NEOPHOTONICS CORP MANAGEMENT DISCUSSION AND ANALYSIS OF THE FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q for the period ended
September 30, 2021and the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the year ended December 31, 2020included in our Annual Report on Form 10-K. References to " NeoPhotonics," "we," "our," and "us" are to NeoPhotonics Corporationunless otherwise specified or the context otherwise requires. This Quarterly Report on Form 10-Q for the period ended September 30, 2021contains "forward-looking statements" that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q for the period ended September 30, 2021that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Terminology such as "believe," "may," "might," "objective," "estimate," "continue," "anticipate," "intend," "should," "plan," "expect," "predict," "potential," or the negative of these terms or other similar expressions is intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and industry and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified in "Part II -Item 1A. Risk Factors" below, and those discussed in the sections titled "Special Note Regarding Forward-Looking Statements" and "Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SECon February 25, 2021. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Overview We develop, manufacture and sell optoelectronic products that transmit and receive high-speed digital optical signals that connect the Cloud and hyperscale data center and telecom networks. We are the world's primary supplier of ultra-pure light tunable lasers that are required for the highest speed-over-distance fiber optic communications links. We believe our annual production volumes for these products significantly exceeds all of our competitors combined at these data rates. Our external cavity tunable laser products, given their low phase noise, compact size, high output power, and low electrical power consumption are the lasers of choice at 400G and above data rates. Even more, our Nano ECL tunable laser, is the laser of choice for use in coherent 400G pluggable high speed modules, including in 400ZR pluggable coherent DCO modules. As the industry moves to ramping 400ZR deployments, we believe demand for our Nano laser is strong. (Herein, "Cloud" refers to the vast constellation of servers that are located in data centers around the world and which are accessed through the internet, along with the associated software and data bases that run on them and the communications links that interconnect them.) Fortunately, because of our high volume laser capacity, we believe we are able to fulfill demand for these products as the supply pipeline readies for increasing 400ZR deployment rates that are just beginning. This is important, as our Nano tunable laser is a core component of the 400ZR module products from a majority of 400ZR module producers to the Cloud and to hyperscalers.
Our products, including our tunable lasers, provide data rates of 400 Gigabits per second (“G”), 600G and 800G and beyond for each wavelength. We sell high performance integrated pluggable coherent optical transceiver modules that directly transmit high speed data using industry standard Internet Protocol (“IP”) encoding on Dense Wavelength Division Multiplexing (“DWDM”), dramatically simplifying data networks, thereby reducing costs and energy consumption. .
With the adoption of coherent transmission using pluggable high speed optical modules in cloud and hyperscale data centers, we believe our total addressable market is growing.
Our recently introduced 400ZR and 400ZR+ pluggable transceiver modules enable new, lower cost network architectures using IP over DWDM protocols that addresses new, rapidly expanding major market segments. Such modules can replace a chassis-based line card with the same much smaller form factor as a pluggable client side transceiver, so that interconnects between data centers can be as simple as interconnects within a data center. Over the past decade we have been first to deliver commercial mass production volumes of coherent optical components for each of the speed advances as maximum speeds per wavelength, or color, have advanced from 100G to 200G, 400G, 600G and now 800G. 24 -------------------------------------------------------------------------------- Table of Contents We believe that we are well positioned to continue world market leadership in these laser, component and module solutions based on our leadership in the ultra-pure light lasers which power them and our comprehensive technologies for Silicon Photonics and Indium Phosphide Photonic Integrated Circuits ("PICs") and optical ICs. Our high-speed optical communications products use coherent technology to encode optical signals from electronic signals for transmission and to decode them for receiving. Ultra-high speeds require coherent technology that encodes information using the phase, amplitude and polarization of an optical wavelength, packing in far more information than simple on/off encoding. We believe that we are a global leader in coherent transmission technology, based on our achieved data rates or speeds, over distance, leadership in ultra-pure color lasers and optical integration for miniaturization and low power consumption. Coherent has become the technology of choice for high speed over distance data transmission in Cloud infrastructure and data center interconnection, in addition to telecom networks. The move to 400G and above transmission speeds is a fulcrum for the industry as it marks the next major step-up in speed. 400G is becoming the basic building block for network deployments for all distances greater than 40km, all of which require coherent transmission technology. We sell to virtually all of the leading telecom network equipment companies such as Ciena, Cisco Systems, including its acquisition of Acacia Communications,
Fiberhome, Fujitsu, Huawei, Infinera, NEC, Nokia and ZTE. Our shipments to Huawei and its affiliates in 2021 were limited to a small number of products that are compliant with the new restrictions. We believe that use cases for 400ZR and 400ZR+ system-level modules will extend across data center interconnect to backhaul for 5G wireless networks and to metro networks. The lower power, higher port density and interoperability of pluggable solutions drive this forecast. These architectures are driven by hyperscale operators and we believe they will be adopted in metro telecom networks using 400ZR+ pluggable modules in areas where reach and density make it the clear economic winner with much lower total costs. Furthermore, we believe that our high performance optics combined with next generation digital signal processors ("DSPs") will enable 800ZR and 800ZR+ pluggable modules within the next few years. Our High Speed Products for data rates of 100G, 400G, 600G, 800G and above were 94% of our revenues for the three and nine months ended September 30, 2021compared to 92% for the same periods a year ago. Our sales concentration in High Speed Products has increased each year for more than 10 years. "High Speed Products" refers to transmitter and receiver products as well as switching and other component products designed for 100G and beyond optical transmission applications. Our high speed 100G and beyond products are based on our Advanced Hybrid Photonic Integration technologies, which support 100 gigabits or more per second of information transmitted over a single channel. Our 400G and above products are a subset of our High Speed Products. Revenue from products for 400G and above applications was $41.7 millionin the three months ending September 30, 2021representing 50% of total revenues and growth of 54% over the same period a year ago. Revenue from products for 400G and above applications was $102.9 millionin the nine months ending September 30, 2021representing 49% of total revenues and growth of 86% over the same period a year ago. Products capable of data rates of 400G and above have accounted for more than 10% of our revenue since 2018 and have nearly doubled from $44 millionin 2019 to $86 millionin 2020, and was $103 millionfor the nine months ended September 30, 2021. We believe that the market for 400G and above products will grow at a 5-year compound annual growth rate of approximately 70 percent through 2024. We therefore expect our 400G and above revenues will continue to grow at an accelerated rate over the immediate and longer term. The Covid-19 pandemic continues to impact our business and the business of our customers and suppliers, as well as how we execute our business. We have implemented strict measures to ensure and maintain safety, including working remotely where possible with enhanced protocols in each of our global facilities. As local health regulations allow in each of our locations, we are moving toward increased in-office work while maintaining a flexible hybrid approach. Our operations and products support essential communications networks globally. We continue to adjust comprehensive business continuity plans to ensure that we are able to deliver for our customers. We are working closely with our supply chain partners globally to ensure we have access to critical components, as we see strong demand for our products supporting increased network bandwidth, and as key semiconductor components globally have moved into shortage. Our Solutions Three critical optical components are required to make a coherent transceiver: (1) a laser with a very narrow linewidth for very pure light; (2) a coherent modulator capable of changing both the intensity and phase of the optical signal to code data onto it; and (3) a coherent receiver capable of detecting both the intensity and phase of the received optical signal to "understand" its content, plus an electronic DSP IC. We have been a leading volume supplier of these optical components since coherent systems were first deployed in volume for telecommunications networks a decade ago, in 2010. We are now the leading supplier of narrow linewidth tunable lasers and coherent receivers to the coherent market, and we have introduced new high-speed coherent modulators for 400G, 25 -------------------------------------------------------------------------------- Table of Contents 600G and above applications. We use our coherent components to design, manufacture and sell complete coherent pluggable transceivers including our 400G QSFP-DD, OSFP and CFP2-DCO modules. Our core capabilities in coherent optics open further opportunities for us in adjacent markets outside of communications. Coherent technology improves sensitivity and performance for such applications as inter-satellite communication links including for low earth orbit ("LEO") satellites, sensing for industrial applications, LIDAR for autonomous vehicle navigation, and medical imaging. Critical accounting policies and estimates We prepare our condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States. The preparation of condensed consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. There have been no material changes to our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020. Results of Operations Revenue Our business is focused on the highest speed digital optics and signal processing communications applications. In the three and nine months ended September 30, 2021, our High Speed Products for data rates of 100G and beyond comprised 94% in each period. We sell substantially all of our products to original equipment manufacturers ("OEMs") and their contract manufacturers. Revenue is recognized upon transfer of control of the product to the buyer. We price our products based on market and competitive conditions and may periodically reduce the price of our products as market and competitive conditions change or as manufacturing costs are reduced. Our first quarter revenue is typically seasonally lower than the rest of the year primarily due to the impact of annual price negotiations with customers that occur at the end of the prior year and lower capacity utilization during the holidays in China. Our sales transactions to customers are denominated primarily in U.S.dollars. Three Months Ended Nine Months Ended September 30, September 30, (in thousands, except percentages) 2021 2020 $ Change % Change 2021 2020 $ Change % Change Total revenue $ 83,742 $ 102,398 $ (18,656)(18)% $ 209,677 $ 302,970 $ (93,293)(31)% We generate most of our revenue from a limited number of customers. In the three months ended September 30, 2021, three customers each were greater than 10% of our revenue, representing 60% of total revenue, and our top five customers during this period represented 79% of total revenue. In the three months ended September 30, 2020, three customers each were greater than 10% of revenue, representing 71% of revenue, and our top five customers during this period represented 82% of total revenue. In the nine months ended September 30, 2021, four customers were each greater than 10% of revenue, representing 67% of total revenue, and the Company's top five customers represented approximately 77% of the total revenue. In the nine months ended September 30, 2020, two customers accounted for approximately 67% of the Company's total revenue, and the Company's top five customers represented approximately 82% of the Company's total revenue. Huawei was our largest customer in 2020, with $148.4 millionin revenue during the first three quarters of 2020. In the first three quarters of 2021, Huawei represented $23.3 millionof total revenue. Three Months Ended September 30, 2021Compared With Three Months Ended September 30, 2020Total revenue decreased by $18.7 million, or 18%, in the three months ended September 30, 2021compared to the same period in 2020. The majority of the decrease is the result of the additional BIS restrictions on Huawei effective in the third quarter of 2020, partially offset by an increase in our high performance products. Huawei revenue was 10% in the three months ended September 30, 2021and was 44% for the same period in 2020. Excluding Huawei, revenue in the third quarter of 2021 grew 30% and High Speed product revenue grew 39%. Our 400G and above product revenue in the third quarter of 2021 increased $14.7 millioncompared to the same period a year ago and comprised 50% of revenue, up from 26% of revenue in the third quarter of 2020.
Nine months ended
Total revenue decreased by
$93.3 million, or 31%, in the nine months ended September 30, 2021compared to the same period in 2020. The majority of the decrease is the result of the additional BIS restrictions on Huawei, partially offset by an increase in our high performance products. Huawei revenue was 11% in the nine months ended September 30, 2021and 49% 26 -------------------------------------------------------------------------------- Table of Contents during the same period in 2020. Excluding Huawei, revenue in the nine months ended September 30, 2021increased by $31.7 million, or 21%, driven by growth in our High Speed products, which increased 32% compared to the same period during 2020.
In the past three and nine months
Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 China 31 % 56 % 32 % 59 % Americas 13 % 17 % 10 % 17 % Rest of world 56 % 27 % 58 % 24 % Total revenue 100 % 100 % 100 % 100 % Geographic revenue represents the shipment location and frequently changes based on the location of contract manufacturing, rather than end customer location. Shipments to the
Americasand to the rest of the world are mainly to contract manufacturers for non- Chinabased network equipment manufacturers ("NEMs"). We believe we will continue to be an industry leader for the highest speed over distance network solutions, supplying customers with components and modules which deliver the highest bandwidth per wavelength and per fiber for long distances. Our High Speed Product market segment consistently represents 94% or more of our business. Since launching 400ZR and 400ZR+ pluggable coherent modules in the fourth quarter of 2019, we have been shipping units for qualification and our first production lines have been installed and are being readied for volume ramping and we continue to invest in production lines for additional capacity. Our QSFP-DD and OSFP 400ZR modules are now in general availability. In addition, we are shipping initial quantities of our newest 96Gbaud component suite for superb 800G DCI and 400G long-haul transmissions. We believe these high-performance products will bring revenue growth and potential expansion into other markets. While we expect a significant portion of our revenue will continue to be derived from a limited number of customers, we continue to see some customer diversification with three customers greater than 10% of our revenue in the nine months ended September 30, 2021, and expect a further increase in diversification with expansion of our high-performance products. Cost of Goods Sold and Gross Margin Our cost of goods sold consists primarily of the cost to produce wafers, modules and to manufacture and test our products. Additionally, our cost of goods sold includes stock-based compensation, write-downs of excess and obsolete inventory, royalty payments, amortization of certain purchased intangible assets, depreciation, acquisition-related fair value adjustments, restructuring charges, warranty costs, logistics and allocated facilities costs. Gross profit as a percentage of total revenue, or gross margin, has been and is expected to continue to be affected by a variety of factors including the introduction of new products, production volume, factory utilization, the mix of products sold, inventory changes, changes in the average selling prices of our products, changes in the cost and volumes of materials purchased from our suppliers, changes in labor costs, changes in overhead costs or requirements, stock-based compensation, write-downs of excess and obsolete inventories and warranty costs. In addition, we periodically negotiate pricing with certain customers which can cause our gross margins to fluctuate, particularly in the quarters in which the negotiations occurred. As a manufacturing company, our margins are sensitive to changes in volume and factory utilization. We have made significant operational improvements with solid progress on cost reductions, yield improvement and effective cost absorption through higher volume in addition to reducing depreciation costs. Because of the additional BIS restrictions on Huawei, the business volume in the nine months ended September 30, 2021was significantly lower, by 31%, as compared to the same period in 2020, impacting our factory utilization and cost absorption. Three Months Ended Nine Months Ended September 30, September 30, (in thousands, except percentages) 2021 2020 $ Change % Change 2021 2020 $ Change % Change Cost of goods sold $ 59,968 $ 77,994 $ (18,026)(23) % $ 162,689 $ 215,338 $ (52,649)(24) % Gross profit $ 23,774 $ 24,404 $ (630)(3) % $ 46,988 $ 87,632 $ (40,644)(46) % Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Gross profit as a % of revenue 28 % 24 %
27 -------------------------------------------------------------------------------- Table of Contents Three Months Ended
September 30, 2021Compared With Three Months Ended September 30, 2020Gross profit decreased by $0.6 million, to $23.8 million, in the three months ended September 30, 2021, compared to $24.4 millionin the same period in 2020. Gross margin increased to 28% in the three months ended September 30, 2021, compared to 24% in the same period a year ago. The decrease in gross profit is primarily related to the reduction in business volume with Huawei of $35.9 million, $3.7 millionof utilization and related charges, annual price adjustments offset by continuous cost reductions and approximately $1.9 millionincrease in inventory write-downs mostly due to end-of-life products reserves. Nine Months Ended September 30, 2021Compared With Nine Months Ended September 30, 2020Gross profit decreased by $40.6 million, or 46%, to $47.0 millionin the nine months ended September 30, 2021, compared to $87.6 millionin the same period in 2020. The decrease in gross profit was primarily related to the reduction in business volume with Huawei of $125.1 million, $13.0 millionof utilization and related charges, annual price adjustments offset by continuous cost reductions and $1.7 millionincrease in inventory write-downs mostly due to end-of-life products reserves. Operating Expenses Personnel costs are the most significant component of operating expenses and consist of costs such as salaries, benefits, bonuses, stock-based compensation and other variable compensation. Three Months Ended Nine Months Ended September 30, September 30,
(in thousands, except percentages) 2021 2020 $ Variation
% Change 2021 2020 $ Change % Change Research and development
$ 13,875 $ 15,276 $ (1,401)(9) % $ 42,383 $ 40,849 $ 1,5344 % Sales and marketing 3,498 3,692 (194) (5) % 10,725 11,630 (905) (8) % General and administrative 7,719 7,758 (39) (1) % 22,411 23,350 (939) (4) % Asset sale related costs 28 87 (59) (68) % 155 219 (64) (29) % Restructuring charges (12) 141 (153) (109) % 10 141 (131) (93) % Total operating expenses $ 25,108 $ 26,954 $ (1,846)(7) % $ 75,684 $ 76,189 $ (505)(1) % Research and development Research and development expense consists of personnel costs, including stock-based compensation, for our research and development personnel, and product development costs, including engineering services, development software and hardware tools, depreciation of equipment and facility costs. We record all research and development expense as incurred.
Three months ended
We focus our research and development efforts to continue pushing the performance leadership boundaries. Research and development expense of
$13.9 million, or 17% of revenue, decreased $1.4 million, or 9%, in the three months ended September 30, 2021, compared to the same period in 2020. The decrease was primarily related to our 400ZR product reaching commercial production in the third quarter of 2020 and such costs are now being charged to cost of goods sold and are no longer being charged to research and development expense.
Nine months ended
Research and development expense of
$42.4 million, or 20% of revenue, increased $1.5 million, or 4%, in the nine months ended September 30, 2021, compared to the same period in 2020. The increase was primarily due to $0.9 millionadditional investment in the development of 400ZR and $0.6 milliondepreciation. We believe that investments in research and development are important to help meet our strategic objectives. We plan to continue to invest in research and development activities, including new products that we believe will further enhance our competitive position and expand our revenue stream. As a percentage of total revenue, our research and development expense may vary as our investment and revenue levels change over time. 28
-------------------------------------------------------------------------------- Table of Contents Sales and marketing Sales and marketing expense consists primarily of personnel costs, including stock-based compensation and other variable compensation, costs related to sales and marketing programs and services and facility costs.
Three months ended
Selling and marketing expenses remained stable during the three months ended
Nine months ended
Sales and marketing expense decreased by
$0.9 million, or 8%, in the nine months ended September 30, 2021, compared to the same period in 2020 primarily from a decrease in variable compensation. We expect to continue to expand our high speed market focus and increase sales and marketing coverage of the DCI, Cloud and hyperscale data center markets, particularly the 400ZR and 400ZR+ products as well as the 64 Gbaud and 96 Gbaud component suites. As a percentage of total revenue, our sales and marketing expense may vary as our revenue changes over time. General and administrative General and administrative expense consists of personnel costs, including stock-based compensation, for our finance, human resources and information technology personnel and certain executive officers, as well as professional services costs related to accounting, tax, banking, legal and information technology services, depreciation and facility costs.
Three months ended
General and administrative expense in the three months ended
September 30, 2021, decreased by an amount of less than $0.1 millionand is primarily related to a decrease in variable compensation, compared to the same period a year ago.
Nine months ended
General and administrative expense decreased by
$0.9 millionor 4%, in the nine months ended September 30, 2021, compared to the same period in 2020. The decrease was mainly from $1.5 milliondecrease in variable compensation, offset by $0.5 millionincrease in information technology service and license costs and other related expenses. Interest and other income (expense), net Interest income consists of income earned on our cash, cash equivalents and short-term investments, as well as restricted cash. Interest expense consists of amounts incurred for interest on our bank and other borrowings. Other income (expense), net is primarily made up of government subsidies as well as foreign currency transaction gains and losses. The functional currency of our subsidiaries in Chinais the RMB and of our subsidiary in Japanis the JPY. The foreign currency transaction gains and losses of our subsidiaries in Chinaand Japanprimarily result from the mark-to-market of U.S.dollar based assets in Chinaand Japan. Three Months Ended Nine Months Ended September 30, September 30, (in thousands, except percentages) 2021 2020 $ Change % Change 2021 2020 $ Change % Change Interest income $ 94 $ 21 $ 73348 % $ 339 $ 141 $ 198140 % Interest expense (207) (263) 56 (21) % (654) (942) 288 (31) % Other income (expense), net 43 (3,317) 3,360 (101) % 306 (2,314) 2,620 (113) % Total $ (70) $ (3,559) $ 3,489(98) % $ (9) $ (3,115) $ 3,106(100) % Three Months Ended September 30, 2021Compared With Three Months Ended September 30, 2020Interest income and expense remained flat in the three months ended September 30, 2021compared to the same period a year ago. Other income (expense), net decreased by $3.4 millionin the three months ended September 30, 2021, as compared to the same period in 2020, due to U.S.dollar appreciation against both the Chinese Renminbi and Japanese Yen. Nine Months Ended September 30, 2021Compared With Nine Months Ended September 30, 2020Interest expense decreased by $0.3 millionin the nine months ended September 30, 2021, as compared to the same period in 2020. The decrease in interest expense was due to a $5.0 milliondecrease in outstanding borrowings from September 30, 2021to September 30, 2020and a reduction in the interest rate on our Wells Fargo loan. Other income (expense), net, decreased $2.6 millionin the nine months ended September 30, 2021, as compared to the same period in 2020, primarily due to U.S.dollar appreciation against both the Chinese Renminbi and Japanese Yen. 29 -------------------------------------------------------------------------------- Table of Contents Income taxes We conduct our business globally and our operating income is subject to varying rates of tax in the U.S., China, Japanand other various foreign jurisdictions. Consequently, our effective tax rate is dependent upon the geographic distribution of our earnings or losses and the tax laws and regulations in each geographical region. Three Months Ended Nine Months Ended September 30, September 30, (in thousands, except percentages) 2021 2020 $ Change % Change 2021 2020 $ Change % Change Income tax (provision) benefit $ (456) $ 1,206 $ (1,662)(138) % (1,279) (1,199) $ (80)7 % Our income tax provision in the three and nine months ended September 30, 2021was primarily related to the operating profit realized in our foreign subsidiaries in Japanand China. Historically, we have experienced net losses in the U.S.and in the short term, we expect this trend to continue. Our income tax benefit in the three months ended September 30, 2020was primarily related to updating the projected pretax profit forecast on our U.S.and non- U.S.operations, which was related to the restructuring actions initiated by the Company in the third quarter of 2020. Our income tax provision for the nine months ended September 30, 2020was primarily related to the operating profit realized in our foreign subsidiaries in Japanand China. Liquidity and capital resources As of September 30, 2021, our principal source of liquidity consisted of approximately $104.7 millionof cash and cash equivalents and our short-term investments, of which approximately $45.5 millionwas held by subsidiaries outside of the United States. Cash, short-term investments and restricted cash held outside of the U.S.may be subject to taxes if repatriated and may not be immediately available for our working capital needs. Approximately $10.0 millionof our retained earnings within our total accumulated deficit as of December 31, 2020was subject to restrictions due to the fact that our subsidiaries in Chinaare required to set aside at least 10% of their respective accumulated profits each year end to fund statutory common reserves. This restricted amount is not distributable as cash dividends except in the event of liquidation. As of September 30, 2021, our total indebtedness was primarily comprised of short-term notes payable and borrowings under our credit facilities totaling $44.8 million(at gross amounts exclusive of debt discounts and issuance costs) consisting of: â¢Borrowings under our Wells Fargo credit facility of $20.2 millionâ¢Short-term note payable of $15.0 millionfrom our credit facilities in Chinaâ¢Notes payable of $9.4 millionfrom our credit facilities in JapanIn addition to our cash, we had approximately $15.9 millionof additional liquidity available to us, of which $5.0 millionis required to be maintained as unused borrowing capacity, under our $50 millioncredit facility with Wells Fargo Bank. We also have additional liquidity available to us of $8.2 millionfrom our $23.2 millioncredit facilities in China. We believe that our existing cash, cash equivalents and cash flows from our operating activities will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced products, the costs to increase our manufacturing capacity and our foreign operations and the continuing market acceptance of our products. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected. 30 -------------------------------------------------------------------------------- Table of Contents Cash flow discussion The table below sets forth selected cash flow data for the periods presented: Nine Months Ended September 30, (in thousands) 2021 2020 Net cash provided by (used in) operating activities $ (21,617) $ 49,514Net cash used in investing activities (8,132) (28,765) Net cash used in financing activities 11,277 (7,416)
Effect of exchange rates on cash, cash equivalents and restricted cash
Net increase (decrease) in cash, cash equivalents and restricted cash
Operating activities Net cash used in operating activities was
$21.6 millionin the nine months ended September 30, 2021, compared to $49.5 millionnet cash provided by operating activities in the same period in 2020. The net cash used in operating activities increased by $71.1 milliondue to the decrease in net income of $37.1 million. Cash outflow from working capital of $27.4 millionwas primarily driven by increases in accounts receivable and inventories, offset by an increase in accounts payable and a decrease in accrued and other liabilities. The increase in accounts receivable is primarily due to increased sales from our high speed products, as well as the timing of shipments due to ongoing supply chain challenges. The increase in inventory and accounts payable is due to increased procurement to support our future growth. The decrease in accrued and other liabilities is primarily related to a settlement payment of all APAT accounts as a result of the litigation settlement from the fourth quarter of 2020 and the payment of our variable compensation. Investing activities Net cash used in investing activities was $8.1 millionin the nine months ended September 30, 2021, compared to $28.8 millionused in investing activities in the same period in 2020. The decrease in cash flows used in investing activities was primarily due to a net increase in proceeds from the investment in and sale of marketable securities of $20.0 millionwhen compared to the same period in 2020. Financing activities Net cash provided by financing activities was $11.3 millionin the nine months ended September 30, 2021, compared to $7.4 millionused in financing activities in the same period in 2020. The decrease in cash flows used in financing activities was primarily due to proceeds received from a short-term note payable of $15.0 millionoffset by a decrease in net payments under our note payable and debt arrangements of $4.7 millionwhen compared to the same period in 2020. Off-balance Sheet Arrangements As of September 30, 2021, we did not have any significant off-balance sheet arrangements. Recent Accounting Pronouncements Refer to Note 1 "Basis of presentation and significant accounting policies" in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements and accounting changes.
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