What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-10-20 compared with 2020-07-21 · 121 added, 136 removed, 174 unchanged (60% of the section changed)

15 unchanged sentences

Our customers range from smaller, regional CSPs to some of the world’s largest CSPs.

We have enabled approximately 1,600 customers to deploy passive optical, Active Ethernet and point-to-point Ethernet fiber access networks.

We have enabled approximately 1,600 CSP customers purchasing directly and through partners to deploy passive optical, Active Ethernet and point-to-point Ethernet fiber access networks.

In the third quarter of 2020, we completed an underwritten public offering of 3,220,000 shares of our common stock, at $20.00 per share, including a full exercise by the underwriters of their option to purchase an additional 420,000 shares of common stock, for net proceeds of $60.1 million, after deducting the underwriting discount and estimated expenses payable by us.

Beginning in 2018, the United States enacted a series of tariffs on certain goods manufactured in China.

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

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

tariff and tariff-related costs of $6.2 million in 2019 and $2.3 million the first nine months of 2020.

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

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

Factors that impacted our cost of revenue for the three and 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.

Factors that impacted our cost of revenue for the three and nine months ended September 26, 2020, and that we expect will impact cost of revenue in future periods, also include:

changes in the mix of products delivered, customer location and regional mix, changes in product warranty and incurrence of retrofit costs, changes in the cost of our inventory, including higher costs due to materials shortages including components, supply constraints or unfavorable changes in trade policies, investments to support expansion of cloud and customer support offerings, tariffs and associated costs to mitigate the impact of tariffs, amortization of intangibles, asset write-offs, silicon support fees and inventory write-downs.

In particular, given the recent supply chain disruptions due to the COVID-19 pandemic, we have seen increases in our global freight charges as we have elected to ship by air in order to meet delivery commitments to our customers as well as air freight rates have increased from historical levels.

Cost of revenue also includes fixed expenses related to our internal operations, which could increase our cost of revenue as a percentage of revenue if there are declines in revenue.

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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 $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.

While our net income was $9.4 million for the nine months ended September 26, 2020, we have incurred significant losses since our inception, and as of September 26, 2020, we had an accumulated deficit of $693.2 million.

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

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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.

In March 2020, we instituted office closures, travel restrictions and a mandatory work-from-home policy for substantially all of our employees which continue today.

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

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

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

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

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

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These accounting principles require us to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented.

Management bases its estimates, assumptions and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances.

Management bases its estimates,

assumptions and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances.

To the extent there are material differences between these estimates and actual results, our financial statements may be affected.

1 unchanged sentence

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

For the nine months ended September 26, 2020, there have been no significant changes in our critical accounting policies and estimates.

Recent Accounting Pronouncements

There have been no additional accounting pronouncements or changes in accounting pronouncements during the 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.

There have been no additional accounting pronouncements or changes in accounting pronouncements during the nine months ended September 26, 2020, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the year ended December 31, 2019, that are significant or potentially significant to us.

Results of Operations

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

Comparison of the Three and Nine Months Ended September 26, 2020 and September 28, 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 Six Months Ended

2020 June 29,

Three Months Ended Nine Months Ended

September 26,

2020 September 28,

2019 Variance

Dollars Variance

Percent June 27,

2020 June 29,

Percent September 26,

2020 September 28,

2019 Variance

7 unchanged sentences

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.

Our revenue increased by $36.0 million and $67.1 million for the three and nine months ended September 26, 2020, respectively, as compared to the corresponding periods in 2019 mostly due to higher systems revenue of $36.2 million and $66.4 million, respectively.

Services revenue declined $0.2 million and increased by $0.7 million, as compared to the corresponding periods in 2019, respectively.

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

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% 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.

Services revenue was relatively flat due to continued ramp in our service offerings aligned with cloud and software products offset by lower professional services related to CAF deployments.

For the three and nine months ended September 26, 2020, revenue generated in the United States was $128.2 million and $324.4 million, or 85% and 87% of our total revenue, respectively, compared to $101.0 million and $262.6 million, or 88% and 86% of our total revenue, respectively, for the same period in 2019.

International revenue was $22.3 million and $46.8 million, or 15% and 13% of our total revenue, respectively, for the three and nine months ended September 26, 2020, as compared to $13.5 million and $41.5 million, or 12% and 14% of our total revenue, respectively, for the same period in 2019.

Lumen Technologies, Inc.

(formerly CenturyLink, Inc.), or Lumen, accounted for more than 10% of the Company's total revenue, representing 12% and 14% for the three and nine months ended September 26, 2020, respectively, and 16% and 15%

for the three and nine months ended September 28, 2019, respectively.

Verizon accounted for 10% of total revenue for the three months ended September 28, 2019.

Cost of Revenue, Gross Profit and Gross Margin

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

Three Months Ended Six Months Ended

2020 June 29,

Three Months Ended Nine Months Ended

September 26,

2020 September 28,

2019 Variance

Dollars Variance

Percent June 27,

2020 June 29,

Percent September 26,

2020 September 28,

2019 Variance

4 unchanged sentences

$ 74,533 $ 64,283 $ 10,250 16 % $ 193,209 $ 170,926 $ 22,283 13 %

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.

Our cost of revenue increased by $10.3 million and $22.3 million for the three and nine months ended September 26, 2020, respectively, as compared with the corresponding periods in 2019.

The $11.0 million and $24.3 million increases in our systems cost of revenue were less than the increases in revenue compared with the corresponding periods in 2019, and were due to continued growth in our All-Platform offerings along with favorable customer and product mix.

The increase in costs of revenue for the nine months ended September 26, 2020 as compared with the corresponding period in 2019, includes a charge of $1.8 million related to our reduction and consolidation of legacy product lines taken in the second quarter of 2020.

The decrease in services cost of revenue was mainly due to improved mix towards our higher gross margin support services versus lower gross margin deployment services for the three and nine months ended September 26, 2020 compared with the corresponding period in 2019.

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

Three Months Ended Six Months Ended

2020 June 29,

Three Months Ended Nine Months Ended

September 26,

2020 September 28,

2019 Variance

Dollars Variance

Percent June 27,

2020 June 29,

Percent September 26,

2020 September 28,

2019 Variance

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Overall 50.5 % 43.9 % 48.0 % 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.

Gross profit increased to $76.0 million and $178.0 million for the three and nine months ended September 26, 2020, respectively, from $50.2 million and $133.2 million during the corresponding periods in 2019 primarily due to higher systems and services gross margin.

During the three and nine months ended September 26, 2020, systems gross margin was negatively impacted by U.S.

tariff and tariff-related costs of $0.6 million and $2.3 million, or 45 and 65 basis points, respectively, and intangible asset amortization of $0.7 million and $2.0 million, or 45 and 60 basis points, respectively.

Excluding the impact of U.S.

tariff and tariff-related costs and intangible assets amortization, systems gross margin was 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 and intangible assets amortization, systems gross margin was 52.5% and 50.5% for the three and nine months ended September 26, 2020, respectively.

During the three and nine months ended September 28, 2019, systems gross margin was negatively impacted by U.S.

tariff and tariff-related costs of $1.1 million and $5.1 million, or 100 and 180 basis points, respectively.

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

The intangible asset amortization for the three and nine months ended September 28, 2019, which was initiated in the third quarter of 2019, was $0.4 million, or 35 and 15 basis points, respectively.

Excluding the impact of U.S.

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

tariff and tariff-related costs and intangible assets amortization, systems gross margin was 46.8% and 47.9% for the three and nine months ended September 28, 2019, respectively.

The increase in systems gross margin excluding U.S.

tariff and tariff-related costs and intangible assets amortization for the three months ended 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.

tariff and tariff-related costs and intangible assets amortization for the three months ended September 26, 2020 compared the corresponding period in 2019, was mainly due to continued growth in our all-platform offerings along with favorable product and customer mix.

Services gross margin increased for the three months ended September 26, 2020 compared to the corresponding period in 2019 due to lower personnel costs as our service revenue mix shifts away from low gross margin deployment services to higher gross margin software maintenance and services aligned with our platform offerings.

Operating Expenses

Research and Development Expenses

The following table sets forth our research and development expenses (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

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 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 Six Months Ended

2020 June 29,

Three Months Ended Nine Months Ended

September 26,

2020 September 28,

2019 Variance

Dollars Variance

Percent June 27,

2020 June 29,

Percent September 26,

2020 September 28,

2019 Variance

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Percent of total revenue 15 % 18 % 18 % 19 %

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.

Sales and marketing expenses for the three months ended September 26, 2020 increased by $3.0 million as compared with the corresponding period in 2019 primarily due to higher personnel expenses of $3.3 million, mainly related to higher sales incentive compensation expense and investments in sales headcount, higher marketing expenses of $0.8 million and higher stock-based compensation of $0.3 million.

These increases were partially offset by a decrease in travel expenses of $1.3 million.

Sales and marketing expenses for the 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.

Sales and marketing expenses for the nine months ended September 26, 2020 increased by $5.9 million as compared with the corresponding period in 2019 primarily due to higher personnel expenses of $6.0 million, mainly related to investments in sales headcount and higher sales incentive compensation expense, higher marketing expenses of $2.2 million and higher stock-based compensation of $0.3 million.

These increases were partially offset by a decrease in travel expenses of $2.9 million.

General and Administrative Expenses

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

Three Months Ended Six Months Ended

2020 June 29,

Research and Development Expenses

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

Three Months Ended Nine Months Ended

September 26,

2020 September 28,

2019 Variance

Dollars Variance

Percent June 27,

2020 June 29,

Percent September 26,

2020 September 28,

2019 Variance

Dollars Variance

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

Research and development $ 20,378 $ 20,890 $ (512) (2) % $ 61,970 $ 60,920 $ 1,050 2 %

Percent of total revenue 14 % 18 % 17 % 20 %

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,

Research and development expenses for the three months ended September 26, 2020 decreased by $0.5 million as compared with the corresponding period in 2019 mainly due to lower facilities expenses of $1.1 million, lower personnel expenses of $0.4 million, lower travel expenses of $0.2 million and decreases in depreciation and amortization expense of $0.2 million.

These decreases were partially offset by increased outside services expenses of $1.4 million.

Research and development expenses for the nine months ended September 26, 2020 increased by $1.1 million as compared with the corresponding period in 2019 mainly due to higher outside services expenses of $2.2 million, higher personnel expenses of $1.3 million, primarily related to incentive compensation expense, and higher stock-based compensation of $0.4 million.

These increases were partially offset by lower facilities expenses of $1.3 million, decreases in depreciation and amortization expense of $0.6 million, lower travel expenses of $0.5 million and lower equipment expenses of $0.4 million.

General and Administrative Expenses

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

Three Months Ended Nine Months Ended

September 26,

2020 September 28,

2019 Variance

Dollars Variance

Percent June 27,

2020 June 29,

Percent September 26,

2020 September 28,

2019 Variance

Dollars Variance

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

General and administrative $ 10,768 $ 9,566 $ 1,202 13 % $ 32,630 $ 27,518 $ 5,112 19 %

Percent of total revenue 7 % 8 % 9 % 9 %

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.

General and administrative expenses for the three months ended September 26, 2020 increased by $1.2 million as compared with the corresponding period in 2019 mainly due to increased amortization and subscription expenses of $0.9 million, primarily related to our cloud-based ERP system that went live in January of 2020, and higher facilities expenses of $0.8 million.

These increases were partially offset by decreases in professional services fees of $0.6 million.

General and administrative expenses for the nine months ended September 26, 2020 increased by $5.1 million as compared with the corresponding period in 2019 mainly due to increased amortization and subscription expenses of $3.1 million, primarily related to our cloud-based ERP system that went live in January of 2020, an increase in personnel expenses of $1.9 million, primarily related to the capitalization of internal resources related to our cloud-based ERP implementation that lowered personnel expenses in 2019 as well as an increase in incentive compensation expense in 2020, and an increase in our bad debt allowance of $1.0 million.

These increases were partially offset by lower professional services fees of $0.9 million.

Restructuring Charges

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

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

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

Three Months Ended Six Months Ended

2020 June 29,

Three Months Ended Nine Months Ended

September 26,

2020 September 28,

2019 Variance

Dollars Variance

Percent June 27,

2020 June 29,

Percent September 26,

2020 September 28,

2019 Variance

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Effective tax rate 0.7 % (22.0) % 6.3 % (5.0) %

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.

The effective tax rate for the three and nine months ended September 26, 2020 was determined using an estimated annual effective tax rate adjusted for discrete items, if any, that occurred during the respective periods.

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

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Liquidity and Capital Resources

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 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.

We have funded our operations and investing activities primarily through sales of our common stock, including an underwritten public offering in August 2020, cash generated from operations, borrowings on our line of credit and financing arrangements for certain lab equipment and consulting services.

As of September 26, 2020, we had cash, cash equivalents and marketable securities of $103.8 million, which consisted of deposits held at banks held at major financial institutions and highly liquid marketable securities such as U.S.

government securities.

Operating Activities

Net cash provided by operating activities was $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.

Net cash provided by operating activities was $20.9 million for the nine months ended September 26, 2020 and consisted of $23.9 million of non-cash charges and net income of $9.4 million.

This was partially offset by $12.3 million of cash flow decreases reflected in the net change in assets and liabilities.

Cash flow decreases resulting from the net change in assets and liabilities primarily consisted of an increase in accounts receivable of $22.6 million, due to product shipment timing.

In addition, there was 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.

In addition, there was increase in inventory of $1.5 million to support higher revenue.

These changes were partially offset by an increase in accounts payable of $5.6 million due to increased inventory purchases, an increase in accrued liabilities of $3.8 million, mainly due to an increase our liability for components at certain suppliers, and an decrease in prepaid expenses and other assets of $3.7 million, due to amortization of the right-of-use asset.

Non-cash charges primarily consisted of depreciation and amortization of $10.3 million, stock-based compensation of $9.8 million and lease restructuring charges of $3.7 million.

During the 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.

During the nine months ended September 28, 2019, net cash provided by operating activities was $4.0 million and consisted of $18.5 million of non-cash charges and $3.8 million of cash flow increases reflected in the net change in assets and liabilities, partially offset by a net loss of $18.2 million.

Cash flow increases resulting from the net change in assets and liabilities primarily consisted of a decrease in accounts receivable of $18.5 million, mainly due to increased linearity of shipments in the third quarter of 2019 resulting in higher collections in the quarter, a decrease in inventory of $3.8 million, primarily due to the transfer of raw material inventory to a new CM, an increase in deferred revenue of $2.6 million due to increased support contracts, software maintenance and Calix Cloud subscriptions and a decrease in prepaid expenses and other assets of $0.4 million, mainly due to operating lease asset amortization.

This was partially offset by a decrease in accounts payable of $16.0 million, primarily due to timing of inventory purchases, a decrease in accrued liabilities of $2.7 million, mainly related to incentive compensation payments to employees, and a decrease in other long-term liabilities of $2.8 million, mainly due to operating lease liability amortization.

Non-cash charges primarily consisted of stock-based compensation of $8.5 million, depreciation and amortization of $7.4 million and loss on asset retirements of $2.6 million.

Investing Activity

For the 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.

For the nine months ended September 26, 2020, we invested in purchasing marketable securities of $40.0 million and capital expenditures of $5.6 million, consisting primarily of purchases of test equipment and computer equipment.

For the nine months ended September 28, 2019, we invested in capital expenditures of $12.4 million, consisting primarily of purchases of test equipment, computer equipment and software.

Financing Activities

Net cash provided by financing activities of $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.

Net cash provided by financing activities of $41.5 million for the nine months ended September 26, 2020 mainly consisted of proceeds from our common stock offering of $60.1 million, proceeds from the issuance of common stock from stock option exercises of $7.7 million and from our employee stock purchase plans of $6.4 million.

These inflows were partially offset by the re-payment of our line of credit of $30.0 million, payments related to financing arrangements of $2.3 million and payments to originate the credit line of $0.3 million.

Net cash used in financing activities of $3.4 million for the nine months ended September 28, 2019 mainly related to reduced borrowing from the line of credit of $5.7 million and payments for financing arrangements of $2.0 million, partially offset by proceeds from the issuance of common stock under our employee stock purchase plans of $4.2 million and from stock option exercises of $0.3 million.

Working Capital and Capital Expenditure Needs

In the third quarter of fiscal 2020, we completed an underwritten public offering of 3,220,000 shares of our common stock, at $20.00 per share, including a full exercise by the Underwriters of their option to purchase an additional 420,000 shares of Common Stock, for net proceeds of $60.1 million, after deducting the underwriting discount and estimated expenses payable by us.

We believe this additional cash position will allow us to invest in future growth needs.

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.

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

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 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.

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

As of September 26, 2020, we were in compliance with these requirements, had no outstanding borrowings and had availability of $35.0 million.

Our interest rate on the line of credit was 3.75% as of the quarter ended September 26, 2020.

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

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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.

As of September 26, 2020, we had $1.7 million outstanding under these financing arrangements.

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

The current amounts due under this agreement are to be paid over a weighted average term of 2.4 years with a weighted average interest rate of 6.3%.

As of 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.

Our future capital requirements will depend on many factors including our rate of revenue growth;

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

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 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;

the success of revenue share programs;

the timing of introductions and timing and rate of customer adoption of new products and enhancements to existing products;

the slowdowns or declines in customer purchases of traditional systems;

acquisition of new capabilities or technologies;

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 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.

As of September 26, 2020, there was $1.6 million outstanding under this arrangement.

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

If we are unable to execute on our current operating plan or continue to generate operating income and positive cash flows, our liquidity, results of operations and financial condition will be adversely affected, and we may need to seek other sources of liquidity, including the sale of additional equity or incremental borrowings, to support our working capital needs.

In addition, we may choose to seek other sources of liquidity even if we believe we have generated sufficient cash flows to support our operational needs.

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Contractual Obligations and Commitments

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):

Our principal commitments as of September 26, 2020 consisted of financing arrangements, operating leases for office space and non-cancelable outstanding purchase obligations.

The following table summarizes our contractual obligations at September 26, 2020 (in thousands):

Payments Due by Period

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$ 119,875 $ 119,875 $ — $ — $ —

Line of credit, including interest (2)

29,026 1,170 27,856 — —

Financing arrangements (2)

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See Note 7, “ Commitments and Contingencies ” of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion regarding our outstanding purchase commitments.

(2) 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.

(2) Represents installment payments, including interest, related to financing arrangements and estimated total minimum revenue-share obligations under the program, including imputed interest, of $15.8 million associated with the completion of developed software products and related enhancements.

The schedule reflects our expected revenue-share payments based on our revenue projections for the developed products over a three-year sales period.

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Off-Balance Sheet Arrangements

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

As of September 26, 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