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Item 7. Management’s Discussion and Analysis

2021-02-22 compared with 2020-02-21 · 155 added, 177 removed, 122 unchanged (73% of the section changed)

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All forward-looking statements and reasons why results may differ included in this report are made as of the date hereof, and we assume no obligation to update these forward-looking statements or reasons why actual results might differ.

We are a leading global provider of cloud and software platforms, systems and services for fiber- and copper-based network architectures and a pioneer in software defined access and cloud products focused on access networks and the subscriber.

Our portfolio allows for a broad range of subscriber services to be provisioned and delivered over a single unified network.

Our access systems can deliver voice and data services, advanced broadband services, mobile broadband, as well as high-definition video and online gaming.

Our most recent generation of premises systems enable CSPs to address the complexity of the smart home and business and offer new services to their device enabled subscribers.

We have designed all of our current platforms and related systems so that they can be monitored, analyzed, managed and supported by Calix Cloud.

We are the leading global provider of cloud and software platforms, systems and services that focus on the access network, the portion of the network that governs available bandwidth and determines the range and quality of services that can be offered to subscribers.

These cloud and software platforms enable CSPs of all types and sizes to innovate and transform their businesses.

Our CSP customers are empowered to utilize real-time data and insights from Calix platforms to simplify their businesses and deliver experiences that excite their subscribers.

These insights enable CSPs to grow their businesses through increased subscriber acquisition, loyalty and revenue, thereby increasing the value of their businesses and contributions to their communities.

We market our cloud and software platforms, systems and services to CSPs globally through our direct sales force as well as select resellers.

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.

In the third quarter of 2018, the United States enacted 10% tariffs on certain goods manufactured in China and increased these tariffs to 25% in May 2019.

In September 2019, the United States imposed a new 15% tariff covering a broader list of products manufactured in China.

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 $3.2 million in 2018 and $6.2 million in 2019.

tariff and tariff-related costs of $2.8 million in 2020, $6.2 million in 2019 and $3.2 million in 2018.

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.

As a result of the tariffs imposed in September 2019 covering a broader list of products, we have expanded the scope of our global supply chain realignment plan, which is expected to take until mid-2020 to complete.

Our revenue decreased to $424.3 million in 2019 from $441.3 million in 2018 and $510.4 million in 2017 .

The decrease in revenue from 2018 to 2019 was primarily due to lower revenue from our legacy incumbent local exchange carrier, or ILEC, customers as well as CenturyLink as they continued to reduce capital investments in response to broadband subscriber losses.

Our revenue and potential revenue growth will depend on our ability to sell and license our cloud and software platforms, systems and services to strategically aligned customers, including from market segments such as cable MSOs, WISPs, fiber overbuilders, municipalities and electric cooperatives, in the United States and internationally.

As a result of the tariffs imposed on a broader list of products in September 2019, we expanded the scope of our global supply chain realignment plan, which was substantially completed in 2020.

Our revenue increased to $541.2 million in 2020 from $424.3 million in 2019 and $441.3 million in 2018.

Our revenue and potential revenue growth will depend on our ability to sell and license our cloud and software platforms, systems and services to strategically aligned customers of all types such as wireless internet service providers, fiber overbuilders, cable MSOs, municipalities and electric cooperatives in the United States and internationally.

Revenue fluctuations result from many factors, including, but not limited to:

increases or decreases in customer orders for our products and services, market, financial or other factors that may delay or materially impact customer purchasing decisions,

non-availability of products due to supply chain challenges, including disruptions from the recent coronavirus outbreak in China, contractual terms with customers that result in delayed revenue recognition and varying budget cycles and seasonal buying patterns of our customers.

increases or decreases in customer orders for our products and services, market, financial or other factors that may delay or materially impact customer purchasing decisions, non-availability of products due to supply chain challenges, including disruptions as a result of the COVID-19 pandemic, contractual terms with customers that result in delayed revenue recognition and varying budget cycles and seasonal buying patterns of our customers.

More specifically, our customers tend to spend less in the first quarter as they are finalizing their annual budgets, and in certain regions, customers are challenged by winter weather conditions that inhibit fiber deployment in outside infrastructure.

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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 year ended December 31, 2019 , and that we expect will impact cost of revenue in future periods, also include:

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

Factors that impacted our cost of revenue in 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 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, changes in product warranty and incurrence of retrofit costs, 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 prior year 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.

Our gross profit and gross margin fluctuate based on timing of factors such as new product introductions or upgrades to existing products, changes in customer mix and changes in the mix of products demanded and sold (and any related write-downs of existing inventory) and have in the past been negatively impacted by increases in mix of revenue towards professional services, increases in mix of revenue from channel sales rather than direct sales or other unfavorable customer or product mix, shipment volumes and any related volume discounts, changes in our product and services costs, pricing decreases or discounts, customer rebates and incentive programs due to competitive pressure or materials shortages, supply constraints, investments to support expansion of cloud and customer support offerings, tariffs or unfavorable changes in trade policies.

Our gross profit and gross margin fluctuate based on timing of factors such as changes in customer mix and changes in the mix of products demanded and sold (and any related write-downs of existing inventory) and have in the past been negatively impacted by increases in mix of revenue towards professional services, increases in mix of revenue from channel sales rather than direct sales or other unfavorable customer or product mix, shipment volumes and any related volume discounts, changes in our product and services costs, pricing decreases or discounts, new product introductions or upgrades to existing products, customer rebates and incentive programs due to competitive pressure or materials shortages, supply constraints, investments to support expansion of cloud and customer support offerings, tariffs or unfavorable changes in trade policies.

Our operating expenses fluctuate based on the following factors among others:

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

For the year ended December 31, 2019 as compared to 2018, our total operating expenses for research and development, sales and marketing and general and administrative decreased by $16.0 million , largely due to restructuring actions we took in 2017 and early 2018.

These restructuring actions were completed in the second quarter of 2018.

Our net loss was $17.7 million in 2019 , $19.3 million in 2018 and $83.0 million in 2017 .

Since our inception, we have incurred significant losses, and as of December 31, 2019 , we had an accumulated deficit of $702.6 million .

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

We had net income of $33.5 million in 2020 and net losses of $17.7 million in 2019 and $19.3 million in 2018.

As of December 31, 2020, we had an accumulated deficit of $669.1 million as a result of losses in previous years.

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.

Comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance.

COVID-19 Pandemic

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

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

The availability of vaccines has been limited, and there are no assurances as to when the pandemic will be contained.

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

The spread of COVID-19 has had a prolonged impact on our supply chain operations due to restrictions, reduced capacity and limited availability from suppliers whom we rely on for sourcing components and materials and from 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 Wi-Fi, 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 for our products, including due to plant closures.

The prolonged impact of COVID-19 could exacerbate these constraints or cause further supply chain disruptions.

In the second quarter of 2020, we transitioned to a work-from-anywhere culture, and many of our employees elected to work remotely on a permanent basis.

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

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

These actions resulted in a charge of $1.8 million related to our reduction and consolidation of legacy product lines and severance-related charges of $1.2 million.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with U.S.

generally accepted accounting principles.

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.

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Revenue is recognized when a performance obligation is satisfied, which occurs when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

Specifically, revenue from software platform licenses, which provides the customer with a right to use the software as it exists, is generally recognized upfront when made available to the customer.

Specifically, revenue from software platform licenses, which provides the customer with a right to use the software as it exists, is generally recognized upfront when product is made available to the customer.

Revenue from cloud-based software subscriptions, customer support, maintenance, extended warranty subscriptions and managed services is generally recognized ratably over the contract term.

Revenue from professional services and training is recognized as the services are completed.

Revenue from professional services and training is recognized as the services are delivered.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account.

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Results of Operations for Years Ended December 31, 2020 and 2019

Our revenue is comprised of the following:

Systems – includes revenue from the sale of access and premises systems, software platform licenses and cloud-based software subscriptions.

Services – includes revenue from professional services, customer support, software- and cloud-based maintenance, extended warranty subscriptions, training and managed services.

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

Years Ended December 31,

2019 vs 2018 Change

2018 vs 2017 Change

Years Ended December 31, 2020 vs 2019 Change

2020 2019 $ %

Systems $ 508,552 $ 393,231 $ 115,321 29 %

Services 32,687 31,099 1,588 5 %

$ 541,239 $ 424,330 $ 116,909 28 %

Percent of total revenue:

Systems 94 % 93 %

Services 6 % 7 %

Our revenue is principally derived in the United States.

Revenue generated in the United States represented approximately 86% of our total revenue in 2019 , 88% in 2018 and 89% in 2017 .

The decrease in revenue during 2019 compared with 2018 was due to lower systems revenue of $12.7 million and lower services revenue of $4.3 million .

The decline in systems revenue was primarily due to reduced demand from CenturyLink, Frontier and our medium-sized ILEC customer base partially offset by growth in our small-sized customers as we continued to see strong demand for our software and cloud platform offerings and the addition of new customers.

The decrease in services revenue was primarily due to lower volume of deployment services associated with CAF-funded customer deployments.

CenturyLink accounted for more than 10% of our total revenue in 2019, 2018 and 2017.

Revenue generated in the United States represented approximately 87% of our total revenue in 2020 and 86% in 2019.

Our revenue increased by $116.9 million during 2020 compared with 2019 mostly due to higher systems revenue of $115.3 million.

Services revenue increased $1.6 million in 2020 compared with 2019.

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 increased demand for network capacity and relieve network capacity constraints as well as provide a better Wi-Fi experience.

The increase in services revenue was due to the continued ramp in our service offerings aligned with cloud and software products partially offset by lower professional services related to CAF deployments.

Lumen accounted for more than 10% of our total revenue in 2020 and 2019.

See Note 12 “Revenue from Contracts with Customers” to the Consolidated Financial Statements set forth in this report for more details on concentration of revenue for the periods presented.

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

Years Ended December 31,

2019 vs 2018 Change

2018 vs 2017 Change

Years Ended December 31, 2020 vs 2019 Change

Cost of revenue:

The decrease in cost of revenue of $7.5 million during 2019 as compared with 2018 was primarily attributable to lower revenue for 2019 as compared with 2018 mainly due to the reduced demand from CenturyLink as well as our medium-sized ILEC customer base.

Partially offsetting the decrease in systems cost of revenue was an increase in U.S.

tariff and tariff-related costs of $3.0 million in 2019.

Systems $ 251,638 $ 211,309 $ 40,329 19 %

Services 22,582 25,096 (2,514) (10) %

$ 274,220 $ 236,405 $ 37,815 16 %

Cost of revenue increased by $37.8 million during 2020 as compared with 2019.

The $40.3 million increase in systems cost of revenue was less than the percentage increase in revenue compared with 2019 and was due to continued growth in our All Platform offerings along with favorable customer and product mix.

The increase in costs of revenue in 2020 as compared to 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 $2.5 million 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.

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

Years Ended December 31,

2019 vs 2018 Change

2018 vs 2017 Change

Years Ended December 31, 2020 vs 2019 Change

Gross profit:

Systems $ 256,914 $ 181,922 $ 74,992 41 %

Services 10,105 6,003 4,102 68 %

$ 267,019 $ 187,925 $ 79,094 42 %

Gross margin:

Gross profit decreased by $9.5 million to $187.9 million during 2019 from $197.4 million during 2018 .

Gross margin decreased to 44.3 % during 2019 from 44.7 % during 2018 .

Systems 50.5 % 46.3 %

Services 30.9 % 19.3 %

49.3 % 44.3 %

Gross profit increased by $79.1 million to $267.0 million during 2020 from $187.9 million during 2019.

Gross margin increased to 49.3% during 2020 from 44.3% during 2019.

During 2020 and 2019, systems gross margin was negatively impacted by U.S.

tariff and tariff-related costs of $6.2 million and $3.2 million, or 160 and 70 basis points, respectively.

tariff and tariff-related costs of $2.8 million and $6.2 million, or 55 and 160 basis points, respectively, and intangible asset amortization of $2.6 million and $1.0 million, or 50 and 25 basis points, respectively.

Excluding the impact of U.S.

tariff and tariff-related costs, systems gross margin was 47.9% and 47.4% for 2019 and 2018, respectively.

This 50 basis

point improvement was mainly due to an increasing mix of our all-platform offerings that have higher gross margin than some of our older traditional systems.

Services gross margin decreased in 2019 primarily due to higher investments in customer success and support personnel to support the expansion of our various services offerings.

tariff and tariff-related costs and intangible assets amortization, systems gross margin was 51.6% and 48.1% for 2020 and 2019, respectively.

This increase of 350 basis points was mainly due to continued growth in our all-platform offerings along with favorable product and customer mix.

Services gross margin increased in 2020 primarily 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

Research and development expenses include personnel costs, outside contractor and consulting services, depreciation on lab equipment, costs of prototypes and overhead allocations.

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

Years Ended December 31,

2019 vs 2018 Change

2018 vs 2017 Change

Research and development

Percent of total revenue

The decrease in research and development expenses during 2019 compared with 2018 was primarily due to lower compensation and employee benefits costs of $4.9 million, mainly due to restructuring activities during 2017 and the first quarter of 2018, lower stock-based compensation of $2.1 million and lower outside services of $1.8 million.

We expect our investments in research and development will be relatively consistent in absolute dollars from our current post-restructuring levels over the near term.

Sales and Marketing Expenses

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

Years Ended December 31,

2019 vs 2018 Change

2018 vs 2017 Change

Years Ended December 31, 2020 vs 2019 Change

2020 2019 $ %

Sales and marketing $ 94,185 $ 82,553 $ 11,632 14 %

Percent of total revenue 17 % 19 %

Sales and marketing expenses decreased by $3.9 million during 2019 compared with 2018 primarily due to lower personnel costs of $2.2 million, including commissions which decreased as a result of lower sales, and lower stock-based compensation of $2.4 million.

The decrease was also due to lower facility expenses of $0.5 million, offset by higher marketing costs of $1.5 million mainly due to increased investment in our smart, connected home and business marketing programs.

Sales and marketing expenses increased by $11.6 million during 2020 compared with 2019 primarily due to higher personnel expenses of $12.2 million, mainly related to investments in sales headcount and higher sales incentive compensation expense, higher marketing expenses of $2.3 million and higher stock-based compensation of $0.9 million.

These increases were partially offset by a decrease in travel expenses of $4.9 million.

We expect to increase our investments in sales and marketing in absolute dollars in order to extend our market reach and grow our business in support of our key strategic initiatives.

Research and Development Expenses

Research and development expenses include personnel costs, outside contractor and consulting services, depreciation on lab equipment, costs of prototypes and overhead allocations.

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

Years Ended December 31, 2020 vs 2019 Change

2020 2019 $ %

Research and development $ 85,258 $ 81,184 $ 4,074 5 %

Percent of total revenue 16 % 19 %

The increase in research and development expenses of $4.1 million during 2020 compared with 2019 was primarily due to higher outside services expenses of $5.2 million, higher personnel expenses of $1.8 million, primarily related to incentive compensation expense, and higher stock-based compensation of $0.8 million.

These increases were partially offset by lower facilities expenses of $2.1 million, decreases in depreciation and amortization expense of $0.6 million, lower travel expenses of $0.6 million and lower equipment expenses of $0.4 million.

We expect to increase our investments in research and development in absolute dollars to expand the functionality and capabilities of our platforms.

General and Administrative Expenses

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

Years Ended December 31,

2019 vs 2018 Change

2018 vs 2017 Change

Years Ended December 31, 2020 vs 2019 Change

2020 2019 $ %

General and administrative $ 44,444 $ 37,115 $ 7,329 20 %

Percent of total revenue 8 % 9 %

The decrease in general and administrative expenses of $3.4 million during 2019 compared with 2018 was primarily due to a decrease in consulting expenses of $3.3 million and stock compensation of $1.5 million.

These decreases were partially offset by higher local taxes of $0.4 million, higher office expenses of $0.3 million and higher personnel costs of $0.2 million.

This decrease in consulting expense was largely a result of our adoption of a new accounting standard in the fourth quarter of 2018, which requires capitalization of certain implementation costs, including consulting and internal personnel expenses, related to our project to migrate our on-premise ERP system to a cloud model.

We capitalized internal personnel expenses of $1.8 million

in 2019 compared to $0.4 million in 2018 related to our new ERP implementation.

In January 2020, we commenced using our cloud-based ERP system and began amortizing the capitalized implementation costs over a period of five years.

Our general and administrative expenses will initially increase in 2020 in absolute dollars as a result of our ERP system being placed in service but are expected to decrease as a percentage of revenue over time.

The increase in general and administrative expenses of $7.3 million during 2020 compared with 2019 was primarily due to increased amortization and subscription expenses of $4.1 million, primarily related to our cloud-based ERP system that went live in January of 2020, personnel expenses of $2.8 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, stock-based compensation of $1.0 million and bad debt allowance of $0.8 million.

These increases were partially offset by lower professional services fees of $1.4 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.

See Note 4, “Balance Sheet Details” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

Loss on Asset Retirement

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Please refer to Note 4 “Balance Sheet Details” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

Restructuring Charges

We adopted a restructuring plan in March 2017.

This restructuring plan realigned our business, increasing our focus towards investments in software platforms and cloud products, while reducing our expense structure in the traditional systems business.

We began to take actions under this plan beginning in March 2017 and recognized $4.2 million of restructuring charges during 2017, consisting of severance and other one-time termination benefits.

Actions pursuant to this restructuring plan were complete as of December 31, 2017.

In the first quarter of 2018, we established a new restructuring plan to further realign our business resources based on the production releases of our platform offerings.

We incurred restructuring charges of $5.7 million during 2018, consisting primarily of severance and other termination related benefits.

Actions pursuant to this restructuring plan were complete as of June 30, 2018.

Gain on Sale of Product Line

During 2018, we recognized a gain of $6.7 million relating to the sale of our outdoor cabinet product line to Clearfield, Inc.

for $10.4 million.

Interest and Other Income (Expense), Net

The following table sets forth our interest and other income (expense), net (dollars in thousands):

Years Ended December 31,

2019 vs 2018 Change

2018 vs 2017 Change

Interest and other income (expense), net

Interest and other income (expense) increased by $0.9 million in 2019 , compared with 2018 , mainly due to higher interest expense related to new financing agreements and reduced foreign currency transaction gains in 2019 as compared to 2018.

Interest and Other Expense, Net

The following table sets forth our interest and other expense, net (dollars in thousands):

Years Ended December 31, 2020 vs 2019 Change

2020 2019 $ %

Interest and other expense, net $ (2,562) $ (1,131) $ (1,431) 127 %

Interest and other expense increased by $1.4 million in 2020 compared with 2019 mainly due to higher interest expense related to the line of credit being outstanding for nearly six months more than in 2019 and foreign currency losses due to the weakening of the U.S.

dollar to the Chinese Renminbi and higher interest expense related to the early settlement our financing agreements in 2020.

Provision for Income Taxes

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

Years Ended December 31,

2019 vs 2018 Change

2018 vs 2017 Change

Years Ended December 31, 2020 vs 2019 Change

2020 2019 $ %

Provision for income taxes $ 800 $ 1,162 $ (362) (31) %

Effective tax rate 2.3 % (7.0) %

The provision for income taxes increased by $0.6 million from $0.5 million in 2018 to $1.2 million in 2019 .

The increase was primarily due to a provision for foreign withholding taxes on the repatriation of cash from our foreign subsidiaries.

On December 22, 2017, the U.S.

government enacted comprehensive tax legislation commonly referred to as the “Tax Cuts and Jobs Act” , or the Tax Act.

The significant impacts from the Tax Act include a net, one-time transition tax of $1.1 million on unrepatriated earnings of foreign subsidiaries, which was offset by our current net operating loss, and a tax expense of $84.4 million related to the revaluation of our deferred tax assets and liabilities due to the reduction of the U.S.

corporate tax rate from 34% to 21%, which was offset by a reduction in our valuation allowance.

The provision for income taxes decreased by $0.4 million from $1.2 million in 2019 to $0.8 million in 2020.

The decrease was primarily due to a decrease in accrued withholding taxes related to the anticipated repatriation of foreign subsidiary earnings.

As of December 31, 2020, we had unrecognized tax benefits of $23.5 million, none of which would affect our effective tax rate if recognized.

2019 Compared to 2018

For a comparison of our results of operations for the years ended December 31, 2018 and 2017, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 1, 2019.

For a comparison of our results of operations for the years ended December 31, 2019 and 2018, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 21, 2020.

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 for our ERP migration and sales of our common stock.

As of December 31, 2019 , we had cash and cash equivalents of $46.8 million , which consisted of deposits held at banks and money market mutual funds held at major financial institutions.

This includes $2.4 million of cash primarily held by our China subsidiary.

As of December 31, 2020, we had cash, cash equivalents and marketable securities of $133.8 million.

This includes $3.0 million of cash primarily held by our foreign subsidiaries.

As of December 31, 2020, our liability for taxes that would be payable as a result of repatriation of undistributed earnings of our foreign subsidiaries to the United States was not significant and limited to withholding taxes considering our existing net operating loss carryovers.

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Years Ended December 31,

Net cash provided by (used in) operating activities

Net cash provided by (used in) investing activities

Net cash provided by operating activities $ 51,409 $ 4,654

Net cash used in investing activities (60,801) (13,353)

Net cash provided by financing activities 42,147 5,971

Operating Activities

Our operating activities provided cash of $4.7 million in 2019 , provided cash of $3.6 million in 2018 and used cash of $62.8 million in 2017 .

Our operating activities provided cash of $51.4 million in 2020 and $4.7 million in 2019.

The increase in net cash provided by operating activities during 2020 as compared to 2019 was due primarily to a favorable change in our net operating results of $58.6 million after adjustment of non-cash charges partially offset by a $11.9 million net cash outflow resulting from changes in operating assets and liabilities.

In 2019 , cash inflows from changes in operating assets and liabilities primarily consisted of a decrease in accounts receivable of $20.5 million , mainly due to increased linearity of shipments during 2019 resulting in higher collections during the year, a decrease in inventory of $10.0 million , primarily due to the consumption of transferred raw material inventory as we transitioned our supply chain, and an increase in deferred revenue of $2.4 million due to increased support contracts, software maintenance and Calix Cloud subscriptions.

Cash outflows from changes in operating assets and liabilities primarily consisted of a decrease in accounts payable of $29.4 million , primarily due to timing of inventory purchases, a decrease in other long-term liabilities of $3.4 million , mainly due to operating lease liability amortization, and a decrease in accrued liabilities of $1.8 million , mainly related to incentive compensation payments to employees.

Non-cash charges primarily consisted of stock-based compensation of $11.2 million , depreciation and amortization of $10.3 million and loss on asset retirements of $2.6 million.

In 2020, cash outflows from changes in operating assets and liabilities primarily consisted of increases in accounts receivable of $22.9 million due to higher sales in the fourth quarter of 2020 as compared to 2019 and in inventory of $12.1 million to support revenue growth.

Cash inflows from changes in operating assets and liabilities primarily consisted of increases in accrued liabilities of $11.9 million due to higher incentive compensation, inventory held at suppliers and warranty costs, in deferred revenue of $3.6 million due to support contracts, software maintenance and Calix Cloud subscriptions, in other long-term liabilities of $2.9 million due to accrued payroll taxes and restructuring charges, and in accounts payable of $2.2 million, primarily due to timing of inventory purchases.

Non-cash charges primarily consisted of stock-based compensation of $14.0 million, depreciation and amortization of $13.7 million and asset retirements and write-downs of $3.9 million.

Investing Activities

In 2019 , net cash used in investing activities consisted of capital expenditures of $13.4 million for purchases of test equipment, computer equipment and furniture and fixtures.

In 2020 cash used in investing activities of $60.8 million consisted of net purchases of marketable securities of $53.0 million and capital expenditures of $7.8 million, primarily related to purchases of test equipment and computer equipment.

Financing Activities

In 2019 , net cash provided by financing activities of $6.0 million primarily consisted of proceeds from the issuance of common stock under our employee stock purchase plans of $8.4 million and from stock option exercises of $0.4 million .

This was partially offset by payments related to financing arrangements of $2.7 million .

In 2020, net cash provided by financing activities of $42.1 million primarily consisted of proceeds from our common stock offering of $60.1 million, proceeds from the issuance of common stock under our employee stock purchase plans of $9.1 million and from stock option exercises of $9.0 million.

These inflows were partially offset by the re-payment of our line of credit of $30.0 million and payments related to financing arrangements of $5.8 million.

2019 Compared to 2018

For a discussion of our liquidity and capital resources and our cash flow activities for the years ended December 31, 2018 and 2017, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” , of our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 1, 2019.

For a discussion of our liquidity and capital resources and our cash flow activities for the years ended December 31, 2019 and 2018, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 21, 2020.

Working Capital and Capital Expenditure Needs

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

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 expenses paid 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 the BofA Loan Agreement, normal recurring trade payables, compensation-related and expense accruals, operating leases and minimum revenue-share obligations.

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

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

In August 2017, we entered into the SVB Loan Agreement, which provides for a revolving credit facility of up to $30.0 million based on a customary accounts receivable borrowing base, subject to certain exceptions for accounts originating outside the United States and certain specific accounts, which could reduce the amount available to us under the credit facility.

The SVB Loan Agreement includes affirmative and negative covenants and requires us to maintain a liquidity ratio at minimum levels specified in the SVB Loan Agreement.

For the month ended November 30, 2017, we were not able to maintain the minimum Adjusted Quick Ratio, or AQR (as defined in the SVB Loan Agreement, as amended) at the level required in the SVB Loan Agreement, which constituted an event of default.

Although SVB waived this event of default effective as of November 30, 2017 and, therefore, this default did not change our ability to borrow under the SVB Loan Agreement, we were required to amend certain covenants under the SVB Loan Agreement.

In February 2018, we entered into an amendment to the SVB Loan Agreement that, among other things, amended certain affirmative financial covenants, including reductions to the required minimum level of the AQR and the inclusion of an additional financial covenant related to the maintenance of Adjusted EBITDA (as defined in the SVB Loan Agreement, as amended).

In August 2018, we entered into a second amendment to the SVB Loan Agreement that, among other things, extended the maturity date from August 7, 2019 to August 7, 2020, amended certain financial covenants, including covenants with respect to the AQR and Adjusted EBITDA, and changed the compliance requirements for the AQR covenant from a monthly basis to a quarterly basis.

In February 2019, we entered into a third amendment to the SVB Loan Agreement to reduce the required minimum level of the AQR for the first half of 2019 and the required minimum Adjusted EBITDA for the first fiscal quarter of 2019 to accommodate the increased costs and use of cash that we anticipate for the first half of 2019 related to activities to mitigate the impact of the U.S.

As of September 28, 2019 and December 31, 2019, we were not able to maintain the minimum AQR at the level required in the SVB Loan Agreement, which constituted events of default.

SVB waived these events of default effective as of September 28, 2019 and December 31, 2019, respectively, therefore, these defaults did not change our ability to borrow under the SVB Loan Agreement.

In January 2020, we repaid outstanding borrowings and terminated the SVB Loan Agreement and entered into the BofA Loan Agreement.

The BofA Loan Agreement requires us to maintain Availability (as defined in the BofA Loan Agreement) of at least $5.0 million among other requirements and borrowing base restrictions.

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 (as defined in the BofA Loan Agreement) is less than $5.0 million, we must maintain a minimum fixed charge coverage ratio, or FCCR, (as defined in the BofA Loan Agreement) of 1.0 to 1.0.

We believe the BofA Loan Agreement is structured to better support our business.

Given our current financial position and history of operating losses, it is possible that we may fail the requirement to maintain Availability greater than $5.0 million in a future period.

As of December 31, 2019 , we borrowed the full principal amount under the SVB line of credit of $30.0 million .

Please refer to Note 5 “ Credit Agreements ” and Note 15 “Subsequent Event” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for more details on the SVB Loan Agreement and the BofA Loan Agreement.

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

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

As of December 31, 2019 , we had $2.9 million outstanding under these financing arrangements.

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

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

As of December 31, 2019 , there was $2.1 million outstanding under this arrangement.

I n March 2018, we entered into an agreement with a vendor to develop a software product and related enhancements pursuant to which we will become obligated, if the delivered software product and related enhancements meet our technical requirements for commercial sale, to make minimum revenue-share payments of $15.8 million over the subsequent three years.

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

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

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

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

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 our assets, including our IP.

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.

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,

of 1.0 to 1.0.

As of December 31, 2020, we were in compliance with these requirements, had no outstanding borrowings and had the full availability of $35.0 million.

Our interest rate on the line of credit was 3.75% as of December 31, 2020.

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

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

We had our first sale in August 2019.

Revenue-share payments are paid quarterly in arrears.

See Note 4 “Balance Sheet Details” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

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, particularly research and development related to growth initiatives such as our software and cloud platforms, and our ability to partner with third parties to outsource our research and development projects;

our ability to

manage product cost, including the cost impact of the U.S.

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

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 line of credit.

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

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

In December 2020, we amended the agreement to increase the revenue-share rate, limit the revenue-share payments to $15.8 million and extend the revenue-share period until March 2024.

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

In the fourth quarter of 2020, we paid $1.4 million to settle the remainder of the balance.

From 2019 to 2020, in connection with our ERP implementation, we entered into financing arrangements for consulting services of $3.8 million.

In the fourth quarter of 2020, we paid $1.4 million to settle the remainder of the balance.

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 December 31, 2019 consisted of our contractual obligations under the SVB Loan Agreement, financing arrangements, operating leases for office space and non-cancelable outstanding purchase obligations.

The following table summarizes our contractual obligations at December 31, 2019 (in thousands):

Our principal commitments as of December 31, 2020 consisted of our contractual obligations under non-cancelable outstanding purchase obligations, operating lease obligations for office space and a revenue share obligation.

The following table summarizes our contractual obligations as of December 31, 2020 (in thousands):

Payments Due by Period

Less Than 1 Year

More Than 5 Years

Line of credit, including interest (1)

Financing arrangements (2)

Operating lease obligations (3)

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

Non-cancelable purchase commitments (1)

(1) Line of credit contractual obligations include projected interest payments over the term of the SVB Loan Agreement, assuming the interest rate in effect for the outstanding borrowings as of December 31, 2019 of 6.25% and payment of the borrowings on August 7, 2020, the contractual maturity date of the credit facility.

See Note 5, “Credit Agreements” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion regarding our contractual obligations relating to our line of credit.

(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 developed software product and related enhancements by an engineering service provider of which approximately $12.8 million has been incurred.

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

If the minimum revenue-share payments are not achieved by the end of the three-year sales period, a true-up payment will be due.

See Note 4 “Balance Sheet Details” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion regarding our outstanding liability.

$ 123,660 $ 123,660 $ — $ — $ —

Operating lease obligations (2)

18,653 3,935 7,729 6,947 42

Revenue share obligation (3)

15,314 2,925 8,342 4,047 —

$ 157,627 $ 130,520 $ 16,071 $ 10,994 $ 42

(1) Represents outstanding purchase commitments to be delivered by our third-party manufacturers or other vendors.

See Note 6 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion regarding our outstanding purchase commitments.

(2) Future minimum operating lease obligations in the table above include primarily payments for our office locations, which expire at various dates through 2026.

See Note 6 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion regarding our operating leases.

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

(3) Represents remaining payments related to a revenue-share obligation, including imputed interest associated with developed software product and related enhancements by an engineering service provider.

The schedule reflects our expected revenue-share payments based on our revenue projections for the developed products over a sales period through March 2024.

If the minimum revenue-share payments are not achieved by the end of that period, a true-up payment will be due.

See Note 4 “Balance Sheet Details” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion regarding our outstanding liability.

Off-Balance Sheet Arrangements

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What changed 10-K

Item 7. Management’s Discussion and Analysis