CALIX, INC 10-Q

ITEM 1. Financial Statements CALIX, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value) September 26, 2020 December 31, 2019 (Unaudited) (See Note 1) ASSETS Current assets: Cash and cash equivalents $ 63,826 $ 46,829 Restricted cash 628 628 Marketable securities 39,986 — Accounts receivable, net 69,131 46,509 Inventory 41,616 40,153 Prepaid expenses and other current assets 9,656 9,698 Total current assets 224,843 143,817 Property and equipment, net 20,168 21,527 Right-of-use operating leases 10,684 15,864 Goodwill 116,175 116,175 Other assets 13,463 19,440 $ 385,333 $ 316,823 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 16,557 $ 10,789 Accrued liabilities 60,506 57,546 Deferred revenue 15,591 17,158 Line of credit — 30,000 Total current liabilities 92,654 115,493 Long-term portion of deferred revenue 19,564 18,340 Operating leases 12,356 14,337 Other long-term liabilities 13,228 14,625 Total liabilities 137,802 162,795 Commitments and contingencies (See Note 7) Stockholders’ equity: Preferred stock, $ 0.025 par value; 5,000 shares authorized; no shares issued and outstanding as of September 26, 2020 and December 31, 2019 — — Common stock, $ 0.025 par value; 100,000 shares authorized; 61,770 shares issued and outstanding as of September 26, 2020, and 61,778 shares issued and 56,448 shares outstanding as of December 31, 2019 1,544 1,545 Additional paid-in capital 939,874 895,899 Accumulated other comprehensive loss ( 693 ) ( 854 ) Accumulated deficit ( 693,194 ) ( 702,576 ) Treasury stock, zero shares as of September 26, 2020 and 5,330 shares as of December 31, 2019 — ( 39,986 ) Total stockholders’ equity 247,531 154,028 $ 385,333 $ 316,823 See accompanying notes to condensed consolidated financial statements. 4 Table of Contents CALIX, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands, except per share data) (Unaudited) Three Months Ended Nine Months Ended September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019 Revenue: Systems $ 142,294 $ 106,060 $ 347,644 $ 281,253 Services 8,214 8,425 23,569 22,886 Total revenue 150,508 114,485 371,213 304,139 Cost of revenue: Systems 68,889 57,858 176,318 152,020 Services 5,644 6,425 16,891 18,906 Total cost of revenue 74,533 64,283 193,209 170,926 Gross profit 75,975 50,202 178,004 133,213 Operating expenses: Sales and marketing 23,079 20,123 65,046 59,196 Research and development 20,378 20,890 61,970 60,920 General and administrative 10,768 9,566 32,630 27,518 Restructuring charges — — 6,286 — Loss on asset retirement — 2,474 — 2,474 Total operating expenses 54,225 53,053 165,932 150,108 Income (loss) from operations 21,750 ( 2,851 ) 12,072 ( 16,895 ) Interest and other income (expense), net: Interest expense, net ( 356 ) ( 271 ) ( 1,263 ) ( 521 ) Other income (expense), net ( 707 ) 353 ( 801 ) 85 Total interest and other income (expense), net ( 1,063 ) 82 ( 2,064 ) ( 436 ) Income (loss) before provision for income taxes 20,687 ( 2,769 ) 10,008 ( 17,331 ) Provision for income taxes 149 610 626 860 Net income (loss) $ 20,538 $ ( 3,379 ) $ 9,382 $ ( 18,191 ) Net income (loss) per common share: Basic $ 0.34 $ ( 0.06 ) $ 0.16 $ ( 0.33 ) Diluted $ 0.32 $ ( 0.06 ) $ 0.16 $ ( 0.33 ) Weighted-average number of shares used to compute net income (loss) per common share: Basic 60,307 55,466 58,053 54,718 Diluted 63,449 55,466 60,331 54,718 Net income (loss) $ 20,538 $ ( 3,379 ) $ 9,382 $ ( 18,191 ) Other comprehensive income (loss), net of tax - foreign currency translation adjustments, net 410 ( 430 ) 161 ( 387 ) Comprehensive income (loss) $ 20,948 $ ( 3,809 ) $ 9,543 $ ( 18,578 ) See accompanying notes to condensed consolidated financial statements. 5 Table of Contents CALIX, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, unaudited) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Treasury Stock Total Stockholders’ Equity Shares Amount Balance at June 27, 2020 58,143 $ 1,587 $ 912,402 $ ( 1,103 ) $ ( 713,732 ) $ ( 39,986 ) $ 159,168 Stock-based compensation — — 3,574 — — — 3,574 Exercise of stock options 219 5 2,128 — — — 2,133 Issuance of vested restricted stock units 18 — — — — — — Stock issued under employee stock purchase plans 170 4 1,641 — — — 1,645 Issuance of common stock in connection with public offering 3,220 82 59,981 — — — 60,063 Treasury stock retirement — ( 134 ) ( 39,852 ) — — 39,986 — Net income — — — — 20,538 — 20,538 Other comprehensive income — — — 410 — — 410 Balance at September 26, 2020 61,770 $ 1,544 $ 939,874 $ ( 693 ) $ ( 693,194 ) $ — $ 247,531 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Treasury Stock Total Stockholders’ Equity Shares Amount Balance at June 29, 2019 55,443 $ 1,520 $ 886,076 $ ( 710 ) $ ( 699,694 ) $ ( 39,986 ) $ 147,206 Stock-based compensation — — 2,762 — — — 2,762 Issuance of vested restricted stock units, net of taxes withheld 59 1 ( 11 ) — — — ( 10 ) Stock forfeited under employee stock purchase plans prior to vesting ( 8 ) — 1 — — — 1 Net loss — — — — ( 3,379 ) — ( 3,379 ) Other comprehensive loss — — — ( 430 ) — — ( 430 ) Balance at September 28, 2019 55,494 $ 1,521 $ 888,828 $ ( 1,140 ) $ ( 703,073 ) $ ( 39,986 ) $ 146,150 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Treasury Stock Total Stockholders’ Equity Shares Amount Balance at December 31, 2019 56,448 $ 1,545 $ 895,899 $ ( 854 ) $ ( 702,576 ) $ ( 39,986 ) $ 154,028 Stock-based compensation — — 9,800 — — — 9,800 Exercise of stock options 967 24 7,717 — — — 7,741 Issuance of vested restricted stock units 299 7 ( 7 ) — — — — Stock issued under employee stock purchase plans 836 20 6,336 — — — 6,356 Issuance of common stock in connection with public offering 3,220 82 59,981 — — — 60,063 Treasury stock retirement — ( 134 ) ( 39,852 ) — — 39,986 — Net income — — — — 9,382 — 9,382 Other comprehensive income — — — 161 — — 161 Balance at September 26, 2020 61,770 $ 1,544 $ 939,874 $ ( 693 ) $ ( 693,194 ) $ — $ 247,531 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Treasury Stock Total Stockholders’ Equity Shares Amount Balance at December 31, 2018 53,955 $ 1,482 $ 876,073 $ ( 753 ) $ ( 684,882 ) $ ( 39,986 ) $ 151,934 Stock-based compensation — — 8,476 — — — 8,476 Exercise of stock options 55 2 324 — — — 326 Issuance of vested performance restricted stock units and restricted stock units, net of taxes withheld 560 14 ( 179 ) — — — ( 165 ) Stock issued under employee stock purchase plans 924 23 4,134 — — — 4,157 Net loss — — — — ( 18,191 ) — ( 18,191 ) Other comprehensive loss — — — ( 387 ) — — ( 387 ) Balance at September 28, 2019 55,494 $ 1,521 $ 888,828 $ ( 1,140 ) $ ( 703,073 ) $ ( 39,986 ) $ 146,150 See accompanying notes to condensed consolidated financial statements. 6 Table of Contents CALIX, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands, unaudited) Nine Months Ended September 26, 2020 September 28, 2019 Operating activities: Net income (loss) $ 9,382 $ ( 18,191 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Stock-based compensation 9,800 8,476 Depreciation and amortization 10,311 7,407 Asset retirements and write-downs 3,749 2,624 Changes in operating assets and liabilities: Accounts receivable, net ( 22,622 ) 18,494 Inventory ( 1,464 ) 3,795 Prepaid expenses and other assets 3,710 370 Accounts payable 5,616 ( 16,047 ) Accrued liabilities 3,834 ( 2,715 ) Deferred revenue ( 342 ) 2,597 Other long-term liabilities ( 1,038 ) ( 2,776 ) Net cash provided by operating activities 20,936 4,034 Investing activities Purchases of property and equipment ( 5,617 ) ( 12,384 ) Purchases of marketable securities ( 39,986 ) — Net cash used in investing activities ( 45,603 ) ( 12,384 ) Financing activities: Proceeds from exercise of stock options 7,741 326 Proceeds from employee stock purchase plans 6,356 4,157 Taxes paid for awards vested under equity incentive plan — ( 166 ) Payments related to financing arrangements ( 2,342 ) ( 2,002 ) Proceeds from the sale of common stock in connection with public offering, net of expense 60,063 — Proceeds from line of credit 30,000 113,300 Repayment of line of credit ( 60,000 ) ( 119,000 ) Payments to originate the line of credit ( 285 ) — Net cash provided by (used in) financing activities 41,533 ( 3,385 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash 131 ( 353 ) Net increase (decrease) in cash, cash equivalents and restricted cash 16,997 ( 12,088 ) Cash, cash equivalents and restricted cash at beginning of period 47,457 50,274 Cash, cash equivalents and restricted cash at end of period $ 64,454 $ 38,186 See accompanying notes to condensed consolidated financial statements. 7 Table of Contents CALIX, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Company and Basis of Presentation Company Calix, Inc. (together with its subsidiaries, “Calix” or the “Company”) was incorporated in August 1999 and is a Delaware corporation. The Company is a leading global provider of cloud and software platforms, systems and services required to deliver the unified access network and smart home and business services of tomorrow. The Company’s platforms and services help its customers build next generation networks by embracing a DevOps operating model, optimizing the subscriber experience by leveraging big data analytics and turn the complexity of the smart home and business into new revenue streams. The Company's cloud and software platforms, systems and services enable communication service providers (“CSPs”) to provide a wide range of revenue-generating services, from basic voice and data to advanced broadband services, over legacy and next-generation access networks. The Company focuses on CSP access networks, the portion of the network that governs available bandwidth and determines the range and quality of services that can be offered to subscribers. Basis of Presentation The accompanying unaudited condensed consolidated financial statements, including the accounts of Calix, Inc. and its wholly-owned subsidiaries, have been prepared in accordance with the requirements of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. generally accepted accounting principles (“GAAP”) can be condensed or omitted. In the opinion of management, the financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of the Company’s financial position and operating results. All intercompany balances and transactions have been eliminated in consolidation. The Condensed Consolidated Balance Sheet at December 31, 2019 has been derived from the audited financial statements at that date. The results of the Company’s operations can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year or any future periods. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The Company’s fiscal year begins on January 1st and ends on December 31st. Quarterly periods are based on a 4-4-5 calendar with the first quarter ending on the Saturday closest to March 31 st . As a result, the Company had one less day in the nine months ended September 26, 2020 than for the nine months ended September 28, 2019. The preparation of financial statements in conformity with GAAP for interim financial reporting requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Risks and Uncertainties The Company is subject to risks and uncertainties as a result of the recent COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on the Company's business is highly uncertain and difficult to predict. Since March 2020, the Company has instituted and continued to maintain office closures, travel restrictions and instituted a mandatory work-from-home policy for substantially all of its employees. The spread of COVID-19 has impacted the Company's supply chain operations through restrictions and shutdown of business activities by suppliers whom the Company relies on for sourcing components and materials and third-party partners whom the Company relies on for manufacturing, warehousing and logistics services. Although demand for the Company's products may remain strong in the short-term as subscribers seek more bandwidth and better WiFi, customers’ purchasing decisions over the longer-term may be impacted by the pandemic and its impact on the economy, which could in turn impact the Company's revenue and results of operations. Furthermore, the Company’s supply chain continues to face challenges in sourcing components and materials to manufacture its products, and future outbreaks could cause further supply chain disruptions. As of the issuance date of these condensed consolidated financial statements, the extent to which the COVID-19 pandemic may materially impact the Company's financial condition, liquidity or results of operations is uncertain. 8 Table of Contents 2. Significant Accounting Policies The Company’s significant accounting policies are disclosed in its Annual Report on Form 10-K for the year ended December 31, 2019. The Company’s significant accounting policies did not change during the nine months ended September 26, 2020. Newly Adopted Accounting Standard The Company did not adopt any new accounting standards during the nine months ended September 26, 2020 that were significant to the Company. Recent Accounting Pronouncements Not Yet Adopted 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 the Company's Annual Report on Form 10-K for the year ended December 31, 2019, that are significant or potentially significant to the Company. 3. Cash, Cash Equivalents, Restricted Cash and Marketable Securities The Company has invested its excess cash primarily in money market funds and highly liquid marketable securities such as corporate debt instruments, commercial paper and U.S. government securities. The Company considers all investments with maturities of three months or less when purchased to be cash equivalents. Marketable securities represent highly liquid corporate debt instruments, commercial paper and U.S. government securities with maturities greater than 90 days at date of purchase. Marketable securities with maturities greater than one year are classified as current because management considers all marketable securities to be available for current operations. Cash equivalents are stated at amounts that approximate fair value based on quoted market prices. Marketable securities are recorded at their fair values. The Company’s investments have been classified and accounted for as available-for-sale. Such investments are recorded at fair value and unrealized holding gains and losses are reported as a separate component of accumulated other comprehensive loss in the stockholders’ equity until realized. Realized gains and losses on sales of marketable securities, if any, are determined on the specific identification method and are reclassified from accumulated other comprehensive income (loss) to results of operations as other income (expense), net. Cash, cash equivalents, restricted cash and marketable securities consisted of the following (in thousands): September 26, 2020 December 31, 2019 Cash and cash equivalents: Cash $ 23,807 $ 46,815 U.S. government securities 29,997 — Money market funds 10,022 14 Total cash and cash equivalents 63,826 46,829 Restricted cash 628 628 Total cash, cash equivalents and restricted cash 64,454 47,457 Marketable securities: U.S. government securities 39,986 — $ 104,440 $ 47,457 The carrying amounts of the Company’s money market funds approximate their fair values due to their nature, duration and short maturities. As of September 26, 2020, all marketable securities were due in one year or less; and the amortized cost and fair value of marketable securities were as follows (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. government securities 39,985 1 — 39,986 4. Fair Value Measurements 9 Table of Contents The Company measures its cash equivalents and marketable securities at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The Company utilizes the following three-tier value hierarchy which prioritizes the inputs used in measuring fair value: Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 – Observable inputs other than quoted prices included in Level 1 for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-driven valuations in which all significant inputs and significant value drivers are observable in active markets. Level 3 – Unobservable inputs to the valuation derived from fair valuation techniques in which one or more significant inputs or significant value drivers are unobservable. The following tables sets forth the Company’s financial assets measured at fair value on a recurring basis based on the three-tier fair value hierarchy (in thousands): As of September 26, 2020 Level 1 Money market funds $ 10,022 U.S. government securities 69,983 $ 80,005 As of December 31, 2019 Level 1 Money market funds $ 14 5. Balance Sheet Details Accounts receivable, net consisted of the following (in thousands): September 26, 2020 December 31, 2019 Accounts receivable $ 70,634 $ 46,883 Allowance for doubtful accounts ( 1,503 ) ( 374 ) $ 69,131 $ 46,509 Inventory consisted of the following (in thousands): September 26, 2020 December 31, 2019 Raw materials $ 154 $ 656 Finished goods 41,462 39,497 $ 41,616 $ 40,153 Property and equipment, net consisted of the following (in thousands): September 26, 2020 December 31, 2019 Test equipment $ 39,612 $ 37,001 Software 16,047 20,646 Computer equipment 11,769 10,835 Furniture and fixtures 2,237 2,342 Leasehold improvements 1,447 2,047 Total 71,112 72,871 Accumulated depreciation and amortization ( 50,944 ) ( 51,344 ) $ 20,168 $ 21,527 10 Table of Contents Other long-term assets consisted of the following (in thousands): September 26, 2020 December 31, 2019 Intangible asset $ 10,175 $ 12,148 Capitalized cloud implementation costs 2,068 6,089 Other long-term assets 1,220 1,203 $ 13,463 $ 19,440 Intangible Asset In March 2018, the Company entered into an agreement with a vendor to develop certain software product and related enhancements pursuant to which the Company may be obligated to make minimum revenue-share payments under the program of up to $ 15.8 million over the three years following availability for sale. The payments are based on a revenue-share rate applied to revenue from the developed-product and the corresponding hardware sales subject to a minimum and a maximum aggregate amount over the three-year sales period. The Company had its first sale in August 2019, and as a result, the Company capitalized an intangible asset with a value of $ 13.2 million in the third quarter of 2019. The Company also recognized a liability, of which $ 11.5 million is included in other long-term liabilities and $ 2.5 million in accrued liabilities in the accompanying Condensed Consolidated Balance Sheet as of September 26, 2020. The intangible asset has an estimated five -year useful life and is being amortized using the greater of the ratio of current gross revenue for the products to the total of current and anticipated future gross revenue for the products or the straight-line method. Capitalized Cloud Implementation Costs I n January 2020, the Company went live with its cloud-based enterprise resource planning (“ERP”) system. As a result, the Company capitalized $ 7.5 million of implementation costs in both prepaid expenses and other current assets and other long-term assets in the Company's Condensed Consolidated Balance Sheet. This amount is being amortized over a period of 29 months, representing the remaining contractual term. The amortization expense for the three and nine months ended September 26, 2020 was $ 0.7 million and $ 2.3 million, respectively. Accrued liabilities consisted of the following (in thousands): September 26, 2020 December 31, 2019 Compensation and related benefits $ 20,042 $ 19,010 Warranty and retrofit 8,556 7,294 Current portion of financing arrangements 5,160 4,044 Component inventory held by suppliers 5,136 1,925 Customer advances or rebates 5,047 7,252 Professional and consulting fees 3,584 4,996 Taxes payable 3,142 2,021 Operating leases 2,756 2,663 Product returns 1,500 919 Operations 1,200 1,053 Freight 1,070 808 Other 3,313 5,561 $ 60,506 $ 57,546 11 Table of Contents Warranty and Retrofit The Company provides a standard warranty for its hardware products. Hardware generally has a one - or five -year standard warranty from the date of shipment. Under certain circumstances, the Company also provides fixes on specifically identified performance failures for products that are outside of the standard warranty period and recognizes estimated costs related to retrofit activities upon identification of such product failures. The Company accrues for potential warranty and retrofit claims based on the Company’s historical product failure rates and historical costs incurred in correcting product failures along with other relevant information related to any specifically identified product failures. The Company’s warranty and retrofit accruals are based on estimates of losses that are probable based on information available. The adequacy of the accrual is reviewed on a periodic basis and adjusted, if necessary, based on additional information as it becomes available. Changes in the Company’s warranty and retrofit accrual are as follows (in thousands): Three Months Ended Nine Months Ended September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019 Balance at beginning of period $ 7,732 $ 7,910 $ 7,294 $ 8,547 Provision for warranty and retrofit charged to cost of revenue 1,716 1,025 4,341 2,591 Utilization of reserve ( 892 ) ( 1,651 ) ( 3,079 ) ( 3,854 ) Balance at end of period $ 8,556 $ 7,284 $ 8,556 $ 7,284 Accrued Restructuring Charges Responding to trends caused by the COVID-19 pandemic, the Company initiated a restructuring plan in June 2020 to accelerate the Company’s all platform future and to align with a work-from-anywhere culture. The Company incurred restructuring charges of approximately $ 6.3 million, consisting of facilities-related charges and severance and other termination related benefits for the nine months ended September 26, 2020. As part of its work-from-anywhere culture, many of the Company’s employees elected to work remotely on a permanent basis. In light of this shift, the Company evaluated its space needs and determined that a portion of the Company's leased office spaces in Richardson, Texas and San Jose, California would no longer be utilized. As a result, the right-of-use assets related to these leases were written down, resulting in a charge of $ 3.5 million during the nine months ended September 26, 2020. In addition, the Company wrote off assets with net book value of $ 0.3 million and accrued common areas maintenance fees and property taxes related to the unused office space totaling $ 1.4 million during nine months ended September 26, 2020. The following table summarizes the activities pursuant to the above restructuring plan (in thousands): Facilities Severance and Related Benefits Total Balance at March 28, 2020 $ — $ — $ — Restructuring charges 5,112 1,174 6,286 Asset write-down ( 3,748 ) — ( 3,748 ) Cash payments ( 60 ) ( 936 ) ( 996 ) Balance at September 26, 2020 $ 1,304 $ 238 $ 1,542 6. Credit Agreements Line of Credit In January 2020, the Company terminated its loan and security agreement with Silicon Valley Bank and entered into a new loan and security agreement with Bank of America, N.A. (“BofA Loan Agreement”). The BofA Loan Agreement provides for a revolving facility up to a principal amount of $ 35.0 million, including a $ 10.0 million sublimit for letters of credit. The BofA Loan Agreement matures, and all outstanding amounts become due and payable, in January 2023. The BofA Loan Agreement is secured by substantially all of the Company’s assets, including the Company’s 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 the Company’s availability is less than $ 5.0 million, the Company must maintain a minimum fixed charge coverage ratio (“FCCR”) of 1.0 to 1.0. As of September 26, 2020, the Company was in compliance with these requirements, had no 12 Table of Contents outstanding borrowings and had full availability of $ 35.0 million. The Company's interest rate on the line of credit was 3.75 % as of September 26, 2020. Financing Arrangements During 2018, the Company entered into financing arrangements to purchase lab and test 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 September 26, 2020, there was $ 1.7 million outstanding under these financing arrangements, which is included in accrued liabilities and other long-term liabilities in the accompanying Condensed Consolidated Balance Sheet. From 2017 to 2020, t he Company entered into financing arrangements for consulting services of $ 5.5 million in connection with the Company’s ERP implementation. 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 September 26, 2020, there was $ 1.6 million outstanding under these arrangements, which is included in accrued liabilities and other long-term liabilities in the accompanying Condensed Consolidated Balance Sheet. 7. Commitments and Contingencies Lease Commitments The Company leases office space under non-cancelable operating leases. Certain of the Company’s operating leases contain renewal options and rent acceleration clauses. Future minimum payments under the non-cancelable operating leases consisted of the following as of September 26, 2020 (in thousands): Period Minimum Future Lease Payments Remainder of 2020 $ 922 2021 3,478 2022 3,682 2023 3,597 2024 3,388 Thereafter 2,881 Total future minimum lease payments 17,948 Less imputed interest ( 2,836 ) $ 15,112 Operating lease liability consisted of the following (in thousands): September 26, 2020 Accrued liabilities - current portion of operating leases $ 2,756 Operating leases 12,356 $ 15,112 The Company leases its headquarters office space in San Jose, California under a lease agreement that expires in December 2025. The future minimum lease payments under the lease are $ 12.4 million and are included in the table above. The weighted average discount rate for the Company's operating leases as of September 26, 2020 was 7.0 %. The weighted average remaining lease term as of September 26, 2020 was 4.4 years. For the three and nine months ended September 26, 2020, total rent expense of the Company was $ 0.9 million and $ 3.1 million, respectively. For the three and nine months ended September 28, 2019, total rent expense of the Company was $ 1.1 million and $ 3.6 million, respectively. Cash paid within operating cash flows for operating leases was $ 2.5 million and $ 2.8 million for nine months ended September 26, 2020 and September 28, 2019, respectively. Purchase Commitments The Company’s contract manufacturers (“CMs”) and original design manufacturers (“ODMs”) place orders for certain component inventory in advance based upon the Company’s build forecasts in order to reduce manufacturing lead times and ensure adequate component supply. The components are used by the CMs and ODMs to build the products included in the build forecasts. The Company generally does not take ownership of the components held by CMs and ODMs. The Company places purchase orders with its CMs and ODMs in order to fulfill its monthly finished product inventory requirements. The Company 13 Table of Contents incurs a liability when the CMs and ODMs convert the component inventory to a finished product and takes ownership of the finished goods inventory. In the event of termination of services with a manufacturing partner, the Company has purchased, and may be required to purchase in the future, certain of the remaining components inventory held by the CM or ODM as well as any outstanding orders pursuant to the contractual provisions with such CM or ODM. As of September 26, 2020, the Company had approximately $ 119.9 million of outstanding purchase commitments for inventories to be delivered by its suppliers, including CMs and ODMs, within one year. The Company has from time to time, and subject to certain conditions, reimbursed certain suppliers for component inventory purchases when this inventory has been rendered excess or obsolete, for example due to manufacturing and engineering change orders resulting from design changes, manufacturing discontinuation of products by its suppliers, or in cases where the Company has committed inventory levels that greatly exceed projected demand. The estimated excess and obsolete inventory liabilities related to such manufacturing and engineering change orders and other factors, which are included in accrued liabilities in the accompanying balance sheets, were $ 5.1 million and $ 1.9 million as of September 26, 2020 and December 31, 2019, respectively. The Company records the related charges in cost of systems revenue in its Condensed Consolidated Statements of Comprehensive Income (Loss). Litigation From time to time, the Company is involved in various legal proceedings arising from the normal course of business activities. The Company is not currently a party to any legal proceedings that, if determined adversely to the Company, in management’s opinion, are currently expected to individually or in the aggregate have a material adverse effect on the Company’s business, operating results or financial condition taken as a whole. 8. Stockholders’ Equity Stock Offering In August 2020, the Company completed an underwritten public offering of 3,220,000 shares of its common stock, $ 20.00 per share, including a full exercise by the underwriters of their option to purchase an additional 420,000 shares of Common Stock, resulting in net proceeds of $ 60.1 million, after deducting the underwriting discount and estimated expenses payable by the Company. Treasury Stock Retirement In August 2020, the Company’s Board of Directors authorized the retirement of the 5,329,817 shares of common stock held as treasury stock. Under Delaware law these shares return to the authorized but unissued common stock pool. As a result, the Company eliminated the $ 40.0 million treasury stock balance, offsetting this against common stock by $ 0.1 million and additional paid-in capital by $ 39.9 million. 2019 Equity Incentive Award Plan At the Company’s 2019 annual meeting of stockholders, the stockholders approved the 2019 Equity Incentive Award Plan (the “2019 Plan”). The 2019 Plan supersedes and replaces the 2010 Equity Incentive Award Plan (the “2010 Plan”) and preceding plans. No further awards will be granted under the 2010 Plan following the effectiveness of the 2019 Plan; however, the terms and conditions of the 2010 Plan will continue to govern any outstanding awards granted under the 2010 Plan. Employees and consultants of the Company, its subsidiaries and affiliates, as well as members of the Company's Board of Directors, are eligible to receive awards under the 2019 Plan. The 2019 Plan provides for the grant of stock options, including incentive stock options and nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), other stock or cash-based awards and dividend equivalents to eligible individuals. The number of shares available for issuance under the 2019 Plan included an initial reserve of 1.7 million shares of common stock, any shares of common stock that are available for issuance under the 2010 Plan as of the effective date of the 2019 Plan and any shares of common stock subject to issued and outstanding awards under the 2010 Plan that expire, are cancelled or otherwise terminate following the effective date of the 2019 Plan. At the Company’s 2020 annual meeting of stockholders, the stockholders approved an increase in the number of shares of common stock issuable under the 2019 Plan by 3.5 million shares. As of September 26, 2020, there were 4.9 million shares available for issuance under the 2019 Plan. Stock Options During the three months ended September 26, 2020, stock option awards exercisable for up to an aggregate of 0.1 million shares of common stock were granted with a grant date fair value of $ 21.09 per share. During the nine months ended September 26, 2020, stock option awards exercisable for up to an aggregate of 1.0 million shares of common stock were granted with a grant date fair value of $ 13.27 per share. 14 Table of Contents During the three months ended March 28, 2020, performance-based stock option awards exercisable for up to an aggregate of 0.8 million shares of common stock were granted to certain Company executives with a grant date fair value of $ 9.16 per share. The actual number of shares earned is contingent upon achievement of annual corporate financial targets for bookings and non-GAAP net income for 2020 (collectively, the “2020 Performance Targets”) during the one -year performance period. These performance-based stock option awards will vest, subject to certification by the Compensation Committee of the Company’s Board of Directors upon the achievement of the 2020 Performance Targets, as to 25 % of the shares of common stock earned on the date of such certification, and as to the remaining 75 % of the shares of common stock earned, in substantially equal quarterly installments over the subsequent 36 months, subject to the executive’s continuous service with the Company through the respective vesting dates. Under the 2020 Performance Targets, if non-GAAP net income is below 80 % of target and bookings are below 90 % of target, no shares are awarded. From this base, shares are awarded on a 50 % weighting for both non-GAAP net income and bookings up to 100 % for each 2020 Performance Target using a sliding scale. The probability of meeting the performance conditions related to these performance-based stock option awards was assessed to be probable as of September 26, 2020, and stock-based compensation expense of $ 0.4 million was recognized for the three months ended September 26, 2020. For the nine months ended September 26, 2020 stock-based compensation expense of $ 1.2 million was recognized. During the three months ended March 30, 2019, performance-based stock option awards exercisable for up to an aggregate of 2.0 million shares of common stock were granted to Company executives with a grant date fair value of $ 8.03 per share. These performance-based stock option awards contained a one -year performance period and a subsequent three -year service period. The actual number of shares earned was contingent upon achievement of both annual and quarterly corporate financial targets for revenue, non-GAAP gross margin and non-GAAP net income per share for 2019 (collectively, the “2019 Performance Targets”) during the one -year performance period. In February 2020, following the review of the Company’s financial performance for 2019, the Compensation Committee of the Company’s Board of Directors certified that the 2019 Performance Targets (as modified) for the 2019 performance-based stock options were partially met, resulting in an award to each Company executive of 30 % of their target shares. One quarter of these performance-based stock option awards vested on this date, and the remaining 75 % of the shares of common stock earned will vest in substantially equal quarterly installments over the subsequent 36 months, subject to the executive’s continuous service with the Company through the respective vesting dates. During the three months ended September 26, 2020, 0.2 million shares of common stock were issued pursuant to the exercise of stock options at a weighted-average exercise price of $ 9.72 per share. During the nine months ended September 26, 2020, 1.0 million shares of common stock were issued pursuant to the exercise of stock options at a weighted-average exercise price of $ 8.00 per share. As of September 26, 2020, unrecognized stock-based compensation expense of $ 11.0 million related to stock options, net of estimated forfeitures, is expected to be recognized over a weighted-average period of 2.9 years. Restricted Stock Units During the nine months ended September 26, 2020, RSUs of 0.1 million were granted with a grant date fair value of $ 11.22 per share. During the three months ended September 26, 2020, RSUs for 18 thousand shares of common stock vested. During the nine months ended September 26, 2020, RSUs for 0.3 million shares of common stock vested. As of September 26, 2020, unrecognized stock-based compensation expense of $ 0.9 million related to RSUs, net of estimated forfeitures, was expected to be recognized over a weighted-average period of 0.6 years. Employee Stock Purchase Plans The Company maintains two employee stock purchase plans - the Amended and Restated Employee Stock Purchase Plan (the “ESPP”) and the Amended and Restated 2017 Nonqualified Employee Stock Purchase Plan (the “NQ ESPP”). The ESPP allows eligible employees to purchase shares of the Company’s common stock through payroll deductions of up to 15 % of their annual compensation subject to certain Internal Revenue Code limitations. In addition, no participant may purchase more than 2,000 shares of common stock in each offering period. During this quarter, the Company revised the ESPP’s two six -month offering periods to August 15 th through February 14 th and February 15 th through August 14 th of each year, with an initial transition period that began on May 15 th and ended on August 14, 2020. The price of common stock purchased under the ESPP is 85 % of the lower of the fair market value of the common stock on the commencement date and the end date of each six -month offering period. In May 2019, the stockholders approved an increase in the number of shares of common stock issuable under the ESPP by 2.5 million shares. The total shares authorized for issuance under the ESPP increased from 7.3 million shares to 9.8 million shares. As of September 26, 2020, there were 2.6 million shares available for issuance under the ESPP. During the three and nine months ended September 26, 2020, 0.2 million and 0.6 million shares were purchased under the ESPP, respectively. As of September 26, 2020, unrecognized stock-based compensation expense of $ 1.1 million related to the ESPP is expected to be recognized over a remaining service period of 0.4 years. 15 Table of Contents The NQ ESPP allows eligible employees to purchase shares of the Company’s common stock through payroll deductions of up to 25 % of their annual compensation. Eligible employees have the right to (a) purchase the maximum number of whole shares of common stock that can be purchased with the elected payroll deductions during each offering period for which the employee is enrolled at a purchase price equal to the closing price of the Company’s common stock on the last day of such offering period and (b) receive an equal number of shares of the Company’s common stock that are subject to a risk of forfeiture in the event the employee terminates employment within the one year period immediately following the purchase date. Beginning in the fourth quarter of 2020, the NQ ESPP’s two six -month offering periods will be changed to November 15 th through May 14 th and May 15 th through November 14 th of each year, with a transition period that began on June 21 st and will end on November 14, 2020. In May 2020, the stockholders approved an amendment of certain terms and an increase in the number of shares of common stock issuable under the NQ ESPP by 1.2 million shares. The maximum number of shares of common stock currently authorized for issuance under the NQ ESPP is 4.7 million shares, with a maximum of 0.5 million shares allocated per purchase period. As of September 26, 2020, there were 2.5 million shares available for issuance under the NQ ESPP, including the stockholder-approved 1.2 million share increase. During the nine months ended September 26, 2020, 0.3 million shares were purchased and issued. As of September 26, 2020, unrecognized stock-based compensation expense of $ 3.5 million related to the NQ ESPP is expected to be recognized over a remaining weighted-average service period of 0.9 years. Stock-Based Compensation The following table summarizes stock-based compensation expense (in thousands): Three Months Ended Nine Months Ended September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019 Cost of revenue: Products $ 159 $ 130 $ 392 $ 408 Services 103 93 308 285 Research and development 1,237 1,033 3,344 2,922 Sales and marketing 1,035 764 2,994 2,652 General and administrative 1,040 742 2,762 2,209 $ 3,574 $ 2,762 $ 9,800 $ 8,476 9. Revenue from Contracts with Customers The Company derives revenue from contracts with customers primarily from the following and categorizes its revenue as follows: • Systems include revenue from the sale of access and premises systems, software platform licenses and cloud-based software subscriptions; and • Services include revenue from professional services, customer support, software- and cloud-based maintenance, extended warranty subscriptions, training and managed services. The following is a summary of revenue disaggregated by geographic region based upon the location of the customers (in thousands): Three Months Ended Nine Months Ended September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019 United States $ 128,189 $ 101,025 $ 324,437 $ 262,647 Europe 9,183 2,883 13,665 7,793 Canada 5,230 3,581 12,219 10,313 Middle East 4,537 3,153 9,168 12,853 Caribbean 1,625 1,186 7,498 3,952 Other 1,744 2,657 4,226 6,581 $ 150,508 $ 114,485 $ 371,213 $ 304,139 Contract Asset The primary contract asset is revenue recognized on professional services contracts where the services are transferred to the customer over time, which has yet to be billed, and is classified within accounts receivable. Amounts are billed in accordance with the agreed-upon contractual terms. The balance at December 31, 2019 was $ 5.0 million of which $ 0.8 million remained in the Company's Condensed Consolidated Balance Sheet at September 26, 2020. The closing balance at September 26, 2020 was $ 3.8 million of which the Company expects to bill 28 % of the balance during the remainder of 2020. The decrease in the 16 Table of Contents contract asset was driven by billings for past services as well as the timing and volume of professional services contracts during the nine months ended September 26, 2020. Contract Liability Deferred revenue consisted of the following (in thousands): September 26, 2020 December 31, 2019 Current: Products and services $ 11,173 $ 12,480 Extended warranty 4,418 4,678 15,591 17,158 Long-term: Products and services 2,417 790 Extended warranty 17,147 17,550 19,564 18,340 $ 35,155 $ 35,498 The increase in the deferred revenue balance for the three months ended September 26, 2020 is primarily driven by cash payments received or due in advance of satisfying the Company's performance obligation offset by $ 7.6 million of revenue recognized that was included in the deferred revenue balance at the beginning of that period. The decrease in the deferred revenue balance for the nine months ended September 26, 2020 is primarily driven by $ 16.9 million of revenue recognized that was included in the deferred revenue balance at the beginning of that period offset by cash payments received or due in advance of satisfying the Company's performance obligations. Revenue allocated to remaining performance obligations represent contract revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. This amount was $ 69.0 million as of September 26, 2020, and the Company expects to recognize 43 % of such revenue over the next 12 months and the remainder thereafter. Contract Costs The Company capitalizes certain sales commissions related primarily to extended warranty support for which the expected amortization period is greater than one year. As of September 26, 2020, the unamortized balance of deferred commissions was $ 0.7 million. For the three and nine months ended September 26, 2020, the amount of amortization was $ 46,000 and $ 0.1 million, respectively, and there was no impairment loss in relation to the costs capitalized. Concentration of Customer Risk Lumen Technologies, Inc. (formerly CenturyLink, Inc.) represented 12 % and 14 % of total revenue 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. No other customers accounted for more than 10% of the Company’s total revenue for these periods. Lumen Technologies, Inc. accounted for 13 % of the Company's accounts receivable as of September 26, 2020 and 17 % as of December 31, 2019. 10. Income Taxes The following table presents the provision for income taxes from operations and the effective tax rates for the periods indicated (in thousands, except percentages): Three Months Ended Nine Months Ended September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019 Provision for income taxes $ 149 $ 610 $ 626 $ 860 Effective tax rate 0.7 % ( 22.0 ) % 6.3 % ( 5.0 ) % The effective tax rate for the three 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. 17 Table of Contents Deferred tax assets are recognized if realization of such assets is more likely than not. The Company has established and continues to maintain a full valuation allowance against its net deferred tax assets, with the exception of certain foreign deferred tax assets, as the Company does not believe that realization of those assets is more likely than not. The Company’s effective tax rate may be subject to fluctuation during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as the mix of forecasted pre-tax earnings in the various jurisdictions in which it operates, valuation allowances against deferred tax assets, the recognition or de-recognition of tax benefits related to uncertain tax positions and changes in or the interpretation of tax laws in jurisdictions where it conducts business. 11. Net Income (Loss) Per Common Share The following table sets forth the computation of basic and diluted net income (loss) per common share for the periods indicated (in thousands, except per share data): Three Months Ended Nine Months Ended September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019 Numerator: Net income (loss) $ 20,538 $ ( 3,379 ) $ 9,382 $ ( 18,191 ) Denominator: Weighted-average common shares outstanding used to compute basic net income (loss) per share 60,307 55,466 58,053 54,718 Effect of dilutive common stock equivalents 3,142 — 2,278 — Weighted-average common shares outstanding used to compute diluted net income (loss) per share 63,449 55,466 60,331 54,718 Net income (loss) per common share: Basic net income (loss) per common share $ 0.34 $ ( 0.06 ) $ 0.16 $ ( 0.33 ) Diluted net income (loss) per common share $ 0.32 $ ( 0.06 ) $ 0.16 $ ( 0.33 ) Potentially dilutive shares, weighted average 169 6,611 579 6,500 Potentially dilutive shares have been excluded from the computation of diluted net income (loss) per common share when their effect is antidilutive. These antidilutive shares were primarily from stock options, restricted stock units and performance restricted stock units. For each of the periods presented where the Company reported a net loss, the effect of all potentially dilutive securities would be antidilutive, and as a result diluted net loss per common share is the same as basic net loss per common share. 18 Table of Contents