What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-02-22 compared with 2020-02-21 · 354 added, 235 removed, 573 unchanged (51% of the section changed)

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Consolidated Balance Sheets, As of December 31, 20 20 and 20 19

Consolidated Statements of Comprehensive Loss, Years Ended December 31, 2019, 2018 and 2017

Consolidated Statements of Comprehensive Income ( Loss ) , Years Ended December 31, 20 20 , 201 9 and 20 18

Consolidated Statements of Stockholders’ Equity, Years Ended December 31, 20 20 , 201 9 and 20 18

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We have audited the accompanying consolidated balance sheets of Calix, Inc.

and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of comprehensive loss, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements).

and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements).

We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

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Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Financial Accounting Standard Board (FASB) Accounting Standard Codification No.

842, Leases .

2016-02, Leases (Topic 842).

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting under Item 9A.

Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

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Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of a

critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Evaluation of net realizable value of inventory

As discussed in Note 4 to the consolidated financial statements, the Company has finished goods inventories with a carrying value of $52,234 thousand as of December 31, 2020.

As discussed in Note 1 to the consolidated financial statements, the Company adjusts the inventory carrying value for excess or obsolete inventory based on assumptions about future demand for products, potential obsolescence of technology, product life cycle, and whether pricing trends or forecasts indicate that the carrying value of inventory exceeds the estimated selling price.

We identified the evaluation of net realizable value of inventory for excess and obsolescence as a critical audit matter.

Evaluation of the Company’s forecasted demand, including the Company’s determination of the effect of market and economic conditions and technology changes, required significant auditor judgment.

The following are primary procedures we performed to address this critical audit matter.

We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s inventory process.

This included controls over the forecasted demand and the Company’s determination of the effect of market and economic conditions and technology changes.

For a sample of inventory, we reperformed the analysis provided by the Company to assess the accuracy of the net realizable value.

We evaluated the Company’s forecasted demand for a selection of certain inventory by assessing historical sales trends and customer orders.

We inquired of Company’s personnel and inspected documents regarding market and economic conditions and technology changes for a selection of certain inventory.

We compared the Company’s forecasted demand to analyst reports.

We have served as the Company’s auditor since 2016.

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Restricted cash — 628

Marketable securities 52,982 —

Accounts receivable, net 69,419 46,509

Inventory 52,268 40,153

Prepaid expenses and other current assets 11,414 9,698

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Right-of-use operating leases 11,741 15,864

Goodwill 116,175 116,175

Other assets 12,165 19,440

$ 427,352 $ 316,823

LIABILITIES AND STOCKHOLDERS’ EQUITY

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100,000 shares authorized;

61,778 shares issued and 56,448 shares outstanding as of December 31, 2019, and 59,285 shares issued and 53,955 shares outstanding as of December 31, 2018

62,122 shares issued and outstanding as of December 31, 2020, and 61,778 shares issued and 56,448 shares outstanding as of December 31, 2019

Additional paid-in capital 948,055 895,899

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Accumulated deficit ( 669,092 ) ( 702,576 )

Treasury stock, 5,330 shares as of December 31, 2019 and 2018

Treasury stock, no shares as of December 31, 2020 and 5,330 shares as of December 31, 2019

Total stockholders’ equity 280,325 154,028

$ 427,352 $ 316,823

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share data)

Years Ended December 31,

2020 2019 2018

Systems $ 508,552 $ 393,231 $ 405,923

Services 32,687 31,099 35,397

Total revenue 541,239 424,330 441,320

Cost of revenue:

Systems 251,638 211,309 216,529

Services 22,582 25,096 27,409

Total cost of revenue 274,220 236,405 243,938

Gross profit 267,019 187,925 197,382

Operating expenses:

Research and development

Sales and marketing 94,185 82,553 86,432

Research and development 85,258 81,184 89,963

General and administrative 44,444 37,115 40,500

Loss on asset retirement

Restructuring charges 6,286 — 5,705

Loss on asset retirement — 2,474 —

Gain on sale of product line — — ( 6,704 )

Total operating expenses 230,173 203,326 215,896

Loss from operations

Interest and other income (expense), net:

Income (loss) from operations 36,846 ( 15,401 ) ( 18,514 )

Interest and other expense, net:

Interest expense, net ( 1,585 ) ( 958 ) ( 632 )

Other income (expense), net ( 977 ) ( 173 ) 378

Total interest and other income (expense), net

Loss before provision for income taxes

Total interest and other expense, net ( 2,562 ) ( 1,131 ) ( 254 )

Income (loss) before provision for income taxes 34,284 ( 16,532 ) ( 18,768 )

Provision for income taxes 800 1,162 530

Net loss per common share:

Basic and diluted

Weighted-average number of shares used to compute net loss per common share:

Basic and diluted

Net income (loss) $ 33,484 $ ( 17,694 ) $ ( 19,298 )

Net income (loss) per common share:

Basic $ 0.57 $ ( 0.32 ) $ ( 0.37 )

Diluted $ 0.54 $ ( 0.32 ) $ ( 0.37 )

Weighted-average number of shares used to compute net income (loss) per common share:

Basic 59,074 54,993 52,609

Diluted 61,998 54,993 52,609

Net income (loss) $ 33,484 $ ( 17,694 ) $ ( 19,298 )

Other comprehensive income (loss), net of tax -

Unrealized gain on available-for-sale marketable securities, net

foreign currency translation adjustments, net 663 ( 101 ) ( 584 )

Total other comprehensive income (loss), net of tax

Comprehensive loss

Comprehensive income (loss) $ 34,147 $ ( 17,795 ) $ ( 19,882 )

See accompanying notes to consolidated financial statements.

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(In thousands)

Comprehensive

Stockholders’

Additional Other Total

Common Stock Paid-in Comprehensive Accumulated Treasury Stockholders’

Shares Amount Capital Loss Deficit Stock Equity

Balance as of December 31, 2017 51,509 $ 1,421 $ 851,054 $ ( 169 ) $ ( 667,357 ) $ ( 39,986 ) $ 144,963

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Stock issued under employee stock purchase plans 1,476 38 7,259 — — — 7,297

Other comprehensive income

Cumulative effect of accounting change — — — — 1,773 — 1,773

Net loss — — — — ( 19,298 ) — ( 19,298 )

Other comprehensive loss — — — ( 584 ) — — ( 584 )

Balance as of December 31, 2018 53,955 1,482 876,073 ( 753 ) ( 684,882 ) ( 39,986 ) 151,934

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Stock issued under employee stock purchase plans 1,807 46 8,387 — — — 8,433

Cumulative effect of accounting change

Net loss — — — — ( 17,694 ) — ( 17,694 )

Other comprehensive loss — — — ( 101 ) — — ( 101 )

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Stock issued under employee stock purchase plans 1,052 26 9,117 — — — 9,143

Other comprehensive loss

Issuance of common stock in connection with public offering, net of expenses 3,220 82 59,981 — — — 60,063

Treasury stock retirement ( 134 ) ( 39,852 ) — — 39,986 —

Net income — — — — 33,484 — 33,484

Other comprehensive income — — — 663 — — 663

Balance as of December 31, 2020 62,122 $ 1,553 $ 948,055 $ ( 191 ) $ ( 669,092 ) $ — $ 280,325

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Years Ended December 31,

2020 2019 2018

Operating activities:

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Net income (loss) $ 33,484 $ ( 17,694 ) $ ( 19,298 )

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Stock-based compensation 13,960 11,181 17,473

Depreciation and amortization 13,718 10,316 9,187

Loss on asset retirements

Asset retirements and write-downs 3,914 2,636 326

Gain on sale of product line — — ( 6,704 )

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Accounts receivable, net ( 22,910 ) 20,517 13,858

Inventory ( 12,116 ) 9,998 ( 20,639 )

Prepaid expenses and other assets 773 ( 63 ) 3,579

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Other long-term liabilities 2,878 ( 3,362 ) ( 183 )

Net cash provided by (used in) operating activities

Net cash provided by operating activities 51,409 4,654 3,560

Investing activities:

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Purchases of marketable securities ( 72,982 ) — —

Sales of marketable securities

Maturities of marketable securities 20,000 — —

Proceeds from sale of product line — — 10,350

Net cash provided by (used in) investing activities

Net cash used in investing activities ( 60,801 ) ( 13,353 ) ( 76 )

Financing activities:

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Payments related to financing arrangements ( 5,758 ) ( 2,737 ) —

Proceeds from the sale of common stock in connection with public offering, net of expenses 60,063 — —

Proceeds from line of credit 30,000 143,300 557,915

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Net cash provided by financing activities 42,147 5,971 7,492

Effect of exchange rate changes on cash, cash equivalents and restricted cash

Effect of exchange rate changes on cash and cash equivalents 595 ( 89 ) ( 477 )

Net increase (decrease) in cash, cash equivalents and restricted cash 33,350 ( 2,817 ) 10,499

Cash, cash equivalents and restricted cash at beginning of year 47,457 50,274 39,775

Cash, cash equivalents and restricted cash at end of year

Cash and cash equivalents at end of year $ 80,807 $ 47,457 $ 50,274

Supplemental disclosures of cash flow information:

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(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 premises of tomorrow.

The Company’s platforms and services help its customers build next generation networks by embracing a DevOps operating model, optimize 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.

The Company is 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 communications service providers (“CSPs”) of all types and sizes to innovate and transform their businesses.

The Company’s 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.

Basis of Presentation and Accounting Guidance

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GAAP as found in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”).

Risks and Uncertainties

The Company is subject to risks and uncertainties as a result of the 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 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, the Company has instituted office closures, travel restrictions and a mandatory work-from-home policy for substantially all of its employees.

The spread of COVID-19 has had a prolonged impact on the Company's supply chain operations due to restrictions, reduced capacity and limited availability from suppliers whom the Company relies on for sourcing components and materials and from third-party partners whom the Company relies on for manufacturing, warehousing and logistics services.

Although demand for the Company's 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 the Company's revenue and results of operations.

Furthermore, the Company's supply chain continues to face constraints primarily due to challenges in sourcing components and materials for the Company's products, including due to plant closures.

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

As of the issuance date of these 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.

Use of Estimates

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

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 the Company expects to be entitled to in exchange for those goods or services.

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.

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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The Company’s estimate of stand-alone selling price is established considering multiple factors including, but not limited to, geographies, market conditions, competitive landscape, internal costs, gross margin objectives, characteristics of targeted customers and pricing practices.

The determination of

estimated stand-alone selling price is made through consultation with and formal approval by management, taking into consideration the go-to-market strategy.

The determination of estimated stand-alone selling price is made through consultation with and formal approval by management, taking into consideration the go-to-market strategy.

For certain revenue arrangements involving delivery of both systems and professional services, each is considered a distinct performance obligation.

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Stock-Based Compensation

Stock-based compensation expense associated with stock options, performance stock options (“PSOs”), restricted stock units (“RSUs”) and purchase rights under the Amended and Restated Employee Stock Purchase Plan (the “ESPP”) and the Amended and Restated 2017 Nonqualified Employee Stock Purchase Plan (the “NQ ESPP”) is measured at the grant date based on the fair value of the award, and is recognized, net of forfeitures, as expense over the remaining requisite service period (generally the vesting period) on a straight-line basis.

fair value of the award, and is recognized, net of forfeitures, as expense over the remaining requisite service period (generally the vesting period) on a straight-line basis.

The fair value of stock option and employee stock purchase right under the ESPP is estimated at the grant date using the Black-Scholes option valuation model.

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From time to time, the Company is involved in legal proceedings arising from the normal course of business activities.

The Company evaluates the likelihood of an unfavorable outcome of legal proceedings to which it is a party and accrues a loss

contingency when the loss is probable and reasonably estimable.

The Company evaluates the likelihood of an unfavorable outcome of legal proceedings to which it is a party and accrues a loss contingency when the loss is probable and reasonably estimable.

Assessing legal contingencies involves significant judgment and estimates, and the outcome of litigation is inherently uncertain and subject to numerous factors outside the Company’s control.

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Credit Risk and Inventory Supplier Concentrations

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.

Cash equivalents consist of money market funds, which are invested through financial institutions in the United States.

Deposits in these financial institutions may, at times, exceed federally insured limits.

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, marketable securities and accounts receivable.

Cash equivalents consist of money market funds and marketable securities with a maturity at the date of purchase of ninety days or less, which are invested through financial institutions in the United States.

Deposits in and investments held by these financial institutions may, at times, exceed federally insured limits.

The Company has not experienced any losses in such accounts.

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Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, marketable securities, trade receivables, accounts payable, line of credit and other accrued liabilities approximate their fair value due to their relatively short-term nature.

Cash, Cash Equivalents, Restricted Cash and Marketable Securities

The carrying amounts of cash and cash equivalents, trade receivables, accounts payable, line of credit and other accrued liabilities approximate their fair value due to their relatively short-term nature.

Marketable securities are valued using quoted market prices in active markets to determine fair value.

Cash, Cash Equivalents and Marketable Securities

Cash equivalents and marketable securities are stated at amounts that approximate fair value based on quoted market prices.

Restricted cash is cash that is legally restricted as to withdrawal or usage.

As of December 31, 2019 , the Company had $0.6 million in restricted cash related to a letter of credit in connection with its San Jose facility lease.

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 agency securities.

The Company has invested its excess cash primarily in money market funds and highly liquid marketable securities such as U.S.

treasury bonds, 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 agency securities with maturities greater than 90 days at date of purchase.

Marketable securities represent highly liquid U.S.

treasury bonds, 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.

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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 loss to results of operations as “Other income (expense), net”.

The Company had no investments as of December 31, 2019 and 2018.

The Company had no investments as of December 31, 2019.

See Note 2 “ Cash, Cash Equivalents, Restricted Cash and Marketable Securities”.

Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments.

The Company records a specific allowance based on an analysis of individual past-due balances.

The Company maintains an allowance for doubtful accounts for expected credit losses at contract inception resulting from the inability of its customers to make required payments.

The Company records a specific allowance and revises the expected loss based on an analysis of individual past-due balances.

Additionally, based on historical write-offs and the Company’s collection experience, the Company records an additional allowance based on a percentage of outstanding receivables.

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Contract Costs

The Company capitalizes sales commissions primarily related to extended warranty and Calix Cloud contracts for which the expected amortization period is greater than one year.

Capitalized commissions are amortized as sales and marketing expenses over the period that the related revenue is recognized, which typically range from three to ten years for extended warranty and cloud offerings.

The Company capitalizes sales commissions primarily related to extended warranty for which the expected amortization period is greater than one year.

Capitalized commissions are amortized as sales and marketing expenses over the period that the related revenue is recognized, which can be up to five years for extended warranty.

The Company classifies the unamortized portion of deferred commissions as current or noncurrent based on the timing of when the Company expects to recognize the expense.

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Management has determined that it operates as a single reporting unit and, therefore, evaluates goodwill impairment at the enterprise level.

In an annual impairment test, the Company first assesses qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test.

In assessing the qualitative factors, management considers the impact of these key factors:

macro-economic conditions, industry and market environment, overall financial performance of the Company, cash flow from operating activities, market capitalization and stock price.

If the Company determines as a result of the qualitative assessment that it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, then the quantitative test is required.

Otherwise, no further testing is required.

In a quantitative test, the Company compares its fair value to its carrying value including goodwill.

The Company determines its fair value using both an income approach and a market approach.

Under the income approach, the Company determines fair value based on estimated future cash flows, discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of the Company and the rate of return an outside investor would expect to earn.

Under the market-based approach, the Company utilizes information regarding the Company as well as publicly available industry information to determine earnings multiples that are used to value the Company.

If the carrying value of the Company exceeds its fair value, the Company will determine the amount of impairment loss by comparing the implied fair value of goodwill with the carrying value of goodwill.

An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value.

At the end of the second quarter of 2020, the Company completed its annual goodwill impairment test.

Based on its assessment of the above qualitative factors, management concluded that the fair value of the Company was more likely than not greater than its carrying amount as of June 30, 2019 .

Based on its assessment of certain qualitative factors such as market capitalization, management concluded that the fair value of the Company was more likely than not greater than its carrying amount as of June 27, 2020.

As such, it was not necessary to perform the two-step quantitative goodwill impairment test at the time.

There have been no significant events or changes in circumstances subsequent to the 2020 annual impairment test that would more likely than not indicate that the carrying value of goodwill may have been impaired as of December 31, 2020.

Therefore, there was no impairment to the carrying value of the Company’s goodwill as of December 31, 2019 .

There were no impairment losses for goodwill for the years ended December 31, 2020, 2019 or 2018.

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Newly Adopted Accounting Standards

The Company did not adopt any new accounting standard in 2020 that were significant to the Company.

In February 2016, the FASB issued Accounting Standards Update No.

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There have been no accounting pronouncements or changes in accounting pronouncements that are significant or potentially significant to the Company.

Cash, Cash Equivalents and Restricted Cash

Cash, cash equivalents and restricted cash consisted of the following (in thousands):

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.

Realized and unrealized gains and losses were de minimis for 2020.

Cash, cash equivalents, restricted cash and marketable securities consisted of the following (in thousands):

Cash and cash equivalents:

Cash $ 30,745 $ 46,815

government securities 39,994 —

Money market funds 10,068 14

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Restricted cash — 628

Total cash, cash equivalents and restricted cash 80,807 47,457

Marketable securities – U.S.

government securities

$ 133,789 $ 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 December 31, 2020, all marketable securities were due in one year or less.

Fair Value Measurements

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The fair value hierarchy also requires the Company to maximize the use of observable inputs, when available, and to minimize the use of unobservable inputs when determining inputs and determining fair value.

As of December 31, 2019 and 2018 , the Company had money market funds of $14,000 and $3.8 million , respectively, and each was classified as a Level 1 financial asset.

The fair values of money market funds classified as Level 1 were derived from quoted market prices as active markets for these instruments exist.

The Company had no Level 2 or Level 3 financial assets.

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 December 31, 2020 Level 1

Money market funds $ 10,068

government securities 92,976

As of December 31, 2019 Level 1

Money market funds $ 14

Balance Sheet Details

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Allowance for doubtful accounts ( 1,405 ) ( 374 )

$ 69,419 $ 46,509

The table below summarizes the changes in allowance for doubtful accounts and product return liability for the periods indicated (in thousands):

Balance at Beginning of Year

Additions Charged to Costs or Expenses or Revenue

Deductions and Write Offs

Balance at Beginning of Year Additions Charged to Costs or Expenses or Revenue Deductions and Write Offs Balance at

Year Ended December 31, 2020

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Finished goods 52,234 39,497

$ 52,268 $ 40,153

Property and equipment, net consisted of the following (in thousands):

Test equipment $ 37,670 $ 37,001

Software 16,093 20,646

Computer equipment 9,062 10,835

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Leasehold improvements 1,345 2,047

66,239 72,871

Accumulated depreciation and amortization ( 45,858 ) ( 51,344 )

$ 20,381 $ 21,527

Depreciation and amortization expenses were $ 13.7 million, $ 10.3 million and $ 9.2 million for the years ended December 31, 2020, 2019 and 2018, respectively.

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Other long-term assets 1,361 1,203

$ 12,165 $ 19,440

Intangible Asset Acquisition

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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 and also recognized a liability of $ 13.2 million (a non-cash investing activity).

The balance of $13.5 million is included in accrued liabilities and other long-term liabilities in the accompanying Consolidated Balance Sheet as of December 31, 2019 .

The values of the intangible asset and liability were based on the net present value of the expected payments using a 6.5% discount rate.

The intangible asset has a five -year useful life and will be amortized using 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, whichever is greater.

The liability balance is $ 13.9 million of which $ 2.9 million is included in accrued liabilities and $ 11.0 million in other long-term liabilities in the accompanying Consolidated Balance Sheet as of December 31, 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.

In December 2020, the Company 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.

Capitalized Cloud Implementation Costs

In 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 Consolidated Balance Sheet.

This amount is being amortized over a period of 29 months, representing the remaining contractual term.

The amortization expense for the year ended December 31, 2020 was $ 3.1 million.

Accrued liabilities consisted of the following (in thousands):

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Professional and consulting fees 4,497 4,996

Current portion of financing arrangements

Operating leases

Taxes payable

Component inventory held by suppliers 3,992 1,925

Taxes payable 3,476 2,021

Operating leases 2,994 2,663

Current portion of financing arrangements 2,925 4,044

Freight 1,955 808

Product returns 1,888 919

Business events

Operations 950 1,053

Other 4,737 5,561

$ 68,736 $ 57,546

Changes in the Company’s accrued warranty and retrofit liability were as follows (in thousands):

Years Ended December 31,

2020 2019 2018

Balance at beginning of year $ 7,294 $ 8,547 $ 8,708

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Accrued Restructuring Charges

The Company adopted a restructuring plan in March 2017.

This restructuring plan realigned the Company’s business, increasing its focus towards its investments in software defined access and cloud products, while reducing its expense structure in its traditional systems business.

The Company began to take actions under this plan beginning in March 2017 and recognized $4.2 million of restructuring charges for the year ended December 31, 2017, consisting primarily of severance and other one-time termination benefits.

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

The Company established a new restructuring plan in February 2018 to further align its business resources based on the production releases of its platform offerings.

The Company incurred restructuring charges of approximately $5.7 million for the year ended December 31, 2018, consisting primarily of severance and other termination related benefits.

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 year ended December 31, 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 for the year ended December 31, 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 for the year ended December 31, 2020.

The following table summarizes the activities pursuant to the above restructuring plans (in thousands):

Severance and Related Benefits

Balance as of December 31, 2017

Restructuring charges for the year

Cash payments

Balance as of December 31, 2018

Facilities Severance and Related Benefits Total

Balance as of March 28, 2020 $ — $ — $ —

Restructuring charges 5,112 1,174 6,286

Asset write-down ( 3,748 ) — ( 3,748 )

Cash payments ( 120 ) ( 1,042 ) ( 1,162 )

Balance as of December 31, 2020 $ 1,244 $ 132 $ 1,376

The Company initiated a restructuring plan in February 2018 to further align its business resources based on the production releases of its platform offerings.

The Company incurred restructuring charges of approximately $ 5.7 million for the year ended December 31, 2018, consisting primarily of severance and other termination related benefits.

Credit Agreements

Line of Credit

On August 7, 2017, the Company entered into a loan and security agreement with Silicon Valley Bank (the “SVB Loan Agreement”).

The SVB Loan Agreement provides for a senior secured revolving credit facility, pursuant to which SVB agreed to make revolving advances available to the Company in a principal amount 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 the Company under the credit facility.

The credit facility includes affirmative and negative covenants applicable to the Company and its subsidiaries.

Furthermore, the SVB Loan Agreement requires the Company to maintain a liquidity ratio at minimum levels set forth in more detail in the SVB Loan Agreement.

The credit facility also includes events of default, the occurrence and continuation of which, would provide SVB with the right to demand immediate repayment of any principal and unpaid interest under the credit facility, and to exercise remedies against the Company and the collateral securing the loans under the credit facility.

In February 2019, the Company entered into a third amendment to the SVB Loan Agreement to reduce the required minimum level of the Adjusted Quick Ratio (“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 the Company anticipated 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, the Company was in compliance with all these requirements except for the minimum AQR covenant.

The Company was not able to maintain the minimum AQR at the level required in the SVB Loan Agreement, which constituted events of default.

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

As of December 31, 2019 and 2018, the Company had borrowings outstanding of $30.0 million under the line of credit, which represents the full capacity available under the facility.

The Company's interest rate on the line of credit was 6.3% as of December 31, 2019 and 7.0% as of December 31, 2018.

In January 2020, the Company replaced the SVB Loan Agreement with a new asset-based credit facility with Bank of America (“BofA”).

See Note 15 “Subsequent Event”.

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.

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

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 of 1.0 to 1.0.

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

Financing Arrangements

During 2018, the Company entered into financing arrangements to purchase lab and test equipment for approximately $5.1 million , which are non-cash investing activities.

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

As of December 31, 2019 , there was $2.9 million outstanding under these financing arrangements, which is included in accrued liabilities and other long-term liabilities in the accompanying Consolidated Balance Sheet.

During 2017, 2018 and 2019, the Company entered into financing arrangements for consulting services of $5.4 million in connection with the Company’s enterprise resource planning (“ERP”) implementation.

These were non-cash investing activities of $2.0 million , $1.8 million and $1.6 million for years ended December 31, 2019 , 2018 and 2017 , respectively.

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 these arrangements, which is included in accrued liabilities and other long-term liabilities in the accompanying Consolidated Balance Sheet.

During 2018, the Company entered into financing arrangements to purchase lab and test equipment for approximately $ 5.1 million, which were non-cash investing activities.

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

The weighted average interest rate was 6.2 %.

During 2018 and 2019, the Company entered into financing arrangements for consulting services of $ 3.8 million in connection with the Company’s ERP implementation.

These were non-cash investing activities of $ 2.0 million and $ 1.8 million for years ended December 31, 2019 and 2018, respectively.

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

The weighted average interest rate was 6.3 %.

Commitments and Contingencies

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Future minimum payments under the non-cancelable operating leases consisted of the following as of December 31, 2020 (in thousands):

Year Ending December 31,

Future Minimum Lease Payments

Year Ending December 31, Future Minimum Lease Payments

Thereafter 42

Total future minimum lease payments 18,653

Less imputed interest ( 2,713 )

Operating lease liability consisted of the following (in thousands):

As of December 31, 2020, the o perating lease liability consisted of the following (in thousands):

Accrued liabilities - current portion of operating leases $ 2,994

Operating leases 12,946

Prior to the adoption of Topic 842, future minimum lease payments under the non-cancelable operating leases as of December 31, 2018 , which were undiscounted, were as follows (in thousands):

Year Ending December 31,

Future Minimum Lease Payments

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 $ 11.9 million and are included in the table for the year ended December 31, 2020 above.

In August 2018, the Company entered into a new office lease agreement in Petaluma, California.

The lease commenced in February 2019 for a term of 64 months .

In October 2020, the Company entered into a lease extension for its facility in Nanjing, China.

The lease extension will commence in February 2021 for a term of 60 months.

The future minimum lease payments of $ 1.7 million are included in the table for the year ended December 31, 2020 above.

The Company recorded a right-of-use operating lease asset and operating lease liability of $2.2 million in the first quarter of 2019.

The Company’s previous lease in Petaluma, California expired in March 2019.

The above tables also include future minimum lease payments for the Company's office facilities in Nanjing, China;

The Company recorded a right-of-use operating lease asset and operating lease liability of $ 1.5 million in the fourth quarter of 2020.

The Company’s previous lease in Nanjing, China expires in February 2021.

The above tables also include future minimum lease payments for the Company's office facilities in Petaluma, California;

Plymouth, Minnesota;

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Purchase Commitments

The Company’s CMs and ODMs place orders for certain component inventory in advance of the Company’s orders based upon the Company’s forecasts in order to reduce manufacturing lead times and ensure adequate component supply.

The Company’s CMs and 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 incurs a liability when the CMs and ODMs convert the component inventory to a finished product subject to purchase orders and takes ownership of the finished goods inventory.

The Company 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 December 31, 2019 , the Company had approximately $52.5 million of outstanding purchase commitments for inventory 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, purchased from suppliers component inventory when this inventory has been rendered excess or obsolete due to manufacturing and engineering change orders resulting from design changes or manufacturing discontinuation of parts by its suppliers, or in cases where inventory levels greatly exceed projected demand.

The estimated excess and obsolete inventory at suppliers was $1.9 million and $2.7 million as of December 31, 2019 and 2018 , respectively, which is included in accrued liabilities in the accompanying Consolidated Balance Sheets.

The Company records the related charges in cost of systems revenue in its Consolidated Statements of Comprehensive Loss.

As of December 31, 2020, the Company had approximately $ 123.7 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 Consolidated Balance Sheets, were $ 4.0 million and $ 1.9 million as of December 31, 2020 and 2019, respectively.

The Company records the related charges in cost of systems revenue in its Consolidated Statements of Comprehensive Income (Loss).

From time to time, the Company is involved in various legal proceedings arising from the normal course of business activities.

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Stockholders’ Equity

Stock Offering

In August 2020, the Company completed an underwritten public offering of 3,220,000 shares of its 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, resulting in net proceeds of $ 60.1 million, after deducting the underwriting discount and expenses paid 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.

Preferred Stock

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2019 Equity Incentive Award Plan

At the Company’s annual meeting of stockholders in May 2019, the stockholders approved the 2019 Equity Incentive Award Plan (the “2019 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;

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, stock appreciation rights, restricted stock, RSUs, other stock or cash-based awards and dividend equivalents to eligible individuals.

The 2019 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, RSUs or other stock or cash-based awards and dividend equivalents to eligible individuals.

The number of shares available for issuance under the 2019 Plan includes 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 December 31, 2020, there were 4.3 million shares available for issuance under the 2019 Plan.

Stock options granted under the 2019 Plan are granted in general at a price not less than 100% of the fair market value of the common stock on the date of grant.

Stock options granted under the 2019 Plan are granted at a price not less than 100 % of the fair market value of the common stock on the date of grant.

Stock options issued under the 2019 Plan generally vest 25 % on the first anniversary of the vesting commencement date and on a quarterly basis thereafter for a period of an additional three years .

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Each RSU granted under the 2019 Plan represents a right to receive one share of the Company’s common stock (subject to adjustment for certain specified changes in the capital structure of the Company) upon the completion of a specific period of continued service.

In October 2017, in connection with the hiring of its Chief Financial Offer, the Company made an “inducement” award of non-qualified stock options to purchase 0.3 million shares of the Company's common stock with an exercise price of $5.05 per share, equal to the grant date fair value based upon the closing price of the Company's common stock.

The stock option was granted outside the terms of the Company's 2010 Equity Incentive Award Plan (under the employee inducement award exemption under the New York Stock Exchange Listed Company Manual Rule 303A.08).

The stock option will vest and become exercisable over four years from the date of grant, with 25% of the shares vesting on the one -year anniversary of the grant date and the remaining shares vesting quarterly thereafter over the next three years, subject to continued employment with the Company.

In December 2017, the Company granted 1.6 million shares of performance-based stock option awards to its executives.

These performance-based stock option awards contain a one -year performance period and a subsequent two -year service period.

The performance target is based on the Company’s non-GAAP operating income during the performance period and accounted for as a performance condition.

After the one-year performance period, if the performance target is met and subject to certification by the Compensation Committee of the Company’s Board of Directors, each performance-based stock option award shall vest with respect to 50% of the earned shares on January 1, 2019 and 6.25% of the earned shares quarterly thereafter, subject to the executive’s continuous service with the Company from the grant date through the respective vesting dates.

If the performance target is not met, all such performance-based stock options shall be immediately forfeited and canceled.

In November 2018, the Compensation Committee of the Company’s Board of Directors modified the performance target.

Subsequently, in February 2019, the Compensation Committee of the Company’s Board of Directors concluded that the revised performance target was met based on the actual non-GAAP net income achieved for 2018.

As such, each stock option was earned subject to the executive's continuous service with the Company from the grant date through the remaining vesting dates.

In February 2019, PSOs 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 PSOs contain a one-year performance period and a subsequent three-year service period.

The actual number of shares earned is 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.

These PSOs would vest, subject to certification by the Compensation Committee of the Company’s Board of Directors, of the achievement of the 2019 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 3 years , subject to the executive’s continuous service with the Company through the respective vesting dates.

If all of the 2019 Performance targets are met, each

executive receives 100% of their target shares.

Furthermore, each executive may receive a number of shares above their target shares for achievement of at least 125% above the non-GAAP net income per share target, up to a maximum of 200% of the target shares for achievement above 125% of the net income per share target.

The actual number of shares earned was contingent upon the 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 August 2019, the Compensation Committee of the Company’s Board of Directors amended the 2019 Performance Targets to provide for the award of up to 40 % of the total number of shares subject to a stock option award in the event the annual corporate financial targets are not met but the quarterly corporate financial targets are met.

As a result, the probability of meeting some of the performance conditions related to these PSOs was assessed to be probable, and $0.5 million of stock-based compensation expense was recognized in 2019.

In February 2020, the Compensation Committee of the Company’s Board of Directors certified that 30 % of the PSOs were earned, of which 25 % of the shares of common stock vested on that date and the remaining 75 % of the shares of common stock earned will vest in substantially equal quarterly installments over the subsequent 3 years, subject to the executive’s continuous service with the Company through the respective vesting dates.

In February 2020, PSOs 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.

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.

In February 2021, the Compensation Committee of the Company’s Board of Directors certified the full achievement of the 2020 Performance Targets subject to the four year services condition.

As such, 25 % of the shares of the PSOs were vested on that date, and the remaining 75 % of the shares of common stock will vest substantially equal quarterly installments over the subsequent 36 months, subject to the executive’s continuous service with the Company through the respective vesting dates.

Stock-based compensation expense of $ 1.6 million was recognized for the year ended December 31, 2020 related to these awards.

Stock Options

The following table summarizes the activity of stock options under the Company’s equity incentive plans (in thousands, except per share data):

Exercise Price

Stock Options

Weighted- Remaining

Average Contractual Aggregate

Number of Exercise Price Life Intrinsic

Stock Options Shares Per Share (in years) Value (1)

Outstanding as of December 31, 2019 6,877 $ 7.66

Granted 2,379 14.25

Exercised ( 1,088 ) 8.25

Canceled ( 1,367 ) 8.19

Outstanding as of December 31, 2020 6,801 $ 9.76 7.50 $ 136,032

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(1) Amounts represent the difference between the exercise price and the fair market value of common stock at December 31, 2020 of $ 29.76 per share for all in the money options outstanding.

During the years ended December 31, 2019 , 2018 and 2017 , total intrinsic value of stock options exercised was $0.2 million , $0.1 million and $10 thousand , respectively.

During the years ended December 31, 2020, 2019 and 2018, total intrinsic value of stock options exercised was $ 6.7 million, $ 0.2 million and $ 0.1 million, respectively.

Total cash received from employees as a result of stock option exercises in 2020, 2019 and 2018 was $ 9.0 million, $ 0.4 million and $ 0.4 million, respectively.

Total fair values of stock options vested during 2020, 2019 and 2018 were $ 4.4 million, $ 7.6 million and $ 2.7 million, respectively.

Restricted Stock Units and Performance Restricted Stock Units (“PRSUs”)

The following table summarizes the activities of the Company’s RSUs and PRSUs under the Company’s equity incentive plans (in thousands, except per share data):

Outstanding at December 31, 2018

Outstanding at December 31, 2019

Upon vesting of certain RSUs and PRSUs, the Company withheld shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes and remitted the cash to the appropriate taxing authorities.

The number of shares withheld was based on the value of the RSUs or PRSUs on their vesting date as determined by the Company’s closing stock price.

The withheld shares are reserved for future grant and issuance under the 2019 Plan.

Restricted Stock Units

The following table summarizes the activities of the Company’s RSUs under the Company’s equity incentive plans (in thousands, except per share data):

Number of Fair Value

Shares Per Share

Outstanding as of December 31, 2019 334 $ 6.71

Granted 112 11.22

Vested ( 314 ) 6.70

Canceled ( 5 ) 6.78

Outstanding as of December 31, 2020 127 $ 10.71

Employee Stock Purchase Plans

The Company maintains two employee stock purchase plans - the ESPP and the NQ ESPP.

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.

The offering periods under the ESPP are six-month periods commencing on May 15 th and November 15 th of each year.

During 2020, 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 a 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.

At the Company’s annual meeting of stockholders 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.

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.

For the year ended December 31, 2019 , shares totaling 0.9 million were purchased and issued.

As of December 31, 2019 , there were 3.2 million shares available for future issuance.

As of December 31, 2020, there were 2.6 million shares available for issuance under the ESPP.

During the year ended December 31, 2020, 0.6 million shares were purchased under the

ESPP, respectively.

As of December 31, 2020, unrecognized stock-based compensation expense of $ 0.4 million related to the ESPP is expected to be recognized over a remaining service period of 0.1 years.

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.

The NQ ESPP provides six-month offering periods commencing June 21 st and December 21 st of each year.

At the Company’s annual meeting of stockholders in May 2018, 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 2.5 million shares.

The maximum number of shares of common stock currently authorized for issuance under the NQ ESPP as of December 31, 2019 is 3.5 million shares, with a maximum of 0.5 million shares allocated per purchase period.

For the year ended December 31, 2019 , 0.5 million shares were purchased and issued, with an additional equal number of shares issued subject to a risk of forfeiture.

As of December 31, 2019 , there were 2.0 million shares available for future issuance.

Beginning in the fourth quarter of 2020, the NQ ESPP’s two six-month offering periods 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, 2020 and ended 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 December 31, 2020, there were 2.3 million shares available for issuance under the NQ ESPP, including the stockholder-approved 1.2 million share increase.

During the year ended December 31, 2020, 0.5 million shares were purchased and issued.

As of December 31, 2020, unrecognized stock-based compensation expense of $ 5.2 million related to the NQ ESPP is expected to be recognized over a remaining weighted-average service period of 1.1 years.

Stock-Based Compensation

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Years Ended December 31,

2019 2019 2018

Cost of revenue:

Research and development

Products $ 575 $ 507 $ 885

Services 450 389 363

Sales and marketing 4,273 3,415 5,787

Research and development 4,736 3,913 5,969

General and administrative 3,926 2,957 4,469

$ 13,960 $ 11,181 $ 17,473

The following table summarizes the weighted-average grant date fair values of the Company’s stock-based awards granted in the periods indicated:

Years Ended December 31,

2020 2019 2018

Stock options $ 8.55 $ 3.66 $ 3.41

RSUs $ 11.22 $ 6.62 $ 6.66

ESPP $ 5.52 $ 2.04 $ 2.21

Nonqualified ESPP $ 19.40 $ 7.24 $ 7.34

The Company values the RSUs and employee stock purchase rights under the Nonqualified ESPP at the closing market price of the Company’s common stock on the date of grant.

The probability of meeting the performance condition related to the PSOs granted in December 2017 was assessed as probable as of December 31, 2018.

As a result, the Company recognized a stock-based compensation expense of $6.9 million in 2018 and $1.6 million in 2019, based on a fair value assessment as of the date of modification.

The probability of meeting one of the performance conditions related to the PSOs granted in February 2019 was assessed as probable as of December 31, 2019 .

result, the Company recognized a cumulative stock-based compensation expense of $0.5 million in 2019, based on a fair value assessment as of the date of modification.

The Company estimates the fair value of stock options and employee stock purchase right under the ESPP at the grant date using the Black-Scholes option-pricing model.

This model requires the use of the following assumptions:

Expected volatility of the Company’s common stock – The Company computes its expected volatility assumption based on a blended volatility ( 50% historical volatility and 50% implied volatility from traded options on the Company’s common stock).

(i) Expected volatility of the Company’s common stock – The Company computes its expected volatility assumption based on a blended volatility ( 50 % historical volatility and 50 % implied volatility from traded options on the Company’s common stock).

The selection of a blended volatility assumption was based upon the Company’s assessment that a blended volatility is more representative of the Company’s future stock price trend as it weighs the historical volatility with the future implied volatility.

Expected life of the option award – Represents the weighted-average period that the stock options are expected to remain outstanding.

(ii) Expected life of the option award – Represents the weighted-average period that the stock options are expected to remain outstanding.

The Company’s computation of expected life utilizes the simplified method in accordance with Staff Accounting Bulletin No.

110 (“SAB 110”) due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.

110 due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.

The mid-point between the vesting date and the expiration date is used as the expected term under this method.

Expected dividend yield – Assumption is based on the Company’s history of not paying dividends and no future expectations of dividend payouts.

Risk-free interest rate – Based on the U.S.

(iii) Expected dividend yield – Assumption is based on the Company’s history of not paying dividends and no future expectations of dividend payouts.

(iv) Risk-free interest rate – Based on the U.S.

Treasury yield curve in effect at the time of grant with maturities approximating the grant’s expected life.

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Years Ended December 31,

ESPP 2020 2019 2018

Expected volatility 70 % 48 % 42 %

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Further, to the extent the Company’s actual forfeiture rate is different from management’s estimate, stock-based compensation is adjusted accordingly.

As of December 31, 2019 , unrecognized stock-based compensation expenses by award type, net of estimated forfeitures, and their expected weighted-average recognition periods are summarized in the following table (in thousands).

December 31, 2019

As of December 31, 2020, unrecognized stock-based compensation expense by award type, net of estimated forfeitures, and their expected weighted-average recognition periods are summarized in the following table (in thousands).

Stock Option RSU ESPPs

Unrecognized stock-based compensation expense $ 15,604 $ 518 $ 5,530

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Shares Reserved for Future Issuance

The Company had common shares reserved for future issuance as follows (in thousands):

As of December 31, 2020, the Company had common shares reserved for future issuance as follows (in thousands):

Stock options outstanding 6,801

Restricted stock units outstanding 127

Performance restricted stock units outstanding

Shares available for future grant under 2019 Plan 4,344

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` Foreign Currency Translation Adjustments

Balance at December 31, 2017

Other comprehensive loss

Balance at December 31, 2018

Balance as of December 31, 2018 $ ( 753 )

Other comprehensive loss ( 101 )

Balance at December 31, 2019

Balance as of December 31, 2019 ( 854 )

Other comprehensive income 663

Balance as of December 31, 2020 $ ( 191 )

Assets and liabilities of the Company’s wholly owned foreign subsidiaries are translated from their respective functional currencies at exchange rates in effect at the balance sheet date, and revenue and expenses are translated at the monthly average exchanges rates.

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Realized foreign currency transaction gains or losses were not significant during the years ended December 31, 2020, 2019 and 2018 and are recorded in “Other income (expense), net” in the Company's Consolidated Statements of Comprehensive Loss.

The domestic and foreign components of loss before provision for incomes taxes were as follows (in thousands):

The domestic and foreign components of income (loss) before provision for incomes taxes were as follows (in thousands):

Years Ended December 31,

2020 2019 2018

Domestic $ 33,777 $ ( 17,935 ) $ ( 20,463 )

Foreign 507 1,403 1,695

$ 34,284 $ ( 16,532 ) $ ( 18,768 )

Provision for income taxes consisted of the following (in thousands):

Years Ended December 31,

2020 2019 2018

State $ 285 $ 313 $ 105

Foreign 507 835 360

Current income tax 792 1,148 465

Deferred foreign income tax 8 14 65

The differences between the statutory tax rate and the effective tax rate, expressed as a percentage of loss before income taxes, were as follows:

$ 800 $ 1,162 $ 530

The differences between the statutory and effective tax rates, expressed as a percentage of net income (loss) before income taxes, were as follows:

Years Ended December 31,

2020 2019 2018

Federal statutory rate 21.0 % 21.0 % 21.0 %

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Foreign income inclusion — ( 1.3 ) ( 1.2 )

Non-deductible stock compensation

Stock-based compensation ( 4.1 ) ( 5.1 ) ( 4.3 )

Other permanent items 0.6 ( 2.0 ) ( 1.6 )

Tax true-up ( 0.4 ) ( 11.8 ) ( 2.3 )

Valuation allowance ( 48.1 ) ( 16.8 ) ( 25.6 )

Net operating loss expiration 37.4 — —

ASC 606 adjustment — — ( 2.0 )

Effective tax rate

2.3 % ( 7.0 ) % ( 2.8 ) %

The significant components of the Company’s deferred tax assets were as follows (in thousands):

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Intangible assets ( 568 ) ( 111 )

Other ( 18 ) ( 10 )

Gross deferred tax assets 189,839 206,328

Valuation allowance ( 189,858 ) ( 206,339 )

All deferred tax assets, along with any related valuation allowance, are classified in the Consolidated Balance Sheet as long-term.

$ ( 19 ) $ ( 11 )

All deferred taxes, along with any related valuation allowance, are classified in the Consolidated Balance Sheet as long-term.

Management reviews the recognition of deferred tax assets to determine if realization of such assets is more likely than not.

The realization of the Company’s deferred tax assets is dependent upon future earnings.

The Company has been in a cumulative loss position since inception, which represents a significant piece of negative evidence.

The realization of the Company’s deferred tax assets is dependent upon the evaluation of historic losses, reversing temporary differences, and future earnings.

As of December 31, 2020, the positive evidence includes 3 years of cumulative U.S.

profitability.

The negative evidence includes historic cumulative losses from 1999 through the third quarter of 2020, expiring attributes that are unavailable for utilization, uneven financial results from year to year, and uncertainly related to the COVID-19 pandemic which makes the evaluation of future earnings challenging.

Using the more likely than not criteria specified in the applicable accounting guidance, this negative evidence cannot be overcome by positive evidence currently available to the Company.

As a result, the Company has established a full valuation allowance against its deferred tax assets with the exception of certain foreign deferred tax assets.

The Company’s valuation allowance increased by $2.8 million and $4.8 million for the years ended December 31, 2019 and 2018, respectively.

As a result, the Company has maintained a full valuation allowance against its deferred tax assets with the exception of certain foreign deferred tax assets.

The Company’s valuation allowance decreased by $ 16.5 million in 2020 and increased by $ 2.8 million in 2019.

As of December 31, 2020, the Company had U.S.

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states research and development credits of approximately $ 37.3 million, $ 38.0 million and $ 3.1 million, respectively, as of December 31, 2020.

federal research and development credits will begin to expire in 2020 and the California research and development credits have no expiration date.

federal research and development credits will begin to expire in 2020 and the California research

and development credits have no expiration date.

The credits related to other various U.S.

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earnings or future non-U.S.

As such, the Company recorded a tax expense of $0.6 million for the estimated withholding, state income tax and foreign income tax associated with repatriating non-U.S.

As such, for the year ended December 31, 2020, the Company recorded a current and cumulative tax expense of $ 0.1 million and $ 0.6 million, respectively, for the estimated withholding, state income tax and foreign income tax associated with repatriating non-U.S.

earnings back to the United States.

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The Company files tax returns in the United States and various state jurisdictions, the United Kingdom, China and Brazil.

The tax years 2000 through 2019 remain open and subject to examination by the appropriate governmental agencies in the U.S.

due to tax attribute carryforwards.

Net Loss Per Common Share

The following table sets forth the computation of basic and diluted net loss per common share for the periods indicated (in thousands, except per share data):

The tax years 2000 through 2020 remain open and subject to examination by the appropriate governmental agencies due to tax attribute carryforwards.

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):

Years Ended December 31,

Weighted-average common shares outstanding

Basic and diluted net loss per common share

Potentially dilutive shares, weighted-average

2020 2019 2018

Net income (loss) $ 33,484 $ ( 17,694 ) $ ( 19,298 )

Weighted-average common shares — basic 59,074 54,993 52,609

Effect of dilutive potential common shares 2,924 — —

Weighted-average common shares — diluted 61,998 54,993 52,609

Basic net income (loss) per common share $ 0.57 $ ( 0.32 ) $ ( 0.37 )

Diluted net income (loss) per common share $ 0.54 $ ( 0.32 ) $ ( 0.37 )

Potentially dilutive shares excluded, weighted-average 753 6,607 5,833

Unvested restricted stock awards are included in the calculation of basic weighted-average shares because such shares are participating securities;

however, the impact was immaterial.

Potentially dilutive shares have been excluded from the computation of diluted net loss per common share when their effect is antidilutive.

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 and RSUs.

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Years Ended December 31,

2020 2019 2018

United States $ 469,649 $ 365,586 $ 386,341

Revenue amounts are accounted for under ASC 605 for 2017.

Europe 22,924 11,480 8,858

Canada 16,842 14,531 10,542

Middle East 14,071 18,664 18,814

Caribbean 9,864 5,809 7,075

Other 7,889 8,260 9,690

$ 541,239 $ 424,330 $ 441,320

The Company’s property and equipment, net of accumulated depreciation, are located in the following geographical areas (in thousands):

United States $ 19,383 $ 20,510

China 998 1,017

$ 20,381 $ 21,527

Contract Asset

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The balance at December 31, 2019 was $ 5.0 million of which $ 0.4 million remained in the Company's Consolidated Balance Sheet at December 31, 2020.

The closing balance at December 31, 2019 was $5.0 million of which the Company expects to bill 82% of the balance during 2020.

The decrease in the contract asset was driven by the timing and volume of professional services contracts with a major customer in fiscal 2019 partially offset by additional business from other customers.

The closing balance as of December 31, 2020 was $ 2.3 million of which the Company expects to bill 92 % of the balance during 2021.

The decrease in the contract asset was driven by billings for past services as well as the timing and volume of professional services contracts.

Contract Liability

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Extended warranty 4,538 4,678

19,189 17,158

Products and services 1,879 790

Extended warranty 18,025 17,550

19,904 18,340

$ 39,093 $ 35,498

The increase in the deferred revenue balance for the year ended December 31, 2020 is primarily driven by cash payments received or due in advance of satisfying the Company's performance obligations, offset by $ 15.8 million of revenue recognized that was included in the deferred revenue balance at the beginning of the year.

Revenue allocated to remaining performance obligations represent contract revenue that has not yet been recognized for contracts greater than one year, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods.

This amount was $57.7 million as of December 31, 2019 , and the Company expects to recognize 40% of such revenue over the next 12 months and the remainder thereafter.

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

$ 71.1 million as of December 31, 2020, and the Company expects to recognize 40 % 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 and Calix Cloud products for which the expected amortization period is greater than one year.

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 December 31, 2020, the unamortized balance of deferred commissions was $ 0.7 million.

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Concentrations of credit risk in relation to customers with an accounts receivable balance of 10% or greater of total accounts receivable and customers with net revenue of 10% or greater of total revenue are presented below for the periods indicated.

Percentage of Accounts Receivable

Percentage of Revenue

Years Ended December 31,

Percentage of Accounts Receivable Percentage of Revenue

December 31, Years Ended December 31,

2020 2019 2020 2019 2018

Lumen Technologies, Inc.

(formerly CenturyLink, Inc.) < 10 %

17 % 11 % 15 % 18 %

Product Line Divestiture

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The Company’s fiscal year begins on January 1st and ends on December 31 st .

Quarterly periods are based on a 4-4-5 fiscal calendar with the first, second and third fiscal quarters ending on the 13 th Saturday of each fiscal period.

As a result, the Company had one fewer day in the first quarter of 2019 and one more day in the fourth quarter of 2019 than in the respective 2018 periods.

Quarterly periods are based on a 4-4-5 fiscal calendar with the first quarter ending on the Saturday closest to March 31 st .

As a result, the Company had one fewer day in the first quarter of 2020 and two more days in the fourth quarter of 2020 than in the respective 2019 periods.

The following table presents selected unaudited quarterly financial data of the Company (in thousands, except per share data).

The Company’s quarterly results of operations for these periods are not necessarily indicative of future results of operations.

Fiscal Year 2019 Quarter Ended

2020 Quarter Ended

March 28 June 27 September 26 December 31

Revenue $ 101,682 $ 119,023 $ 150,508 $ 170,026

Gross profit 45,624 56,405 75,975 89,015

Operating income (loss) ( 6,340 ) ( 3,338 ) 21,750 24,774

Net income (loss) ( 6,944 ) ( 4,212 ) 20,538 24,102

Net income (loss) per common share, basic and diluted

Fiscal Year 2018 Quarter Ended

Net income (loss) per common share, basic $ ( 0.12 ) $ ( 0.07 ) $ 0.34 $ 0.39

Net income (loss) per common share, diluted $ ( 0.12 ) $ ( 0.07 ) $ 0.32 $ 0.37

2019 Quarter Ended

March 30 June 29 September 28 December 31

Revenue $ 89,350 $ 100,304 $ 114,485 $ 120,191

Gross profit 38,343 44,668 50,202 54,712

Operating income (loss) ( 9,113 ) ( 4,931 ) ( 2,851 ) 1,494

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Net income (loss) per common share, basic and diluted $ ( 0.18 ) $ ( 0.09 ) $ ( 0.06 ) $ 0.01

Subsequent Event

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

The new loan and security agreement (“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 the Company’s assets, including the Company’s intellectual property.

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

The Availability (as defined in the BofA Loan Agreement) 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 of 1.0 to 1.0.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data