CALIX, INC 10-Q

ITEM 1. Financial Statements CALIX, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value) October 2, 2021 December 31, 2020 (Unaudited) (See Note 1) ASSETS Current assets: Cash and cash equivalents $ 60,215 $ 80,807 Marketable securities 128,492 52,982 Accounts receivable, net 91,929 69,419 Inventory 75,166 52,268 Prepaid expenses and other current assets 18,957 11,414 Total current assets 374,759 266,890 Property and equipment, net 20,960 20,381 Right-of-use operating leases 10,841 11,741 Deferred tax assets 161,968 — Goodwill 116,175 116,175 Other assets 11,014 12,165 $ 695,717 $ 427,352 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 31,340 $ 13,115 Accrued liabilities 61,444 68,736 Deferred revenue 24,217 19,189 Total current liabilities 117,001 101,040 Long-term portion of deferred revenue 21,568 19,904 Operating leases 11,516 12,946 Other long-term liabilities 10,006 13,137 Total liabilities 160,091 147,027 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 October 2, 2021 and December 31, 2020 — — Common stock, $ 0.025 par value; 100,000 shares authorized; 63,732 shares issued and outstanding as of October 2, 2021, and 62,122 shares issued and outstanding as of December 31, 2020 1,594 1,553 Additional paid-in capital 984,833 948,055 Accumulated other comprehensive loss ( 206 ) ( 191 ) Accumulated deficit ( 450,595 ) ( 669,092 ) Total stockholders’ equity 535,626 280,325 $ 695,717 $ 427,352 See accompanying notes to condensed consolidated financial statements. 4 Table of Contents CALIX, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands, except per share data) (Unaudited) Three Months Ended Nine Months Ended October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 Revenue: Systems $ 163,076 $ 142,294 $ 475,931 $ 347,644 Services 9,155 8,214 27,044 23,569 Total revenue 172,231 150,508 502,975 371,213 Cost of revenue: Systems 76,339 68,889 218,675 176,318 Services 6,399 5,644 18,946 16,891 Total cost of revenue 82,738 74,533 237,621 193,209 Gross profit 89,493 75,975 265,354 178,004 Operating expenses: Sales and marketing 31,144 23,079 88,905 65,046 Research and development 25,727 20,378 75,807 61,970 General and administrative 14,631 10,768 41,320 32,630 Restructuring charges — — — 6,286 Total operating expenses 71,502 54,225 206,032 165,932 Income from operations 17,991 21,750 59,322 12,072 Interest and other expense, net: Interest expense, net ( 86 ) ( 356 ) ( 330 ) ( 1,263 ) Other expense, net ( 463 ) ( 707 ) ( 120 ) ( 801 ) Total interest and other expense, net ( 549 ) ( 1,063 ) ( 450 ) ( 2,064 ) Income before income taxes 17,442 20,687 58,872 10,008 Income taxes ( 159,982 ) 149 ( 159,625 ) 626 Net income $ 177,424 $ 20,538 $ 218,497 $ 9,382 Net income per common share: Basic $ 2.79 $ 0.34 $ 3.47 $ 0.16 Diluted $ 2.61 $ 0.32 $ 3.24 $ 0.16 Weighted-average number of shares used to compute net income per common share: Basic 63,588 60,307 63,057 58,053 Diluted 67,907 63,449 67,537 60,331 Net income $ 177,424 $ 20,538 $ 218,497 $ 9,382 Other comprehensive income (loss), net of tax - foreign currency translation adjustments, net ( 24 ) 410 ( 15 ) 161 Comprehensive income $ 177,400 $ 20,948 $ 218,482 $ 9,543 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 July 3, 2021 63,200 $ 1,580 $ 972,259 $ ( 182 ) $ ( 628,019 ) $ — $ 345,638 Stock-based compensation — — 6,661 — — — 6,661 Issuance of common stock under equity incentive plans, net of forfeitures 532 14 5,913 — — — 5,927 Net income — — — — 177,424 — 177,424 Other comprehensive loss — — — ( 24 ) — — ( 24 ) Balance at October 2, 2021 63,732 $ 1,594 $ 984,833 $ ( 206 ) $ ( 450,595 ) $ — $ 535,626 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Treasury Stock Total Stockholders’ Equity Shares Amount Balance at June 27, 2020 58,143 $ 1,587 $ 912,402 $ ( 1,103 ) $ ( 713,732 ) $ ( 39,986 ) $ 159,168 Stock-based compensation — — 3,574 — — — 3,574 Issuance of common stock under equity incentive plans, net of forfeitures 407 9 3,769 — — — 3,778 Issuance of common stock in connection with public offering 3,220 82 59,981 — — — 60,063 Treasury stock retirement — ( 134 ) ( 39,852 ) — — 39,986 — Net income — — — — 20,538 — 20,538 Other comprehensive income — — — 410 — — 410 Balance at September 26, 2020 61,770 $ 1,544 $ 939,874 $ ( 693 ) $ ( 693,194 ) $ — $ 247,531 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Treasury Stock Total Stockholders’ Equity Shares Amount Balance at December 31, 2020 62,122 $ 1,553 $ 948,055 $ ( 191 ) $ ( 669,092 ) $ — $ 280,325 Stock-based compensation — — 18,055 — — — 18,055 Issuance of common stock under equity incentive plans, net of forfeitures 1,610 41 18,723 — — — 18,764 Net income — — — — 218,497 — 218,497 Other comprehensive loss — — — ( 15 ) — — ( 15 ) Balance at October 2, 2021 63,732 $ 1,594 $ 984,833 $ ( 206 ) $ ( 450,595 ) $ — $ 535,626 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Treasury Stock Total Stockholders’ Equity Shares Amount Balance at December 31, 2019 56,448 $ 1,545 $ 895,899 $ ( 854 ) $ ( 702,576 ) $ ( 39,986 ) $ 154,028 Stock-based compensation — — 9,800 — — — 9,800 Issuance of common stock under equity incentive plans, net of forfeitures 2,102 51 14,046 — — — 14,097 Issuance of common stock in connection with public offering 3,220 82 59,981 — — — 60,063 Treasury stock retirement — ( 134 ) ( 39,852 ) — — 39,986 — Net income — — — — 9,382 — 9,382 Other comprehensive income — — — 161 — — 161 Balance at September 26, 2020 61,770 $ 1,544 $ 939,874 $ ( 693 ) $ ( 693,194 ) $ — $ 247,531 See accompanying notes to condensed consolidated financial statements. 6 Table of Contents CALIX, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands, unaudited) Nine Months Ended October 2, 2021 September 26, 2020 Operating activities: Net income $ 218,497 $ 9,382 Adjustments to reconcile net income to net cash provided by operating activities: Stock-based compensation 18,055 9,800 Depreciation and amortization 11,351 10,311 Reversal of valuation allowance on deferred tax assets ( 161,995 ) — Asset retirements and write-downs — 3,749 Changes in operating assets and liabilities: Accounts receivable, net ( 22,510 ) ( 22,622 ) Inventory ( 22,897 ) ( 1,464 ) Prepaid expenses and other assets ( 9,776 ) 3,710 Accounts payable 18,311 5,616 Accrued liabilities ( 7,008 ) 3,834 Deferred revenue 6,691 ( 342 ) Other long-term liabilities ( 4,544 ) ( 1,038 ) Net cash provided by operating activities 44,175 20,936 Investing activities Purchases of property and equipment ( 7,271 ) ( 5,617 ) Purchases of marketable securities ( 200,509 ) ( 39,986 ) Maturities of marketable securities 125,000 — Net cash used in investing activities ( 82,780 ) ( 45,603 ) Financing activities: Proceeds from common stock issuances related to employee benefit plans 18,764 14,097 Payments related to financing arrangements ( 723 ) ( 2,342 ) Proceeds from the sale of common stock in connection with public offering, net of expense — 60,063 Proceeds from line of credit — 30,000 Repayment of line of credit — ( 60,000 ) Payments to originate the line of credit — ( 285 ) Net cash provided by financing activities 18,041 41,533 Effect of exchange rate changes on cash and cash equivalents ( 28 ) 131 Net increase (decrease) in cash and cash equivalents ( 20,592 ) 16,997 Cash and cash equivalents at beginning of period 80,807 47,457 Cash and cash equivalents at end of period $ 60,215 $ 64,454 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 nine months ended October 2, 2021 than for the nine months ended September 26, 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 nine months ended October 2, 2021. Newly Adopted Accounting Standard The Company did not adopt any new accounting standards during the nine months ended October 2, 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 nine months ended October 2, 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, municipal 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, corporate debt securities, municipal 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 expense, net. Realized and unrealized gains and losses were de minimis for the period ended October 2, 2021. Cash, cash equivalents and marketable securities consisted of the following (in thousands): October 2, 2021 December 31, 2020 Cash and cash equivalents: Cash $ 30,609 $ 30,745 Commercial paper 23,449 — Money market funds 6,007 10,068 Municipal securities 150 — U.S. government securities — 39,994 Total cash and cash equivalents 60,215 80,807 Marketable securities: Commercial paper 117,984 — U.S. government agency securities 3,891 — Corporate debt securities 3,772 — U.S. government securities 1,520 52,982 Municipal securities 1,325 — Total marketable securities 128,492 52,982 $ 188,707 $ 133,789 The carrying amounts of the Company’s money market funds approximate their fair values due to their nature, duration and short maturities. 9 Table of Contents 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 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 October 2, 2021 Level 1 Level 2 Total Money market funds $ 6,007 $ — $ 6,007 U.S. government securities 1,520 — 1,520 Commercial paper — 141,433 141,433 U.S. government agency securities — 3,891 3,891 Corporate debt securities — 3,772 3,772 Municipal securities — 1,475 1,475 $ 7,527 $ 150,571 $ 158,098 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): October 2, 2021 December 31, 2020 Accounts receivable $ 92,703 $ 70,824 Allowance for doubtful accounts ( 774 ) ( 1,405 ) $ 91,929 $ 69,419 Inventory consisted of the following (in thousands): October 2, 2021 December 31, 2020 Raw materials $ 169 $ 34 Finished goods 74,997 52,234 $ 75,166 $ 52,268 10 Table of Contents Property and equipment, net consisted of the following (in thousands): October 2, 2021 December 31, 2020 Test equipment $ 38,876 $ 37,670 Software 14,440 16,093 Computer equipment 10,594 9,062 Furniture and fixtures 1,733 2,069 Leasehold improvements 1,189 1,345 Total 66,832 66,239 Accumulated depreciation and amortization ( 45,872 ) ( 45,858 ) $ 20,960 $ 20,381 Other long-term assets consisted of the following (in thousands): October 2, 2021 December 31, 2020 Intangible asset $ 7,543 $ 9,517 Other long-term assets 3,471 2,648 $ 11,014 $ 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 a 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 October 2, 2021, the liability, including accrued interest, was $ 13.6 million of which $ 4.4 million is included in accrued liabilities and $ 9.2 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): October 2, 2021 December 31, 2020 Compensation and related benefits $ 14,261 $ 23,740 Warranty and retrofit 10,126 9,208 Component inventory held by suppliers 4,606 3,992 Professional and consulting fees 4,595 4,497 Taxes payable 4,482 3,476 Current portion of revenue share obligations 4,397 2,925 Customer advances or rebates 4,358 8,374 Operating leases 3,151 2,994 Freight 2,587 1,955 Product returns 1,749 1,888 Operations 1,286 950 Other 5,846 4,737 $ 61,444 $ 68,736 11 Table of Contents Changes in the Company’s accrued warranty and retrofit liability were as follows (in thousands): Three Months Ended Nine Months Ended October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 Balance at beginning of period $ 9,911 $ 7,732 $ 9,208 $ 7,294 Provision for warranty and retrofit charged to cost of revenue 769 1,716 2,974 4,341 Utilization of reserve ( 554 ) ( 892 ) ( 2,056 ) ( 3,079 ) Balance at end of period $ 10,126 $ 8,556 $ 10,126 $ 8,556 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 ( 193 ) ( 132 ) ( 325 ) Balance as of October 2, 2021 $ 1,051 $ — $ 1,051 6. Credit Agreement 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 any 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 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, 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 October 2, 2021 (in thousands): Period Future Minimum Lease Payments Remainder of 2021 $ 1,005 2022 4,014 2023 4,157 2024 3,962 2025 3,453 Thereafter 175 Total future minimum lease payments 16,766 Less imputed interest ( 2,099 ) $ 14,667 As of October 2, 2021, the operating lease liability consisted of the following (in thousands): Accrued liabilities - current portion of operating leases $ 3,151 Operating leases 11,516 $ 14,667 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 $ 10.2 million and are included in the table above. The weighted average discount rate for the Company’s operating leases as of October 2, 2021 was 6.5 %. The weighted average remaining lease term as of October 2, 2021 was 4.1 years. For the three and nine months ended October 2, 2021, total rent expense of the Company was $ 1.0 million and $ 3.1 million, respectively. For the three and nine months ended September 26, 2020, total rent expense of the Company was $ 0.9 million and $ 3.1 million, respectively. Cash paid within operating cash flows for operating leases was $ 2.9 million and $ 2.5 million for the nine months ended October 2, 2021 and September 26, 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 October 2, 2021, the Company had approximately $ 184.1 million of outstanding purchase commitments for inventories to be delivered by its suppliers, including CMs and ODMs, within one year. The Company has from time to time, and subject to certain conditions, reimbursed certain suppliers for component inventory purchases when this inventory has been rendered excess or obsolete, for example due to manufacturing and engineering change orders resulting from design changes, manufacturing discontinuation of products by its suppliers, or in cases where the Company has committed inventory levels that greatly exceed projected demand. The estimated excess and obsolete inventory liabilities related to such manufacturing and engineering change orders and other factors, which are included in accrued liabilities in the accompanying balance sheets, were $ 4.6 million and $ 4.0 million as of October 2, 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. 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 October 2, 2021, there were 7.0 million shares available for issuance under the 2019 Plan. Stock Options During the three months ended October 2, 2021, no stock option awards were granted. During the nine months ended October 2, 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 October 2, 2021, and stock-based compensation expense of $ 1.9 million was recognized for the three months ended October 2, 2021. For the nine months ended October 2, 2021, stock-based compensation expense of $ 4.8 million was recognized. During the three months ended October 2, 2021, 0.4 million shares of common stock were issued pursuant to the exercise of stock options at a weighted-average exercise price of $ 6.98 per share. During the nine months ended October 2, 2021, 1.0 million shares of common stock were issued pursuant to the exercise of stock options at a weighted-average exercise price of $ 8.20 per share. As of October 2, 2021, unrecognized stock-based compensation expense of $ 27.6 million related to stock options, net of estimated forfeitures, is expected to be recognized over a weighted-average period of 2.2 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 October 2, 2021, there were 3.6 million shares available for issuance under the ESPP. During the nine months ended October 2, 2021, 0.3 million shares were purchased under the ESPP. As of October 2, 2021, unrecognized stock-based compensation expense of $ 1.1 million related to the ESPP is expected to be recognized over a remaining service period of 0.4 years. 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 October 2, 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 nine months ended October 2, 2021, 0.2 million shares were purchased and issued. As of October 2, 2021, unrecognized stock-based compensation expense of $ 4.8 million related to the NQ ESPP is expected to be recognized over a remaining weighted-average service period of 0.9 year. Stock-Based Compensation The following table summarizes stock-based compensation expense (in thousands): Three Months Ended Nine Months Ended October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 Cost of revenue: Products $ 211 $ 159 $ 559 $ 392 Services 177 103 483 308 Sales and marketing 1,791 1,035 4,961 2,994 Research and development 1,803 1,237 5,031 3,344 General and administrative 2,679 1,040 7,021 2,762 $ 6,661 $ 3,574 $ 18,055 $ 9,800 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 customer support, software- and cloud-based maintenance, extended warranty subscriptions, professional services, training and managed services. The following is a summary of revenue disaggregated by geographic region based upon the location of the customers (in thousands): Three Months Ended Nine Months Ended October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 United States $ 136,312 $ 129,205 $ 414,246 $ 326,063 Americas ex U.S. 11,800 7,032 37,660 18,969 Europe 19,443 9,183 32,701 15,414 Middle East & Africa 3,905 4,537 16,165 9,171 Asia Pacific 771 551 2,203 1,596 $ 172,231 $ 150,508 $ 502,975 $ 371,213 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 $ 0.3 million remained in the Company’s Condensed Consolidated Balance Sheet as of October 2, 2021. The closing balance as of October 2, 2021 was $ 1.2 million of which the Company expects to bill 55 % 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 October 2, 2021. Contract Liability Deferred revenue consisted of the following (in thousands): October 2, 2021 December 31, 2020 Current: Products and services $ 19,465 $ 14,651 Extended warranty 4,752 4,538 24,217 19,189 Long-term: Products and services 2,639 1,879 Extended warranty 18,929 18,025 21,568 19,904 $ 45,785 $ 39,093 The increase in the deferred revenue balance for the three and nine months ended October 2, 2021 is primarily driven by cash payments received or due in advance of satisfying the Company’s performance obligations offset by $ 8.6 million and $ 17.1 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 represents 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 $ 105.0 million as of October 2, 2021, and the Company expects to recognize 34 % 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 October 2, 2021, the unamortized balance of deferred commissions was $ 4.0 million. For the three and nine months ended October 2, 2021, the amount of amortization was $ 0.4 million and $ 0.7 million, respectively. There was no impairment loss in relation to the costs capitalized. Concentration of Customer Risk One customer, our only greater-than-10%-of-revenue customer, represented 10 % of the Company’s total revenue for the three months ended October 2, 2021. No customer accounted for more than 10% of the Company’s total revenue for the nine months ended October 2, 2021. Another customer, Lumen Technologies, Inc. (formerly CenturyLink, Inc.), our only greater-than-10%-of-revenue customer, represented 12 % and 14 % of total revenue for three and nine months ended September 26, 2020, respectively. No customer represented more than 10% of the Company’s accounts receivable as of October 2, 2021 or December 31, 2020. 16 Table of Contents 10. Income Taxes The following table presents income taxes and the effective tax rates for the periods indicated (in thousands, except percentages): Three Months Ended Nine Months Ended October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 Income taxes $ ( 159,982 ) $ 149 $ ( 159,625 ) $ 626 Effective tax rate ( 917.2 ) % 0.7 % ( 271.1 ) % 6.3 % The Company’s income taxes for the nine months ended October 2, 2021 and September 26, 2020 was determined using an estimated effective tax rate adjusted for discrete items that occurred during the respective periods. The income tax benefit for the nine months ended October 2, 2021 was primarily due to the release of the valuation allowance on certain U.S. federal and state deferred tax assets and, to a lesser degree, benefits related to stock-based compensation and income taxes related to various states and profitable subsidiaries. For the nine months ended September 26, 2020, the tax expense was primarily related to the foreign tax provision. The Company has net deferred tax assets that have arisen primarily as a result of temporary differences, net operating loss carryforwards and tax credits. The Company’s ability to realize a deferred tax asset is based on its ability to generate sufficient future taxable income within the applicable carryforward period and subject to any applicable limitations. A valuation allowance is required when, based upon an assessment of various factors, including recent operating loss history, anticipated future earnings, and prudent and reasonable tax planning strategies, it is more likely than not that some portion of the deferred tax assets will not be realized. At each reporting period, the Company assesses the estimated future realizability of the gross carrying value of its deferred tax assets. The Company’s periodic assessments take into consideration both positive evidence (future profitability projections for example and recent financial performance) and negative evidence (historical financial performance for example) as it relates to evaluating the future recoverability of its deferred tax assets. During the third quarter of 2021, the Company recognized an income tax benefit of $ 162.0 million offset by current income taxes, based on management’s reassessment of the amount of its 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 its analysis, the Company used the most updated plans and estimates that it currently uses to manage the underlying business and calculated the ability to utilize its deferred tax assets. The Company continues to maintain a valuation allowance of $ 28.7 million on certain U.S. federal and state deferred tax assets that the Company believes are not more likely than not to be realized in future periods. The Company considers scheduled reversals of deferred tax liabilities, projected future taxable income, ongoing tax planning strategies and other matters, including the period over which its deferred tax assets will be recoverable, in assessing the need for and the amount of the valuation allowance. In the event that actual results differ from these estimates, or if the Company decides to adjust these estimates in the future periods, further adjustments to its valuation allowance may be recorded, which could materially impact the Company’s financial position and net income in the period of the adjustment. 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, management concluded that the deferred tax assets were not more likely to be realized which resulted in an immaterial domestic provision as the deferred tax assets were fully offset with the valuation allowance. The Company’s 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 as actual results differing from its estimates of pre-tax earnings in the various jurisdictions in which the Company operates, which could impact the recognition of its 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 the Company conducts business. 17 Table of Contents 11. Net Income Per Common Share The following table sets forth the computation of basic and diluted net income per common share for the periods indicated (in thousands, except per share data): Three Months Ended Nine Months Ended October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 Numerator: Net income $ 177,424 $ 20,538 $ 218,497 $ 9,382 Denominator: Weighted-average common shares outstanding used to compute basic net income per share 63,588 60,307 63,057 58,053 Effect of dilutive common stock equivalents 4,319 3,142 4,480 2,278 Weighted-average common shares outstanding used to compute diluted net income per share 67,907 63,449 67,537 60,331 Net income per common share: Basic net income per common share $ 2.79 $ 0.34 $ 3.47 $ 0.16 Diluted net income per common share $ 2.61 $ 0.32 $ 3.24 $ 0.16 Potentially dilutive shares, weighted average 1,224 169 908 579 Potentially dilutive shares have been excluded from the computation of diluted net income per common share when their effect is antidilutive. These antidilutive shares were from stock options. 18 Table of Contents