What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-10-26 compared with 2021-07-27 · 123 added, 106 removed, 163 unchanged (58% of the section changed)

11 unchanged sentences

Our 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.

These insights enable BSPs to grow their brand through increased subscriber acquisition, loyalty and revenue and to reduce their operating costs, thereby increasing the value of their businesses and contributions to their communities.

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

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

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

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

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

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

Factors that impacted our cost of revenue for the three and six months ended July 3, 2021, and that we expect will impact cost of revenue in future periods, also include:

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

Given the recent supply chain disruptions related to component shortages and longer lead times as a result of increased global demand for certain components and related to the COVID-19 pandemic, we have seen more challenges in supply chain logistics due to greater global demand for transport services as well as increases in

our global freight charges as we have elected to ship by air in order to meet delivery commitments to our customers and as air freight rates have increased from prior year levels.

Factors that impacted our cost of revenue for the three and nine months ended October 2, 2021, and that we expect will impact cost of revenue in future periods, also include:

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

Given the ongoing supply chain disruptions related to component shortages, longer lead times as a result of increased global demand for certain components and disruptions and related to the COVID-19 pandemic, we see continued product supply delays and related challenges, which we expect to persist in the foreseeable future.

Similarly, challenges in

supply chain logistics have persisted due to greater global demand for transport services as well as labor shortages and resulted in increases in our global freight charges as we have elected to ship by air in order to meet delivery commitments to our customers and as air freight rates have increased from prior year levels.

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

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

While we had net income of $33.5 million in 2020 and $41.1 million for the first half of 2021, we have incurred significant losses since our inception, and as of July 3, 2021, we had an accumulated deficit of $628.0 million.

During the third quarter of 2021, we recognized a discrete tax benefit of $162.0 million based on our reassessment of the amount of our U.S.

federal and state deferred tax assets that are more likely than not to be realized, primarily as a result of actual and projected increases in U.S.

profitability in the current and future periods.

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

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The extent of the impact of the COVID-19 pandemic on our 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, we instituted office closures, travel restrictions and a work-from-anywhere policy for substantially all our employees due to shelter-in-place mandates.

In July 2021, we reopened our U.S.

offices to fully-vaccinated employees who choose to work in the office and visitors and lifted certain travel restrictions.

offices to fully-vaccinated employees, who choose to work in the office, and visitors as well as lifted certain travel restrictions.

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

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

Furthermore, our supply chain continues to face constraints primarily due to challenges in sourcing components and materials for our products.

Furthermore, our supply chain continues to face constraints primarily due to challenges in sourcing components and materials and managing global logistics and transport services for our products due to shortages and delays.

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

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Our critical accounting policies and estimates, which are revenue recognition and inventory valuation, are described under “Critical Accounting Policies and Estimates” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2020.

For the six months ended July 3, 2021, there have been no significant changes in our critical accounting policies and estimates.

During the third quarter of 2021, we recognized an income tax benefit of $ 162.0 million offset by current income taxes, based on our reassessment of the amount of our U.S.

federal and other state deferred tax assets that are more likely than not to be realized, primarily as a result of actual and projected increases in U.S.

profitability in the current and future periods.

As a result, we determined that the following policy is a critical accounting policy and estimate:

We evaluate our tax positions and estimate our current tax exposure along with assessing temporary differences that result from different book to tax treatment of items not currently deductible for tax purposes.

These differences result in deferred tax assets and liabilities on our Consolidated Balance Sheets, which are estimated based upon the difference between the financial statement and tax bases of assets and liabilities using the enacted tax rates that will be in effect when these differences reverse.

In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in our Consolidated Statements of Comprehensive Income become deductible expenses under applicable income tax laws or loss or credit carryforwards are utilized.

Accordingly, realization of our deferred tax assets is dependent on future taxable income against which these deductions, losses and credits can be utilized.

We must assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not more likely than not, we must establish a valuation allowance.

Management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets.

Prior to the third quarter of 2021, we maintained a 100% valuation allowance against all deferred tax assets, because there was insufficient positive evidence to overcome the existing negative evidence, primarily consisting of several years of consecutive reported pre-tax losses, such that it was not more likely than not that the deferred tax assets were realizable.

In the third quarter of 2021, we had reported positive operating performance for five consecutive quarters and continued to maintain a cumulative three-year pre-tax profit.

In addition, we expect continued positive operating performance into the foreseeable future to allow for utilization of all operating loss and substantially all tax credit carryforwards prior to their expiration.

After considering these factors, we determined that the positive evidence overcame any negative evidence and concluded that it was more likely than not that a substantial portion of our U.S.

federal and certain other state deferred tax assets were realizable.

We currently maintain a valuation allowance of $28.7 million for certain U.S.

federal and California state deferred tax assets.

Other than the change above, there have been no significant changes in our critical accounting policies and estimates for the nine months ended October 2, 2021.

Recent Accounting Pronouncements

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 our Annual Report on Form 10-K for the year ended December 31, 2020 that are significant or potentially significant to us.

There have been no additional accounting pronouncements or changes in accounting pronouncements during the nine months ended October 2, 2021 as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the year ended December 31, 2020 that are significant or potentially significant to us.

Results of Operations

Comparison of the Three and Six Months Ended July 3, 2021 and June 27, 2020

Comparison of the Three and Nine Months Ended October 2, 2021 and September 26, 2020

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

Three Months Ended Six Months Ended

2021 June 27,

Three Months Ended Nine Months Ended

2021 September 26,

2020 Variance

Dollars Variance

Percent July 3,

2021 June 27,

Percent October 2,

2021 September 26,

2020 Variance

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100 % 100 % 100 % 100 %

Our revenue increased by $49.6 million and $110.0 million for the three and six months ended July 3, 2021, respectively, as compared to the corresponding periods in 2020 mostly due to higher systems revenue of $48.7 million and $107.5 million.

Our revenue increased by $21.7 million and $131.8 million for the three and nine months ended October 2, 2021, respectively, as compared to the corresponding periods in 2020 mostly due to higher systems revenue of $20.8 million and $128.3 million, as compared to the corresponding periods in 2020.

Services revenue increased by $0.9 million and $3.5 million compared to the corresponding periods in 2020.

The increase in systems revenue was primarily due to higher revenue from our small, regional customers and, to a lesser extent, our medium-sized customers, as service providers adopt our All Platform offerings and seek to provide a better Wi-Fi experience.

The increase in services revenue was due to the continued ramp in our service offerings aligned with cloud and software products for their customers.

For the three and six months ended July 3, 2021, revenue generated in the United States was $133.6 million and $268.3 million, or 79% and 81% of our total revenue, respectively, compared to $108.2 million and $196.2 million, or 91% and 89% of our total revenue, respectively, for the same periods in 2020.

International revenue was $35.1 million and $62.4 million, or 21% and 19% of our total revenue, respectively, for the three and six months ended July 3, 2021, as compared to $10.8 million and $24.5 million, or 9% and 11% of our total revenue, respectively, for the same periods in 2020.

No customer accounted for more than 10% of our total revenue for the three and six months ended July 3, 2021.

For both the three and six months ended June 27, 2020, only Lumen Technologies, Inc.

(formerly CenturyLink, Inc.), or Lumen, accounted for more than 10% of our total revenue, representing 15% of our total revenue.

to provide a better Wi-Fi experience, partially offset by a decrease in revenue to large customers.

The increase in services revenue was due to the continued ramp in our service offerings aligned with cloud and software products for our customers.

For the three and nine months ended October 2, 2021, revenue generated in the United States was $136.3 million and $414.2 million, or 79% and 82% of our total revenue, respectively, compared to $129.2 million and $326.1 million, or 86% and 88% of our total revenue, respectively, for the same periods in 2020.

International revenue was $35.9 million and $88.7 million, or 21% and 18% of our total revenue, respectively, for the three and nine months ended October 2, 2021, as compared to $21.3 million and $45.2 million, or 14% and 12% of our total revenue, respectively, for the same periods in 2020.

One customer represented 10% of our total revenue for the three months ended October 2, 2021.

No customer accounted for more than 10% of our total revenue for the nine months ended October 2, 2021.

Another customer, Lumen Technologies, Inc.

(formerly CenturyLink, Inc.), accounted for more than 10% of our total revenue, representing 12% and 14% of our total revenue for the three and nine months ended September 26, 2020, respectively.

Cost of Revenue, Gross Profit and Gross Margin

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

Three Months Ended Six Months Ended

2021 June 27,

Three Months Ended Nine Months Ended

2021 September 26,

2020 Variance

Dollars Variance

Percent July 3,

2021 June 27,

Percent October 2,

2021 September 26,

2020 Variance

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$ 82,738 $ 74,533 $ 8,205 11 % $ 237,621 $ 193,209 $ 44,412 23 %

Our cost of revenue increased by $16.4 million and $36.2 million for the three and six months ended July 3, 2021, respectively, as compared with the corresponding periods in 2020.

The $16.0 million and $34.9 million increases in our systems cost of revenue were less than the percentage increase in revenue compared with the corresponding periods in 2020 and were due to continued growth in our All Platform offerings along with favorable customer and product mix, the increasing spread between fixed costs in relation to revenue growth and a refund for previously paid U.S.

Our cost of revenue increased by $8.2 million and $44.4 million for the three and nine months ended October 2, 2021, respectively, as compared with the corresponding periods in 2020.

The $7.5 million and $42.4 million increases in our systems cost of revenue were less than the percentage increase in revenue compared with the corresponding periods in 2020.

This was due to continued growth in our All Platform offerings along with favorable customer and product mix, the increasing spread between fixed costs in relation to revenue growth and a refund for previously paid U.S.

import tariffs due to the subsequent export of tariffed products.

This was partially offset by increased freight costs due to higher prices for transportation as well as a mix towards more air shipments to meet delivery commitments.

The increase in services cost of revenue for the three and six months ended July 3, 2021 compared with the corresponding periods in 2020 was mainly due to increased personnel costs as we made further investments in our customer success organization.

This was partially offset by increased costs due to higher prices for transportation and components due to shortages.

The increase in services cost of revenue for the three and nine months ended October 2, 2021 compared with the corresponding periods in 2020 was mainly due to increased personnel costs as we made further investments in our customer success organization.

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

Three Months Ended Six Months Ended

2021 June 27,

Three Months Ended Nine Months Ended

2021 September 26,

2020 Variance

Dollars Variance

Percent July 3,

2021 June 27,

Percent October 2,

2021 September 26,

2020 Variance

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Overall 52.0 % 50.5 % 52.8 % 48.0 %

Gross profit increased to $89.6 million and $175.9 million for the three and six months ended July 3, 2021, respectively, from $56.4 million and $102.0 million during the corresponding periods in 2020 due to higher gross margin for both systems and services.

The increase in systems gross margin for the three and six months ended July 3, 2021 compared to the corresponding periods in 2020 was mainly due to continued growth in our All Platform offerings along with favorable product and customer mix as well as a credit for previously paid tariffs due to product re-export.

Services gross margin increased for the three and six months ended July 3, 2021 compared to the corresponding periods in 2020 as our service revenue mix shifted away from low gross margin deployment services to higher gross margin software maintenance and services aligned with our platform offerings.

Gross profit increased to $89.5 million and $265.4 million for the three and nine months ended October 2, 2021, respectively, from $76.0 million and $178.0 million during the corresponding periods in 2020 due to higher gross margin for both systems and services.

The increase in systems gross margin for the three and nine months ended October 2, 2021 compared to the corresponding periods in 2020 was mainly due to continued growth in our All Platform offerings along with favorable product and customer mix as well as a credit for previously paid tariffs due to product re-export.

This was partially offset by increased costs due to higher prices for transportation and components due to shortages.

Services gross margin increased for the three and nine months ended October 2, 2021 compared to the corresponding periods in 2020 as our service revenue mix shifted away from low gross margin deployment services to higher gross margin services aligned with our platform offerings.

Operating Expenses

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

Three Months Ended Six Months Ended

2021 June 27,

Three Months Ended Nine Months Ended

2021 September 26,

2020 Variance

Dollars Variance

Percent July 3,

2021 June 27,

Percent October 2,

2021 September 26,

2020 Variance

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

Sales and marketing expenses for the three months ended July 3, 2021 increased by $8.4 million compared with the corresponding period in 2020 primarily due to increases in personnel expenses of $5.1 million, mainly related to investments in sales headcount and higher sales incentive compensation, marketing expenses of $1.3 million and stock-based compensation of $0.7 million.

Sales and marketing expenses for the six months ended July 3, 2021 increased by $15.8 million compared with the corresponding period in 2020 primarily due to increases in personnel expenses of $11.9 million, mainly related to investments in sales headcount and higher sales incentive compensation, marketing expenses of $1.8 million, stock-based compensation of $1.2 million and outside services expenses of $0.8 million.

These increases were partially offset by a decrease in travel expenses of $1.1 million.

We expect to slightly increase our investments in sales and marketing as a percentage of revenue in order to extend our market reach and grow our business in support of our key strategic initiatives.

Sales and marketing expenses for the three months ended October 2, 2021 increased by $8.1 million compared with the corresponding period in 2020 primarily due to increases in personnel expenses of $4.3 million, mainly related to investments in sales headcount and higher sales incentive compensation, marketing expenses of $0.9 million, travel expenses of $0.8 million, stock-based compensation of $0.8 million and outside services expenses of $0.4 million.

Sales and marketing expenses for the nine months ended October 2, 2021 increased by $23.9 million compared with the corresponding period in 2020 primarily due to increases in personnel expenses of $16.2 million, mainly related to investments in sales headcount and higher sales incentive compensation, marketing expenses of $2.7 million, stock-based compensation of $2.0 million, software costs of $1.4 million and outside services expenses of $1.3 million.

We expect to increase our investments in sales and marketing as a percentage of revenue in order to extend our market reach and grow our business in support of our key strategic initiatives.

Research and Development Expenses

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

Three Months Ended Six Months Ended

2021 June 27,

Three Months Ended Nine Months Ended

2021 September 26,

2020 Variance

Dollars Variance

Percent July 3,

2021 June 27,

Percent October 2,

2021 September 26,

2020 Variance

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Percentage of systems gross profit 30 % 28 % 29 % 36 %

Research and development expenses for the three months ended July 3, 2021 increased by $4.8 million as compared with the corresponding period in 2020 mainly due to increases in outside services of $3.1 million, personnel expenses of $1.6 million and stock-based compensation of $0.5 million.

These increases were partially offset by lower facilities expenses of $0.7 million.

Research and development expenses for the six months ended July 3, 2021 increased by $8.5 million as compared with the corresponding period in 2020 mainly due to increases in outside services of $4.8 million, personnel expenses of $3.5 million, stock-based compensation of $1.1 million and depreciation and amortization of $0.7 million.

Research and development expenses for the three months ended October 2, 2021 increased by $5.3 million as compared with the corresponding period in 2020 mainly due to increases in outside services expenses of $2.3 million, personnel expenses of $1.8 million, stock-based compensation of $0.6 million and depreciation and amortization of $0.3 million.

Research and development expenses for the nine months ended October 2, 2021 increased by $13.8 million as compared with the corresponding period in 2020 mainly due to increases in outside services expenses of $7.1 million, personnel expenses of $5.3 million, stock-based compensation of $1.7 million and depreciation and amortization of $1.0 million.

These increases were partially offset by lower facilities expenses of $1.4 million.

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

Three Months Ended Six Months Ended

2021 June 27,

Three Months Ended Nine Months Ended

2021 September 26,

2020 Variance

Dollars Variance

Percent July 3,

2021 June 27,

Percent October 2,

2021 September 26,

2020 Variance

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

General and administrative expenses for the three months ended July 3, 2021 increased by $2.5 million as compared with the corresponding period in 2020 mainly due to increases in stock-based compensation of $1.6 million, unallocated-facilities expenses of $0.8 million, and personnel expenses of $0.7 million.

General and administrative expenses for the three months ended October 2, 2021 increased by $3.9 million as compared with the corresponding period in 2020 mainly due to increases in stock-based compensation of $1.6 million, personnel expenses of $1.1 million and outside services of $0.9 million.

General and administrative expenses for the nine months ended October 2, 2021 increased by $8.7 million as compared with the corresponding period in 2020 mainly due to increases in stock-based compensation of $4.3 million, personnel expenses of $2.4 million, unallocated-facilities expenses of $1.8 million and outside services expenses of $1.0 million.

Beginning in the third quarter of 2020, we changed our facility allocation to align with our work-from-anywhere initiative, and consequently, most of our facilities expenses are retained in general and administrative expenses.

These increases were partially offset by a decrease in our bad debt expense of $1.2 million.

General and administrative expenses for the six months ended July 3, 2021 increased by $4.8 million as compared with the corresponding period in 2020 mainly due to increases in stock-based compensation of $2.6 million, unallocated-facilities expenses of $2.1 million, and personnel expenses of $1.4 million.

These increases were partially offset by a decrease in our bad debt expense of $1.1 million.

We expect our general and administrative expenses to decline as a percentage of revenue over time as revenue continues to grow.

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

We incurred restructuring charges of $6.3 million, consisting of facilities-related charges and severance and other termination related benefits, for the six months ended June 27, 2020.

We incurred restructuring charges of $6.3 million, consisting of facilities-related charges and severance and other termination related benefits, for the nine months ended September 26, 2020.

See Note 5, “Balance Sheet Details” of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details.

Provision for Income Taxes

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

Three Months Ended Six Months Ended

2021 June 27,

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

Three Months Ended Nine Months Ended

2021 September 26,

2020 Variance

Dollars Variance

Percent July 3,

2021 June 27,

Percent October 2,

2021 September 26,

2020 Variance

Dollars Variance

Provision for income taxes $ 207 $ 148 $ 59 40 % $ 357 $ 477 $ (120) (25) %

Income taxes $ (159,982) $ 149 $ (160,131) (107,470) % $ (159,625) $ 626 $ (160,251) (25,599) %

Effective tax rate (917.2) % 0.7 % (271.1) % 6.3 %

The effective tax rate for the three and six 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.

While we have recently reported profitability, we have not yet been able to establish a sustained level of profitability in the U.S.

or other sufficient significant positive evidence to conclude that our U.S.

deferred tax assets are more likely than not to be realized.

Therefore, we continue to maintain a valuation allowance against most of our U.S.

deferred tax assets.

At some point, if we establish a sustained level of profitability and project continued profitability, we may reverse a significant portion of our valuation allowance recorded against U.S.

deferred tax assets, resulting in a non-recurring, non-cash income tax benefit.

Our 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 we operate, 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 we conduct business.

During the third quarter of 2021, we recognized an income tax benefit of $162.0 million offset by current income taxes, based on our reassessment of the amount of our U.S.

federal and other state deferred tax assets that are more likely than not to be realized, primarily as a result of actual and projected increases in U.S.

profitability in the current and future periods.

In performing our analysis, we used the most updated plans and estimates that we currently use to manage the underlying business and calculated the ability to utilize our deferred tax assets.

We continue to maintain a valuation allowance of $28.7 million on certain U.S.

federal and California state deferred tax assets that we believe are not more likely than not to be realized in future periods.

As of September 26, 2020, the total expense was primarily related to foreign activity.

In 2020, based on a review of the positive and negative evidence, we concluded that the deferred tax assets were not more likely than not to be realized, which resulted in an immaterial domestic provision as the deferred tax assets were fully offset with the valuation allowance.

Our income taxes may be subject to fluctuation during the year and in future years as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as actual results differing from our estimates of pre-tax earnings in the various jurisdictions in which we operate, which could impact the recognition of our 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 we conduct business.

Liquidity and Capital Resources

We have funded our operations and investing activities primarily through sales of our common stock, including an underwritten public offering in August 2020, cash flow generated from operations and various borrowing arrangements.

As of July 3, 2021, we had cash, cash equivalents and marketable securities of $175.8 million, which consisted of deposits held at banks and major financial institutions and highly liquid marketable securities such as U.S.

As of October 2, 2021, we had cash, cash equivalents and marketable securities of $188.7 million, which consisted of deposits held at banks and major financial institutions and highly liquid marketable securities such as U.S.

government agency securities and commercial paper.

Operating Activities

Net cash provided by operating activities was $33.4 million for the six months ended July 3, 2021 and consisted of net income of $41.1 million and non-cash charges of $19.1 million, consisting of stock-based compensation of $11.4 million and depreciation and amortization of $7.7 million.

This was partially offset by cash flow decreases of $26.8 million reflected in the net change in assets and liabilities.

Cash flow decreases resulting from the net change in assets and liabilities primarily consisted of an increase in inventory of $24.9 million to support revenue growth and to mitigate supply chain shortages and disruptions and a decrease in total accrued liabilities of $12.9 million, mainly related to incentive compensation payouts, rebate redemptions and a reduction of customer advance payments.

In addition, there was an increase in accounts receivable of $10.7 million, due to product shipment timing, and an increase in prepaid expenses and other assets of $6.4 million mainly due to advance payments to our supply chain partners for deposits, expedite fees and component surcharges.

Net cash provided by operating activities was $44.2 million for the nine months ended October 2, 2021 and consisted of net income of $218.5 million partially offset by non-cash charges of $132.6 million and cash flow decreases of $41.7 million

reflected in the net change in assets and liabilities.

Non-cash charges consisted of the reversal of the valuation allowance on certain deferred tax assets of $162.0 million offset by stock-based compensation of $18.1 million and depreciation and amortization of $11.4 million.

Cash flow decreases resulting from the net change in assets and liabilities primarily consisted of an increase in inventory of $22.9 million to support revenue growth and to mitigate supply chain shortages and disruptions and an increase in accounts receivable of $22.5 million, due to product shipment timing.

In addition, there was an increase in prepaid expenses and other assets of $9.8 million mainly due to advance payments to our supply chain partners for deposits, expedite fees and component surcharges, capitalized sales commissions and deposits for our ConneXions conference, and a decrease in total accrued liabilities of $11.6 million, mainly related to incentive compensation payouts, rebate redemptions and a reduction of customer advance payments.

These changes were partially offset by an increase in accounts payable of $18.3 million due to increased inventory purchases and an increase in deferred revenue of $6.7 million due to Calix Cloud subscriptions, support contracts and extended warranties.

During the six months ended June 27, 2020, net cash provided by operating activities was $3.9 million and consisted of $17.0 million of non-cash charges and $1.9 million of cash flow decreases reflected in the net change in assets and liabilities, partially offset by a net loss of $11.2 million.

Cash flow decreases resulting from the net change in assets and liabilities primarily consisted of an increase in accounts receivable of $12.1 million, due to the timing of product shipments.

In addition, there was a decrease in deferred revenue of $0.9 million due to the invoice timing of our customer support and subscription offerings and a decrease in accounts payable of $0.7 million, primarily due to timing of payments to our suppliers.

These changes were partially offset by an increase in accrued liabilities of $7.9 million, due to an increase in accruals related to our restructuring activities and an increase our liability for components at certain suppliers.

In addition, there was a decrease in inventory of $3.5 million due to lower deliveries as a result of the supply disruption during 2020 and an increase in prepaid expenses and other assets of $1.2 million, due to an increase in our VAT receivable and employee receivables related to income tax obligations associated with our NQ ESPP.

Non-cash charges primarily consisted of depreciation and amortization of $7.0 million, stock-based compensation of $6.2 million and lease restructuring charges of $3.7 million.

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

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

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

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

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

Investing Activity

For the six months ended July 3, 2021, cash used in investing activities of $68.2 million consisted of net purchases of marketable securities of $64.3 million and capital expenditures of $3.9 million, consisting primarily of purchases of test equipment and computer equipment.

Net cash used in investing activities of $4.5 million for the six months ended June 27, 2020 consisted of capital expenditures primarily for purchases of test equipment and computer equipment.

For the nine months ended October 2, 2021, cash used in investing activities of $82.8 million consisted of net purchases of marketable securities of $75.5 million and capital expenditures of $7.3 million, consisting primarily of purchases of test equipment and computer equipment.

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

Financing Activities

Net cash provided by financing activities of $12.6 million for the six months ended July 3, 2021 consisted of proceeds from the issuance of common stock related to our employee equity plans.

Net cash provided by financing activities of $4.5 million for the six months ended June 27, 2020 mainly consisted of proceeds from the issuance of common stock related to our employee equity plans of $10.3 million.

These inflows were partially offset by the partial re-payment of our line of credit of $4.0 million, payments related to financing arrangements of $1.5 million and payments to originate the credit line of $0.3 million.

Net cash provided by financing activities of $18.0 million for the nine months ended October 2, 2021 primarily consisted of proceeds from the issuance of common stock related to our equity plans.

Net cash provided by financing activities of $41.5 million for the nine months ended September 26, 2020 mainly consisted of proceeds from our common stock offering of $60.1 million and proceeds from the issuance of common stock related to our equity plans of $14.1 million.

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

Working Capital and Capital Expenditure Needs

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The BofA Loan Agreement is secured by substantially all of our assets, including our 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, we had no outstanding borrowings and had full availability of $35.0 million.

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

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

We had our first sale in August 2019.

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

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

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 October 2, 2021), in each case largely based on a fixed charge coverage ratio measured at the end of each fiscal quarter.

As of October 2, 2021, we had no outstanding borrowings and had full availability of $35.0 million.

In March 2018, and as amended in December 2020, we entered into an agreement with a vendor to develop a certain software product and related enhancements pursuant to which we are 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 aggregate revenue-share payments are not achieved by the end of that period, a true-up payment will be due.

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

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Contractual Obligations and Commitments

Our principal commitments as of July 3, 2021 consisted of our contractual obligations under non-cancelable outstanding purchase obligations, operating lease obligations for office space and a revenue share obligation.

The following table summarizes our contractual obligations as of July 3, 2021 (in thousands):

Our principal commitments as of October 2, 2021 consisted of our contractual obligations under non-cancelable outstanding purchase obligations, operating lease obligations for office space and a revenue share obligation.

The following table summarizes our contractual obligations as of October 2, 2021 (in thousands):

Payments Due by Period

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

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

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

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

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Off-Balance Sheet Arrangements

As of July 3, 2021 and December 31, 2020, we did not have any off-balance sheet arrangements.

As of October 2, 2021 and December 31, 2020, we did not have any off-balance sheet arrangements.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis