CALIX, INC 10-Q

ITEM 1. Financial Statements CALIX, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value) July 3, 2021 December 31, 2020 (Unaudited) (See Note 1) ASSETS Current assets: Cash and cash equivalents $ 58,590 $ 80,807 Marketable securities 117,259 52,982 Accounts receivable, net 80,164 69,419 Inventory 77,136 52,268 Prepaid expenses and other current assets 17,449 11,414 Total current assets 350,598 266,890 Property and equipment, net 19,663 20,381 Right-of-use operating leases 10,983 11,741 Goodwill 116,175 116,175 Other assets 10,416 12,165 $ 507,835 $ 427,352 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 34,971 $ 13,115 Accrued liabilities 58,627 68,736 Deferred revenue 23,951 19,189 Total current liabilities 117,549 101,040 Long-term portion of deferred revenue 21,307 19,904 Operating leases 11,920 12,946 Other long-term liabilities 11,421 13,137 Total liabilities 162,197 147,027 Commitments and contingencies (See Note 7) Stockholders’ equity: Preferred stock, $ 0.025 par value; 5,000 shares authorized; no shares issued and outstanding as of July 3, 2021 and December 31, 2020 — — Common stock, $ 0.025 par value; 100,000 shares authorized; 63,200 shares issued and outstanding as of July 3, 2021, and 62,122 shares issued and outstanding as of December 31, 2020 1,580 1,553 Additional paid-in capital 972,259 948,055 Accumulated other comprehensive loss ( 182 ) ( 191 ) Accumulated deficit ( 628,019 ) ( 669,092 ) Total stockholders’ equity 345,638 280,325 $ 507,835 $ 427,352 See accompanying notes to condensed consolidated financial statements. 4 Table of Contents CALIX, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands, except per share data) (Unaudited) Three Months Ended Six Months Ended July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020 Revenue: Systems $ 159,553 $ 110,841 $ 312,855 $ 205,350 Services 9,117 8,182 17,889 15,355 Total revenue 168,670 119,023 330,744 220,705 Cost of revenue: Systems 72,673 56,721 142,336 107,429 Services 6,378 5,897 12,547 11,247 Total cost of revenue 79,051 62,618 154,883 118,676 Gross profit 89,619 56,405 175,861 102,029 Operating expenses: Sales and marketing 29,710 21,343 57,761 41,967 Research and development 25,716 20,921 50,080 41,592 General and administrative 13,664 11,193 26,689 21,862 Restructuring charges — 6,286 — 6,286 Total operating expenses 69,090 59,743 134,530 111,707 Income (loss) from operations 20,529 ( 3,338 ) 41,331 ( 9,678 ) Interest and other income (expense), net: Interest expense, net ( 119 ) ( 617 ) ( 244 ) ( 907 ) Other income (expense), net 255 ( 109 ) 343 ( 94 ) Total interest and other income (expense), net 136 ( 726 ) 99 ( 1,001 ) Income (loss) before provision for income taxes 20,665 ( 4,064 ) 41,430 ( 10,679 ) Provision for income taxes 207 148 357 477 Net income (loss) $ 20,458 $ ( 4,212 ) $ 41,073 $ ( 11,156 ) Net income (loss) per common share: Basic $ 0.32 $ ( 0.07 ) $ 0.65 $ ( 0.20 ) Diluted $ 0.30 $ ( 0.07 ) $ 0.61 $ ( 0.20 ) Weighted-average number of shares used to compute net income (loss) per common share: Basic 63,042 57,261 62,795 56,906 Diluted 67,634 57,261 67,347 56,906 Net income (loss) $ 20,458 $ ( 4,212 ) $ 41,073 $ ( 11,156 ) Other comprehensive loss, net of tax - foreign currency translation adjustments, net 44 3 9 249 Comprehensive income (loss) $ 20,502 $ ( 4,209 ) $ 41,082 $ ( 10,907 ) See accompanying notes to condensed consolidated financial statements. 5 Table of Contents CALIX, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, unaudited) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Treasury Stock Total Stockholders’ Equity Shares Amount Balance at April 3, 2021 62,851 $ 1,572 $ 961,846 $ ( 226 ) $ ( 648,477 ) $ — $ 314,715 Stock-based compensation — — 6,223 — — — 6,223 Issuance of common stock under equity incentive plans, net of forfeitures 349 8 4,190 — — — 4,198 Net income — — — — 20,458 — 20,458 Other comprehensive income — — — 44 — — 44 Balance at July 3, 2021 63,200 $ 1,580 $ 972,259 $ ( 182 ) $ ( 628,019 ) $ — $ 345,638 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Treasury Stock Total Stockholders’ Equity Shares Amount Balance at March 28, 2020 56,628 $ 1,549 $ 899,978 $ ( 1,106 ) $ ( 709,520 ) $ ( 39,986 ) $ 150,915 Stock-based compensation — — 3,241 — — — 3,241 Issuance of common stock under equity incentive plans, net of forfeitures 1,515 38 9,183 — — — 9,221 Net loss — — — — ( 4,212 ) — ( 4,212 ) Other comprehensive income — — — 3 — — 3 Balance at June 27, 2020 58,143 $ 1,587 $ 912,402 $ ( 1,103 ) $ ( 713,732 ) $ ( 39,986 ) $ 159,168 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Treasury Stock Total Stockholders’ Equity Shares Amount Balance at December 31, 2020 62,122 $ 1,553 $ 948,055 $ ( 191 ) $ ( 669,092 ) $ — $ 280,325 Stock-based compensation — — 11,394 — — — 11,394 Issuance of common stock under equity incentive plans, net of forfeitures 1,078 27 12,810 — — — 12,837 Net income — — — — 41,073 — 41,073 Other comprehensive income — — — 9 — — 9 Balance at July 3, 2021 63,200 $ 1,580 $ 972,259 $ ( 182 ) $ ( 628,019 ) $ — $ 345,638 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Treasury Stock Total Stockholders’ Equity Shares Amount Balance at December 31, 2019 56,448 $ 1,545 $ 895,899 $ ( 854 ) $ ( 702,576 ) $ ( 39,986 ) $ 154,028 Stock-based compensation — — 6,225 — — — 6,225 Issuance of common stock under equity incentive plans, net of forfeitures 1,695 42 10,278 — — — 10,320 Net loss — — — — ( 11,156 ) — ( 11,156 ) Other comprehensive loss — — — ( 249 ) — — ( 249 ) Balance at June 27, 2020 58,143 $ 1,587 $ 912,402 $ ( 1,103 ) $ ( 713,732 ) $ ( 39,986 ) $ 159,168 See accompanying notes to condensed consolidated financial statements. 6 Table of Contents CALIX, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands, unaudited) Six Months Ended July 3, 2021 June 27, 2020 Operating activities: Net income (loss) $ 41,073 $ ( 11,156 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Stock-based compensation 11,394 6,225 Depreciation and amortization 7,737 7,006 Asset retirements and write-downs — 3,749 Changes in operating assets and liabilities: Accounts receivable, net ( 10,745 ) ( 12,082 ) Inventory ( 24,868 ) 3,494 Prepaid expenses and other assets ( 6,390 ) 1,175 Accounts payable 21,918 ( 671 ) Accrued liabilities ( 10,184 ) 7,868 Deferred revenue 6,164 ( 947 ) Other long-term liabilities ( 2,742 ) ( 726 ) Net cash provided by operating activities 33,357 3,935 Investing activities Purchases of property and equipment ( 3,928 ) ( 4,480 ) Purchases of marketable securities ( 147,277 ) — Maturities of marketable securities 83,000 — Net cash used in investing activities ( 68,205 ) ( 4,480 ) Financing activities: Proceeds from common stock issuances related to employee benefit plans 12,837 10,320 Payments related to financing arrangements ( 212 ) ( 1,529 ) Proceeds from line of credit — 30,000 Repayment of line of credit — ( 34,000 ) Payments to originate the line of credit — ( 285 ) Net cash provided by financing activities 12,625 4,506 Effect of exchange rate changes on cash and cash equivalents 6 ( 238 ) Net increase (decrease) in cash and cash equivalents ( 22,217 ) 3,723 Cash and cash equivalents at beginning of period 80,807 47,457 Cash and cash equivalents at end of period $ 58,590 $ 51,180 See accompanying notes to condensed consolidated financial statements. 7 Table of Contents CALIX, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Company and Basis of Presentation Company Calix, Inc. (together with its subsidiaries, “Calix” or the “Company”) was incorporated in August 1999 and is a Delaware corporation. The Company is 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 broadband service providers (“BSPs”) of all types and sizes to innovate and transform their businesses. The Company’s BSP 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 BSPs 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 The accompanying unaudited condensed consolidated financial statements, including the accounts of Calix, Inc. and its wholly-owned subsidiaries, have been prepared in accordance with the requirements of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. generally accepted accounting principles (“GAAP”) can be condensed or omitted. In the opinion of management, the financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of the Company’s financial position and operating results. All intercompany balances and transactions have been eliminated in consolidation. The Condensed Consolidated Balance Sheet as of December 31, 2020 has been derived from the audited financial statements at that date. The results of the Company’s operations can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year or any future periods. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. The Company’s fiscal year begins on January 1 st and ends on December 31 st . Quarterly periods are based on a 4-4-5 calendar with the first quarter ending on the Saturday closest to March 31 st . As a result, the Company had five more days in the six months ended July 3, 2021 than for the six months ended June 27, 2020. The preparation of financial statements in conformity with GAAP for interim financial reporting requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Risks and Uncertainties The Company is subject to risks and uncertainties as a result of the 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, particularly as variants of the coronavirus continue to spread around the world. Although the availability of vaccines has increased, there are no assurances as to when the pandemic will be fully contained. In March 2020, the Company instituted office closures, travel restrictions and a work-from-anywhere policy for substantially all of its employees due to shelter-in-place mandates. In July 2021, the Company reopened its U.S. offices to fully-vaccinated employees who choose to work in the office and visitors and lifted certain travel restrictions. 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 on whom the Company relies for sourcing components and materials and from third-party partners on whom the Company relies 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. The prolonged impact of COVID-19 could exacerbate these constraints or cause further supply chain disruptions. As of the issuance date of these condensed consolidated financial statements, the extent to which the COVID-19 pandemic may materially impact the Company’s financial condition, liquidity or results of operations remains uncertain. 8 Table of Contents 2. Significant Accounting Policies The Company’s significant accounting policies are disclosed in its Annual Report on Form 10-K for the year ended December 31, 2020. The Company’s significant accounting policies did not change during the six months ended July 3, 2021. Newly Adopted Accounting Standard The Company did not adopt any new accounting standards during the six months ended July 3, 2021 that were significant to the Company. Recent Accounting Pronouncements Not Yet Adopted There have been no additional accounting pronouncements or changes in accounting pronouncements during the six months ended July 3, 2021 as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, that are significant or potentially significant to the Company. 3. Cash, Cash Equivalents and Marketable Securities The Company has invested its excess cash primarily in money market funds and highly liquid marketable securities such as commercial paper, corporate debt securities 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 commercial paper, U.S. government agency securities and U.S. government securities with maturities greater than 90 days at date of purchase. Cash equivalents are stated at amounts that approximate fair value based on quoted market prices. Marketable securities are recorded at their fair values. Marketable securities with maturities greater than one year are classified as current because management considers all marketable securities to be available for current operations. 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 loss to results of operations as other income (expense), net. Realized and unrealized gains and losses were de minimis for the period ended July 3, 2021. Cash, cash equivalents and marketable securities consisted of the following (in thousands): July 3, 2021 December 31, 2020 Cash and cash equivalents: Cash $ 17,777 $ 30,745 Commercial paper 21,399 — Money market funds 18,263 10,068 Corporate debt securities 1,151 — U.S. government securities — 39,994 Total cash and cash equivalents 58,590 80,807 Marketable securities: Commercial paper 114,150 — U.S. government agency securities 3,109 — U.S. government securities — 52,982 Total marketable securities 117,259 52,982 $ 175,849 $ 133,789 The carrying amounts of the Company’s money market funds approximate their fair values due to their nature, duration and short maturities. 4. Fair Value Measurements The Company measures its cash equivalents and marketable securities at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on 9 Table of Contents assumptions that market participants would use in pricing an asset or liability. The Company utilizes the following three-tier value hierarchy, which prioritizes the inputs used in measuring fair value: Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 – Observable inputs other than quoted prices included in Level 1 for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-driven valuations in which all significant inputs and significant value drivers are observable in active markets. Level 3 – Unobservable inputs to the valuation derived from fair valuation techniques in which one or more significant inputs or significant value drivers are unobservable. The 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. 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 July 3, 2021 Level 1 Level 2 Total Money market funds $ 18,263 $ — $ 18,263 Commercial paper — 135,549 135,549 U.S. government agency securities — 3,109 3,109 Corporate debt securities — 1,151 1,151 $ 18,263 $ 139,809 $ 158,072 As of December 31, 2020 Level 1 Money market funds $ 10,068 U.S. government securities 92,976 $ 103,044 5. Balance Sheet Details Accounts receivable, net consisted of the following (in thousands): July 3, 2021 December 31, 2020 Accounts receivable $ 80,971 $ 70,824 Allowance for doubtful accounts ( 807 ) ( 1,405 ) $ 80,164 $ 69,419 Inventory consisted of the following (in thousands): July 3, 2021 December 31, 2020 Raw materials $ 182 $ 34 Finished goods 76,954 52,234 $ 77,136 $ 52,268 10 Table of Contents Property and equipment, net consisted of the following (in thousands): July 3, 2021 December 31, 2020 Test equipment $ 37,133 $ 37,670 Software 14,905 16,093 Computer equipment 9,897 9,062 Furniture and fixtures 2,025 2,069 Leasehold improvements 1,466 1,345 Total 65,426 66,239 Accumulated depreciation and amortization ( 45,763 ) ( 45,858 ) $ 19,663 $ 20,381 Other long-term assets consisted of the following (in thousands): July 3, 2021 December 31, 2020 Intangible asset $ 8,201 $ 9,517 Other long-term assets 2,215 2,648 $ 10,416 $ 12,165 Intangible Asset Acquisition In March 2018, and as amended in December 2020, the Company entered into an agreement with a vendor to develop certain software product and related enhancements pursuant to which the Company is obligated to make revenue-share payments under the program, subject to aggregate fixed revenue-share payments of $ 15.8 million. The payments are based on a revenue-share rate applied to revenue from the developed-product and the corresponding hardware sales 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. 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 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. As of July 3, 2021, the liability, including accrued interest, was $ 14.0 million of which $ 3.4 million is included in accrued liabilities and $ 10.6 million in other long-term liabilities in the accompanying Condensed Consolidated Balance Sheet. As of December 31, 2020, the liability, including accrued interest, was $ 13.9 million of which $ 2.9 million was included in accrued liabilities and $ 11.0 million in other long-term liabilities. Accrued liabilities consisted of the following (in thousands): July 3, 2021 December 31, 2020 Compensation and related benefits $ 16,725 $ 23,740 Warranty and retrofit 9,911 9,208 Taxes payable 4,459 3,476 Professional and consulting fees 4,347 4,497 Component inventory held by suppliers 4,002 3,992 Current portion of revenue share obligations 3,417 2,925 Customer advances or rebates 3,359 8,374 Operating leases 3,005 2,994 Product returns 2,062 1,888 Operations 1,741 950 Freight 1,543 1,955 Other 4,056 4,737 $ 58,627 $ 68,736 11 Table of Contents Changes in the Company’s accrued warranty and retrofit liability were as follows (in thousands): Three Months Ended Six Months Ended July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020 Balance at beginning of period $ 9,650 $ 7,430 $ 9,208 $ 7,294 Provision for warranty and retrofit charged to cost of revenue 1,003 1,276 2,205 2,625 Utilization of reserve ( 742 ) ( 974 ) ( 1,502 ) ( 2,187 ) Balance at end of period $ 9,911 $ 7,732 $ 9,911 $ 7,732 Accrued Restructuring Charges Responding to trends caused by the COVID-19 pandemic, the Company initiated a restructuring plan in June 2020 to accelerate the Company’s All Platform future and to align with a work-from-anywhere culture. The Company incurred restructuring charges of approximately $ 6.3 million, consisting of facilities-related charges and severance and other termination-related benefits during 2020. As part of the Company’s shift to a work-from-anywhere culture, many of the Company’s employees elected to work remotely on a permanent basis. In light of this change, the Company evaluated its space needs and determined that a portion of the Company's leased office spaces in Richardson, Texas and San Jose, California would no longer be utilized. As a result, the right-of-use assets related to these leases were written down, resulting in a charge of $ 3.5 million during 2020. In addition, the Company wrote off assets with net book value of $ 0.3 million and accrued common areas maintenance fees and property taxes related to the unused office space totaling $ 1.4 million during 2020. The following table summarizes restructuring activities (in thousands): Facilities Severance and Related Benefits Total Balance as of December 31, 2020 $ 1,244 $ 132 $ 1,376 Cash payments ( 133 ) ( 132 ) ( 265 ) Balance as of July 3, 2021 $ 1,111 $ — $ 1,111 6. Credit Agreements Line of Credit The Company has a 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 its 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 % ( 3.75 % as of July 3, 2021), in each case largely based on a fixed charge coverage ratio measured at the end of each fiscal quarter. As of July 3, 2021, the Company had no outstanding borrowings and had full availability of borrowings up to $ 35.0 million. 12 Table of Contents 7. Commitments and Contingencies Lease Commitments The Company leases office space under non-cancelable operating leases. Certain of the Company’s operating leases contain renewal options and rent acceleration clauses. Future minimum payments under the non-cancelable operating leases consisted of the following as of July 3, 2021 (in thousands): Period Future Minimum Lease Payments Remainder of 2021 $ 1,905 2022 3,911 2023 4,053 2024 3,855 2025 3,342 Thereafter 158 Total future minimum lease payments 17,224 Less imputed interest ( 2,299 ) $ 14,925 As of July 3, 2021, the operating lease liability consisted of the following (in thousands): Accrued liabilities - current portion of operating leases $ 3,005 Operating leases 11,920 $ 14,925 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 $ 10.7 million and are included in the table above. The weighted average discount rate for the Company's operating leases as of July 3, 2021 was 6.6 %. The weighted average remaining lease term as of July 3, 2021 was 4.3 years. For the three and six months ended July 3, 2021, total rent expense of the Company was $ 0.9 million and $ 2.1 million, respectively. For the three and six months ended June 27, 2020, total rent expense of the Company was $ 1.1 million and $ 2.2 million, respectively. Cash paid within operating cash flows for operating leases was $ 2.0 million and $ 1.7 million for the six months ended July 3, 2021 and June 27, 2020, respectively. Purchase Commitments The Company’s suppliers, including contract manufacturers (“CMs”) and original design manufacturers (“ODMs”), place orders for certain component inventory in advance based upon the Company’s build forecasts in order to reduce manufacturing lead times and ensure adequate component supply. The components are used by the CMs and ODMs to build the products included in the build forecasts. The Company generally does not take ownership of the components held by CMs and ODMs. The Company places purchase orders with its CMs and ODMs in order to fulfill its monthly finished product inventory requirements. The Company 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 July 3, 2021, the Company had approximately $ 140.9 million of outstanding purchase commitments for inventories to be delivered by its suppliers, including CMs and ODMs, within one year. The Company has from time to time, and subject to certain conditions, reimbursed certain suppliers for component inventory purchases when this inventory has been rendered excess or obsolete, for example due to manufacturing and engineering change orders resulting from design changes, manufacturing discontinuation of products by its suppliers, or in cases where the Company has committed inventory levels that greatly exceed projected demand. The estimated excess and obsolete inventory liabilities related to such manufacturing and engineering change orders and other factors, which are included in accrued liabilities in the accompanying balance sheets, was $ 4.0 million for both of the periods ending July 3, 2021 and December 31, 2020, respectively. The Company records the related charges in cost of systems revenue in its Condensed Consolidated Statements of Comprehensive Income (Loss). 13 Table of Contents Litigation From time to time, the Company is involved in various legal proceedings arising from the normal course of business activities. The Company is not currently a party to any legal proceedings that, if determined adversely to the Company, in management’s opinion, are currently expected to individually or in the aggregate have a material adverse effect on the Company’s business, operating results or financial condition taken as a whole. 8. Stockholders’ Equity 2019 Equity Incentive Award 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 Equity Incentive Award Plan (“the 2019 Plan”). The 2019 Plan provides for the grant of stock options, including incentive stock options and nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, other stock or cash-based awards and dividend equivalents to eligible individuals. At the Company’s 2021 annual meeting of stockholders, the stockholders approved an increase in the number of shares of common stock issuable under the 2019 Plan by 3.8 million shares. As of July 3, 2021, there were 7.0 million shares available for issuance under the 2019 Plan. Stock Options During the three months ended July 3, 2021, stock option awards exercisable for up to an aggregate of 0.5 million shares of common stock were granted with a grant date weighted-average exercise price of $ 40.82 per share. During the six months ended July 3, 2021, stock option awards exercisable for up to an aggregate of 0.6 million shares of common stock were granted with a grant date weighted-average exercise price of $ 39.38 per share. These stock option awards vest 25 % on the first anniversary of the vesting commencement date and on a quarterly basis thereafter over an additional three years . In February 2021, performance-based stock option awards exercisable for up to an aggregate of 0.7 million shares of common stock were granted to certain Company executives with a grant date exercise price of $ 36.74 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 2021 (collectively, the “2021 Performance Targets”) during the one-year performance period. These performance-based stock option awards will vest, subject to certification by the Compensation Committee of the Company’s Board of Directors upon the achievement of the 2021 Performance Targets, as to 25 % of the shares of common stock earned on the one year anniversary of the date of grant, and as to the remaining 75 % of the shares of common stock earned, in substantially equal quarterly installments over the subsequent 36 months, subject to the executive’s continuous service with the Company through the respective vesting dates. If the non-GAAP net income target is achieved below 80 % of target or the bookings target is achieved below 90 % of target, no shares would be awarded, and the performance-based stock option awards would be forfeited in full. If both targets are achieved at the minimum threshold of 80 % of target for non-GAAP net income and 90 % of target for bookings, then the shares are awarded at 50 % of the granted shares, with an increasing percentage of shares awarded above the minimum thresholds up to 100 % of the granted shares if both targets are achieved at 100 % or more of target. The probability of meeting the performance conditions related to these performance-based stock option awards was assessed to be probable as of July 3, 2021, and stock-based compensation expense of $ 1.9 million was recognized for the three months ended July 3, 2021. For the six months ended July 3, 2021, stock-based compensation expense of $ 2.9 million was recognized. During the three months ended July 3, 2021, 0.1 million shares of common stock were issued pursuant to the exercise of stock options at a weighted-average exercise price of $ 7.38 per share. During the six months ended July 3, 2021, 0.6 million shares of common stock were issued pursuant to the exercise of stock options at a weighted-average exercise price of $ 9.17 per share. As of July 3, 2021, unrecognized stock-based compensation expense of $ 31.7 million related to stock options, net of estimated forfeitures, is expected to be recognized over a weighted-average period of 2.4 years. Employee Stock Purchase Plans The Company maintains two employee stock purchase plans - the Amended and Restated Employee Stock Purchase Plan (the “ESPP”) and the Amended and Restated 2017 Nonqualified Employee Stock Purchase Plan (the “NQ ESPP”). The ESPP allows eligible employees to purchase shares of the Company’s common stock through payroll deductions of up to 15 % of their eligible 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 two six-month offering periods from August 15 th through February 14 th and February 15 th through August 14 th of each year. 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 14 Table of Contents Company’s 2021 annual meeting of stockholders, the stockholders approved an increase in the number of shares of common stock issuable under the ESPP by 1.3 million shares, which will go into effect for the six-month purchase period commencing August 15, 2021 and ending on February 14, 2022. The total shares authorized for issuance under the ESPP increased from 9.8 million shares to 11.1 million shares. As of July 3, 2021, there were 2.4 million shares available for issuance under the ESPP. During the six months ended July 3, 2021, 0.2 million shares were purchased under the ESPP. As of July 3, 2021, unrecognized stock-based compensation expense of $ 0.3 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 eligible 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 two six-month offering periods from November 15 th through May 14 th and May 15 th through November 14 th of each year. At the Company’s 2021 annual meeting of stockholders, the stockholders approved an increase in the number of shares of common stock issuable under the NQ ESPP by 0.8 million shares. The maximum number of shares of common stock currently authorized for issuance under the NQ ESPP is 5.5 million shares, with a maximum of 0.5 million shares allocated per purchase period. As of July 3, 2021, there were 2.9 million shares available for issuance under the NQ ESPP, including the stockholder-approved 0.8 million share increase. During the three and six months ended July 3, 2021, 0.2 million shares were purchased and issued. As of July 3, 2021, unrecognized stock-based compensation expense of $ 6.0 million related to the NQ ESPP is expected to be recognized over a remaining weighted-average service period of 1.1 year. Stock-Based Compensation The following table summarizes stock-based compensation expense (in thousands): Three Months Ended Six Months Ended July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020 Cost of revenue: Products $ 186 $ 126 $ 348 $ 233 Services 157 90 307 205 Sales and marketing 1,723 1,002 3,170 1,958 Research and development 1,644 1,098 3,227 2,107 General and administrative 2,513 926 4,342 1,722 $ 6,223 $ 3,242 $ 11,394 $ 6,225 9. Revenue from Contracts with Customers The Company derives revenue from contracts with customers primarily from the following and categorizes its revenue as follows: • Systems include revenue from the sale of access and premises systems, software platform licenses and cloud-based software subscriptions; and • Services include revenue from professional services, customer support, software- and cloud-based maintenance, extended warranty subscriptions, training and managed services. The following is a summary of revenue disaggregated by geographic region based upon the location of the customers (in thousands): Three Months Ended Six Months Ended July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020 United States $ 133,618 $ 108,198 $ 268,324 $ 196,248 Canada 7,444 2,868 13,950 6,431 Europe 9,844 2,110 13,259 6,231 Middle East 5,172 2,330 12,260 4,631 Caribbean 6,954 2,310 11,717 4,682 Other 5,638 1,207 11,234 2,482 $ 168,670 $ 119,023 $ 330,744 $ 220,705 15 Table of Contents Contract Asset The primary contract asset is revenue recognized on professional services contracts where the services are transferred to the customer over time, which has yet to be billed, and is classified within accounts receivable. Amounts are billed in accordance with the agreed-upon contractual terms. The balance as of December 31, 2020 was $ 2.3 million of which $ 0.7 million remained in the Company's Condensed Consolidated Balance Sheet as of July 3, 2021. The closing balance as of July 3, 2021 was $ 1.4 million of which the Company expects to bill 66 % of the balance during the remainder of 2020. The decrease in the contract asset was driven by billings for past services and a reduction in expected cash collections on ongoing projects partially offset by additional unbilled work performed during the three months ended July 3, 2021. Contract Liability Deferred revenue consisted of the following (in thousands): July 3, 2021 December 31, 2020 Current: Products and services $ 19,399 $ 14,651 Extended warranty 4,552 4,538 23,951 19,189 Long-term: Products and services 2,729 1,879 Extended warranty 18,578 18,025 21,307 19,904 $ 45,258 $ 39,093 The increase in the deferred revenue balance for the three and six months ended July 3, 2021 is primarily driven by cash payments received or due in advance of satisfying the Company’s performance obligations offset by $ 6.8 million and $ 11.1 million of revenue recognized that was included in the deferred revenue balance at the beginning of each period, respectively. 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 $ 92.0 million as of July 3, 2021, and the Company expects to recognize 36 % of such revenue over the next 12 months and the remainder thereafter. Contract Costs The Company capitalizes certain sales commissions related primarily to multi-year subscriptions and extended warranty support for which the expected amortization period is greater than one year. As of July 3, 2021, the unamortized balance of deferred commissions was $ 2.3 million. For the three and six months ended July 3, 2021, the amount of amortization was $ 0.2 million and $ 0.3 million, respectively. There was no impairment loss in relation to the costs capitalized. Concentration of Customer Risk No company accounted for more than 10% of the Company's total revenue for the three and six months ended July 3, 2021. Lumen Technologies, Inc. (formerly CenturyLink, Inc.) represented 15 % of total revenue for three and six months ended June 27, 2020. No other customers accounted for more than 10% of the Company’s total revenue for three and six months ended June 27, 2020. No customer represented more than 10% of the Company’s accounts receivable as of July 3, 2021 or December 31, 2020. 10. Income Taxes The following table presents the provision for income taxes from operations and the effective tax rates for the periods indicated (in thousands, except percentages): Three Months Ended Six Months Ended July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020 Provision for income taxes $ 207 $ 148 $ 357 $ 477 Effective tax rate 1.0 % ( 3.6 ) % 0.9 % ( 4.5 ) % 16 Table of Contents The effective tax rate for the three months ended July 3, 2021 was determined using an estimated annual effective tax rate adjusted for discrete items, if any, that occurred during the respective periods. Deferred tax assets are recognized if realization of such assets is more likely than not. The Company has established and continues to maintain a full valuation allowance against its net deferred tax assets, with the exception of certain foreign deferred tax assets, as the Company does not believe that realization of those assets is more likely than not. The Company’s effective tax rate may be subject to fluctuation during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as the mix of forecasted pre-tax earnings in the various jurisdictions in which it operates, valuation allowances against deferred tax assets, the recognition or de-recognition of tax benefits related to uncertain tax positions and changes in or the interpretation of tax laws in jurisdictions where it conducts business. While the Company has reported U.S. pre-tax income for the first half of 2021, the Company has not yet been able to establish a sustained level of profitability in the U.S. or other sufficient significant positive evidence to conclude that its U.S. deferred tax assets are more likely than not to be realized. Therefore, the Company continues to maintain a valuation allowance against most of its U.S. deferred tax assets. At some point, if the Company establishes a sustained level of profitability and projects continued profitability, the Company may reverse a significant portion of its valuation allowance recorded against U.S. deferred tax assets, resulting in a non-recurring non-cash income tax benefit. 11. Net Income (Loss) Per Common Share The following table sets forth the computation of basic and diluted net income (loss) per common share for the periods indicated (in thousands, except per share data): Three Months Ended Six Months Ended July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020 Numerator: Net income (loss) $ 20,458 $ ( 4,212 ) $ 41,073 $ ( 11,156 ) Denominator: Weighted-average common shares outstanding used to compute basic net income (loss) per share 63,042 57,261 62,795 56,906 Effect of dilutive common stock equivalents 4,592 — 4,552 — Weighted-average common shares outstanding used to compute diluted net income (loss) per share 67,634 57,261 67,347 56,906 Net income (loss) per common share: Basic net income (loss) per common share $ 0.32 $ ( 0.07 ) $ 0.65 $ ( 0.20 ) Diluted net income (loss) per common share $ 0.30 $ ( 0.07 ) $ 0.61 $ ( 0.20 ) Potentially dilutive shares, weighted average 1,096 6,996 752 6,789 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. For each of the periods presented where the Company reported a net loss, the effect of all potentially dilutive securities would be antidilutive, and as a result diluted net loss per common share is the same as basic net loss per common share. 17 Table of Contents