transport, for us and our channel partners. If our supply chain operations continue to be affected or are curtailed by the outbreak of diseases such as COVID-19, our supply chain, manufacturing and product shipments will be delayed, which could adversely affect our business, operations and customer relationships. We have and may continue to need to seek alternate sources of supply which may be more expensive, unavailable or may result in delays in shipments to us and from our supply chain and subsequently to our customers. See “Risk Factors, We face risks related to actual or threatened health epidemics and other outbreaks, which could significantly disrupt our manufacturing, sales and other operations” below.
Research and development
As of December 31, 2020, our research and development organization has over 270 employees located primarily in San Jose and Thousand Oaks, California, Rolling Meadows, Illinois, Ashburton, United Kingdom and Bangalore, India. We also work with contract engineers in various locations globally. Our research and development team has deep expertise and experience in wireless technology, antenna design and network architecture and operation. We expect to continue to expand our product offerings and solutions capabilities in the future and to invest significantly in continued research and development efforts.
Intellectual property
Our success depends in part on our ability to protect our core technology and innovations. We rely on federal, state, common law and international rights, as well as contractual restrictions, to protect our intellectual property. We control access to our proprietary technology by entering into confidentiality and invention assignment agreements with our employees and contractors, and confidentiality agreements with third parties, such as Internet service providers, vendors, individuals and entities that may be exploring a business relationship with us. In addition to these contractual arrangements, we also rely on a combination of trade secrets, copyrights, patents, trademarks, service marks and domain names to protect our intellectual property. We seek patent protection for certain of our key innovations, protocols, processes and other inventions. We pursue the registration of our trademarks, service marks and domain names in the United States and England and in certain other locations outside of these jurisdictions. These laws, procedures and restrictions provide only limited protection and the legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain and still evolving. Furthermore, effective patent, trademark, copyright and trade secret protection may not be available in every country in which our products are available.
As of December 31, 2020, we had 86 issued U.S. patents and 103 patents issued in various foreign jurisdictions as well as 5 U.S. and 39 foreign patent applications pending. We file patent applications in the United States and other countries where we believe there to be a strategic technological or business reason to do so. Although we actively attempt to utilize patents to protect our technologies, we believe that none of our patents, individually, are material to our business.
Competition
The market for wireless broadband solutions is rapidly evolving, highly competitive and subject to rapid technological change. We expect competition to persist, intensify and increase in the future.
In all of our markets, we compete with a number of wireless equipment providers worldwide that vary in size and in the products and solutions offered. Our competitors for products and solutions for the unlicensed, sub-6 GHz spectrum bands include Radwin, MicroTik, Airspan, and Ubiquiti. cnWave, our 60 GHz mm Wave product, competes with Siklu, Radwin, and MikroTik, among others. In the licensed microwave market, our competitors include SIAE, SAF Technica and Aviat Networks, among others. Our Wi-Fi products and solutions compete with HPE (Aruba), CommScope (Ruckus Wireless), Extreme Networks, and Ubiquiti. Our cnReach IIoT products and solutions compete principally with GE MDS and Freewave. Our cnMatrix cloud-managed switch platform competes with Ubiquiti, Ruckus, HPE and MikroTik. Our cnMatrix Ethernet enterprise switching products and solutions complete with MikroTik, Ubiquiti and HPE. As our target markets continue to develop and expand, and as the technology for wireless broadband continues to evolve, we expect competition to increase and expand from both established and emerging market participants. We also expect consolidation to impact the competitive landscape, such as the acquisition by Arris Group of Ruckus Wireless in 2017, and the subsequent acquisition of Arris Group by CommScope in 2019, and the acquisition of Aerohive by Extreme Networks in 2019.
The market for our products and solutions is influenced by a variety of factors, including the following:
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Total cost of ownership and return on investment associated with the solutions;
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Ease of configuration, installation and use of the solution;
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Ability to provide a complete compatible solution;
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Broad application across a range of use cases and frequencies;
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Product quality, functionality and reliability;
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Ability to allow centralized management of the solutions to enable better network planning, including scalable provisioning, configuration, monitoring and complete network visualization; and
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Ability to provide quality, full service pre- and post-sales product support.
We believe we compete favorably on each of these factors.
Regulatory requirements
In addition to regulations of general application to global businesses, we are subject to a number of regulatory requirements specific to our industry, including, without limitation:
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Radio frequency usage. Because our products transmit energy in radio frequency spectrum, our products are subject to:
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rules relating to radio frequency spectrum allocation and authorization of certain radio equipment issued by the Federal Communications Commission for non-federal uses or the National Telecommunications and Information Administration for federal uses; and
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local type approval, or homologation, rules requiring confirmation that our products meet minimum regulatory, technical and safety requirements prior to sale in various countries around the world, for example: European Technical Standards Institute (ETSI), Industry Canada (IC) and Agencia National De Telecommunicatoes (Anatel).
The applicable regulatory agencies in each jurisdiction adopt regulations to manage spectrum use, establish and enforce priorities among competing uses, limit harmful radio frequency interference and promote policy goals such as broadband deployment. These spectrum regulations regulate allocation, licensing, and equipment authorizations. Since our customers purchase devices to operate in specific spectrum bands allocated by the regulatory authorities, our products must meet the technical requirements set forth for such spectrum allocation(s).
In some bands, the operator, such as our customer, must seek prior regulatory authority to operate using specified frequencies, and the resulting spectrum license authorizes the licensee, for a limited term, to operate in a spectrum consistent with licensed technical parameters within a specified geographic area. We must design and manufacture our products to comply with these technical parameters.
Our products generally are subject to compliance testing prior to approval, and, as a condition of authority in each jurisdiction, we must ensure that our products have the proper labels and documentation specifying such authority. We generally use telecommunications certification bodies to obtain certification for our devices in each jurisdiction in which we intend to market and sell our products.
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Trade compliance requirements. We are subject to compliance with rules in jurisdictions from which we export or into which we import our products, including export control and reporting, import clearance, anti-bribery, antitrust and competition rules and regulations, including:
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Import and export requirements issued by the United States, the European Union or other jurisdictions, including the U.S. Department of Commerce, the Office of Foreign Assets Control, the U.K. Foreign, Commonwealth & Development Office, Ministry of Defense and Department of International Trade including rules banning sales to persons or entities on applicable designated parties lists, or to persons or entities in embargoed countries, rules requiring export licenses prior to sales of products incorporating encryption technology to certain end users, and local rules governing import of products, including packaging and labeling laws. In addition, some of our products include enabled encryption technology, which may require us to obtain a license prior to a sale to certain foreign agencies. These rules require us to monitor databases of, and establish and enforce policies to prohibit the sale of our products to, embargoed persons, entities and countries.
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Rules and regulations, particularly in the United States and the European Union, governing environmental matters that restrict the use of certain dangerous substances in electrical or electronic equipment, govern use of certain chemical substances throughout their lifecycle and Waste Electrical and Electronic Equipment, Directive 2012/2019/EU, related to the collection, treatment, recycling and recovery of waste electrical and electronic equipment in the European Union and related laws elsewhere. These rules govern our use of components in our products, requiring us to comply with environmental rules and regulations in our selection of component parts and in the manufacturing process, as well as over the disposal upon destruction or retirement of our products.
We are also subject to rules governing our use of personal data, such as the General Data Protection Regulation in the European Union, the California Consumer Privacy Act, and other applicable regulations in the United States and around the world, and current and proposed e-privacy and direct marketing rules governing direct and email marketing. These rules govern how we use personal data of our employees, customers and others with whom we might do business, including in our marketing activities.
Human Capital Management
We pride ourselves on developing and maintaining a strong reputation for innovation and integrity and conduct our business affairs honestly and in an ethical manner. We expect our corporate culture to embody trust and respect for individuals, teamwork and innovation; Cambium is a place where employees are proud to work, and where customers, suppliers and partners want to work with
us. One of our most valuable assets is our integrity. We are guided by our core values of growth and profitability; outstanding global teamwork; relentless innovation and edge, making and meeting commitments; respecting and developing our people; and serving our community.
We are focused on hiring, training, and retaining exceptional talent. As of December 31, 2020, we had approximately 512 full-time employees, of whom 306 are located outside the United States. We have not experienced any work stoppages, and we consider our relationship with our employees to be good. We have a broad base of diverse talent in more than 25 countries and we believe that attracting, developing and retaining the best talent is critical to our success and achievement of our strategic objectives.
We appreciate one another’s differences and strengths and are proud that our workforce comprises employees with a diversity of backgrounds and perspectives. Diversity, inclusion and belonging have long been a part of our culture, and we work to continually expand our diversity, inclusion and belonging initiatives and to conform to the principles of equal opportunity. We do not discriminate based on race, religion, national origin, disability, medical condition, marital status, sex, gender, age, military or veteran status, sexual orientation or any other protected characteristic as established by federal, state or local laws. Further, we have policies in place that prohibit harassment of all kinds and we prohibit retaliation in all forms and are committed to encouraging a culture where employees can freely ask questions and raise concerns.
Although we are predominantly working remotely as a result of the COVID-19 pandemic and the resultant closure of our offices, we work collaboratively, without hierarchy, and our management team is readily available to all employees, with additional quarterly global town hall events that allow for open question and answer dialogue.
We offer what we believe is a competitive compensation package, tailored to the job function and geography of each employee. Our team is global, and we offer competitive and meaningful compensation and benefits programs that meet the diverse needs of our employees, while also reflecting local market practices. We believe our compensation structure aligns with our shareholders’ long-term interests by balancing profitability and growth, as well as current market practices, and reflects our commitment to pay for performance. Competition for qualified personnel in the technology space is intense, and our success depends in large part on our ability to recruit, develop and retain a productive and engaged workforce. Accordingly, investing in our employees and their well-being, offering competitive compensation and benefits, promoting diversity and inclusion, adopting progressive human capital management practices and community outreach constitute core elements of our corporate strategy. In addition to competitive salaries and bonuses or sales commissions, we offer a robust employment total rewards package that promotes employee well-being and includes health care, extended parental leave, and paid time off, including extended leave for new parents (moms, dads and partners) to care for a newborn or newly adopted child.
We also offer rewards and recognition programs to our employees, including peer-led recognition of employees who best exemplify our values. We believe that these recognition programs help drive strong employee performance. We conduct annual employee performance reviews, where each employee is evaluated by their manager as well as a self-assessment. Employee performance is assessed based on a variety of key performance metrics, including the achievement of corporate objectives and objectives specific to the employee’s department or role.
We grant equity-based compensation to many of our employees and have extended the opportunity for equity ownership through our recently launched employee share purchase plan in the United States and the United Kingdom, which we hope to extend to other jurisdictions in the future. Additionally, we offer benefits to support our employees’ physical and mental health by providing tools and resources to help them improve or maintain their health and encourage healthy behaviors and facilitate a number of employee support groups.
Our Compensation Committee oversees our company-wide compensation programs and practices, and our Chief Executive Officer and Senior Director of Human Resources regularly update our Board of Directors and the Compensation Committee on human capital matters.
COVID-19 Response
During the COVID-19 pandemic, our primary focus has been on the safety and well-being of our employees and their families. A large majority of our workforce worked remotely and successfully throughout most of 2020. For employees that have needed access to our offices, for example in order to use lab or test equipment, we have followed the advice and recommendations of medical experts to implement new protocols to ensure the safety of our employees, including face coverings, temperature checks, health certifications, social distancing and capacity limits. We supported our employees through programs and benefits provided throughout the year, pivoting all of our people programs and practices to enable business continuity in the current environment, including providing access to resources required to effectively work remotely.
Available information
Our Internet address is www.cambiumnetworks.com and our investor relations website is located at http://investors.cambiumnetworks.com. We make available free of charge on our investor relations website under the heading “Financials” our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports as soon as reasonably practicable after such materials are electronically filed with (or furnished to) the SEC. Information
contained on our websites is not incorporated by reference into this Annual Report on Form 10-K. In addition, the public may read and copy materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site, www.sec.gov, that includes filings of and information about issuers that file electronically with the SEC.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors.
This Report contains forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, the risk factors set forth below. These risks and uncertainties are not the only ones we face. Our business, financial condition, results of operations or prospects could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material. If any of the risks actually occur, our business, financial condition, results of operations and prospects could be adversely affected.
Risks related to our business
Our operating results can be difficult to predict and may fluctuate significantly, which could result in a failure to meet investor expectations or our guidance and a decline in the trading price of our shares.
Our quarterly and annual operating results have fluctuated in the past and may fluctuate significantly in the future. In particular, the timing and size of our sales of our products are difficult to predict and can result in significant fluctuations in our revenues from period to period. For instance, we have historically received and fulfilled a substantial portion of sales orders and generated a substantial portion of revenues during the last few weeks of each quarter. In addition, we generally recognize all product revenues in the same period in which the related products are sold. Because our operating results are relatively fixed in the short term, any failure to meet expectations regarding sales could have an immediate and material effect on our earnings. If our revenues or operating results fall below the expectations of investors or securities analysts or below any estimates we may provide to the market, the trading price of our shares would likely decline, which could have a material and adverse impact on investor confidence and employee retention.
Our operating results may fluctuate due to a variety of factors, many of which are outside of our control, and which we may not foresee. In addition to other risks listed in this “Risks Factors” section, factors that may affect our operating results include:
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Fluctuations in demand for our products, including seasonal variations;
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The impact of COVID-19 and other health crises or pandemics on our operations;
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Our failure to timely fulfill orders for our products, which may be due to a number of factors, including the inability of our third-party manufacturers and suppliers to meet our demand or logistical failures in warehousing and shipping products;
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Failure of our distributors and channel partners to effectively promote and sell our products or manage their inventory and fulfillment;
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Our ability to control costs, including our manufacturing and component costs and operating expenses;
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Our ability to develop, introduce and ship in a timely manner new products and product enhancements, and to anticipate future market demands;
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Changes in the competitive dynamics of our target markets, including new entrants, consolidation and pricing pressures;
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The inherent complexity, length and associated unpredictability of the sales cycles for our products;
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Announcements made by us or our competitors of new or enhanced products, promotions or other transactions;
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Variation in product costs, prices or mix of products we sell;
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Product quality issues that could result in increases in product warranty costs and harm to our reputation and brand;
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General economic or political conditions in our markets; and
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Increasing uncertainty of international trade relations and tariffs.
The effects of these or other factors individually or in combination could result in fluctuations and unpredictability in our operating results, our ability to forecast those results and the trading price of our shares. As a result, our past results should not be relied upon as an indication of our future performance.
The introduction of new products and technology is key to our success, and if we fail to predict and respond to emerging technological trends and network operators’ changing needs, we may be unable to remain competitive.
The wireless broadband market is generally characterized by rapidly changing technology, changing needs of network operators, evolving regulations and industry standards and frequent introductions of new products and services. Historically, new product introductions have been a key driver of our revenue growth. To succeed, we must effectively anticipate and adapt in a timely manner to network operator requirements and continue to develop or acquire new products and features that meet market demands, technology trends and evolving regulatory requirements and industry standards. Our ability to keep pace with technological developments, such as 5G, Wi-Fi 6, and LTE, satisfy increasing network operator requirements, and achieve product acceptance depends upon our ability to enhance our current products and develop and introduce or otherwise acquire the rights to new products on a timely basis and at competitive prices. The process of developing new technology is complex and uncertain, and the development of new products and enhancements typically requires significant upfront investment, which may not result in material improvements to existing products or result in marketable new products or cost savings or revenues for an extended period of time, if at all. We are currently investing in the development of products and technology for the 5G standard once it is generally adopted in our target markets. There can be no assurance we will successfully address the new standard in a timely manner or that our products will achieve market acceptance. Network operators have delayed, and may in the future delay, purchases of our products while awaiting release of new products or product enhancements. In addition, the introduction of new or enhanced products requires that we carefully manage the transition from older products to minimize disruption in channel partner ordering practices. If we fail to anticipate industry trends and evolving regulations by developing or acquiring rights to new products or product enhancements and timely and effectively introducing such new products and enhancements, or network operators do not perceive our products to have compelling technological advantages, our business would be adversely affected.
Competitive pressures may harm our business, revenues, growth rates and market share.
We generate a majority of our revenues from sales to wireless internet service providers. The market for wireless broadband products is rapidly evolving, highly competitive and subject to rapid technological change. We expect competition to persist, intensify and increase.
In all our markets, we compete with a number of wireless equipment providers worldwide that vary in size and in the products and solutions offered. Our competitors for products and solutions for the unlicensed, sub-6 GHz spectrum bands include Radwin, MikroTik, Airspan and Ubiquiti. cnWave, our 60 GHz mmWave product, competes with Siklu, Radwin, and MikroTik, among others. In the licensed microwave markets, our competitors include SIAE, SAF Tehnica and Aviat Networks, among others. Our Wi-Fi products and solutions compete with HPE (Aruba), CommScope (Ruckus Wireless), Extreme Networks and Ubiquiti. Our cnReach IIoT products and solutions compete principally with GE MDS and Freewave. Our cnMatrix cloud-managed switch platform competes with Ubiquiti, Ruckus, HPE and MikroTik. Our cnMatrix Ethernet enterprise switching products and solutions compete with MikroTik, Ubiquiti, and HPE. As our target markets continue to develop and expand, and as the technology for wireless broadband continues to evolve, we expect competition to increase. We also expect consolidation to impact the competitive landscape, such as the acquisition by Arris Group of Ruckus Wireless in 2017, and the subsequent acquisition of Arris Group by CommScope in 2019, and the acquisition of Aerohive by Extreme Networks in 2019.
Demand for our solutions versus those of our competitors is influenced by a variety of factors, including the following:
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Product quality, performance, features and functionality, and reliability;
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Depth and breadth of the sales channel;
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Brand awareness and reputation;
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Total cost of ownership and return on investment associated with the products;
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Ease of configuration, installation and use of the products;
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Ability to provide a complete compatible and scalable solution;
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Broad application across a range of use cases;
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Ability to allow centralized management of the products and network to better enable network planning, including scalable provisioning, configuration, monitoring and complete network visualization; and
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Strength, quality and scale of pre- and post-sales product support.
We expect increased competition from our current competitors, as well as emerging companies and established companies, such as Nokia, Ericsson, Huawei and NEC, that may enter our markets. Further, we have in the past and may again experience price competition from lower cost vendors selling to network operators that have lower budget or less demanding applications than our
products have been designed to serve. To address these competitive conditions, we introduced our lower cost ePMP and PTP 550 products that allow us to target certain market segments without compromising our gross margins on our more sophisticated and functionally versatile products. We also expect that even higher cost competitors may engage in price competition to establish greater market share, which may adversely affect our ability to grow our revenues and profitability. Competition could result in loss of market share, increased pricing pressure, reduced profit margins, or increased sales and marketing expense, any of which would likely cause serious harm to our business, operating results or financial condition.
A number of our current or potential competitors have longer operating histories, greater name recognition, significantly larger customer bases and sales channels and significantly greater financial, technical, sales, marketing and other resources than we do. Our competitors may be able to anticipate, influence or adapt more quickly to new or emerging technologies and changes in network operator requirements, devote greater resources to the promotion and sale of their products and services, initiate or withstand substantial price competition, bundle similar products to compete, take advantage of acquisitions or other opportunities more readily, and develop and expand their product and service offerings more quickly than we can.
Some of our competitors have been acquired or entered into partnerships or other strategic relationships to offer a more comprehensive solution than they had previously offered. We expect this trend to continue. The companies resulting from such consolidation may create more compelling products and be able to offer greater pricing flexibility, making it more difficult for us to compete effectively. In addition, continued industry consolidation might adversely affect network operators’ perceptions of the viability of smaller and even medium-sized wireless broadband equipment providers and, consequently, network operators’ willingness to purchase from those companies.
Additionally, the markets for development, distribution and sale of our products are rapidly evolving. New entrants seeking to gain market share by introducing new technology and new products may make it more difficult for us to sell our products, and could create increased pricing pressure, reduced profit margins due to increased expenditure on sales and marketing, or the loss of market share or expected market share, any of which may significantly harm our business, operating results and financial condition. The success of new products depends on several factors, including appropriate new product definition, component costs, timely completion and introduction of products, differentiation of new products from those of our competitors and market acceptance of these products. We may not be able to successfully anticipate or adapt to changing technology on a timely basis, or at all. New technologies could render our existing products less attractive and if such technologies are widely adopted as the industry standard for wireless Internet service providers, our business financial condition, results of operations and prospects could be materially adversely affected.
We rely on third-party manufacturers, which subjects us to risks of product delivery delays and reduced control over product costs and quality.
We outsource the manufacturing of our products to third-party manufacturers such as Flextronics, with whom we entered into an agreement pursuant to which Flextronics manufactures and supplies certain of our products subject to orders from us and our demand forecasts. In certain cases, we rely on third-party manufacturers to design products to our specifications and license those designs back to us. Purchases from these third-party manufacturers account for the most significant portion of our cost of revenues. Our reliance on third-party manufacturers reduces our control over the manufacturing process, including reduced control over quality, product costs and product supply and timing. From time to time, we have experienced and may in the future experience delays in shipments or issues concerning product quality from our third-party manufacturers. If any of our third-party manufacturers suffer interruptions, delays or disruptions in supplying our products, including by natural disasters or work stoppages or capacity constraints, our ability to ship products to distributors and network operators would be delayed. Additionally, if any of our third-party manufacturers experience quality control problems in their manufacturing operations and our products do not meet network operators’ requirements, we could be required to cover the repair or replacement of any defective products. These delays or product quality issues could have an immediate and material adverse effect on our ability to fulfill orders and could have a negative impact on our operating results. In addition, such delays or issues with product quality could harm our reputation and our relationship with our channel partners.
Our agreements do not typically obligate our third-party manufacturers to supply products to us in specific quantities or for an extended term, which could result in short notice to us of supply shortages and increases in the prices we are charged for manufacturing services. We believe that our orders may not represent a material portion of the total orders of our primary third-party manufacturers, such as Flextronics, and, as a result, fulfilling our orders may not be prioritized in the event they are constrained in their abilities or resources to fulfill all of their customer obligations in a timely manner. Although we provide demand forecasts to some of our third-party manufacturers, such forecasts are not generally binding and if we overestimate our requirements, some of our third-party manufacturers may assess charges, or we may have liabilities for excess inventory, each of which could negatively affect our gross margins. Conversely, because lead times for required materials and components vary significantly and depend on factors such as the specific supplier, contract terms and the demand for each component at a given time, if we underestimate our requirements, our third-party manufacturer may have inadequate materials and components required to produce our products. This could result in an interruption of the manufacturing of our products, delays in shipments and deferral or loss of revenues. For example, as a result of increased global demand for some components used in our products, particularly semiconductor-related components and
including components provided by Qualcomm, foundries have experienced capacity shortages and have responded by allocating existing supply among their customers, including us. This capacity shortage coupled with an increase in demand for our affected products, due in part to a global increase in demand for bandwidth has resulted in supply shortages that have caused increased lead times for some of our products. We may suffer delays introducing new products to the market and in sales of existing products as a result of parts unavailability or shortages, resulting in loss or delay of revenue.
If our third-party manufacturers experience financial, operational, manufacturing capacity or other difficulties, or experience or continue to experience shortages in required components, or if they are otherwise unable or unwilling to continue to manufacture our products in required volumes or at all, our supply may be disrupted, we may be required to seek alternate manufacturers and we may be required to re-design our products. It would be time-consuming and costly, and could be impracticable, to begin to use new manufacturers and designs and such changes could cause significant interruptions in supply and could have an adverse impact on our ability to meet our scheduled product deliveries and may subsequently lead to the loss of sales, delayed revenues or an increase in our costs, which could materially and adversely affect our business and operating results.
We outsource manufacturing to third-party manufacturers operating outside of the U.S., subjecting us to risks of international operations.
Our third-party manufacturers predominantly operate outside of the U.S. causing us to face risks to our business based on changes in tariffs, trade barriers, export regulations, political conditions and contractual restrictions. For example, our cost of goods in the Wi-Fi and switch products, as well as most of our ePMP products, has been adversely affected by U.S. tariffs on goods produced for us in China and later imported into the United States. Our products manufactured in China and elsewhere may also be adversely affected by the outbreak of diseases such as COVID-19, if such diseases result in delays, shutdowns or other restrictions on our manufacturing processes by our third-party manufacturers, or on our ability to distribute products from our distribution centers. We also have products manufactured for us in Mexico, and any uncertainty of trade relations between Mexico and the United States could cause the cost of our products manufactured there to rise. Our future operating results could be materially affected to the extent additional tariffs are imposed by the United States or other countries.
We rely on distributors and value-added resellers for the substantial majority of our sales, and the failure of our channel partners to promote and support sales of our products would materially reduce our expected future revenues.
We rely on channel partners for a substantial majority of our sales and our future success is highly dependent upon establishing and maintaining successful relationships with distributors and value-added resellers. Recruiting and retaining qualified channel partners and training them in our technology and products require significant time and resources. Our reliance on channel partners for sales of our products results in limited visibility into demand and channel inventory levels which in turn adversely impacts our ability to accurately forecast our future revenues. By relying on our channel partners, we may have less contact with network operators, thereby making it more difficult for us to establish brand awareness, service ongoing network operator requirements and respond to evolving needs for new product functionality.
Sales through distributors have been highly concentrated in a few distributors, with over 37%, 36%, and 41% of our revenues in 2018, 2019 and 2020, respectively, coming from our three largest distributors. In addition, certain of our distributors may rely disproportionately on sales to a small number of end customers. Termination or degradation of a relationship with a major distributor, or of a distributor with its major customer, could result in a temporary or permanent material loss of revenues. We may not be successful in finding other distributors on satisfactory terms, or at all, and our distributors may fail to maintain or replace business with their major customer, either of which could adversely affect our ability to sell in certain geographic markets or to certain network operators, adversely impacting our revenues, cash flow and market share.
We generally do not require minimum purchase commitments from our channel partners, and our agreements do not prohibit our channel partners from offering products or services that compete with ours or from terminating our contract on short notice. Many of our channel partners also sell products from our competitors. Some of our competitors may have stronger relationships with our channel partners than we do and we have limited control, if any, over the sale by our channel partners of our products instead of our competitors’ products, or over the extent of the resources devoted to market and support our competitors’ products, rather than our products or solutions. Our competitors may be more effective in providing incentives to existing and potential channel partners to favor their products or to prevent or reduce sales of our products. Our failure to establish and maintain successful relationships with our channel partners would materially and adversely affect our business, operating results and financial condition.
We face risks related to actual or threatened health epidemics and other outbreaks, which could significantly disrupt our manufacturing, sales and other operations.
Our business could be adversely impacted by the effects of a widespread outbreak of contagious disease, COVID-19. Our business has been impacted by COVID-19 and worldwide government efforts to halt the outbreak through restrictions on travel and extended business closures. For example, one of our mechanical suppliers has ceased operating, causing us to move production to an alternate supplier. We are working with other suppliers who have experienced component part shortages due to capacity constraints caused by COVID-19 that have caused lead times for our products to increase. The majority of our products are manufactured at contract manufacturers located outside the U.S., and one of our primary distribution centers for the sale and distribution of some of our products is a third-party logistics provider in China. Previously, in an effort to halt the outbreak of COVID-19, the Chinese government placed significant restrictions on travel within China, leading to extended business closures, including closures at our third-party manufacturers. Although most of the restrictions on operations of our third-party manufacturers and other suppliers have been lifted or eased, our suppliers and third-party manufacturers could continue to be disrupted by parts and component shortages, worker absenteeism, quarantines, office and factory closures, disruptions to ports and other shipping infrastructure, or other travel or health-related restrictions and such restrictions could spread to other locations where we outsource manufacture or distribution of our products if the virus and its variants continues to spread or resurge. If our supply chain operations are affected or are curtailed by the outbreak of diseases such as COVID-19, our supply chain, manufacturing and product shipments will be delayed, which could adversely affect our business, operations and customer relationships. We may need to seek alternate sources of supply which may be more expensive, unavailable or may result in delays in shipments to us from our supply chain and subsequently to our customers. Further, if our distributors’ or end user customers’ businesses are similarly affected, they might delay or reduce purchases from us, which could adversely affect our results of operations.
In addition, freight and logistics constraints caused in part by restrictions imposed by governments to combat the COVID-19 pandemic, have resulted in increased costs and constrained available transport, for us and our channel partners. If our supply chain operations continue to be affected or are curtailed by the outbreak of diseases such as COVID-19, our supply chain, manufacturing and product shipments will be delayed, which could adversely affect our business, operations and customer relationships. We have sought and may continue to seek alternate sources of supply which may be more expensive, unavailable or may result in delays in shipments to us and from our supply chain and subsequently to our customers.
We are conducting business with substantial modifications to employee travel, employee work locations, and virtualization or cancellation of certain sales and marketing events, among other modifications. Our business is highly dependent on travel of our sales, operations, quality and technical support, and other managers and employees. Limitations placed on travel globally could significantly limit our ability to market our products, establish relationships with new customers, and manage post-contract support and maintenance activities. Other companies as well as many governments have imposed significant restrictions on business operations and other precautionary and preemptive actions to address COVID-19, and they may take further actions that cause us or our customers or suppliers to alter their normal business operations. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities, or that we determine are in the best interest of our employees, customers, partners, suppliers and shareholders. Any such alterations or modifications may adversely impact our business, our customers and prospects, or our financial results.
The extent to which the COVID-19 pandemic will impact our business and financial results going forward will be dependent on future developments such as the length and severity of the crisis, the potential resurgence of COVID-19 and its variants in the future, future government actions in response to the crisis, the acceptance and effectiveness of the COVID-19 vaccines and the overall impact of the COVID-19 pandemic on the global economy and capital markets, among many other factors, all of which remain highly uncertain and unpredictable. We cannot at this time quantify or forecast the business impact of COVID-19, and there can be no assurance that the COVID-19 pandemic will not have a material and adverse effect on our business, financial results and financial condition. In addition, the COVID-19 pandemic increases the likelihood and potential severity of other risks described in this “Risk Factors” section.
Our revenue growth rate in recent periods may not be indicative of our future performance.
Our revenue growth rate in recent periods may not be indicative of our future performance. For example, our revenues grew 11.6% from 2017 to 2018, 10.4% from 2018 to 2019 and 4.3% from 2019 to 2020. Accordingly, we may not achieve similar revenue growth rates of our earlier years in future periods. Our revenues for any prior annual period may not be an indication of our future revenues or revenue growth. If we are unable to maintain consistent revenues or revenue growth, our operating results and the trading price of our shares could be materially affected.
Our third-party logistics and warehousing provider may fail to deliver products to our channel partners and network operators in a timely manner, which could harm our reputation and operating results.
We rely on our third-party logistics and warehousing provider, with distribution hubs in the United States, the Netherlands and China, to fulfill the majority of our worldwide sales and deliver our products on a timely basis. Any delay in delivery of our products to distributors or network operators could create dissatisfaction, harm our reputation, result in the loss of future sales and, in some cases, subject us to penalties. We rely on our third-party logistics and warehousing provider to accurately segregate and record our inventory for us and to report to us the receipt and shipments of our products. Our third-party logistics and warehousing provider also manages and tracks the delivery of our products from the warehouse and safeguards our inventory, which accounts for a vast majority of our inventory balance. The failure of our third-party logistics and warehousing provider to perform these key tasks sufficiently, or the disruption to its business as a result of restrictions imposed as a result of COVID-19 or other crises, could disrupt the shipment of our products to distributors and network operators or cause errors in our recorded inventory, either of which could adversely affect our business and operating results.
Our ability to sell our products is highly dependent on the quality of our support and services offerings, and our failure to offer high-quality support and services could have a material adverse effect on our business, operating results and financial condition.
Network operators rely on our products for critical applications and, as such, high-quality support is critical for the successful marketing and sale of our products. If we or our channel partners do not provide adequate support to network operators in deploying our products or in resolving post-deployment issues quickly, our reputation may be harmed and our ability to sell our products could be materially and adversely affected.
If we or our distributors and channel partners are unable to attract new network operators or sell additional products to network operators that currently use our products, our revenue growth would be adversely affected, and our revenues could decrease.
To increase our revenues, we depend on the adoption of our solutions by network operators that purchase our products through our channel partners. Network operators typically need to make substantial investments when deploying network infrastructure, which can delay a purchasing decision. Once a network operator has deployed infrastructure for a particular portion of its network, it is often difficult and costly to switch to another vendor’s equipment. If we or our channel partners are unable to demonstrate that our products offer significant performance, functionality or cost advantages to the competitor’s product, it would be difficult for us to generate sales to that network operator once a competitor’s equipment has been deployed.
Our future success also depends significantly on additional purchases of our products by network operators that have previously purchased our products. Network operators may choose not to purchase additional products because of several factors, including dissatisfaction with our products or pricing relative to competitive offerings, reductions in network operators’ spending levels or other causes outside of our control. If we are not able to generate repeat purchases from network operators, our revenues may grow more slowly than expected or may decline, and our business and operating results would be adversely affected.
The seasonality of our business creates significant variance in our quarterly revenues, which makes it difficult to compare or forecast our financial results on a quarter-by-quarter basis.
Our revenues fluctuate on a seasonal basis, which affects the comparability of our results between sequential periods. While generally consistent, in certain periods other business factors have masked this seasonal pattern and the quantifiable effects of these seasonal variations are difficult to predict accurately. These factors introduce risk into our business as we rely upon forecasts of demand to build inventory in advance of anticipated sales. If our sales mix changes, or if the geographic mix of our sales changes, the seasonal nature of our revenues may change in unpredictable ways, which could increase the volatility of both our financial results and share price.
We require third-party components, including components from limited or sole source suppliers, to build our products. The unavailability of these components could substantially disrupt our ability to manufacture our products and fulfill sales orders.
We rely on third-party components to build our products, and we rely on our third-party manufacturers to obtain the components necessary for the manufacture of our products. If we underestimate our requirements or our third-party suppliers are not able to timely deliver components, our third-party manufacturers may have inadequate materials and components required to produce our products. This could result in an interruption in the manufacture of our products, delays in shipments and deferral or loss of revenues.
We have in the past and may in the future experience shortages in available supply of required components. For example, as a result of increased global demand for some components used in our products, particularly semiconductor-related components and including components provided by Qualcomm, foundries have experienced capacity shortages and have responded by allocating existing supply among their customers, including us. This capacity shortage, coupled with an increase in demand for our affected
products, due in part to a global increase in demand for bandwidth has resulted in supply shortages that have caused increased lead times for some of our products. Unpredictable price increases for such components may also occur. We and our third-party manufacturers generally rely on purchase orders rather than long-term contracts with suppliers of required components. As a result, our third-party manufacturers may not be able to secure sufficient components at reasonable prices or of acceptable quality to build our products in a timely manner, adversely impacting our ability to meet demand for our products. In addition, if our component suppliers cease manufacturing needed components, we could be required to redesign our products to incorporate components from alternative sources or designs, a process which would cause significant delays in the manufacture and delivery of our products.
We currently depend on a limited number of suppliers for several critical components for our products, and in some instances, we use sole or single source suppliers for our components to simplify design and fulfillment logistics. Neither we nor our third-party manufacturers carry substantial inventory of our product components. Many of these components are also widely used in other product types, such as components provided by Qualcomm. Shortages, such as those we are currently experiencing, are possible and our ability to predict the availability of such components may be limited. In the event of a shortage or supply interruption from our component suppliers, we or our third-party manufacturers may not be able to develop alternate or second sources in a timely manner, on commercially reasonable terms or at all, and the development of alternate sources may be time-consuming, difficult and costly. Suppliers allocating their existing short supplies may allocate an insufficient quantity of supplies to us which would result in delays in lead times for manufacture of our products and our inability to timely meet customer demand for our products. Any resulting failure or delay in shipping products could result in lost revenues and a material and adverse effect on our operating results.
Our gross margin varies from period to period and may decline in the future.
Our gross margin varies from period to period, may be difficult to predict and may decline in future periods. Variations in our gross margin are generally driven by shifts in the mix of products we sell, the timing and related cost of fulfilling orders and other factors. In addition, the market for wireless broadband solutions is characterized by rapid innovation and declining average sale prices as products mature in the marketplace. The sales prices and associated gross margin for our products may decline due to change in sales strategy, competitive pricing pressures, demand, promotional discounts and seasonal changes in demand. Larger competitors with more diverse product and service offerings may reduce the price of products or services that compete with ours or may bundle them with other products and services. If we meet such price reductions but do not similarly reduce our product manufacturing costs, our margins would decline. Any decline in our gross margins could have an adverse impact on the trading price of our shares.
Our products are technologically complex and may contain undetected hardware defects or software bugs, which could result in increased warranty claims, loss of revenues and harm to our reputation.
Our products are technologically complex and, when deployed, are critical to network operations. Our products rely on our proprietary embedded software, and have in the past contained and may in the future contain undetected errors, bugs or security vulnerabilities, or suffer reliability or quality issues. Some defects in our products may only be discovered after a product has been installed and used by network operators. Any errors, bugs, defects, security vulnerabilities or quality or reliability issues discovered in our products after commercial release could result in increased warranty claims, damage to our reputation and brand, loss of market shares or loss of revenues, any of which could adversely affect our business, operating results and financial condition. In addition, our products operate in part in outdoor settings and must withstand environmental effects such as severe weather, lightning or other damage. Our products may also contain latent defects and errors from time to time related to embedded third-party components.
We have in the past and may in the future become subject to warranty claims that may require us to make significant expenditures to repair or replace defective products, or redesign our products to eliminate product vulnerabilities. We may in the future also be the subject of product liability claims. Such claims could require a significant amount of time and expense to resolve and defend against and could harm our reputation by calling into question the quality of our products. We also may incur costs and expenses relating to a recall of one or more of our products. The process of identifying recalled products that have been widely distributed may be lengthy and require significant resources and we may incur significant replacement costs, contract damage claims from network operators and harm to our reputation. Additionally, defects and errors may cause our products to be vulnerable to security attacks, cause them to fail to help secure networks or temporarily interrupt network traffic. Although we disclaim responsibility for certain warranty and product liability claims as well as product recalls or security problems, any substantial costs or payments made in connection with warranty and product liability claims, product recalls or security problems could cause our operating results to decline and harm our brand.
If our channel partners do not effectively manage inventory of our products, fail to timely resell our products or overestimate expected future demand, they may reduce purchases in future periods, causing our revenues and operating results to fluctuate or decline.
Our channel partners purchase and maintain inventories of our products to meet future demand and have only limited rights to return the products they have purchased from us. Our channel partners are not generally committed to volume purchases of our products in any period, although some of our products carry minimum order quantities. Accordingly, if our channel partners purchase
more product than is required to meet demand in a particular period, causing their inventory levels to grow, they may delay or reduce additional future purchases, causing our quarterly results to fluctuate and adversely impacting our ability to accurately predict future earnings.
If we are not able to effectively forecast demand or manage our inventory, we may be required to record write-downs for excess or obsolete inventory.
We maintain inventory of finished goods and, to a lesser extent, raw materials that we believe are sufficient to allow timely fulfillment of sales, subject to the impact of supply shortages. Growth in our sales and new product launches may require us to build inventory in the future. Higher levels of inventory expose us to a greater risk of carrying excess or obsolete inventory, which may in turn lead to write-downs. We may also record write-downs in connection with the end-of-life for specific products. Decisions to increase or maintain higher inventory levels are typically based upon uncertain forecasts or other assumptions. Because the markets in which we compete are volatile, competitive and subject to rapid technology and price changes, if the assumptions on which we base these decisions turn out to be incorrect, our financial performance could suffer and we could be required to write-off the value of excess products or components inventory.
We are exposed to the credit risk of our channel partners, which could result in material losses.
We generate a substantial majority of our revenues through sales to our distributors. Distributors may not have the resources required to meet payment obligations, or may delay payments if their end customers are late making payments. Our exposure to credit risks of our channel partners and their end customers may increase if such entities are adversely affected by global or regional economic conditions. Given the broad geographic coverage of our distributor relationships, we have in the past and may in the future experience difficulties surrounding the collection of payments. Any significant delay or default in the collection of significant accounts receivable could result in the need for us to obtain working capital from other sources and could adversely impact our operating results and financial condition.
If we do not effectively deploy and train our direct sales force, we may be unable to increase sales.
Although we rely on channel partners to fulfill the substantial majority of our sales, our direct sales force plays a critical role driving our sales through direct engagement with network operators. We have invested and will continue to invest substantially in our sales organization. Our sales headcount has grown from 87 as of December 31, 2016 to 108 as of December 31, 2020, as we focus on growing our business, entering new markets and increasing our market share, and we expect to continue to incur significant expenses as we continue to invest in sales and marketing in order to achieve revenue growth. There is significant competition for sales personnel with the skills and technical knowledge that we require. Our ability to achieve significant revenue growth will depend, in large part, on our success in recruiting, training, retaining and integrating sufficient numbers of sales personnel to support our growth, particularly in international markets. New hires require significant training and may take significant time before they achieve full productivity. Our recent hires may not become productive as quickly as we expect, and we may be unable to hire and retain sufficient numbers of qualified individuals needed to increase our sales. If we are unable to hire and train a sufficient number of effective sales personnel, or the sales personnel we hire do not achieve expected levels of productivity, our business, operating results and financial condition could be materially adversely affected.
Our business and prospects depend on the strength of our brand. Failure to maintain and enhance our brand would harm our ability to increase sales by expanding our network of channel partners as well as the number of network operators who purchase our products.
Maintaining and enhancing our brand is critical to expanding our base of channel partners and the number of network operators who purchase our products. Maintaining and enhancing our brand will depend largely on our ability to continue to develop products and solutions that provide the high quality at attractive economics sought by network operators. If we fail to promote, maintain and protect our brand successfully, our ability to sustain and expand our business and enter new markets will suffer. Our brand may be impaired by a number of factors, including product failure and counterfeiting. If we fail to maintain and enhance our brand, or if we need to incur unanticipated expenses to establish the brand in new markets, our operating results would be negatively affected.
Our sales cycles can be long and unpredictable and our sales efforts require considerable time and expense. As a result, our sales and revenues are difficult to predict and may vary substantially from period to period.
Our sales efforts involve educating channel partners and network operators about the technical capabilities, applications and benefits of our products. Network operators typically require long sales cycles to select a product supplier and place sales orders. The sale process usually begins with an evaluation, followed by one or more network trials, followed by vendor selection and finally installation, testing and deployment. Network operator purchasing activity depends upon the stage of completion of expanding network infrastructures and the availability of funding, among other factors. We spend substantial time and resources on our sales
efforts without any assurance that our efforts will produce any sales. In addition, purchases of our products are frequently subject to budget constraints, multiple approvals, and unplanned administrative, processing and other delays. Moreover, the evolving nature of the market may lead prospective network operators to postpone their purchasing decisions pending resolution of network standards or adoption of technology by others. Network operators may also postpone a purchase decision pending the release of new or enhanced products by us or others. As a result, it is difficult to predict whether a sale will be completed, the particular period in which a sale will be completed or the period in which revenues from a sale will be recognized. Our operating results may therefore vary significantly from quarter to quarter.
A portion of our revenues are generated by sales to government entities, which are subject to a number of challenges and risks.
We derive a portion of our revenues from contracts with government agencies and we believe the success and growth of our business will in part depend on our continued and increasing sales to U.S. and foreign, federal, state and local governmental end customers in the future. However, demand from government agencies is often unpredictable, and we may be unable to maintain or grow our revenues from this market. Sales to government agencies are subject to substantial risks, including but not limited to the following:
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selling to government agencies can be highly competitive, expensive and time-consuming, often requiring significant upfront time and expense without any assurance that such efforts will generate a sale;
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government entities may have statutory, contractual or other legal rights to terminate contracts with our channel partners or us for convenience or due to a default, and any such termination may adversely impact our future business, financial condition, results of operations and prospects;
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U.S. or other government certification requirements applicable to our goods and services may be difficult to meet, require an additional administrative or compliance burden on us not found in our commercial contracts, and if we are unable to meet these certification requirements, our ability to sell into the government sector may be adversely impacted until we have attained required certifications;
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government demand and payment for our services may be adversely impacted by public sector budgetary cycles and funding constraints;
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selling to government entities may require us to comply with various regulations that are not applicable to sales to non-government entities, including regulations that may relate to pricing, classified material and other matters, or requirements regarding the development and maintenance of programs such as small business subcontracting, or compliance with EEOC requirements. Complying with such regulations may also require us to put in place controls and procedures to monitor compliance with the applicable regulations that may be costly or not possible;
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the U.S. government may require certain products that it purchases be manufactured in the United States and other relatively high-cost manufacturing locations under Buy American Act or other regulations, and we may not manufacture all products in locations that meet these requirements, which may preclude our ability to sell some products or services; and
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governments may investigate and audit government contractors’ administrative and financial processes and compliance with laws and regulations applicable to government contractors, and any unfavorable audit could result in fines, civil or criminal liability, damage to our reputation and suspension or debarment from further government business.
The occurrence of any of the foregoing could cause governments and governmental agencies to delay or refrain from purchasing our products in the future which could materially and adversely affect our operating results.
We generate a significant amount of revenues from sales outside of the United States, and we are therefore subject to a number of risks associated with international sales and operations.
We have extensive international operations and generate a significant amount of revenues from sales to channel partners in Europe, the Middle East and Africa, Asia-Pacific and South America. For example, sales outside of the United States accounted for 57% of our total revenues in 2018, 55% in 2019, and 49% in 2020. We rely on our third-party logistics and warehousing provider, with distribution hubs in the United States, the Netherlands and China, to fulfill the majority of our worldwide sales and to deliver our products to our customers. We have estimated the geographical distribution of our product revenues based on the ship-to destinations specified by our distributors when placing orders with us. Our ability to grow our business and our future success will depend on our ability to continue to expand our global operations and sales worldwide.
As a result of our international reach, we must hire and train experienced personnel to manage our international operations. If we experience difficulties in recruiting, training, managing and retaining an international staff, and specifically staff related to sales management and sales personnel, we may experience difficulties expanding our sales outside of the United States. If we are not able to
maintain these relationships internationally or to recruit additional channel partners, our future international sales could be limited. Business practices in the international markets that we serve may differ from those in the United States and may require us in the future to include terms other than our standard terms in contracts.
Our international sales and operations are subject to a number of risks, including the following:
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fluctuations in currency exchange rates, which could drive fluctuations in our operating expenses;
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required local regulatory certifications in each jurisdiction, which may be delayed for political or other reasons other than product quality or performance;
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requirements or preferences for domestic products, which could reduce demand for our products;
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differing technical standards, existing or future regulatory and certification requirements and required product features and functionality;
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management communication problems related to entering new markets with different languages, cultures and political systems;
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difficulties in enforcing contracts and collecting accounts receivable, and longer payment cycles, especially in emerging markets;
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heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of, and irregularities in, financial statements;
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difficulties and costs of staffing and managing foreign operations;
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the uncertainty of protection of intellectual property rights in some countries;
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potentially adverse tax consequences, including regulatory requirements regarding our ability to repatriate profits to the United Kingdom;
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requirements to comply with foreign privacy, information security, and data protection laws and regulations and the risks and costs of non-compliance;
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added legal compliance obligations and complexity;
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the increased cost of terminating employees in some countries;
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political and economic instability and terrorism; and
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the impact of the spread of any diseases globally that might impact our operations.
These and other factors could harm our ability to generate future international revenues. Expanding our existing international operations and entering into additional international markets will require significant management attention and financial commitments. Our failure to successfully manage our international operations and the associated risks effectively could limit our future growth or materially adversely affect our business, operating results and financial condition.
Economic conditions and regulatory changes following the United Kingdom’s exit from the European Union could adversely impact our operations, operating results and financial condition.
The United Kingdom ceased to be a member of the European Union on January 31, 2020. While an agreement governing the U.K.’s departure from the European Union, Brexit, was agreed to on December 24, 2020, there continues to be uncertainty over the practical consequences of Brexit and questions remain as to its application, particularly relating to the United Kingdom’s trading policies with the EU and other countries. The full effects of Brexit will depend on agreements the United Kingdom may make to retain access to the European Union or other markets. Given the lack of comparable precedent, it is unclear what economic, financial, trade and legal implications the withdrawal of the United Kingdom from the European Union will have generally and how such withdrawal will affect us. The consequences of Brexit have brought legal uncertainty and increased complexity which could continue as national laws and regulations in the U.K. differ from EU laws and regulations and additional requirements come into effect in the U.K. and EU relating to testing, authorization, labeling and other requirements that may impact our ability to import, export and otherwise distribute our products, services, and solutions.
Brexit may, among other outcomes, disrupt the free movement of goods, services and people between the United Kingdom and the European Union, undermine bilateral cooperation in key geographic areas, disrupt the markets we serve, and significantly disrupt trade between the United Kingdom and the European Union or other nations as the United Kingdom pursues independent trade relations. Since we derive most of our revenues through our U.K. subsidiary, which owns our intellectual property, the consequences
of Brexit, together with the significant uncertainty regarding the provisions governing the relationship between the U.K. and the European Union after December 31, 2020, could adversely change our tax benefits or liabilities in certain jurisdictions and adversely impact our trade operations and our management of our export compliance from our Netherlands distribution hub. Our U.K. operations may be adversely affected as we become subject to new laws and regulations implemented in the U.K. as part of Brexit, including compliance with U.K. labor and other regulations as well as compliance with EU privacy laws. Brexit could also create uncertainty with respect to the legal and regulatory requirements over the operation of our products to which we and our network operators in the U.K. are subject and lead to divergent national laws and regulations as the U.K. government determines which EU laws to replace or replicate.
While we are not experiencing any immediate adverse impact on our financial condition as a direct result of Brexit, the effects of Brexit will depend on any agreements the United Kingdom makes to retain access to the European Union or other markets. Our U.K. operations will be required to comply with new legal and regulatory requirements in the U.K. that occasionally are in addition to, or inconsistent with, those of the European Economic Area, or EEA, in each case, leading to increased complexity and costs. We import and export our products into our distribution hub in the Netherlands, which will now be subject to the laws of the EU, which may be different from those that we previously operated under as a U.K. company. Compliance with new laws or regulations regarding trade, delivery and other cross-border activities between the United Kingdom and the European Union could be costly, negatively impacting our business, financial condition, operating results and cash flows.
The loss of key personnel or an inability to attract, retain and motivate qualified personnel may impair our ability to expand our business.
Our success is substantially dependent upon the continued service and performance of our senior management team and key technical, marketing and production personnel. Our employees, including our senior management team, are generally at-will employees, and therefore may terminate employment with us at any time with no advance notice. The replacement of any members of our senior management team or other key personnel likely would involve significant time and costs and may significantly delay or prevent the achievement of our business objectives.
Our future success also depends, in part, on our ability to continue to attract and retain highly skilled personnel. Competition for highly skilled personnel is frequently intense, particularly for highly skilled research and development personnel. Any failure to successfully attract or retain qualified personnel to fulfill our current or future needs may negatively impact our growth.
A substantial portion of our product portfolio relies on the availability of unlicensed RF spectrum and if such spectrum were to become unavailable through overuse or licensing, the performance of our products could suffer and our revenues from their sales could decrease.
A substantial portion of our product portfolio operates in unlicensed RF spectrum, which is used by a wide range of consumer devices and is becoming increasingly crowded. If such spectrum usage continues to increase through the proliferation of consumer electronics and products competitive with ours, the resultant higher levels of noise in the bands of operation our products use could decrease the effectiveness of our products, which could adversely affect our ability to sell our products. Our business could be further harmed if currently unlicensed RF spectrum becomes licensed in the United States or elsewhere. Network operators that use our products may be unable to obtain licenses for RF spectrum. Even if the unlicensed spectrum remains unlicensed, existing and new governmental regulations may require we make changes in our products. For example, to provide products for network operators who utilize unlicensed RF spectrum, we may be required to limit their ability to use our products in licensed or otherwise restricted RF spectrum. The operation of our products by network operators in the United States or elsewhere in a manner not in compliance with local law could result in fines, operational disruption, or harm to our reputation.
We may acquire other businesses which could require significant management attention, disrupt our business, dilute shareholder value and adversely affect our operating results.
To execute on our business strategy, we may acquire or make investments in complementary companies, products or technologies such as our August 2019 acquisition of the assets and liabilities of the Xirrus business from Riverbed Technology, Inc. Our integration of acquired businesses such as Xirrus may not be successful and we may not achieve the benefits of the acquisition. We may not be able to find suitable acquisition candidates, and we may not be able to complete such acquisitions on favorable terms, if at all. If we do complete additional acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, and any acquisitions we complete could be viewed negatively by our channel partners, investors and financial analysts. In addition, if we are unsuccessful at integrating such acquisitions, or the technologies associated with such acquisitions, into our company, the revenues and operating results of the combined company could be adversely affected. Any integration process may require significant time and resources, and we may be unable to manage the process successfully. We may not successfully evaluate or utilize the acquired technology or personnel, or accurately forecast the financial impact of an acquisition transaction, including unexpected liability or accounting charges. We may pay cash, incur debt or issue equity securities to pay for any future acquisition, each of which
could adversely affect our financial condition or the value of our shares. The sale of equity or issuance of debt to finance any such acquisitions could result in dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could also include covenants or other restrictions that would impede our ability to manage our operations.
Risks related to our industry
New regulations or standards or changes in existing regulations or standards in the United States or internationally related to our products may result in unanticipated costs or liabilities, which could have a material adverse effect on our business, results of operations and future sales.
Our products are subject to governmental regulations in a variety of jurisdictions. To achieve and maintain market acceptance, our products must comply with these regulations as well as a significant number of industry standards. In the United States, our products must comply with various regulations defined by the Federal Communications Commission, or FCC, Underwriters Laboratories and others. We must also comply with similar international regulations. In addition, radio emissions, such as our products, are subject to health and safety regulation in the United States and in other countries in which we do business, including by the Center for Devices and Radiological Health of the Food and Drug Administration, the Occupational Safety and Health Administration and various state agencies. Member countries of the European Union have enacted similar standards concerning electrical safety and electromagnetic compatibility and emissions, and chemical substances and use standards. As these regulations and standards evolve, and if new regulations or standards are implemented, we could be required to modify our products or develop and support new versions of our products, and our compliance with these regulations and standards may become more burdensome. The failure of our products to comply, or delays in compliance, with the various existing and evolving industry regulations and standards could prevent or delay introduction of our products, which could harm our business. Foreign regulatory agencies may delay or fail to certify our products for political or other reasons other than product quality or performance. Network operator uncertainty regarding future policies may also affect demand for wireless broadband products, including our products. Our inability to alter our products to address these requirements and any regulatory changes may have a material adverse effect on our business, operating results and financial condition.
We are subject to governmental export and import controls that could impair our ability to compete in international markets and subject us to liability if we are not in compliance with applicable laws.
Our technology and products are subject to export control and import laws and regulations, including the U.S. Export Administration Regulations, U.S. customs regulations, the economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls, and applicable U.K. and EU export and import laws and regulations. Exports, re-exports and transfers of our products and technology must be made in compliance with these laws and regulations. U.S., U.K. and EU export control laws and economic sanctions include a prohibition on the shipment of certain products and technology to embargoed or sanctioned countries, governments and persons. We take precautions to prevent our products and technology from being shipped to, downloaded by or otherwise transferred to applicable sanctions targets, but our products could be shipped to those targets by our channel partners despite such precautions. If our products are shipped to or downloaded by sanctioned targets in the future in violation of applicable export laws, we could be subject to government investigations, penalties and reputational harm. Certain of our products incorporate encryption technology and may be exported, re-exported or transferred only with the required applicable export license from the U.S. or the U.K. or through an export license exception.
If we fail to comply with applicable export and import regulations, customs and trade regulations, and economic sanctions and other laws, we could be subject to substantial civil and criminal penalties, including fines and incarceration for responsible employees and managers, and the possible loss of export or import privileges as well as harm our reputation and indirectly have a material adverse effect on our business, operating results and financial condition. In addition, if our channel partners fail to comply with applicable export and import regulations, customs regulations, and economic and sanctions and other laws in connection with our products and technology, then we may also be adversely affected, through reputational harm and penalties. Obtaining the necessary export license for a particular sale may be time-consuming, may result in the delay or loss of sales opportunities and approval is not guaranteed.
Any change in export or import, customs or trade and economic sanctions laws, and regulations, shift in the enforcement or scope of existing laws and regulations, or change in the countries, governments, persons or technologies targeted by such laws and regulations, could also result in decreased use of our products, or in our decreased ability to export or sell our products to existing or potential network operators with international operations. Any decreased use of our products or limitation on our ability to export or sell our products could affect our business, financial condition and results of operations.
We do business in countries with a history of corruption and transact business with foreign governments, which increases the risks associated with our international activities.
We are subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the FCPA, the U.K. Bribery Act of 2010, and many other laws around the world that prohibit improper payments or offers or authorization of payments to governments and their employees, officials, and agents and political parties for the purpose of obtaining or retaining business, inducing an individual to not act in good faith, direct business to any person, or secure any advantage. We have operations, deal with and make sales to governmental entities in countries known to experience corruption, particularly certain emerging countries in Asia, Eastern Europe, the Middle East and South America. Our activities in these countries create the risk of illegal or unauthorized payments or offers of payments or other things of value by our employees, consultants or channel partners that could be in violation of applicable anti-corruption laws, including the FCPA. In many foreign countries where we operate, particularly in countries with developing economies, it may be a local custom for businesses to engage in practices that are prohibited by the FCPA or other similar laws and regulations. Although we have taken actions to discourage and prevent illegal practices including our anti-corruption compliance policies, procedures, training and monitoring, the actions taken to safeguard against illegal practices, and any future improvements in our anti-corruption compliance practices, may not be effective, and our employees, consultants or channel partners may engage in illegal conduct for which we might be held responsible. Violations of anti-corruption laws may result in severe criminal or civil sanctions, including suspension or debarment from government contracting, and we may be subject to other liabilities and significant costs for investigations, litigation and fees, diversion of resources, negative press coverage, or reputational harm, all of which could negatively affect our business, operating results and financial condition. In addition, the failure to create and maintain accurate books and records or the failure to maintain an adequate system of internal accounting controls may subject us to sanctions.
If we fail to comply with environmental requirements, our business, financial condition, operating results and reputation could be adversely affected.
We are subject to various environmental laws and regulations including laws governing the hazardous material content of our products and laws relating to the recycling of electrical and electronic equipment. The laws and regulations to which we are subject include the European Union’s Restriction of Hazardous Substances Directive, or RoHS, and Waste Electrical and Electronic Equipment Directive, or WEEE, as implemented by EU member states. Similar laws and regulations exist or are pending in other regions, including in the United States, and we are, or may in the future be, subject to these laws and regulations.
RoHS restricts the use of certain hazardous materials, including lead, mercury and cadmium, in the manufacture of certain electrical and electronic products, including some of our products. We have incurred, and expect to incur in the future, costs to comply with these laws, including research and development costs, and costs associated with assuring the supply of compliant components. Certain of our products are eligible for an exemption for lead used in network infrastructure equipment. If this exemption is revoked, or if there are other changes to RoHS (or its interpretation) or if similar laws are passed in other jurisdictions, we may be required to reengineer our products to use components compatible with these regulations. This reengineering and component substitution could result in additional costs to us or disrupt our operations or logistics.
WEEE requires producers of electrical and electronic equipment to be responsible for the collection, reuse, recycling and treatment of their products. Currently, our distributors generally take responsibility for this requirement, as they are often the importer of record. However, changes to WEEE and existing or future laws similar to WEEE may require us to incur additional costs in the future.
If we are unable to comply with these or similar laws or regulations, we could incur fines, penalties, restrictions on our ability to manufacture our products or restrictions or limitations on our ability to import or export our products to or from various jurisdictions.
Any failure to comply with current and future environmental laws could result in the incurrence of fines or penalties and could adversely affect the demand for or sales of our products.
If we were not able to satisfy data protection, security, privacy and other government- and industry-specific requirements or regulations, our business, results of operations and financial condition could be harmed.
Personal privacy, data protection, information security and telecommunications-related laws and regulations have been widely adopted in the United States, Europe and in other jurisdictions where we offer our products. The regulatory frameworks for these matters, including privacy, data protection and information security matters, is rapidly evolving and is likely to remain uncertain for the foreseeable future. We expect that there will continue to be new proposed laws, regulations and industry standards concerning privacy, data protection, information security and telecommunications services in the United States, the European Union and other jurisdictions in which we operate or may operate, and it is not known what impact such future laws, regulations and standards may have on our business. For example, the European Commission adopted the General Data Protection Regulation, or GDPR, effective in May 2018, which imposes more stringent EU data protection requirements and imposes greater penalties for noncompliance than prior
regulations. In July 2020, the European Court of Justice invalidated the Privacy Shield regime that had been established under GDPR as a safe harbor for transfers of data to and from third parties, and raised several questions regarding the efficacy of Standard Contractual Clauses, or SCCs, as a European Commission-approved compliance method to transfer personal data of EEA individuals to the U.S. focusing on whether data transfers under SCCs are consistent with the EU privacy principles. We rely on SCCs for transfers to and from third parties. In addition, we must ensure that third parties processing personal data of our EEA customers and/or employees outside of the EEA have compliant transfer mechanisms. To the extent we rely on SCCs, or any third party relies on the Privacy Shield regime for the compliant transfer of personal data, our ability to process EEA personal data to such parties could be jeopardized.
Additionally, California enacted the California Consumer Privacy Act of 2018, which took effect on January 1, 2020, and broadly defines personal information, gives California residents expanded privacy rights and protections and provides for civil penalties for violations. We understand that additional states as well as other countries around the world are also in the process of enacting or amending data protection, security, and privacy regulations. We also expect that existing laws, regulations and standards may be interpreted in new manners in the future. Future laws, regulations, standards and other obligations, and changes in the interpretation of existing laws, regulations, standards and other obligations could require us to modify our products, restrict our business operations, increase our costs and impair our ability to maintain and grow our channel partner base and increase our revenues. The cost of compliance with, and other burdens imposed by new privacy laws may limit the use and adoption of our products and services and could have an adverse impact on our business, results of operations and financial condition.
Although we work to comply with applicable privacy and data security laws and regulations, industry standards, contractual obligations and other legal obligations, those laws, regulations, standards and obligations are evolving and may be modified, interpreted and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another. As such, we cannot assure ongoing compliance with all such laws, regulations, standards and obligations. Any failure or perceived failure by us to comply with applicable laws, regulations, standards or obligations, or any actual or suspected security incident, whether or not resulting in unauthorized access to, or acquisition, release or transfer of personally identifiable information or other data, may result in governmental enforcement actions and prosecutions, private litigation, fines and penalties or adverse publicity, and could cause channel partners to lose trust in us, which could have an adverse effect on our reputation and business.
Risks related to our intellectual property
We rely on the availability of third-party licenses, the loss of which could materially harm our ability to sell our products.
We rely on certain software or other intellectual property licensed from third parties. It may be necessary in the future to seek new licenses or renew existing licenses. There can be no assurance that the necessary licenses would be available on acceptable terms, if at all. If we are unable to maintain these licenses, or obtain licenses to alternative third-party intellectual property, on acceptable terms, we may be precluded from selling our products, may be required to re-design our products to eliminate reliance on such third-party intellectual property or otherwise experience disruption in operating our business. Third parties owning such intellectual property may engage in litigation against us seeking protection of their intellectual property rights, any of which could have a material adverse effect on our business, operating results, and financial condition.
If we are unable to protect our intellectual property rights, our competitive position could be harmed or we may incur significant expenses to enforce our rights.
We protect our proprietary information and technology through license agreements, nondisclosure agreements, noncompetition covenants, and other contractual provisions and agreements, as well as through patent, trademark, copyright and trade secret laws in the United States and similar laws in other countries. These protections may not be available in all jurisdictions and may be inadequate to prevent our competitors or other third-party manufacturers from copying, reverse engineering or otherwise obtaining and using our technology, proprietary rights or products. For example, the laws of certain countries in which our products are manufactured or licensed do not protect our proprietary rights to the same extent as the laws of the United States. In addition, third parties may seek to challenge, invalidate or circumvent our patents, trademarks, copyrights and trade secrets, or applications for any of the foregoing. We have focused patent, trademark, copyright and trade secret protection primarily in the United States and Europe, although we distribute our products globally. As a result, we may not have sufficient protection of our intellectual property in all countries where infringement may occur. There can be no assurance that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology or design around our proprietary rights. In each case, our ability to compete could be significantly impaired. To prevent substantial unauthorized use of our intellectual property rights, it may be necessary to prosecute actions for infringement and/or misappropriation of our proprietary rights against third parties. Any such action could result in significant costs and diversion of our resources and management’s attention, and we may not be successful in such action.
Claims by others that we infringe their intellectual property rights could harm our business.
Our industry is characterized by vigorous protection and pursuit of intellectual property rights. A number of companies hold a large number of patents that may cover technology necessary to our products. We have in the past received and expect to continue to receive claims by third parties that we infringe their intellectual property rights. For example, on August 7, 2018, Ubiquiti Networks, Inc. filed a lawsuit, which we refer to as the Ubiquiti Litigation, in the United States District Court, Northern District of Illinois, against us, two of our employees, one of our distributors and one of our end users. The complaint alleged that our development of and sales and promotion of our Elevate software as downloaded on a Ubiquiti device violated the Computer Fraud and Abuse Act and Illinois Computer Crimes Prevention Law, the Digital Millennium Copyright Act and the Copyright Act and constituted misrepresentation and false advertising and false designation of origin in violation of the Lanham Act and state competition laws, breach of contract, tortious interference with contract and unfair competition, and trademark infringement and common law misappropriation. On December 1, 2020, we reached a settlement agreement with Ubiquiti, settling all claims made in the Ubiquiti Litigation. The Court dismissed the Ubiquiti Litigation, with prejudice, on January 5, 2021.
In addition, we have received correspondence from certain patent holding companies who assert that we infringe certain patents related to wireless communication technologies. A court adjudicating a claim that we infringe these patents may not rule in our favor should these patent holding companies file suit against us. As our business expands, we enter into new technologies, and the number of products and competitors in our market increases, we expect that infringement claims may increase in number and significance. It is not uncommon for suppliers of certain components of our products, such as chipsets, to be involved in intellectual property-related lawsuits by or against third parties. Our key component suppliers are often targets of such assertions, and we may become a target as well. Any claims or proceedings against us, whether meritorious or not, could be time-consuming, result in costly litigation, require significant amounts of management time or result in the diversion of significant operational resources, any of which could materially and adversely affect our business and operating results.
Intellectual property lawsuits are subject to inherent uncertainties due to the complexity of the technical issues involved, and we cannot be certain that we will be successful in defending ourselves against intellectual property claims. In addition, we currently have a limited portfolio of issued patents compared to our larger competitors, and therefore may not be able to effectively utilize our intellectual property portfolio to assert defenses or counterclaims in response to patent infringement claims or litigation brought against us by third parties. Patent holding companies may seek to monetize patents they previously developed, have purchased or otherwise obtained. Many companies, including our competitors, may now, and in the future, have significantly larger and more mature patent portfolios than we have, which they may use to assert claims of infringement, misappropriation and other violations of intellectual property rights against us. In addition, future litigation may involve non-practicing entities or other patent owners who have no relevant products or revenue and against whom our own patents may therefore provide little or no deterrence or protection, and many other potential litigants have the capability to dedicate substantially greater resources than we do to enforce their intellectual property rights and to defend claims that may be brought against them.
A successful claimant could secure a judgment that requires us to pay substantial damages or prevents us from distributing certain products, obtaining the services of certain employees or independent contractors, or performing certain services. In addition, we might be required to seek a license for the use of such intellectual property, which may not be available on commercially acceptable terms or at all. Alternatively, we may be required to develop non-infringing technology, which could require significant effort and expense and may ultimately not be successful. Any claims or proceedings against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time, result in the diversion of significant operational resources, or require us to enter into royalty or licensing agreements.
Although we may be able to seek indemnification from our component suppliers and certain of our third-party manufacturers who have provided us with design and build services, these third-party manufacturers or component suppliers may contest their obligations to indemnify us, or their available assets or indemnity obligation may not be sufficient to cover our losses.
Our obligations to indemnify our channel partners and network operators against intellectual property infringement claims could cause us to incur substantial costs.
We have agreed, and expect to continue to agree, to indemnify our channel partners and network operators for certain intellectual property infringement claims, such as the Ubiquiti Litigation. If intellectual property infringement claims are made against our channel partners or network operators concerning our products, we could be required to indemnify them for losses resulting from such claims or to refund amounts they have paid to us. The maximum potential amount of future payments we could be required to make may be substantial or unlimited and could materially harm our business. We may in the future agree to defend and indemnify our distributors, network operators and other parties, even if we do not believe that we have an obligation to indemnify them or that our services and products infringe the asserted intellectual property rights. Alternatively, we may reject certain of these indemnity demands, which may lead to disputes with a distributor, network operator or other party and may negatively impact our relationships with the party demanding indemnification or result in litigation against us.
If our third-party manufacturers do not respect our intellectual property and trade secrets and produce competitive products using our design, our business would be harmed.
We outsource manufacture, and in some cases hardware or software design, to third-party manufacturers predominantly in Mexico, China, Israel and Taiwan. Prosecution of intellectual property infringement and trade secret theft is more difficult in some of these jurisdictions than in the United States. Although our agreements with our third-party manufacturers generally preclude them from misusing our intellectual property and trade secrets, or using our designs to manufacture product for our competitors, we may be unsuccessful in monitoring and enforcing our intellectual property rights and may find counterfeit goods in the market being sold as our products or products similar to ours produced for our competitors using our intellectual property. Although we take steps to stop counterfeits, we may not be successful and network operators who purchase these counterfeit goods may experience product defects or failures, harming our reputation and brand and causing us to lose future sales.
We use open source software in our products that may subject our firmware to general release or require us to re-engineer our products and the firmware contained therein, which may cause harm to our business.
We incorporate open source software into our products. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the software code. Some open source licenses contain requirements that we make available source code for modifications or derivative works we create based upon the open source software and that we license such modifications or derivative works under the terms of a particular open source license or other license granting third parties certain rights of further use. If we combine our proprietary firmware or other software with open source software in a certain manner, we could, under certain of the open source licenses, be required to release our proprietary source code publicly or license such source code on unfavorable terms or at no cost. Open source license terms relating to the disclosure of source code in modifications or derivative works to the open source software are often ambiguous and few if any courts in jurisdictions applicable to us have interpreted such terms. As a result, many of the risks associated with usage of open source software cannot be eliminated, and could, if not properly addressed, negatively affect our business.
If we were found to have inappropriately used open source software, we may be required to release our proprietary source code, re-engineer our firmware or other software, discontinue the sale of our products in the event re-engineering cannot be accomplished on a timely basis or take other remedial action that may divert resources away from our development efforts, any of which could adversely increase our expenses and delay our ability to release our products for sale. We could also be subject to similar conditions or restrictions should there be any changes in the licensing terms of the open source software incorporated into our products.
Financial and accounting risks
If we fail to maintain an effective system of internal controls, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, and the rules and regulations of Nasdaq. The requirements of these rules and regulations has and will increase our legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly and place strain on our personnel, systems and resources.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures over financial reporting. We are continuing to develop and refine our disclosure controls, internal control over financial reporting and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers.
Our current controls and any new controls we develop may become inadequate because of growth in our business. Further, weaknesses, including material weaknesses, in our internal controls have been discovered in the past and additional weaknesses may be discovered in the future. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal controls also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will be required to include in our periodic reports we will file with the SEC under Section 404 of the Sarbanes-Oxley Act once we cease to be an emerging growth company. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the market price of our shares.
We have expended and anticipate we will continue to expend significant resources, and we expect to provide significant management oversight, to maintain and improve the effectiveness of our disclosure controls and procedures and internal controls over financial reporting. Any future failure to maintain the adequacy of our internal controls, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. If our internal controls are perceived as inadequate or we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and our share price could decline. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on Nasdaq.
Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until after we are no longer an emerging growth company. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Any failure to maintain effective disclosure controls and internal control over financial reporting could have a material and adverse effect on our business and operating results and could cause a decline in the price of our shares.
Our business, operating results and growth rates may be adversely affected by current or future unfavorable economic and market conditions.
Our business depends on the overall demand for wireless network technology and on the economic health and general willingness of our current and prospective end-customers to make those capital commitments necessary to purchase our products. If the conditions in the U.S. and global economies deteriorate, become uncertain or volatile, our business, operating results and financial condition may be materially adversely affected. Economic weakness, end-customer financial difficulties, limited availability of credit and constrained capital spending have resulted, and may in the future result, in challenging and delayed sales cycles, slower adoption of new technologies and increased price competition, and could negatively impact our ability to forecast future periods, which could result in an inability to satisfy demand for our products and a loss of market share.
In particular, we cannot be assured of the level of spending on wireless network technology, the deterioration of which would have a material adverse effect on our results of operations and growth rates. The purchase of our products or willingness to replace existing infrastructure is discretionary and highly dependent on a perception of continued rapid growth in consumer usage of mobile devices and in many cases involves a significant commitment of capital and other resources. Therefore, weak economic conditions or a reduction in capital spending would likely adversely impact our business, operating results and financial condition. A reduction in spending on wireless network technology could occur or persist even if economic conditions improve.
In addition, if interest rates rise or foreign exchange rates weaken for our international customers, overall demand for our products and services could decline and related capital spending may be reduced. Furthermore, any increase in worldwide commodity prices may result in higher component prices for us and increased shipping costs, both of which may negatively impact our financial results.
The elimination of LIBOR could adversely affect our business, results of operations or financial condition.
In July 2017, the head of the United Kingdom Financial Conduct Authority announced plans to phase out the use of LIBOR by the end of 2021. Although the impact is uncertain at this time, the elimination of LIBOR could have an adverse impact on our business, results of operations, or financial condition. We may incur significant expenses to amend our LIBOR-indexed loans, and other applicable financial or contractual obligations, including our credit facilities, to a new reference rate, which may differ significantly from LIBOR. Accordingly, the use of an alternative rate could result in increased costs, including increased interest expense on our credit facilities, and increased borrowing and hedging costs in the future. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR and we are unable to predict the effect of any such alternatives on our business, results of operations or financial condition.
Our credit facility contains restrictive financial covenants that may limit our operating flexibility.
Our credit facility contains certain restrictive covenants that either limit our ability to, or require a mandatory prepayment in the event we, among other things, incur additional indebtedness and liens, merge with other companies or consummate certain changes of control, acquire other companies, engage in new lines of business, change business locations, make certain investments, make any payments on any subordinated debt, transfer or dispose of assets, amend certain material agreements, and enter into various specified transactions. We, therefore, may not be able to engage in any of the foregoing transactions unless we obtain the consent of our lenders or prepay certain amounts under the credit facility. The credit facility also contains certain financial covenants and financial reporting requirements. We have in the past, and may in the future, fail to comply with all of the financial or restrictive covenants of our credit facility, requiring a waiver from our lenders. Our obligations under the credit facility are secured by substantially all of our assets. We may not be able to generate or sustain sufficient cash flow or sales to meet the financial covenants or pay the principal and interest under the credit facility, and we may in the future be unable to meet our financial covenants, requiring additional waivers that our
lenders may be unwilling to grant. Furthermore, our future working capital, proceeds of borrowings or proceeds of equity financings could be required to be used to repay or refinance the amounts outstanding under the credit facility and, therefore, may be unavailable for other purposes. In the event of a liquidation, our lenders would be repaid all outstanding principal and interest prior to distribution of assets to unsecured creditors, and the holders of our shares would receive a portion of any liquidation proceeds only if all of our creditors, including our lenders, were first repaid in full.
We may face exposure to unknown tax liabilities, which could adversely affect our financial condition, cash flows and results of operations .
We are subject to income and non-income based taxes in the United States and in various non-U.S. jurisdictions. We file U.S. federal income tax returns as well as income tax returns in various U.S. state and local jurisdictions and many non-U.S. jurisdictions. The United States, United Kingdom, India, Mexico, and Brazil are the main taxing jurisdictions in which we operate. Significant judgment is required in dealing with uncertainties in the application of complex tax regulations when calculating our worldwide income tax liabilities and other tax liabilities. We are not aware of any uncertain tax positions as specified by Accounting Standards Codification 740, Income Taxes. We expect to continue to benefit from our implemented tax positions. We believe that our tax positions comply with applicable tax law and intend to vigorously defend our positions. However, as described below, tax authorities could take differing positions on certain issues.
We may be subject to income tax audits in all the jurisdictions in which we operate. The years open for audit vary depending on the tax jurisdiction. In the United States, we are no longer subject to U.S. federal income tax examinations by tax authorities for years before 2017. In the non-U.S. jurisdictions, the tax returns that are open vary by jurisdiction and are generally for tax years between 2014 through 2020. We routinely assess exposures to any potential issues arising from current or future audits of current and prior years’ tax returns. When assessing such potential exposures and where necessary, we provide a reserve to cover any expected loss. To the extent that we establish a reserve, we increase our provision for income taxes. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We record an additional charge in our provision for taxes in the period in which we determine that tax liability is greater than the original estimate. If the governing tax authorities have a differing interpretation of the applicable law, a successful challenge of any of our tax positions could adversely affect our financial condition, cash flows and/or results of operations.
Risks related to ownership of our ordinary shares
Because Vector Capital holds a controlling interest in us, the influence of our public shareholders over significant corporate actions will be limited.
Affiliates of Vector Capital directly or indirectly own approximately 63% of our outstanding shares through their ownership of Vector Cambium Holdings (Cayman), L.P., or VCH, L.P., which was reduced from 75% as a result of Vector Capital’s sale of 2.5 million of our ordinary shares on December 3, 2020 pursuant to a registration statement declared effective on November 24, 2020. As a result of its controlling interest in us, Vector Capital has the power to:
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control all matters submitted to our shareholders;
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elect our directors; and
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exercise control over our business, policies and affairs.
Vector Capital is not prohibited from selling its interest in us to third parties, and has sold and will continue to periodically sell its interest in us under the currently effective shelf registration statement and future registration statements that are filed by us. While Vector Capital continues to own a majority of our outstanding shares, our ability to engage in significant transactions, such as a merger, acquisition or liquidation, is limited without the consent of Vector Capital. Conflicts of interest could arise between us and Vector Capital, and any conflict of interest may be resolved in a manner that does not favor us. Vector Capital may continue to retain control of us for the foreseeable future and may decide not to enter into a transaction in which our shareholders would receive consideration for their shares that is much higher than the cost to them or the then-current market price of those shares. In addition, Vector Capital could elect to sell a controlling interest in us and shareholders may receive less than the then-current fair market value or the price paid for their shares. Any decision regarding their ownership of us that Vector Capital may make at some future time will be in their absolute discretion.
In addition, pursuant to the terms of our Amended and Restated Memorandum and Articles of Association, Vector Capital and its affiliates have the right to, and have no duty to abstain from, exercising its right to engage or invest in the same or similar business as us, and do business with any of our channel partners, distributors, network operators and any other party with which we do business. In the event that any of our directors or officers who is also a director, officer or employee of Vector Capital or its affiliates acquires knowledge of a corporate opportunity or is offered a corporate opportunity, then Vector Capital or its affiliates may pursue or acquire such corporate opportunity without presenting the corporate opportunity to us without liability, and to the maximum extent
permitted by applicable law, such relevant director will be deemed to have fully satisfied their fiduciary duty if the knowledge of such corporate opportunity was not acquired solely in such person’s capacity as our director or officer and such person acted in good faith.
In addition, pursuant to our Amended and Restated Memorandum and Articles of Association, a director who is in any way interested in a contract or transaction with us will declare the nature of his interest at a meeting of the board of directors. A director may vote in respect of any such contract or transaction notwithstanding that he may be interested therein and if he does so his vote will be counted and he may be counted in the quorum at any meeting of the board of directors at which any such contract or transaction shall come before the meeting of the board of directors for consideration. We have adopted a written audit committee charter, pursuant to which the audit committee must review all related party transactions required to be disclosed in our financial statements and approve any such related party transaction, unless the transaction is approved by another independent committee of our board.
We are a controlled company within the meaning of Nasdaq rules and, as a result, we qualify for and are relying on exemptions from certain corporate governance requirements.
Vector Capital controls a majority of the voting power of our outstanding shares and as a result, we are a controlled company within the meaning of the corporate governance standards of the Nasdaq. Under Nasdaq rules, a controlled company may elect not to comply with certain corporate governance requirements of the Nasdaq, including the requirements that:
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a majority of the board of directors consist of independent directors;
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the nominating and corporate governance committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;
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the compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and
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there be an annual performance evaluation of the nominating and corporate governance and compensation committees.
We are utilizing these exemptions, other than the exemption relating to the independence of the board of directors, as our board of directors is now composed of a majority of independent directors. In addition, although we have adopted charters for our audit and compensation committees and intend to conduct annual performance evaluations for these committees, our compensation committee is not composed entirely of independent directors, although all members of our audit committee are independent. Accordingly, shareholders may not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of Nasdaq.
The price of our shares may be volatile, and shareholders could lose all or part of their investment.
The trading price of our shares may fluctuate substantially. The trading price of our shares will depend on a number of factors, including those described in this “Risk factors” section, many of which are beyond our control and may not be related to our operating performance. These fluctuations could cause shareholders to lose all or part of their investment in our shares since they might be unable to sell their shares at or above the price paid for them. Factors that could cause fluctuations in the trading price of our shares include the following:
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the financial projections we may provide to the public, any changes in those projections or our failure to meet those projections;
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actual or anticipated developments in our business or our competitors’ businesses or the competitive landscape generally;
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sales of our shares by us or our shareholders or hedging activities by market participants;
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failure of financial analysts to maintain coverage of us, changes in financial estimates by any analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
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operating performance or stock market valuations of other technology companies generally, or those in our industry in particular;
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announced or completed acquisitions of businesses or technologies by us or our competitors;
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general economic conditions and slow or negative growth of our markets;
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rumors and market speculation involving us or other companies in our industry;
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litigation involving us, our industry or both or investigations by regulators into our operations or those of our competitors;
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developments or disputes concerning our intellectual property or other proprietary rights;
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new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
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changes in accounting standards, policies, guidelines, interpretations or principles;
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any major change in our management; and
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other events or factors, including those resulting from war, incidents of terrorism or responses to these events.
In addition, the stock market in general, and the market for technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of our shares, regardless of our actual operating performance. In the past, following periods of volatility in the overall market and the market prices of particular companies’ securities, securities class action litigations have often been instituted against these companies. Litigation of this type, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
Our memorandum and articles of association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our shares.
Our Amended and Restated Memorandum and Articles of Association contain provisions to limit the ability of others to acquire control of our company through non-negotiated transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. For example, our board of directors has the authority to issue undesignated, or “blank-check,” preferred shares without shareholder approval. As a result, our board of directors could authorize and issue a series of preferred shares with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult, which may not be in the interests of holders of our ordinary shares. In addition, our board is staggered and divided into three classes, with each class subject to re-election once every three years on a rotating basis, special meeting of shareholders may only be called by a specified group of directors, executives or shareholders and shareholders must comply with advance notice provisions in order to bring business before or nominate directors for election at shareholder meetings. As a result, shareholders would be prevented from electing an entirely new board of directors at any annual meeting and the ability of shareholders to change the membership of a majority of our board of directors may be delayed.
Because we are incorporated under Cayman Islands law, shareholders may face difficulties in protecting their interests, and the ability to protect rights through U.S. courts may be limited.
We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our Amended and Restated Memorandum and Articles of Association, the Companies Act (as amended) of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are governed by the common law of the Cayman Islands and we have adopted an exclusive forum by law that requires certain shareholder litigations regarding such matters to be brought in Cayman Islands Courts. These exclusive forum provisions do not apply to claims under U.S. federal securities laws. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands.
Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our existing articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for shareholders to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.
In addition, the Cayman Islands courts are also unlikely (1) to recognize or enforce against us judgments of courts of the United States based on certain civil liability provisions of U.S. securities laws, or (2) to impose liabilities against us, in original actions brought in the Cayman Islands, based on certain civil liability provisions of U.S. securities laws that are penal in nature. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will in certain circumstances recognize and enforce a foreign judgment of a foreign court of competent jurisdiction without any re-examination of the merits at common law.
As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or large shareholders than they would as shareholders of a public company incorporated in the United States.
We are an emerging growth company, and any decision on our part to comply only with certain reduced disclosure requirements applicable to emerging growth companies could make our shares less attractive to investors.
We are an emerging growth company, as defined in the JOBS Act, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years following our initial public offering, although if the market value of our shares that are held by non-affiliates exceeds $700 million as of any June 30 before the conclusion of that five year period, or if we have total annual gross revenues of $1.07 billion or more during any fiscal year before the conclusion of that five year period, we would cease to be an emerging growth company as of the end of the fiscal year in which such threshold is met. In addition, if we issue more than $1 billion in non-convertible debt in a three-year period, we would cease to be an emerging growth company immediately. Investors may find our shares less attractive because we choose to rely on these exemptions. If some investors find our shares less attractive as a result of our choice to reduce our disclosures, there may be a less active trading market for our shares and our share price may be more volatile.
Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
Our directors may have conflicts of interest because of their ownership of equity interests of, and their employment with, our parent company and our affiliates.
Two of our directors hold ownership interests in Vector Capital as well as ownership in and employment positions with its affiliates. Ownership interests in Vector Capital by our directors could create, or appear to create, potential conflicts of interest when our directors are faced with decisions that could have different implications for us and for Vector Capital or its affiliates. Conflicts of interest may not be resolved in our favor.
General risks
If we are unable to manage our growth and expand our operations successfully, our business and operating results will be harmed.
We have expanded our operations significantly since inception and anticipate that further significant geographic and market expansion will be required to achieve our business objectives. The growth and expansion of our geographic sales, expansion of our products and our entry into new industry verticals places a significant strain on our management, operational and financial resources. Any such future growth would also add complexity to and require effective coordination throughout our organization. To manage any future growth effectively, we must continue to improve and expand our information technology and financial infrastructure, our operating and administrative systems and controls, and our ability to manage headcount, capital and processes in an efficient manner. We may not be able to successfully implement improvements to these systems and processes in a timely or efficient manner, which could result in additional operating inefficiencies and could cause our costs to increase more than planned. If we do increase our operating expenses in anticipation of the growth of our business and this growth does not meet our expectations, our operating results may be negatively impacted. If we are unable to manage future expansion, our ability to provide high quality products and services could be harmed, which could damage our reputation and brand and may have a material adverse effect on our business, operating results and financial condition.
Our business is subject to the risks of earthquakes, fire, floods and other catastrophic events, and to interruption by manmade problems such as network security breaches, computer viruses, terrorism and war.
We have substantial operations in Illinois, California, England and India, and our third-party manufacturers are predominantly located in Mexico, China, Taiwan and Israel. Operations in some of these areas are susceptible to disruption due to severe weather, seismic activity, political unrest and other factors. For example, a significant natural disaster, such as an earthquake, a fire or a flood, occurring at the facilities of one of our third-party manufacturers could have a material adverse impact on their ability to manufacture and timely deliver our products. In addition, due to the current fears over the spread of COVID-19, our third-party manufacturers in China may experience disruption of their operations. Despite the implementation of network security measures, we also may be
vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our solutions. In addition, natural disasters, acts of terrorism or war could cause disruptions in the businesses of our suppliers, manufacturers, network operators or the economy as a whole. To the extent that any such disruptions result in delays or cancellations of orders or impede our ability to timely deliver our products, or the deployment of our products, our business, operating results and financial condition would be adversely affected.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments.
None.

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ITEM 2. PROPERTIES
Item 2. Properties.
As of December 31, 2020, we occupied approximately 38,000 square feet of office space in Rolling Meadows, Illinois under lease agreements that expire in 2024, where we have corporate and executive functions, research and development, customer support, operations and administration and finance services. We also lease approximately 27,000 square feet of office space in Ashburton, England under lease agreements all of which expire in 2026, approximately 32,000 square feet of space in Bangalore, India under two leases that expire in 2021, approximately 9,000 square feet of office space in San Jose, California under a lease that expires in 2022, and approximately 9,000 square feet of office space in Thousand Oaks, California under a lease that expires in 2022. In addition, we maintain offices in Miami, Florida, Italy, Dubai, Mexico and Singapore.
For additional information regarding obligations under operating leases, see Note 18 - Leases in the Notes to the Consolidated Financial Statements included in Part II, Item 8: “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings.
Third parties may from time to time assert legal claims against us.
Our industry is characterized by vigorous protection and pursuit of intellectual property rights. A number of companies hold a large number of patents that may cover technology necessary to our products. We have in the past received and expect to continue to receive claims by third parties that we infringe their intellectual property rights. For example, on August 7, 2018, Ubiquiti Networks, Inc. filed a lawsuit, which we refer to as the Ubiquiti Litigation, in the United States District Court, Northern District of Illinois, against us, two of our employees, one of our distributors and one of our end users. The complaint alleged that our development of and sales and promotion of our Elevate software as downloaded on a Ubiquiti device violated the Computer Fraud and Abuse Act and Illinois Computer Crimes Prevention Law, the Digital Millennium Copyright Act and the Copyright Act and constituted misrepresentation and false advertising and false designation of origin in violation of the Lanham Act and state competition laws, breach of contract, tortious interference with contract and unfair competition, and trademark infringement and common law misappropriation. On December 1, 2020, we reached a settlement agreement with Ubiquiti, settling all claims made in the Ubiquiti Litigation. The Court dismissed the Ubiquiti Litigation, with prejudice, on January 5, 2021.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures.
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.
Market information
Our ordinary shares have been listed on the NASDAQ Global Market under the symbol “CMBM” since June 26, 2019.
Holders of record
As of December 31, 2020, there were 175 shareholders of record of our ordinary shares. Because many of our shares are held by brokers and other institutions on behalf of shareholders, we are unable to estimate the total number of shareholders represented by these record holders. The closing price of our ordinary shares on December 31, 2020 was $25.08 per share as reported on the NASDAQ Global Market.
Recent sale of unregistered securities
None.
Use of proceeds from Initial Public Offering of ordinary shares
The offer and sale of all of the shares in our IPO were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-21789), which was declared effective by the SEC on June 25, 2019. The remainder of the information required by this item regarding the use of our IPO proceeds has been omitted pursuant to SEC rules because such information has not changed since our last periodic report was filed.
Dividend policy
We have not declared or paid dividends on our ordinary shares since our IPO. Neither Cayman Island law nor our amended and restated certificate of incorporation requires our board of directors to declare dividends on our ordinary shares. Any future determination to declare cash dividends on our ordinary shares will be made at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant. We do not anticipate paying cash dividends on our ordinary shares for the foreseeable future.
Equity compensation plan information
Information regarding the securities authorized for issuance under our equity compensation plans will be included in our Proxy Statement relating to our 2021 annual meeting of Shareholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2020 and is incorporated herein by reference.
Issuer Purchase of Equity Securities
None.
Performance graph
Notwithstanding any statement to the contrary in any of our filings with the SEC, the following information shall not be deemed “filed” with the SEC or “soliciting material” under the Securities Exchange Act of 1934 and shall not be incorporated by reference into any such filings irrespective of any general incorporation language contained in such filing.
The following graph compares the total cumulative shareholder return on our ordinary shares with the total cumulative return of the Russell 3000 Index and the NASDAQ Composite Index during the period commencing on June 26, 2019, the initial trading day of our ordinary shares, and ending on December 31, 2020. The graph assumes that $100 was invested at the beginning of the period in our ordinary shares and in each of the comparative indices, and the reinvestment of any dividends. Historical share price performance should not be relied upon as an indication of future share price performance.
6/26/2019
6/28/2019
9/30/2019
12/31/2019
3/31/2020
6/30/2020
9/30/2020
12/31/2020
Cambium Networks Corporation
100.00
98.87
100.00
90.10
52.06
75.88
173.92
258.56
Russell 3000 (TR)
100.00
101.26
102.44
111.75
89.74
107.87
117.80
135.10
NASDAQ Composite (TR)
100.00
101.23
101.41
114.05
99.07
128.50
142.94
165.28

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Selected Financial Data.
Consolidated Selected Financial Data
The following selected consolidated financial data should be read together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K and the information in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our fiscal year ends on December 31. The following selected financial data has been derived from our audited consolidated financial statements. Historical results are not necessarily indicative of future results.
Year Ended December 31,
Consolidated Statements of Operations Data:
(in thousands)
Revenues
$
241,762
$
267,028
$
278,459
Cost of revenues
126,267
135,799
139,049
Gross profit
115,495
131,229
139,410
Operating expenses
Research and development
38,917
47,692
43,188
Sales and marketing
42,658
46,253
36,784
General and administrative
18,804
30,125
28,851
Depreciation and amortization
8,765
5,858
6,639
Total operating expenses
109,144
129,928
115,462
Operating income
6,351
1,301
23,948
Interest expense, net
8,113
8,076
5,326
Other expense, net
(Loss) income before income taxes
(2,312
)
(7,321
)
18,131
(Benefit) provision for income taxes
(799
)
10,280
(444
)
Net (loss) income
$
(1,513
)
$
(17,601
)
$
18,575
(Loss) earnings per share
Basic
$
(0.11
)
$
(0.89
)
$
0.72
Diluted
$
(0.11
)
$
(0.89
)
$
0.70
Weighted-average number of shares outstanding to
compute net (loss) earnings per share
Basic
13,600,411
19,741,764
25,707,092
Diluted
13,600,411
19,741,764
26,403,112
As of December 31,
Consolidated Balance Sheet Data:
(in thousands)
Cash
$
19,346
$
62,472
Working capital (1)
61,449
57,524
Total assets
172,479
205,753
Total debt (2)
63,612
54,158
Total shareholders' equity
39,929
63,387
(1)
Working capital is defined as total current assets minus total current liabilities.
(2)
Total debt is shown net of deferred financing fees of $1.6 million and $1.1 million for 2019 and 2020, respectively.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto of Cambium Networks Corporation (“Cambium”, “we”, “our”, or “us”) 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 materiality 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 those discussed under Part I, Item 1A. “Risk Factors.” Our historical results are not necessarily indicative of the results that may be expected for any period in the future.
Overview
We provide fixed wireless broadband and Wi-Fi networking infrastructure solutions for network operators, including medium-sized wireless internet service providers, enterprises, mobile network operators and government agencies, communities and cities worldwide. Our scalable, reliable and high-performance solutions enable the creation of a purpose-built wireless fabric that connects people, places and things with a unified wireless fabric that spans multiple standards and frequencies of fixed wireless and Wi-Fi, all managed centrally via the cloud, deployed indoors and outdoors. Our multi-gigabit wireless fabric offers a compelling value proposition to traditional fiber and alternative wireless solutions mobile infrastructure.
Our wireless fabric includes intelligent radios, smart antennas, radio frequency, or RF, algorithms, wireless-aware switches and our on-premises or cloud-based network management software. Our embedded proprietary RF technology and software enables automated optimization of data flow at the outermost points in the network, which we refer to as the “intelligent edge.” This intelligent edge offers network operators increased performance, visibility, control and management, as well as the ability to efficiently transfer large amounts of data back to enterprise data centers for fast and efficient analysis and decision-making even in conditions characterized by a high degree of interfering signals generated both within the network or from outside sources, which we refer to as noise. Our products support licensed and unlicensed spectrum, tailored for many frequency bands. We provide deep technical and operational expertise based on years of deploying networks, resulting in ease of use of our products, and all Cambium Networks solutions are backed by our global organization that provides 24/7 support services tailored to meet the business needs of our end users.
We were formed in 2011 when Cambium Networks acquired the Point-to-Point, or PTP, and Point-to-Multi-Point, or PMP, businesses from Motorola Solutions. Prior to the acquisition, Motorola Solutions had invested over a decade in developing the technology and intellectual property assets that formed the foundation for our business, having launched the Canopy PMP business in 1999 and having acquired the Orthogon Systems PTP business in 2006. Following the acquisition, we renamed the business Cambium Networks and we leveraged the technology to continue to develop and offer an extensive portfolio of reliable, scalable and secure enterprise-grade fixed wireless broadband and PTP and PMP platforms, Wi-Fi, switch and IIoT solutions.
We offer our fixed wireless broadband and Wi-Fi solutions in three categories:
•
PTP: We offer PTP solutions that are designed to operate in unlicensed spectrum from 900 MHz to 5.9 GHz and in licensed spectrum from 6-38 and 71-86 GHz. In addition, our PTP 700 operates in NATO Band IV from 4.4-5.9 GHz, as well as in the 7 GHz and 8 GHz bands, and meets stringent federal operating, performance and security standards. The mainstay of our backhaul offering is the PTP 670 for commercial applications and PTP 700 for defense and national security applications. In addition, our PTP 820 series offers carrier-grade microwave backhaul in licensed spectrum, and our PTP 550 offers price-performance leadership in spectral efficiency in sub-6GHz unlicensed spectrum.
•
PMP: Our PMP portfolio ranges from our top-of-the-line PMP 450 series to our ePMP solutions for network operators that need to optimize for both price and performance to our cnReach family of narrow-bandwidth connectivity products for industrial communications. The PMP 450 series is optimized for performance in high-density and demanding physical environments, and includes the PMP 450m with integrated cnMedusa massive multi-user multiple input/multiple output, or MU-MIMO, technology. The PMP 450 product line also supports the FCC’s Citizen Broadband Radio Service, or CBRS. The FCC completed the auction of CBRS Priority Access Licenses, or PAL, in the third quarter of 2020, complementing the existing availability of General Authorized Access, or GAA, licenses. Network operators are adopting the PMP 450 solution to exercise both PAL and GAA licenses. For less demanding environments, ePMP provides a high-quality platform at a more affordable price. The ePMP 3000 supports 4x4 MU-MIMO and is complemented by a broad portfolio of ePMP Force 300 subscriber radios. cnReach products enables IIoT applications, such as supervisory control and data acquisition, or SCADA, processes in the oil and gas, electric utility, water, railroad and other industrial settings. In September 2020, we announced the pending availability of the 60 GHz cnWave solution. cnWave, which began shipping in volume in the fourth quarter of 2020, enables multi Gbps networking using the 60 GHz band and includes Facebook Terragraph technology.
•
Wi-Fi: Our Wi-Fi portfolio includes our cnPilot cloud-managed Wi-Fi solutions, our cnMatrix cloud-managed wireless-aware switching solution, and our Xirrus Wi-Fi solutions. cnPilot is for indoor and outdoor enterprise, small business and home applications and offers a range of Wi-Fi access points and RF technology that enable network optimization based on desired geographic coverage and user density. cnMatrix provides the intelligent interface between wireless and wired networks. cnMatrix’s policy-based configuration accelerates network deployment, mitigates human error, increases security, and improves reliability. Xirrus has a portfolio of high performance enterprise Wi-Fi access points and cloud based subscription services. In June 2020, we introduced our first Wi-Fi 6 access point, the XV3-8, which supports both cnPilot and Xirrus solutions. Additional Wi-Fi 6 access points are under development to meet diverse user cases.
We generate a substantial majority of our sales through our global channel distribution network, including, as of December 31, 2020, approximately 170 distributors that we sell to directly, together with over 9,000 value added resellers and system integrators supplied by these distributors, for further sales to end-users. Our channel partners provide lead generation, pre-sales support and product fulfillment, along with professional services for network design, installation, commissioning and on-going field support. Although we fulfill sales almost exclusively through our channel partners, through our global sales team we engage directly with network operators in our key vertical markets including service providers, enterprises, industrials, defense and national security entities, and state and local governments. Our sales team responds to bids or requests for quotes, typically in collaboration with a channel partner. Our distributors carry inventory of our products for resale, and generally have stock rotation rights only if they simultaneously place an off-setting order for product. As such, we generally recognize revenue from sales to distributors on a sell-in basis, and manage our finished goods inventory to plan for distributor demand.
We outsource production to third-party manufacturers, who are responsible for purchasing and maintaining inventory of components and raw materials and, in certain cases, we resell third-party products on a white-label basis. We believe that this approach gives us the advantages of relatively low capital investment and significant flexibility in scheduling production, managing inventory levels and providing a comprehensive solution to meet network operator demand. The majority of our products are delivered to us at one of three distribution hubs, where we have outsourced the warehousing and delivery of our products to a third-party logistics provider and from which we manage worldwide fulfillment.
Trends and the impact of COVID-19
Although the outbreak of COVID-19 has resulted and is likely to continue to result in disruption to our business and operations as well as the operations of our customers and suppliers, the severity of the impact has lessened, and our markets are recovering as the need for additional connectivity grows. We have experienced increases in customer demand, as a result of strong demand for PMP products as the need for connectivity grows, as schools, businesses, and enterprises continue to operate remotely, and increased PTP revenues from improved federal business. In addition, we have seen a strong recovery in enterprise Wi-Fi solutions driven by improved field deployments and the transition to Wi-Fi 6 solutions. We also experienced increases in product sales in connection with our wireless broadband solutions for customers accessing the CBRS band. We have benefitted from investments we have made over the past few years in fixed wireless infrastructure technologies in such areas as PMP, including CBRS-compatible products in the U.S. and in new opportunities such as gigabit wireless solutions with our 60 GHz millimeter wave products, our new enterprise Wi-Fi 6, and cloud-enabled wireless switching products. Our forthcoming 5G 28 GHz millimeter wave products are expected in 2021, further accelerating this trend as we enter markets demanding higher broadband performance, and in the U.S. the first phase of the Rural Digital Opportunity Fund, or RDOF, launched by the Federal Communications Commission, or FCC, is expected to accelerate the provision of high-speed broadband service to millions of underserved communities in the U.S. over the next ten years.
However, we expect that continued social distancing measures, continuing shutdowns globally that impact the ability of our end user customers to deploy our products, and continued restrictions and even cessation in travel impacting our sales activities, and general business uncertainty will continue to negatively impact demand in several of our markets. In addition, although all of our major suppliers are currently operating, reductions in production due to mandated closures of or labor restrictions as our third-party manufacturers continue to battle the COVID-19 pandemic.
Our supply operations remain impacted by COVID-19. For example, at least one of our mechanical suppliers has ceased operating, causing us to move production to an alternative supplier. In addition, we are experiencing component part shortages, as the global integrated circuit supply is under pressure as demand surpasses supply capacity for certain chipsets, causing foundries to allocate existing supply among their customers. Logistics challenges have arisen as container shortages in China lengthen availability times of containers and carriage, resulting in increases in relevant freight costs, all at a time when demand across many of our product lines has increased. As a result, we are experiencing increased lead times for the supply of some of our products. We are working with our suppliers to meet our forecasted demand.
Our suppliers and third-party manufacturers could continue to be disrupted by parts and component shortages, workers absenteeism, quarantines, office and factory closures, disruptions to ports and other shipping infrastructure, or other travel or health-
related restrictions. If our supply chain operations continue to be affected or are curtailed by the outbreak of diseases such as COVID-19, our supply chain, manufacturing, and product shipments will be delayed, which could adversely affect our business, operations and customer relationships. We have and may continue to need to seek alternate sources of supply which may be more expensive, unavailable or may result in delays in shipments to us and from our supply chain and subsequently to our customers.
We have experienced and expect to continue to experience an increase in certain costs, particularly transportation and logistics expenses. Freight and logistics constraints caused in part by restrictions imposed by governments to combat the COVID-19 pandemic, have increased costs and constrained available transport, for us and our channel partners. The pandemic could lead to an extended disruption of economic activity and the impact on our consolidated results of operations, financial position and cash flows could be material.
We are focused on making sure our employees are safe and continue to operate with a substantial portion of our workforce working from home. We continue to evaluate our timing to open our offices based on the availability and deployment of vaccines among our workforce. We have extended remote working for the first half of 2021and will monitor conditions for extending this further into 2021. While we continue to significantly reduce travel, with the opening in certain countries and the easing of shutdowns in many locations, we are allowing select travel to meet customer needs. The third parties that perform our manufacturing, assembly, packaging and shipping have generally remained operational. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments, including the duration, severity and spread of the pandemic, related restrictions on travel and transportation and other actions that may be taken by governmental authorities and the impact to the business of our suppliers or customers, all of which are uncertain and cannot be predicted.
In addition, a substantial portion of our Wi-Fi products are manufactured in China, and we continue to monitor tensions between the U.S. and China and their potential impact on our ability to produce and ship our products. To date, no disruption in production or shipments have occurred since China re-opened facilities following the COVID-19 induced shutdown at the end of 2019, other than capacity constraint caused by component shortages. We have, however, continued to incur costs related to increased tariffs for China-manufactured goods, and should tensions escalate, our ability to manufacture our products in China could be affected, causing disruptions in our supply chain, and requiring us to seek other sources of supply.
With respect to liquidity, we believe our balance sheet will provide us the necessary capital to navigate the COVID-19 pandemic. In addition, during 2020, we implemented several initiatives to conserve cash and optimize profitability, including limiting discretionary spending, temporarily reducing personnel costs, eliminating non-essential travel, delaying or reducing hiring activities, deferring certain discretionary capital expenditures.
Xirrus acquisition
In August 2019, we acquired select assets and assumed select liabilities of the Xirrus Wi-Fi products and cloud services business from Riverbed Technology, Inc. Xirrus has a portfolio of high performance enterprise Wi-Fi access points and subscription services. We paid $2.0 million upon closing and the agreement provided for additional $3.0 million of contingent consideration subject to Xirrus attaining certain booking targets. As of December 31, 2019, all booking targets were met and we paid the full $3.0 million of consideration through February 2020. This acquisition is intended to enhance and accelerate our existing network service application capabilities.
We account for business combinations in accordance with ASC 805, Business Combinations. We recorded the acquisition using the acquisition method of accounting and recognized assets and liabilities at their fair value as of the date of acquisition. We based the preliminary allocation of the purchase price on estimates and assumptions known at the date of acquisition that are subject to change within the purchase price allocation period, which is generally one year from the acquisition date. Our review of the purchase price allocation was completed in the period ended June 30, 2020. We determined the estimated fair value of identifiable intangible assets acquired primarily using an income approach.
Basis of presentation
Revenues
Our revenues are generated primarily from the sale of our products, which consist of hardware with essential embedded software. Our revenues also include limited amounts for software products, extended warranty on hardware products and subscription services. We generally recognize product revenues at the time of shipment, provided that all other revenue recognition criteria have been met. Revenues are recognized net of estimated stock returns, volume-based rebates and cooperative marketing allowances that we provide to distributors. We recognize subscription services revenue ratably over the term in which the services are provided and our performance obligation is satisfied. We provide a standard warranty on our hardware products, with the term depending on the product, and record a liability for the estimated future costs associated with potential warranty claims. In addition, we also offer extended warranties for purchase and represents a future performance obligation for us. The extended warranty is included in deferred
revenues and is recognized on a straight-line basis over the term of the extended warranty. We provide our cnMaestro, LINKPlanner and cnArcher applications as supplemental tools to help network operators design, install, and manage their networks, and as a means of driving sales of our hardware products.
Cost of revenues and gross profit
Our cost of revenues is comprised primarily of the costs of procuring finished goods from our third-party manufacturers, third-party logistics and warehousing provider costs, freight costs and warranty costs. We outsource our manufacturing to third-party manufacturers located primarily in Mexico, China, Israel and Taiwan. Cost of revenues also includes costs associated with supply operations, including personnel related costs, provision for excess and obsolete inventory, third-party license costs and third-party costs related to services we provide. From and after our initial public offering in June 2019, cost of revenues also includes share-based compensation expense.
Gross profit has been and will continue to be affected by various factors, including changes in product mix. The margin profile of products within each of our core product categories can vary significantly depending on the operating performance, features and manufacturer of the product. Generally, our gross margins on backhaul and fixed wireless access point products are greater than those on our customer premise equipment (“CPE”) products. Because the ratio of CPE to PTP and PMP access points typically increases as network operators build out the density of their networks, increases in follow-on sales to network operators as a percentage of our total sales typically have a downward effect on our overall gross margins. Finally, gross margin will also vary as a function of changes in pricing due to competitive pressure, our third-party manufacturing and other production costs, cost of shipping and logistics, provision for excess and obsolete inventory and other factors. We expect our gross margins will fluctuate from period to period depending on the interplay of these various factors.
Operating expenses
We classify our operating expense as research and development, sales and marketing, and general and administrative expense. Personnel costs are the primary component of each of these operating expense categories, which consist of cash-based personnel costs, such as salaries, sales commissions, benefits and bonuses. Immediately prior to the completion of our initial public offering (“IPO”), we effected a recapitalization, which among other things, exchanged the vested share-based compensation awards held by our employees for our shares and unvested share-based compensation awards for restricted share awards or restricted share units issued by us, in each case on a value-for-value basis (the “Recapitalization”) and resulted in one-time share-based compensation expenses recognized in June 2019. From and after the Recapitalization and IPO in June 2019, our operating expenses include share-based compensation expense as well as other costs associated with being a public company. In addition, we separate depreciation and amortization in their own category.
Research and development
In addition to personnel-related costs, research and development expense consists of costs associated with design and development of our products, product certification, travel and recruiting. We generally recognize research and development expense as incurred. For certain of our software projects under development, we capitalize the development cost during the period between determining technological feasibility of the product and commercial release. We amortize the capitalized development cost upon commercial release, generally over three years. We typically do not capitalize costs related to the development of first-generation product offerings as technological feasibility generally coincides with general availability of the software. Although research and development expenses decreased in 2020 related to lower contractor spend and travel as a result of restrictions due to the COVID-19 pandemic, as these restrictions are lifted, we expect research and development expense to increase as we continue to invest in our future products and services.
Sales and marketing
In addition to personnel costs for sales, marketing, service and product line management personnel, sales and marketing expense consists of our training programs, trade shows, marketing programs, promotional materials, demonstration equipment, national and local regulatory approval on our products, travel and entertainment, and recruiting. In 2020, we experienced a decrease in payroll related costs driven by a reduction in headcount as part of the restructuring announced in November 2019 and February 2020. In addition, in 2020 we experienced a reduction in travel and entertainment and marketing related spending as a result of restrictions due to the COVID-19 pandemic. We expect sales and marketing expense to begin to increase as these restrictions are lifted and we increase the size of our sales, marketing, service, and product line management organization to support our growth, and, in particular, as we continue to expand our global distribution network.
General and administrative
In addition to personnel costs, general and administrative expense consists of professional fees, such as legal, audit, accounting, information technology and consulting costs, insurance, facilities and other supporting overhead costs. We expect general and administrative expense to increase in absolute dollars as we continue to incur additional costs associated with being a public company, partially offset by the absence of financing and management fees previously paid to Vector Capital, which ended in the second quarter of 2019.
Depreciation and amortization
Depreciation and amortization expense consist of depreciation related to fixed assets such as computer equipment, furniture and fixtures, and testing equipment, as well as amortization related to acquired and internal use software and definite lived intangibles.
Provision for income taxes
Our provision for income taxes consists primarily of income taxes in the jurisdictions in which we conduct business. As we have expanded our international operations, we have incurred additional foreign tax expense, and we expect this to continue. Management assesses our deferred tax assets in each reporting period, and if it is determined that it is not more likely than not to be realized, we will record a valuation allowance in that period.
Results of operations
The following table presents the consolidated statements of operations, as well as the percentage relationship to total revenues for items included in our consolidated statements of operations for the year ended December 31, 2019 compared to the year ended December 31, 2020:
(in thousands)
Statements of Operations Data:
Revenues
$
267,028
$
278,459
Cost of revenues
135,799
139,049
Gross profit
131,229
139,410
Operating expenses
Research and development
47,692
43,188
Sales and marketing
46,253
36,784
General and administrative
30,125
28,851
Depreciation and amortization
5,858
6,639
Total operating expenses
129,928
115,462
Operating income
1,301
23,948
Interest expense, net
8,076
5,326
Other expense, net
(Loss) income before income taxes
(7,321
)
18,131
Provision (benefit) for income taxes
10,280
(444
)
Net (loss) income
$
(17,601
)
$
18,575
Percentage of Revenues:
Revenues
100.0
%
100.0
%
Cost of revenues
50.9
%
49.9
%
Gross margin
49.1
%
50.1
%
Operating expenses
Research and development
17.9
%
15.5
%
Sales and marketing
17.3
%
13.2
%
General and administrative
11.3
%
10.4
%
Depreciation and amortization
2.2
%
2.4
%
Total operating expenses
48.7
%
41.5
%
Operating income
0.4
%
8.6
%
Interest expense, net
3.0
%
1.9
%
Other expense, net
0.2
%
0.2
%
(Loss) income before income taxes
(2.8
)%
6.5
%
Provision (benefit) for income taxes
3.8
%
(0.2
)%
Net (loss) income
(6.6
)%
6.7
%
The following is a discussion and analysis of our results of operations for the year ended December 31, 2019 compared to the year ended December 31, 2020. As permitted by the SEC under the FAST Act Modernization and Simplification of Regulation S-K, we have elected to omit the discussion of the earliest period (2018) presented as it was included in our MD&A in our 2019 Form 10-K filed on March 24, 2020, incorporated by reference from Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” thereto.
Comparison of the year ended December 31, 2019 to the year ended December 31, 2020
Revenues
Change
(dollars in thousands)
$
%
Revenues
$
267,028
$
278,459
$
11,431
4.3
%
Revenues increased $11.4 million, or 4.3%, from $267.0 million in 2019 to $278.5 in 2020, which was attributable to increased demand for our point-to-multi-point products due to increased network traffic and demand for CBRS technology, and our Wi-Fi products, which benefitted from new Wi-Fi 6 products and a full year of Xirrus revenue, partially offset by decreased sales of our Point-to-Point products due to decrease demand in the defense sector. Complementing this overall trend, revenue growth in 2020 also benefitted from continued expansion of our channel, with total registered channel partners of more than 9,000 as of December 31, 2020.
Revenues by product category
Change
(dollars in thousands)
$
%
Point-to-Multi-Point
$
156,157
$
172,601
$
16,444
10.5
%
Point-to-Point
71,618
60,435
(11,183
)
(15.6
)%
Wi-Fi
35,678
39,990
4,312
12.1
%
Other
3,575
5,433
1,858
52.0
%
Total revenues by product category
$
267,028
$
278,459
$
11,431
4.3
%
Point-to-Multi-Point
Our PMP product line comprised 58% of total revenues for 2019 and 62% of total revenues for 2020. PMP revenue growth was attributable to continued growth in core PMP products from increased network traffic and demand for our CBRS solutions, as well as the benefit from new product introductions.
Point-to-Point
PTP revenue decreased due to softer demand in the defense sector.
Wi-Fi
Wi-Fi revenue increased primarily as a result of recent new product introductions, including Wi-Fi 6 and cnMatrix, as well as a full year of sales of Xirrus products and services which was acquired in August 2019.
Revenues by geography
Change
(dollars in thousands)
$
%
North America
$
122,565
$
147,328
$
24,763
20.2
%
Europe, Middle East, Africa
85,930
80,927
(5,003
)
(5.8
)%
Caribbean and Latin America
31,767
29,418
(2,349
)
(7.4
)%
Asia Pacific
26,766
20,786
(5,980
)
(22.3
)%
Total revenues by geography
$
267,028
$
278,459
$
11,431
4.3
%
Revenues increased in 2020 compared to 2019 reflecting higher revenue in North America partially offset by decreases in all other regions. North America contributed 53% of total revenues in 2020 compared with 46% in 2019 due to increased revenues of 20.2% in 2020. The increased revenues in North America was driven by higher revenues for PMP, Wi-Fi and Other products, driven mostly by higher PMP revenues due to increased demand for CBRS and robust network traffic, partially offset by decreased PTP revenues due to the softer demand in the defense industry. Europe, Middle East, Africa revenues decreased mostly due to a technology transition resulting in lower PMP sales to a large customer in Italy partially offset by increases in revenues of Wi-Fi products. Caribbean and Latin America revenues decreased due to lower PMP revenues as a result of adverse economic conditions and currency exchange rates and the impact from business shutdowns and other restrictions due to the COVID-19 pandemic. The decrease in Asia Pacific revenues was driven by lower revenue across all product categories due to softened demand along with the impact of business shutdowns and other restrictions due to the COVID-19 pandemic.
Cost of revenues and gross margin
Change
(dollars in thousands)
$
%
Cost of revenues
$
135,799
$
139,049
$
3,250
2.4
%
Gross margin
49.1
%
50.1
%
100 bps
Cost of revenues increased $3.2 million, or 2.4%, from $135.8 million for 2019 to $139.0 million for 2020. The increase in cost of revenues was primarily due to increased product and freight costs as a result of increased revenues.
Gross margin increased from 49.1% in 2019 to 50.1% in 2020. The increase was driven by higher volumes, improved mix of higher margin products, and the initiatives we put in place focused on cost reductions and supply chain efficiencies, partially offset by higher shipping costs.
Operating expenses
Change
(dollars in thousands)
$
%
Research and development
$
47,692
$
43,188
$
(4,504
)
(9.4
)%
Sales and marketing
46,253
36,784
(9,469
)
(20.5
)%
General and administrative
30,125
28,851
(1,274
)
(4.2
)%
Depreciation and amortization
5,858
6,639
13.3
%
Total operating expenses
$
129,928
$
115,462
$
(14,466
)
(11.1
)%
Research and development
Research and development expense decreased $4.5 million, or 9.4%, from $47.7 million in 2019 to $43.2 million in 2020. As a percentage of revenues, research and development expenses decreased from 17.9% in 2019 to 15.5% in 2020. Research and development expense decreased mainly due to a $3.8 million reduction in share-based compensation mostly due to one-time expense recorded in connection with our Recapitalization and IPO in June 2019. The remaining decrease is driven by lower contractor costs of $3.0 million due to fewer contractors and lower negotiated rates in 2020, higher capitalized labor costs of $1.3 million, and lower travel costs of $0.8 million due to reductions in non-essential travel as a result of restrictions on travel due to the COVID-19 pandemic. These decreases were partially offset by $4.1 million higher bonus expense due to improved financial results and higher restructuring costs of $0.5 million in 2020.
Sales and marketing
Sales and marketing expense decreased $9.5 million, or 20.5%, from $46.3 million in 2019 to $36.8 million in 2020. As a percentage of revenues, sales and marketing expense decreased from 17.3% in 2019 to 13.2% in 2019. Sales and marketing expense decreased mainly due to a $3.2 million reduction in share-based compensation mostly due to one-time expense recorded in connection with our Recapitalization and IPO in June 2019. The remainder of the decrease is driven by lower travel spend of $3.5 million due to reduction in non-essential travel as a result of restrictions on travel due to the COVID-19 pandemic, lower payroll related costs of $2.2 million driven by a reduction in headcount, lower marketing related spend of $1.9 million also as a result of restrictions due to the COVID-19 pandemic. These decreases are partially offset by higher bonus expense of $1.6 million due to improved financial results in 2020.
General and administrative
General and administrative expense decreased $1.3 million, or 4.2%, from $30.1 million in 2019 to $28.8 million in 2020. As a percentage of revenues, general and administrative expense decreased from 11.3% in 2019 to 10.4% in 2020. The decrease in general and administrative expense is mainly due to lower share-based compensation of $7.1 million, mostly reflecting one-time expense recorded in connection with our Recapitalization and IPO in June 2019. These decreases were partially offset by an increase in bonus expense of $2.5 million, increase in directors and officers insurance of $1.7 million and higher legal fees of $1.6 million. The higher bonus expense reflected improved financial results in 2020 and additional employees included in our bonus program. The higher directors and officers insurance was due to a full year of directors and officers premiums in 2020 compared with six months in 2019.
Depreciation and amortization
Depreciation and amortization expense increased $0.8 million, or 13.3%, from $5.9 million in 2019 to $6.7 million in 2020. The increase in depreciation and amortization was mostly driven by the addition of assets related to the Xirrus acquisition completed in August 2019, comprising of $0.6 million of intangible amortization related to the intangibles recognized and $0.1 million of higher depreciation related to the assets acquired, along with the addition of amortization of leasehold improvement of $0.1 million.
Interest expense, net
Change
(dollars in thousands)
$
%
Interest expense, net
$
8,076
$
5,326
$
(2,750
)
(34.1
)%
Interest expense decreased $2.8 million, or 34.1% from $8.1 million in 2019 to $5.3 million in 2020. The decrease was primarily due to lower debt balances in 2020 compared with 2019 reflecting payments on the term loan and revolver with proceeds from our IPO in June 2019 and scheduled principal payments on the term loan during 2019 and 2020. In addition, the decrease resulted from lower interest rates on the term loan beginning in January 2020.
Other expense, net
Change
(dollars in thousands)
$
%
Other expense, net
$
$
$
(55
)
(10.1
)%
Other expense remained relatively flat from 2019 to 2020, and was primarily associated with foreign currency fluctuations.
Provision (benefit) for income taxes
Change
(dollars in thousands)
$
Provision (benefit) for income taxes
$
10,280
$
(444
)
$
(10,724
)
Effective income tax rate
(140.4
)%
(2.4
)%
Our tax expense changed from a tax provision of $10.3 million in 2019 to a tax benefit of ($0.4) million for 2020. The effective tax rates for the years ended December 31, 2019 and 2020 were (140.4)% and (2.4)%, respectively. For the year ended December 31, 2020, our income tax provision (benefit) changed by $10.7 from the year ended December 31, 2019 primarily due to an establishment of a valuation allowance against our deferred tax assets recognized of $9.6 million during 2019, versus net utilization of valuation allowance in 2020 of $1.2 million. The Company’s effective tax rate for the year ended December 31, 2019 differed from the U.S. statutory rate primarily due to the recognition of a valuation allowance against our UK deferred tax assets, taxation of pre-IPO management incentive unit equity awards, tax benefits on research and development, and tax benefits on foreign derived intangible
income. The Company’s effective tax rate for the year ended December 31, 2020 differed from the U.S. statutory rate primarily due to a benefit on research and development credit, a benefit on the partial release of a valuation allowance, and partially offset by the tax expense due to the increase of the tax rate applied to UK deferred tax assets. See Note 14 - Income taxes in the Notes to the Consolidated Financial Statements for more information related to income taxes.
Liquidity and Capital Resources
As of December 31, 2020, we had a cash balance of $62.5 million. Our primary liquidity needs are: (i) to fund normal operating expenses; (ii) to meet interest and principal requirements of our outstanding indebtedness; and (iii) to fund capital expenditures. We believe these needs will be satisfied over at least the next 12 months using cash flow generated by our operations and our available borrowings under our revolving credit facility. 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 to support development efforts, the timing of new product introductions, market acceptance of our products and overall economic conditions. We expect to regularly assess market conditions and may raise additional equity or incur additional debt if and when our board of directors determines that doing so is in our best interest.
In accordance with the terms of our secured credit facility, we are required to repay a portion of our outstanding principal under our secured credit facility pursuant to the annual excess cash flow provision of the loan agreement. As a result of our cash flow as of December 31, 2020, pursuant to the terms of this excess cash flow provision, we expect to repay $19.7 million of the outstanding principal on our term loan by June 3, 2021, and the $19.7 million is included in the current portion of long-term debt included in current liabilities on our consolidated balance sheets at December 31, 2020. This payment will be funded from cash on hand along with additional cash flow generated by our operations during the first five months of 2021.
Cash Flows
The following table sets forth summarized cash flow data for the periods indicated (in thousands):
Years Ended December 31,
Cash provided by operating activities
$
3,553
$
56,901
Cash used in investing activities
$
(8,612
)
$
(5,400
)
Cash provided by (used in) financing activities
$
20,022
$
(8,368
)
Cash flows from operating activities
Net cash provided by operating activities for 2019 of $3.6 million consisted primarily of a net loss of $17.6 million, adjustments for share-based compensation expense of $17.7 million, depreciation and amortization of $7.5 million and changes in deferred tax assets of $7.4 million along with changes in operating assets and liabilities that resulted in net cash outflows of $11.8 million. The changes in operating assets and liabilities consisted primarily of a $7.6 million increase in inventories as we procured additional inventory of new products in anticipation of increased sales, reduced accounts payable of $2.1 million and reduced accrued payables to Vector Capital of $5.5 million as we paid the accrued Vector Capital management fees following the IPO in June 2019.
Net cash provided by operating activities for 2020 of $56.9 million consisted primarily of net income of $18.6 million, adjustments for depreciation and amortization of $7.8 million, share-based compensation expense of $3.4 million, and increase in provision for inventory excess and obsolescence of $1.9 million along with changes in operating assets and liabilities that resulted in net cash inflows of $25.7 million. The changes in operating assets and liabilities consisted primarily of a $11.1 million increase in accrued employee compensation related to higher bonus due to improved financial results in 2020, which amounts will be paid in 2021, higher accounts payable of $6.1 million due to timing of purchases and payments, lower inventories of $5.7 million as we implemented inventory management strategies in 2020, along with a reduction in accounts receivable of $3.2 million due to stronger cash collections.
Cash flows from investing activities
Our investing activities for both periods presented consisted of capital expenditures for property, equipment and software in support of the growth of our business. Our investing activities in 2019 also included $2.0 million of cash paid for the acquisition of select assets and assumption of select liabilities of the Xirrus Wi-Fi business and a $2.7 million contingent consideration paid in November 2019 related to the acquisition. Our investing activities in 2020 included the remaining $0.3 million contingent consideration payment for the Xirrus acquisition in February 2020.
Cash flows from financing activities
Net cash provided by financing activities of $20.0 million for 2019 was primarily due to $66.0 million in proceeds received from the issuance of shares in our IPO, net of underwriters commissions, paid down $30.7 million in principal under our term loan and revolving loan facilities, payment of $9.5 million in scheduled principal payments due under our term loan facility, and payment of $4.6 million of deferred issuance costs related to our IPO.
Net cash used in financing activities of $8.4 million for 2020 was primarily due to payment of $10.0 million in scheduled principal payments due under our term loan facility offset by $1.6 million in proceeds from the exercise of share options.
Debt
We had outstanding external debt on our term loan of $65.3 million and $55.3 million, including the current portions of $10.0 million and $29.7 million at December 31, 2019 and 2020, respectively. We had no outstanding debt balance on our revolving credit facility at December 31, 2019 and 2020. The current portion of debt at December 31, 2020 includes $19.7 million related to a required repayment in principal in accordance with the excess cash flow provision of the term loan agreement, based on our calculation of cash flow at December 31, 2020, which we expect to pay by June 3, 2021. We have classified this $19.7 million required payment as a current liability rather than long-term debt and is included in the current portion of long-term debt on our consolidated balance sheets.
On June 28, 2019, we entered into a Third Amendment to Amended and Restated Credit Agreement (the “Third Amendment”). The Third Amendment amends the Amended and Restated Credit Agreement, dated December 21, 2017, as amended by that Waiver and First Amendment to Amended and Restated Credit Agreement dated as of November 21, 2018 and as further amended by the Consent, Waiver and Second Amendment to Amended and Restated Credit Agreement dated as of April 26, 2019 (as amended, amended and restated, supplemented, restructured or otherwise modified, renewed or replaced from time to time, the “Credit Agreement”).
Pursuant to the Third Amendment, certain actions taken by us in connection with our June 2019 IPO were consented to by Silicon Valley Bank and the Lenders, including (i) the exchange of outstanding vested and unvested Class B units and phantom units in VCH L.P. for ordinary shares in us (in exchange for vested units) and restricted stock awards (for unvested Class B units) and restricted stock units (for unvested phantom units) and the adoption of the employee share incentive plan and employee share purchase plan and forms of award agreement thereunder by us; (ii) the payment of accrued and unpaid management fees owed to an affiliate of VCH, L.P.; and (iii) the entering into of the Shareholder Agreement by and between VCH, L.P. as a guarantor and loan party and terminated the guaranty granted by an affiliate of VCH, L.P. In addition, the prior two tranches under the loan were combined, with only one tranche of term loan remaining. The minimum consolidated fixed charge coverage ratio for the trailing twelve-month period ending December 31, 2019 and each trailing twelve-month quarterly period ending thereafter was amended to 1.25:1.00. All other financial covenants remained the same.
On July 1, 2019, we repaid $30.7 million to the Lenders out of the net proceeds of our IPO, comprised of $20.7 million repayment of the term loan and repayment of all outstanding amounts under the revolving credit facility, leaving an available revolving commitment of $10.0 million.
The Credit Agreement contains customary representations, warranties and affirmative and negative covenants. We are required to maintain a quarterly minimum consolidated fixed charge coverage ratio and minimum consolidated leverage ratio, and a monthly minimum adjusted quick ratio. As of December 31, 2019 and 2020, we were in compliance with all affirmative and negative covenants.
Contractual Obligations and Commercial Commitments
We lease office space and equipment under operating leases that run through 2026. Additionally, our Credit Agreement matures in December 2022.
Contractual obligations as of December 31, 2020 are as follows (in thousands):
Payments due by period
Less than
1 year
1 to 3 years
3 to 5 years
More than
5 years
Total
Operating lease obligations
$
2,598
$
2,788
$
$
$
6,451
Term credit facility (1)
29,747
25,503
-
-
55,250
Term credit facility interest (1)
2,085
1,145
-
-
3,230
Purchase obligations (2)
69,012
-
-
-
69,012
Total (3)
$
103,442
$
29,436
$
$
$
133,943
(1)
Based upon the Credit Agreement debt outstanding, principal payments and interest rate in effect on December 31, 2020, of 5.5%.
(2)
Consists primarily of inventory commitments
(3)
Comprises liabilities recorded on the balance sheet of $104.7 million and obligations not recorded on the balance sheet of $29.2 million.
Off-balance sheet arrangements
We do not engage in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as variable interest entities, structured finance, or special purpose entities, as part of our ongoing business. Accordingly, our operating results, financial condition and cash flows are not subject to off-balance sheet risks.
Recent accounting pronouncements
We have reviewed all recently issued accounting standards and have disclosed in Note 1 in this Annual Report on Form 10-K the results of our review and assessment of the impact of each of the standards on our consolidated financial statements.
Critical accounting policies and estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expense and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these judgments and estimates under different assumptions or conditions and any such differences may be material. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. For a summary of all of our accounting policies, including the accounting policies discussed below, see Note 1, Description of Business and Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements.
Recognition of revenues
Our revenues are generated primarily from the sale of hardware products, with essential embedded software. Our revenues also include limited amounts for software products, extended warranty on hardware products and subscription services. Revenue is recognized upon transfer of control of promised products to customers in an amount that reflects the consideration we expect to receive in exchange for those products. We generally recognize product revenues at the time of shipment, provided that all other revenue recognition criteria have been met. Revenues are recognized net of estimated stock returns, volume-based rebates and cooperative marketing allowances that we provide to distributors. We recognize revenues on extended warranty on a straight-line basis over the term of the extended warranty. We recognize subscription services revenue ratably over the term in which the services are provided and our performance obligation is satisfied. We determine the appropriate revenue recognition for our contracts with customers by analyzing the type, terms and conditions of each contract or arrangement. Certain of our contracts have multiple performance obligations for which we allocate the transaction price to each performance obligation based on the standalone selling price of each distinct product or service in the contract. The standalone selling price is the price at which we expect to be entitled to in exchange for transferring the promised good or service to the customer. The best evidence of standalone selling price is the observable price of a product or service when the Company sells that product or service separately in similar circumstances and to similar customers. In certain cases, the standalone sales price is not directly observable, and we estimate the transaction price allocated to each performance obligation using the expected cost plus margin approach. When, or as, a performance obligation is satisfied, we recognize as revenue
the amount of the transaction price that is allocated to that performance obligation. The transaction price recognized excludes an estimate for the consideration related to products we expect to be returned or amounts we expect to refund.
Inventory and inventory valuation
Inventories are stated at the lower of cost or net realizable value. In determining the cost of raw materials, consumables and goods purchased for resale, the weighted average purchase price is used. For finished goods, cost is computed as production cost including capitalized inbound freight costs.
The valuation of inventory requires us to estimate excess or obsolete inventory. The determination of excess or obsolete inventory is estimated based on a comparison of the quantity and cost of inventory on hand to our forecast of customer demand. The actual amount of inventory written off in future periods will likely differ from the inventory excess and obsolete provisions reflected in our consolidated balance sheets due to difference between estimated and actual future demand, which could have a material effect on our net inventory as reported in our consolidated financial statements. Any adjustments to the valuation of inventory are included in cost of revenues.
Product warranties
We provide a standard warranty on our products, with the term depending on the product, and record a liability for the estimated future costs associated with potential warranty claims at the time products are sold. Our responsibility under our standard warranty is the repair or replacement of in-warranty defective product, or to credit the purchase price of the defective product, at our discretions, without charge to the customer. Our estimate of future warranty costs is largely based on historical experience factors, including product failure rates, material usage, and service delivery cost incurred in correcting product failures. These provisions are reviewed and adjusted by management periodically to reflect actual and anticipated experience. The warranty costs are reflected in our consolidated statements of operations within cost of revenues.
Income taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in our consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement carrying amount and the tax bases of assets and liabilities using enacted income tax rates in effect for the year in which the differences are expected to be recovered or settled. The effect of a change in income tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax asset in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
We may be subject to income tax audits in all the jurisdictions in which we operate and, as a result, we must also assess exposures to any potential issues arising from current or future audits of current and prior years’ tax returns. Accordingly, we must assess such potential exposures and, where necessary, provide a reserve to cover any expected loss. We recognize the benefit of a tax position if it is more likely than not to be sustained. Recognized tax positions are measured at the largest amount more likely than not of being realized upon settlement. To the extent that we establish a reserve, our income tax expense would be increased. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize an income tax benefit during the period in which new information becomes available indicating the liability is no longer necessary. We record an additional income tax expense in the period in which new information becomes available indicating the tax liability is greater than our original estimate.
Share-based compensation
We recognize all share-based compensation expense as a cost in the consolidated financial statements. Equity classified awards are measured at the grant date fair value of the award and expense is recognized, net of estimated forfeitures, on a straight-line basis over the requisite service period for each separately vesting portion of the award and forfeiture rates are periodically updated for actual experience over the vesting term. We estimate the fair value of share options granted using the Black-Sholes option pricing model. We use the Monte-Carlo simulation model to determine the grant date fair value for share awards with a market condition.
Business Combinations
We apply the provisions of ASC 805, Business Combinations, in the accounting for our acquisitions. Assets and liabilities assumed are recognized at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the net of the acquisition date fair values of the assets acquired and the liabilities assumed. Estimates are used in valuing certain intangible assets and include, but are not limited to, future expected cash flows as well as assumptions about the period to be used and discount rates. During the measurement period, which may be up to one year from the acquisition date, any adjustments to the value of the assets acquired and liabilities assumed are recorded with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations.
JOBS Act accounting election
We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, are subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest rate risk
We had $55.3 million of debt outstanding as of December 31, 2020 under our Credit Agreement. We are exposed to interest rate risk from fluctuations in the US LIBOR rate that is a component of the interest rate used to calculate interest expense on the debt.
Interest accrues on the outstanding principal amount of the term loan on a quarterly basis and is equal to the US LIBOR rate plus a base rate of 4.75%, 4.25% or 4.00%. The base rate is affected by our financial performance as measured by the consolidated leverage ratio. The rate on the term loan was 6.85% as of December 31, 2019 and was reduced to 6.0% on January 1, 2020 due to a reduction in the LIBOR rate. The rate was further reduced to 5.5% on November 13, 2020 due to a reduction in the base rate from 4.75% to 4.25% based on improved financial performance as measured by our consolidated leverage ratio and remained at 5.5% at December 31, 2020. A hypothetical 100-basis point increase in interest rates, and assuming a constant base rate and required principal payments, would result in an additional $0.5 million in interest expense related to our external debt per year.
In July 2017, the head of the United Kingdom Financial Conduct Authority announced plans to phase out the use of LIBOR by the end of 2021. Our Credit Agreement provides that if LIBOR is not available, the rate shall be determined by the administrative agent by reference to other applicable rates, and additionally allows the Company to convert to an ABR loan or other options. At this time, no consensus exists as to what rate or rates may become the acceptable alternatives to LIBOR and we are unable to predict the effect of any such alternatives on our current interest rate.
Foreign currency exchange risk
We conduct business in all parts of the world and are thereby exposed to market risks related to fluctuations in foreign currency exchange rates. The U.S. dollar is the single largest currency in which our revenue contracts are denominated. Any decline in the value of local foreign currencies against the U.S. dollar results in our products and services being more expensive to a potential foreign customer. In those instances where our goods and services have already been sold, receivables may be more difficult to collect. Additionally, in jurisdictions where the revenue contracts are denominated in U.S. dollars and operating expenses are incurred in the local currency, any decline in the value of the U.S. dollar will have an unfavorable impact to operating margins. We have not entered into any foreign currency hedging transactions. We do not purchase or hold any derivative financial instruments for speculation or arbitrage.
We do not hold any cash in any investment accounts and all cash is deposited with financial institutions that management believes are of high credit quality. Our cash consists primarily of U.S. dollar denominated demand accounts.
Inflation risk
We do not believe that inflation has had a material effect on our business, financial condition or results of operations during the years ended December 31, 2019 and 2020.
Credit risk
We consider the credit risk of all customers and regularly monitor credit risk exposures in our trade receivables. Our standard credit terms with our customers are generally net 30 to 60 days. We had one customer representing more than 10% of trade receivables at December 31, 2019 and two customers representing more than 10% of trade receivables at December 31, 2020. In addition, we had two customers representing more than 10% of revenue for the years ended December 31, 2019 and 2020.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data.
The information required by this item is incorporated by reference to the consolidated financial statements and accompanying notes set forth on pages through of this Annual Report on Form 10-K.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Financial Officer and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended, or the Exchange Act), as of December 31, 2020, the end of the period covered by this Annual Report on Form 10-K. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its Chief Executive and Chief Financial Officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded, that as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our consolidated financial statements for external purposes in accordance with U.S. GAAP. Under the supervision of, and with the participation of our Chief Executive Officer and Chief Financial Officer, management assessed the effectiveness of internal controls over financial reporting as of December 31, 2020.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management based its assessment on criteria established in “Internal Control Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2020.
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm due to a transition period established by the rules of the SEC for “emerging growth companies”.
Changes in Internal Control
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act for the year ended December 31, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
None.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information.
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance.
Information required by Part III, Item 10, will be included in our Proxy Statement relating to our 2021 annual meeting of shareholders to be filed with the SEC within 120 days after the end of our year ended December 31, 2020, and is incorporated herein by reference.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation.
Information required by Part III, Item 11, will be included in our Proxy Statement relating to our 2021 annual meeting of shareholders to be filed with the SEC within 120 days after the end of our year ended December 31, 2020, and is incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.
Information required by Part III, Item 12, will be included in our Proxy Statement relating to our 2021 annual meeting of shareholders to be filed with the SEC within 120 days after the end of our year ended December 31, 2020, and is incorporated herein by reference.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information required by Part III, Item 13, will be included in our Proxy Statement relating to our 2021 annual meeting of shareholders to be filed with the SEC within 120 days after the end of our year ended December 31, 2020, and is incorporated herein by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services.
Information required by Part III, Item 14, will be included in our Proxy Statement relating to our 2021 annual meeting of shareholders to be filed with the SEC within 120 days after the end of our year ended December 31, 2020, and is incorporated herein by reference.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits, Financial Statement Schedules.
Documents filed as part of this annual report on Form 10-K:
(1)
Financial Statements. The following index lists consolidated financial statements and notes thereto filed as part of this annual report on Form 10-K:
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets as of December 31, 2019 and 2020
Consolidated Statements of Operations for the years ended December 31, 2018, 2019 and 2020
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2018, 2019 and 2020
Consolidated Statements of Shareholders’ (Deficit) Equity for the years ended December 31, 2018, 2019 and 2020
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2019 and 2020
Notes to Consolidated Financial Statements
(2)
Financial Statement Schedules. All schedules have been omitted because they are not applicable as the required information is included in the consolidated financial statements or notes thereto.
(3)
Exhibits. A list of exhibits filed or furnished with this report on Form 10-K (or incorporated by reference to exhibits previously files by Cambium) is provided in the accompanying Exhibit Index.