What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-07-21 compared with 2020-04-30 · 186 added, 92 removed, 124 unchanged (69% of the section changed)

18 unchanged sentences

As a result of these tariffs, we incurred U.S.

tariff and tariff-related costs of $6.2 million in 2019 and $1.0 million in 2020.

tariff and tariff-related costs of $6.2 million in 2019 and $1.7 million the first six months of 2020.

In order to mitigate the impact of the tariffs enacted by the United States, we undertook a broad plan to realign our global supply chain by moving substantially all of our production outside of China in addition to other supply chain improvements in the first half of 2019.

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Cost of revenue is strongly correlated to revenue and tends to fluctuate due to all of the above factors that may cause revenue fluctuations.

Factors that impacted our cost of revenue for the three months ended March 28, 2020 , and that we expect will impact cost of revenue in future periods, also include:

changes in the mix of products delivered, customer location and regional mix, changes in product warranty and incurrence of retrofit costs, changes in the cost of our inventory, including higher costs due to materials shortages including components, supply constraints or unfavorable changes in trade policies, investments to

support expansion of cloud and customer support offerings, tariffs and associated costs to mitigate the impact of tariffs, amortization of intangibles, asset write-offs, silicon support fees and inventory write-downs.

Factors that impacted our cost of revenue for the three and six months ended June 27, 2020, and that we expect will impact cost of revenue in future periods, also include:

investments to support expansion of cloud and customer support offerings, tariffs and associated costs to mitigate the impact of tariffs, amortization of intangibles, asset write-offs, silicon support fees and inventory write-downs.

In particular, recently we have seen increases in global freight charges following China’s reopening of manufacturing.

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and fluctuations in stock-based compensation expenses due to timing of equity grants or other factors affecting vesting.

Our net loss was $6.9 million for the three months ended March 28, 2020 , respectively, compared to a net loss of $9.8 million for the three months ended March 30, 2019 , respectively.

Since our inception we have incurred significant losses, and as of March 28, 2020 , we had an accumulated deficit of $709.5 million .

Our net loss was $11.2 million for the six months ended June 27, 2020 and $17.7 million for 2019.

Since our inception we have incurred significant losses, and as of June 27, 2020, we had an accumulated deficit of $713.7 million.

Further, as a result of factors contributing to the fluctuations described above among other factors, many of which are outside our control, our quarterly operating results fluctuate from period to period.

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We are subject to risks and uncertainties as a result of the COVID-19 pandemic.

The extent of the impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict, as the response to the pandemic is in its early stages and information is rapidly evolving.

We have instituted office closures, implemented shelter-in-place orders and restrictions and instituted a mandatory work from home policy for substantially all of our employees.

The spread of COVID-19 has impacted our supply chain operations through restrictions and shutdown of business activities by suppliers whom we rely on for sourcing components and materials and third-party partners whom we rely on for manufacturing, warehousing and logistics services.

While we experienced and continue to experience the effects of a supply disruption, it did not have a significant impact on our first quarter of 2020 results.

At the same time, the demand for products in the telecommunications industry, including for our products, has remained strong as subscribers seek more bandwidth and better WiFi, exacerbating the impact of the supply disruption.

As the global response to address the COVID-19 pandemic evolves, we believe societal behaviors will accelerate and increase demands on the access infrastructure, which would have a favorable impact on the business outlook for Calix.

However, in the near term, the impact to the overall economy and its effect on consumer buying decisions create significant uncertainty, which could in turn negatively impact our revenue and results of operations.

The extent of the impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict as coronavirus continues to spread around the world.

There is still no vaccine, and treatments are limited.

We have instituted office closures, travel restrictions and continue with a mandatory work-from-home policy for substantially all of our employees.

The spread of COVID-19 has impacted our supply chain operations through restrictions, reduced capacity and shutdown of business activities by suppliers whom we rely on for sourcing components and materials and third-party partners whom we rely on for manufacturing, warehousing and logistics services.

Although demand for our products has been strong in the short-term as subscribers seek more bandwidth and better WiFi, customers’ purchasing decisions over the long-term may be impacted by the pandemic and its impact on the economy, which could in turn impact our revenue and results of operations.

Furthermore, our supply chain continues to face constraints primarily due to challenges in sourcing components and materials to manufacture our products, and future outbreaks could exacerbate these constraints or cause further supply chain disruptions.

The extent to which the COVID-19 pandemic may materially impact our financial condition, liquidity or results of operations is uncertain.

In the second quarter of 2020, we made the decision to embrace a work-from-anywhere model, with many of our employees electing to work remotely on a permanent basis.

This operating mode reduces our physical facilities requirements, and consequently, we established a restructuring plan to align our business to a work-from-anywhere model and incurred facilities-related restructuring charges of $5.1 million.

Furthermore, in the second quarter of 2020 we realigned our product portfolio to reduce and consolidate certain legacy product lines as customers accelerated their interest in our all-platform offerings.

These actions resulted in a component inventory accrual of $1.8 million and severance-related charges of $1.2 million.

Critical Accounting Policies and Estimates

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Our critical accounting policies and estimates, which are revenue recognition and inventory valuation, are described under “Critical Accounting Policies and Estimates” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2019.

For the three months ended March 28, 2020 , there have been no significant changes in our critical accounting policies and estimates.

For the six months ended June 27, 2020, there have been no significant changes in our critical accounting policies and estimates.

Recent Accounting Pronouncements

There have been no additional accounting pronouncements or changes in accounting pronouncements during the three months ended March 28, 2020 , as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the year ended December 31, 2019 , that are significant or potentially significant to us.

There have been no additional accounting pronouncements or changes in accounting pronouncements during the six months ended June 27, 2020, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the year ended December 31, 2019, that are significant or potentially significant to us.

Results of Operations

Comparison of the Three Months Ended March 28, 2020 and March 30, 2019

Comparison of the Three and Six Months Ended June 27, 2020 and June 29, 2019

Our revenue is comprised of the following:

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The following table sets forth our revenue (dollars in thousands):

Three Months Ended

Three Months Ended Six Months Ended

2020 June 29,

2019 Variance

Dollars Variance

Percent June 27,

2020 June 29,

2019 Variance

Dollars Variance

Systems $ 110,841 $ 92,833 $ 18,008 19 % $ 205,350 $ 175,193 $ 30,157 17 %

Services 8,182 7,471 711 10 % 15,355 14,461 894 6 %

$ 119,023 $ 100,304 $ 18,719 19 % $ 220,705 $ 189,654 $ 31,051 16 %

Percent of total revenue:

Our revenue increased by $12.3 million for the three months ended March 28, 2020 , as compared to the corresponding period in 2019 due to higher systems revenue of $12.1 million and higher services revenue of $0.2 million .

The increase in systems revenue was primarily due to higher revenue from our small, regional customers and to a lesser extent our medium-sized incumbent local exchange carrier, or ILEC, customers.

Revenue in first quarter of 2019 was impacted by production challenges and delays associated with our global supply chain realignment efforts.

Services revenue was relatively flat compared to the same period in 2019.

For the three months ended March 28, 2020 , revenue generated in the United States was $88.1 million , or 87% of our total revenue, compared to $75.8 million , or 85% of our total revenue, for the same period in 2019 .

International revenue was $13.6 million , or 13% of our total revenue, for the three months ended March 28, 2020 , as compared to $13.6 million , or 15% of our total revenue, for the same period in 2019 .

Systems 93 % 93 % 93 % 92 %

Services 7 % 7 % 7 % 8 %

100 % 100 % 100 % 100 %

Our revenue increased by $18.7 million and $31.1 million for the three and six months ended June 27, 2020, respectively, as compared to the corresponding periods in 2019 due to higher systems revenue of $18.0 million and $30.2 million, respectively, and higher services revenue of $0.7 million and $0.9 million, respectively.

The increase in systems revenue was primarily due to higher revenue from our small, regional customers and, to a lesser extent, our large-sized customers, as service providers accelerated some deployments to respond to demand for network capacity and relieve network capacity constraints.

The increase in services revenue was due to continued ramp in our next generation service offerings was only partially offset by lower professional services related to CAF deployments.

For the three and six months ended June 27, 2020, revenue generated in the United States was $108.2 million and $196.2 million, or 91% and 89% of our total revenue, respectively, compared to $85.8 million and $161.6 million, or 86% and 85% of our total revenue, respectively, for the same period in 2019.

International revenue was $10.8 million and $24.5 million, or 9% and 11% of our total revenue, respectively, for the three and six months ended June 27, 2020, as compared to $14.5 million and $28.0 million, or 14% and 15% of our total revenue, respectively, for the same period in 2019.

Only CenturyLink, Inc.

accounted for more than 10% of the Company's total revenue, representing 15% and 14% of total revenue for the first quarter of 2020 and 2019, respectively.

accounted for more than 10% of the Company's total revenue, representing 15% for both the three and six months ended June 27, 2020, and 17% and 15% for the three and six months ended June 29, 2019, respectively.

Cost of Revenue, Gross Profit and Gross Margin

The following table sets forth our cost of revenue (dollars in thousands):

Three Months Ended

Three Months Ended Six Months Ended

2020 June 29,

2019 Variance

Dollars Variance

Percent June 27,

2020 June 29,

2019 Variance

Dollars Variance

Cost of revenue:

Our cost of revenue increase d by $5.1 million for the three months ended March 28, 2020 as compared with the corresponding period in 2019 .

The $6.1 million increase in our systems cost of revenue was consistent with the increase in revenue for the three months ended March 28, 2020 compared with the corresponding period in 2019 .

The decrease in services cost of revenue was mainly due to reduced personnel costs for the three months ended March 28, 2020 compared with the corresponding period in 2019 .

Systems $ 56,721 $ 49,561 $ 7,160 14 % $ 107,429 $ 94,162 $ 13,267 14 %

Services 5,897 6,075 (178) (3) % 11,247 12,481 (1,234) (10) %

$ 62,618 $ 55,636 $ 6,982 13 % $ 118,676 $ 106,643 $ 12,033 11 %

Our cost of revenue increased by $7.0 million and $12.0 million for the three and six months ended June 27, 2020, respectively, as compared with the corresponding periods in 2019.

The $7.2 million and $13.3 million increases in our systems cost of revenue were less than the increases in revenue compared with the corresponding periods in 2019, despite a charge of $1.8 million related to our reduction and consolidation of legacy product lines taken in the second quarter of 2020, and were partly due to favorable customer and product mix.

The decrease in services cost of revenue was mainly due to reduced personnel costs for the three and six months ended June 27, 2020 compared with the corresponding period in 2019.

The following table sets forth our gross profit and gross margin (dollars in thousands):

Three Months Ended

Three Months Ended Six Months Ended

2020 June 29,

2019 Variance

Dollars Variance

Percent June 27,

2020 June 29,

2019 Variance

Dollars Variance

Gross profit:

Systems $ 54,120 $ 43,272 $ 10,848 25 % $ 97,921 $ 81,031 $ 16,890 21 %

Services 2,285 1,396 889 64 % 4,108 1,980 2,128 107 %

$ 56,405 $ 44,668 $ 11,737 26 % $ 102,029 $ 83,011 $ 19,018 23 %

Gross margin:

Gross profit increase d to $45.6 million for the three months ended March 28, 2020 , from $38.3 million during the corresponding period in 2019 primarily due to higher systems and services gross margin.

During the three months ended March 28, 2020 , systems gross margin was negatively impacted by U.S.

tariff and tariff-related costs of $1.0 million , or 100 basis points, and intangible asset amortization of $0.7 million, or 70 basis points.

Systems 48.8 % 46.6 % 47.7 % 46.3 %

Services 27.9 % 18.7 % 26.8 % 13.7 %

Overall 47.4 % 44.5 % 46.2 % 43.8 %

Gross profit increased to $56.4 million and $102.0 million for the three and six months ended June 27, 2020, respectively, from $44.7 million and $83.0 million during the corresponding periods in 2019 primarily due to higher systems and services gross margin.

During the three and six months ended June 27, 2020, systems gross margin was negatively impacted by U.S.

tariff and tariff-related costs of $0.7 million and $1.7 million, or 65 and 80 basis points, respectively, and intangible asset amortization of $0.7 million and $1.3 million, or 60 basis points for both periods, respectively.

Excluding the impact of U.S.

tariff and tariff-related costs and intangible assets amortization, systems gross margin was 48.1% for the three months ended March 28, 2020 .

During the three months ended March 30, 2019 , systems gross margin was negatively impacted by U.S.

tariff and tariff-related costs of $2.2 million , or 260 basis points.

There was no intangible asset amortization in the three months ended March 30, 2019 .

tariff and tariff-related costs and intangible assets amortization, systems gross margin was 50.1% and 49.1% for the three and six months ended June 27, 2020, respectively.

During the three and six months ended June 29, 2019, systems gross margin was negatively impacted by U.S.

tariff and tariff-related costs of $1.9 million and $4.0 million, or 200 and 230 basis points, respectively.

There was no intangible asset amortization in the three and six months ended June 29, 2019.

Excluding the impact of U.S.

tariff and tariff-related costs, systems gross margin was 48.5% for the three months ended March 30, 2019 .

Systems gross margin excluding U.S.

tariff and tariff-related costs and intangible assets amortization declined 40 basis points for the three months ended March 28, 2020 compared the corresponding period in 2019 , mainly due to a less favorable customer and product mix, partially offset by continued growth in our all-platform offerings.

Services gross margin increased for the three months ended March 28, 2020 compared to the corresponding period in 2019 due to lower personnel costs as our service revenue mix shifts away from low gross margin deployment services to higher gross margin software maintenance and services aligned with our platform offerings.

tariff and tariff-related costs, systems gross margin was 48.6% and 48.5% for the three and six months ended June 29, 2019, respectively.

The increase in systems gross margin excluding U.S.

tariff and tariff-related costs and intangible assets amortization for the three months ended June 27, 2020 compared the corresponding period in 2019, was mainly due to continued growth in our all-platform offerings along with favorable product and customer mix.

Services gross margin increased for the three months ended June 27, 2020 compared to the corresponding period in 2019 due to lower personnel costs as our service revenue mix shifts away from low gross margin deployment services to higher gross margin software maintenance and services aligned with our platform offerings.

Operating Expenses

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The following table sets forth our research and development expenses (dollars in thousands):

Three Months Ended

Three Months Ended Six Months Ended

2020 June 29,

2019 Variance

Dollars Variance

Percent June 27,

2020 June 29,

2019 Variance

Dollars Variance

Research and development $ 20,921 $ 20,700 $ 221 1 % $ 41,592 $ 40,030 $ 1,562 4 %

Percent of total revenue 18 % 21 % 19 % 21 %

Research and development expenses for the three months ended March 28, 2020 increased by $1.3 million as compared with the corresponding period in 2019 mainly due to higher personnel expenses of $1.1 million, primarily related to incentive compensation expense in 2020 compared to no incentive compensation earned in the year ago period, and higher outside services expenses of $0.7 million.

This increase was partially offset by decreases in equipment expenses of $0.2 million.

Research and development expenses for the three months ended June 27, 2020 increased by $0.2 million as compared with the corresponding period in 2019 mainly due to higher personnel expenses of $0.7 million, primarily related to incentive compensation expense, and higher stock-based compensation of $0.2 million.

These increases were partially offset by decreases in depreciation and amortization expense of $0.3 million and lower travel expenses of $0.2 million.

Research and development expenses for the six months ended June 27, 2020 increased by $1.6 million as compared with the corresponding period in 2019 mainly due to higher personnel expenses of $1.8 million, primarily related to incentive compensation expense, higher outside services expenses of $0.8 million and higher stock-based compensation of $0.2 million.

These increases were partially offset by decreases in depreciation and amortization expense of $0.4 million, lower equipment expenses of $0.3 million and lower travel expenses of $0.3 million.

Sales and Marketing Expenses

The following table sets forth our sales and marketing expenses (dollars in thousands):

Three Months Ended

Three Months Ended Six Months Ended

2020 June 29,

2019 Variance

Dollars Variance

Percent June 27,

2020 June 29,

2019 Variance

Dollars Variance

Sales and marketing $ 21,343 $ 19,734 $ 1,609 8 % $ 41,967 $ 39,073 $ 2,894 7 %

Percent of total revenue 18 % 20 % 19 % 21 %

Sales and marketing expenses for the three months ended March 28, 2020 increased by $1.3 million as compared with the corresponding period in 2019 primarily due to higher personnel costs of $1.0 million , resulting from increased headcount and to a lesser extent incentive compensation, and higher marketing costs of $0.6 million.

This increase was partially offset by decreases in travel expenses of $0.2 million.

Sales and marketing expenses for the three months ended June 27, 2020 increased by $1.6 million as compared with the corresponding period in 2019 primarily due to higher personnel expenses of $1.7 million, mainly related to higher sales incentive compensation expense and investments in sales headcount, higher marketing expenses of $0.8 million and higher stock-based compensation of $0.2 million.

These increases were partially offset by a decrease in travel expenses of $1.4 million.

Sales and marketing expenses for the six months ended June 27, 2020 increased by $2.9 million as compared with the corresponding period in 2019 primarily due to higher personnel expenses of $2.7 million, mainly related to investments in sales headcount and higher sales incentive compensation expense, and higher marketing expenses of $1.4 million.

These increases were partially offset by a decrease in travel expenses of $1.6 million.

General and Administrative Expenses

The following table sets forth our general and administrative expenses (dollars in thousands):

Three Months Ended

Three Months Ended Six Months Ended

2020 June 29,

2019 Variance

Dollars Variance

Percent June 27,

2020 June 29,

2019 Variance

Dollars Variance

General and administrative $ 11,193 $ 9,165 $ 2,028 22 % $ 21,862 $ 17,952 $ 3,910 22 %

Percent of total revenue 9 % 9 % 10 % 9 %

General and administrative expenses for the three months ended March 28, 2020 increased by $1.9 million as compared with the corresponding period in 2019 mainly due to an increase in personnel costs of $1.2 million, primarily related to incentive compensation expense in 2020 compared to no incentive compensation earned in the year ago period, and the initial capitalized cloud-computing amortization of $0.8 million as our cloud-based ERP system went live in January of 2020.

General and administrative expenses for the three months ended June 27, 2020 increased by $2.0 million as compared with the corresponding period in 2019 mainly due to capitalized cloud-computing amortization and subscription expenses of $1.1 million as our cloud-based ERP system went live in January of 2020, an increase in our bad debt allowance of $0.9 million, and an increase in personnel expenses of $0.4 million, primarily related to incentive compensation expense.

These increases were partially offset by decreases in professional services fees of $0.4 million and facilities expenses of $0.2 million.

General and administrative expenses for the six months ended June 27, 2020 increased by $3.9 million as compared with the corresponding period in 2019 mainly due to capitalized cloud-computing amortization and subscription expenses of $2.2 million as our cloud-based ERP system went live in January of 2020, an increase in personnel expenses of $1.7 million, primarily related to the capitalization of internal resources related to our cloud-based ERP implementation that lowered personnel expenses in 2019 as well as an increase in incentive compensation expense in 2020, and an increase in our bad debt allowance of $1.0 million.

These increases were partially offset by lower facilities expenses of $0.4 million and lower professional services fees of $0.3 million.

Restructuring Charges

The following table sets forth our restructuring charges (dollars in thousands):

Three Months Ended Six Months Ended

2020 June 29,

2019 Variance

Dollars Variance

Percent June 27,

2020 June 29,

2019 Variance

Dollars Variance

Restructuring charges $ 6,286 $ — $ 6,286 100 % $ 6,286 $ — $ 6,286 100 %

Percent of total revenue 5 % — % 3 % — %

Responding to changes and trends caused by the COVID-19 pandemic, we initiated a restructuring plan in June 2020 to accelerate our all-platform future and to align with a work-from-anywhere culture.

We incurred restructuring charges of $6.3 million, consisting of facilities-related charges and severance and other termination related benefits.

See Note 5, “ Balance Sheet Details ” of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details.

Provision for Income Taxes

The following table sets forth our provision for income taxes (dollars in thousands):

Three Months Ended

Three Months Ended Six Months Ended

2020 June 29,

2019 Variance

Dollars Variance

Percent June 27,

2020 June 29,

2019 Variance

Dollars Variance

Provision for income taxes $ 148 $ 95 $ 53 56 % $ 477 $ 250 $ 227 91 %

Effective tax rate (3.6) % (1.9) % (4.5) % (1.7) %

The effective tax rate for the three months ended March 28, 2020 was determined using an estimated annual effective tax rate adjusted for discrete items, if any, that occurred during the respective periods.

The effective tax rate for the three and six months ended June 27, 2020 was determined using an estimated annual effective tax rate adjusted for discrete items, if any, that occurred during the respective periods.

Deferred tax assets are recognized if realization of such assets is more likely than not.

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We have funded our operations and investing activities primarily through cash generated from operations, borrowings on our line of credit, financing arrangements for certain lab equipment and consulting services and sales of our common stock.

As of March 28, 2020 , we had cash and cash equivalents of $46.2 million , which consisted of deposits held at banks held at major financial institutions.

As of June 27, 2020, we had cash and cash equivalents of $50.6 million, which consisted of deposits held at banks held at major financial institutions.

Operating Activities

Net cash provided by operating activities was $1.2 million for the three months ended March 28, 2020 and consisted of $6.5 million of non-cash charges and $1.7 million of cash flow increases reflected in the net change in assets and liabilities, partially offset by a net loss of $6.9 million .

Cash flow increases resulting from the net change in assets and liabilities primarily consisted of an increase in accounts payable of $9.5 million , primarily due to timing of payments to our contract manufacturers, or CMs, a decrease in inventory of $9.6 million due to lower deliveries due to the supply disruption during of the quarter, an increase in deferred revenue of $2.1 million mainly due to increased Calix Cloud subscriptions and an increase in accrued liabilities of $1.4 million due to an increase in inventory held by suppliers.

This was partially offset by an increase in accounts receivable of $20.6 million , mainly due to timing of shipments and delays in processing invoices due to the ERP migration.

Non-cash charges primarily consisted of stock-based compensation of $3.0 million and depreciation and amortization of $3.5 million .

During the three months ended March 30, 2019 , net cash used in operating activities was $0.4 million and consisted of a net loss of $9.8 million partially offset by $3.9 million of cash flow increases reflected in the net change in assets and liabilities and by $5.5 million of non-cash charges.

Cash flow increases resulting from the net change in assets and liabilities primarily consisted of a decrease in accounts receivable of $11.8 million, mainly due to lower sales, a decrease in inventory of $2.9 million, primarily due to unavailability of finished goods from our supply chain partners, and an increase in deferred revenue of $0.7 million due to increased sales of license subscriptions and related support.

This was partially offset by a decrease in accounts payable of $6.3 million, primarily due to a commensurate decline in cost of revenue, an increase in prepaid expenses and other assets of $1.9 million, mainly due to inventory sold to a CM and not yet paid, a decrease in other long-term liabilities of $1.7 million, mainly due to the amortization of operating lease liabilities, and a decrease in accrued liabilities of $1.6 million, mainly related to a decrease in accrued professional and consulting fees and a decrease in accrued business events.

Net cash provided by operating activities was $3.9 million for the six months ended June 27, 2020 and consisted of $17.0 million of non-cash charges and $1.9 million of cash flow decreases reflected in the net change in assets and liabilities, partially offset by a net loss of $11.2 million.

Cash flow decreases resulting from the net change in assets and liabilities primarily consisted of an increase in accounts receivable of $12.1 million, due to product shipment timing.

In addition, there was a decrease in deferred revenue of $0.9 million due to the invoice timing of our customer support and subscription offerings and a decrease in accounts payable of $0.7 million, primarily due to timing of payments to our suppliers.

These changes were partially offset by an increase in accrued liabilities of $7.9 million, due to an increase in accruals related to our restructuring activities and an increase our liability for components at certain suppliers.

In addition, there was a decrease in inventory of $3.5 million due to lower deliveries as a result of the supply disruption during 2020 and an increase in prepaid expenses and other assets of $1.2 million, due to an increase in our VAT receivable and employee receivables related to income tax obligations associated with our NQ ESPP.

Non-cash charges primarily consisted of depreciation and amortization of $7.0 million, stock-based compensation of $6.2 million and lease restructuring charges of $3.7 million.

During the six months ended June 29, 2019, net cash used in operating activities was $3.3 million and consisted of a net loss of $14.8 million partially offset by $1.0 million of cash flow increases reflected in the net change in assets and liabilities and by $10.4 million of non-cash charges.

Cash flow increases resulting from the net change in assets and liabilities primarily consisted of a decrease in accounts receivable of $6.8 million, mainly due to lower sales, a decrease in inventory of $4.8 million, primarily due to the transfer of raw material inventory to our new CM and higher excess and obsolete reserves, an increase in deferred revenue of $3.2 million due to increased support contracts, software maintenance and Calix Cloud subscriptions and a decrease in prepaid expenses and other assets of $1.7 million, mainly due to operating lease asset amortization.

This was partially offset by a decrease in accrued liabilities of $10.3 million, mainly related to incentive compensation payments to employees and ESPP purchases, a decrease in accounts payable of $2.7 million, primarily due to less inventory purchases, a decrease in other long-term liabilities of $2.5 million, mainly due to operating lease liability amortization.

Non-cash charges primarily consisted of stock-based compensation of $5.7 million and depreciation and amortization of $4.6 million.

Investing Activities

Net cash used in investing activities of $1.7 million for the three months ended March 28, 2020 consisted of capital expenditures primarily for purchases of test equipment, computer equipment and software.

Net cash used in investing activities of $5.0 million for the three months ended March 30, 2019 consisted of capital expenditures primarily for purchases of test equipment, computer equipment and software.

Investing Activity

For the six months ended June 27, 2020 we invested $4.5 million in capital expenditures consisting primarily of purchases of test equipment and computer equipment.

Similarly, for the six months ended June 29, 2019, we invested $9.5 million in capital expenditures consisting primarily of purchases of test equipment, computer equipment and software.

Financing Activities

Net cash provided by financing activities of $0.1 million for the three months ended March 28, 2020 mainly consisted of proceeds from the issuance of common stock from stock option exercises of $1.1 million offset by payments related to financing arrangements of $0.8 million and payments to originate the credit line of $0.2 million.

Net cash used in financing activities of $0.4 million for the three months ended March 30, 2019 mainly consisted of payments for financing arrangements of $0.7 million partially offset by proceeds from the issuance of common stock from stock option exercises of $0.3 million.

Net cash provided by financing activities of $4.5 million for the six months ended June 27, 2020 mainly consisted of proceeds from the issuance of common stock from stock option exercises of $5.6 million and from our employee stock purchase plans of $4.7 million.

These inflows were partially offset by the partial re-payment of our line of credit of $4.0 million, payments related to financing arrangements of $1.5 million and payments to originate the credit line of $0.3 million.

Net cash used in financing activities of $1.9 million for the six months ended June 29, 2019 mainly related to reduced borrowing from the line of credit of $5.0 million and payments for financing arrangements of $1.3 million, partially offset by proceeds from the issuance of common stock under our employee stock purchase plans of $4.2 million and from stock option exercises of $0.3 million.

Working Capital and Capital Expenditure Needs

Our material cash commitments include contractual obligations under our Bank of America Loan Agreement, or BofA Loan Agreement, obligations from financing arrangements, minimum revenue-share obligations, normal recurring trade payables, compensation-related and expense accruals, operating leases and non-cancelable firm purchase commitments.

Our material cash commitments include non-cancelable firm purchase commitments, contractual obligations under our loan and security agreement with Bank of America, or BofA Loan Agreement, normal recurring trade payables, compensation-related and expense accruals, operating leases, minimum revenue-share obligations and obligations from financing arrangements.

We believe that our outsourced approach to manufacturing provides us significant flexibility in both managing inventory levels and financing our inventory.

In the event that our revenue plan does not meet our expectations, we may be required to eliminate or curtail expenditures to mitigate the impact on our working capital.

In January 2020, we terminated the Silicon Valley Bank Loan Agreement and entered into a new loan and security agreement with Bank of America, N.A.

In the event that our revenue plan does not meet our expectations, we may be required to curtail or eliminate expenditures to mitigate the impact on our working capital.

In January 2020, we terminated our Silicon Valley Bank loan and security agreement and entered into a new loan and security agreement with Bank of America, N.A.

The BofA Loan Agreement provides for a revolving facility up to a principal amount of up to $35.0 million, including a $10.0 million sublimit for letters of credit.

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The BofA Loan Agreement is secured by substantially all of our assets, including our intellectual property.

Loans under the credit facility will bear interest at a rate per annum equal to LIBOR (customarily defined) plus an applicable margin between 1.50% to 2.25% and Prime Rate (customarily defined) plus an applicable margin between 0.50% to 1.25%, in each case largely based on a fixed charge coverage ratio measured at the end of each fiscal quarter.

Effective July 1, 2020, loans under the credit facility will bear interest at a rate per annum equal to either LIBOR (customarily defined) plus an applicable margin between 1.5% to 2.0% or Prime Rate (customarily defined) plus an applicable margin between 0.5% to 1.0%, in each case largely based on a fixed charge coverage ratio measured at the end of each fiscal quarter.

The availability of borrowings under the BofA Loan Agreement is subject to certain conditions and requirements, including among others, if at any time our availability is less than $5.0 million, we must maintain a minimum fixed charge coverage ratio, or FCCR, of 1.0 to 1.0.

As of March 28, 2020 , we were in compliance with these requirements, had

borrowings outstanding of $30.0 million , availability of $5.0 million and an FCCR of 7.9 to 1.0.

Our interest rate on the line of credit was 4.5% as of March 28, 2020 .

During 2018, we entered into financing arrangements to purchase lab equipment for approximately $5.1 million.

Each agreement is to be paid over 36 months with a weighted average interest rate of 6.2%.

As of March 28, 2020 , we had $2.5 million outstanding under these financing arrangements.

During 2017, 2018 and 2019, in connection with our ERP implementation, we entered into financing arrangements for consulting services of $5.4 million.

The current amounts due under this agreement are to be paid over a weighted average term of 2.4 years with a weighted average interest rate of 6.5%.

As of March 28, 2020 , there was $1.8 million outstanding under this arrangement.

I n March 2018, the Company entered into an agreement with a vendor to develop software products pursuant to which the Company will become obligated, if the vendor delivered software that meets the Company's technical requirements for commercial sale, to make minimum revenue-share payments of $15.8 million over the subsequent three years.

As of June 27, 2020, we were in compliance with these requirements, had borrowings outstanding of $26.0 million, availability of $9.0 million and an FCCR of 4.1 to 1.0.

Our interest rate on the line of credit was 4.5% as of the quarter ended June 27, 2020 and decreased to 3.75% on July 1, 2020.

In March 2018, we entered into an agreement with a vendor to develop software products pursuant to which we would become obligated, if the vendor delivered software that meets our technical requirements for commercial sale, to make minimum revenue-share payments of $15.8 million over the subsequent three years.

The payments are based on a revenue-share rate applied to revenue from developed product sales subject to a minimum and a maximum aggregate amount over the three-year sales period.

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Revenue-share payments are paid quarterly in arrears, and we began making payments in the first quarter of 2020.

During 2018, we entered into financing arrangements to purchase lab equipment for approximately $5.1 million.

Each agreement is to be paid over 36 months with a weighted average interest rate of 6.2%.

As of June 27, 2020, we had $2.1 million outstanding under these financing arrangements.

From 2017 to 2020, in connection with our ERP implementation, we entered into financing arrangements for consulting services of $5.5 million.

The current amounts due under this agreement are to be paid over a weighted average term of 2.4 years with a weighted average interest rate of 6.2%.

As of June 27, 2020, there was $1.9 million outstanding under this arrangement.

We believe, based on our current operating plan and expected operating cash flows, that our existing cash and cash equivalents, along with available borrowings under our BofA Loan Agreement, will be sufficient to meet our anticipated cash needs for at least the next twelve months.

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timing of customer payments and payment terms, particularly of larger customers;

the timing and extent of spending to support development efforts, particularly research and development related to growth initiatives such as our software and cloud platforms, and our ability to partner with third parties to outsource our research and development projects;

the timing and extent of spending to support development efforts;

our ability to manage product cost, including the cost impact of the U.S.

tariffs as well as our ability to continue to mitigate the cost impact through supply chain re-engineering, the possibility of additional tariffs that may impact our product costs and higher component costs associated with new technologies;

the impact of the COVID-19 pandemic, our ability to implement efficiencies and maintain product margin levels;

tariffs as well as the possibility of additional tariffs or costs associated with disruptions in global trade and relations that may impact our product costs and higher component costs associated with new technologies;

the global impact of the COVID-19 pandemic, particularly if restrictions are prolonged;

our ability to implement efficiencies and maintain product margin levels;

the expansion of sales and marketing activities;

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and the continued market acceptance of our products.

If we are unable to execute on our current operating plan or generate positive operating income and positive cash flows, our liquidity, results of operations and financial condition will be adversely affected and we may fail to meet the borrowing base requirements or comply with the covenants in the BofA Loan Agreement, in which case we may not be able to borrow under the BofA line of credit.

If we are unable to execute on our current operating plan or generate positive operating income and positive cash flows, our liquidity, results of operations and financial condition will be adversely affected, and we may fail to meet the borrowing base requirements or comply with the covenants in the BofA Loan Agreement, in which case we may not be able to borrow under the BofA Loan Agreement.

We may need to seek other sources of liquidity, including the sale of equity or incremental borrowings, to support our working capital needs.

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Contractual Obligations and Commitments

Our principal commitments as of March 28, 2020 consisted of our contractual obligations under the BofA Loan Agreement, financing arrangements, operating leases for office space and non-cancelable outstanding purchase obligations.

The following table summarizes our contractual obligations at March 28, 2020 (in thousands):

Our principal commitments as of June 27, 2020 consisted of our contractual obligations under the BofA Loan Agreement, financing arrangements, operating leases for office space and non-cancelable outstanding purchase obligations.

The following table summarizes our contractual obligations at June 27, 2020 (in thousands):

Payments Due by Period

Less Than 1 Year

More Than 5 Years

Total Less Than 1 Year 1-3 Years 3-5 Years More Than 5 Years

Non-cancelable purchase commitments (1)

$ 104,763 $ 104,763 $ — $ — $ —

Line of credit, including interest (2)

29,026 1,170 27,856 — —

Financing arrangements (3)

19,977 5,450 14,527 — —

Operating lease obligations (4)

Non-cancelable purchase commitments (4)

(1) Line of credit contractual obligations include projected interest payments over the term of the BofA Loan Agreement, assuming the interest rate in effect for the outstanding borrowings as of March 28, 2020 of 4.5% and payment of the borrowings on January 27, 2023, the contractual maturity date of the credit facility.

See Note 5, “Credit Agreements” of the

Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion regarding our contractual obligations relating to our line of credit.

18,802 3,720 6,971 6,774 1,337

$ 172,568 $ 115,103 $ 49,354 $ 6,774 $ 1,337

(1) Represents outstanding purchase commitments for inventory to be delivered by our third-party manufacturers.

See Note 6, “ Commitments and Contingencies ” of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion regarding our outstanding purchase commitments.

(2) Line of credit contractual obligations include projected interest payments over the term of the BofA Loan Agreement, assuming the interest rate in effect for the outstanding borrowings as of June 27, 2020 of 4.5% and payment of the borrowings on January 27, 2023, the contractual maturity date of the credit facility.

See Note 5, “Credit Agreements” of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion regarding our contractual obligations relating to our line of credit.

(3) Represents installment payments, including interest, related to financing arrangements and estimated total minimum revenue-share obligations under the program, including imputed interest, of $15.8 million associated with developed software product and related enhancements by an engineering service provider of which approximately $12.8 million has been incurred.

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See Note 6 “ Commitments and Contingencies ” of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion regarding our operating leases.

(4) Represents outstanding purchase commitments for inventory to be delivered by our third-party manufacturers.

Off-Balance Sheet Arrangements

As of March 28, 2020 and December 31, 2019 , we did not have any off-balance sheet arrangements.

As of June 27, 2020 and December 31, 2019, we did not have any off-balance sheet arrangements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis