CALIX, INC 10-Q

ITEM 1. Financial Statements CALIX, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value) July 2, 2022 December 31, 2021 (Unaudited) (See Note 1) ASSETS Current assets: Cash and cash equivalents $ 51,516 $ 51,333 Marketable securities 173,369 153,002 Accounts receivable, net 86,128 85,219 Inventory 98,324 88,880 Prepaid expenses and other current assets 51,505 30,811 Total current assets 460,842 409,245 Property and equipment, net 22,029 21,783 Right-of-use operating leases 10,962 12,182 Deferred tax assets 167,928 168,962 Goodwill 116,175 116,175 Other assets 14,876 13,685 $ 792,812 $ 742,032 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 22,951 $ 29,061 Accrued liabilities 74,782 71,597 Deferred revenue 33,511 27,478 Total current liabilities 131,244 128,136 Long-term portion of deferred revenue 24,709 22,016 Operating leases 10,584 12,376 Other long-term liabilities 9,146 11,076 Total liabilities 175,683 173,604 Commitments and contingencies (See Note 6) Stockholders’ equity: Preferred stock, $ 0.025 par value; 5,000 shares authorized; no shares issued and outstanding as of July 2, 2022 and December 31, 2021 — — Common stock, $ 0.025 par value; 100,000 shares authorized; 65,241 shares issued and outstanding as of July 2, 2022, and 64,274 shares issued and outstanding as of December 31, 2021 1,631 1,607 Additional paid-in capital 1,032,833 997,855 Accumulated other comprehensive loss ( 2,261 ) ( 320 ) Accumulated deficit ( 415,074 ) ( 430,714 ) Total stockholders’ equity 617,129 568,428 $ 792,812 $ 742,032 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 Six Months Ended July 2, 2022 July 3, 2021 July 2, 2022 July 3, 2021 Revenue: Systems $ 191,195 $ 159,553 $ 365,621 $ 312,855 Services 10,847 9,117 21,369 17,889 Total revenue 202,042 168,670 386,990 330,744 Cost of revenue: Systems 94,448 72,673 180,361 142,336 Services 7,414 6,378 14,657 12,547 Total cost of revenue 101,862 79,051 195,018 154,883 Gross profit 100,180 89,619 191,972 175,861 Operating expenses: Sales and marketing 41,138 29,710 77,229 57,761 Research and development 30,430 25,716 60,247 50,080 General and administrative 18,911 13,664 34,942 26,689 Total operating expenses 90,479 69,090 172,418 134,530 Operating income 9,701 20,529 19,554 41,331 Interest and other income (expense), net: Interest income (expense), net 240 ( 119 ) 275 ( 244 ) Other income (expense), net ( 272 ) 255 ( 340 ) 343 Total interest and other income (expense), net ( 32 ) 136 ( 65 ) 99 Income before income taxes 9,669 20,665 19,489 41,430 Income taxes 2,148 207 3,849 357 Net income $ 7,521 $ 20,458 $ 15,640 $ 41,073 Net income per common share: Basic $ 0.12 $ 0.32 $ 0.24 $ 0.65 Diluted $ 0.11 $ 0.30 $ 0.23 $ 0.61 Weighted-average number of shares used to compute net income per common share: Basic 64,836 63,042 64,662 62,795 Diluted 68,169 67,634 68,285 67,347 Net income $ 7,521 $ 20,458 $ 15,640 $ 41,073 Other comprehensive income (loss), net of tax: Unrealized loss on available-for-sale marketable securities, net ( 306 ) — ( 1,467 ) — Foreign currency translation adjustments, net ( 403 ) 44 ( 474 ) 9 Total other comprehensive income (loss), net of tax ( 709 ) 44 ( 1,941 ) 9 Comprehensive income $ 6,812 $ 20,502 $ 13,699 $ 41,082 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 Total Stockholders’ Equity Shares Amount Balance as of April 2, 2022 64,612 $ 1,616 $ 1,014,336 $ ( 1,552 ) $ ( 422,595 ) $ 591,805 Stock-based compensation — — 10,007 — — 10,007 Issuance of common stock under equity incentive plans, net of forfeitures 629 15 8,490 — — 8,505 Net income — — — — 7,521 7,521 Other comprehensive loss — — — ( 709 ) — ( 709 ) Balance as of July 2, 2022 65,241 $ 1,631 $ 1,032,833 $ ( 2,261 ) $ ( 415,074 ) $ 617,129 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity Shares Amount Balance as of April 3, 2021 62,851 $ 1,572 $ 961,846 $ ( 226 ) $ ( 648,477 ) $ 314,715 Stock-based compensation — — 6,223 — — 6,223 Issuance of common stock under equity incentive plans, net of forfeitures 349 8 4,190 — — 4,198 Net income — — — — 20,458 20,458 Other comprehensive loss — — — 44 — 44 Balance as of July 3, 2021 63,200 $ 1,580 $ 972,259 $ ( 182 ) $ ( 628,019 ) $ 345,638 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity Shares Amount Balance as of December 31, 2021 64,274 $ 1,607 $ 997,855 $ ( 320 ) $ ( 430,714 ) $ 568,428 Stock-based compensation — — 20,475 — — 20,475 Issuance of common stock under equity incentive plans, net of forfeitures 967 24 14,503 — — 14,527 Net income — — — — 15,640 15,640 Other comprehensive loss — — — ( 1,941 ) — ( 1,941 ) Balance as of July 2, 2022 65,241 $ 1,631 $ 1,032,833 $ ( 2,261 ) $ ( 415,074 ) $ 617,129 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity Shares Amount Balance as of December 31, 2020 62,122 $ 1,553 $ 948,055 $ ( 191 ) $ ( 669,092 ) $ 280,325 Stock-based compensation — — 11,394 — — 11,394 Issuance of common stock under equity incentive plans, net of forfeitures 1,078 27 12,810 — — 12,837 Net income — — — — 41,073 41,073 Other comprehensive loss — — — 9 — 9 Balance as of July 3, 2021 63,200 $ 1,580 $ 972,259 $ ( 182 ) $ ( 628,019 ) $ 345,638 See accompanying notes to condensed consolidated financial statements. 6 Table of Contents CALIX, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands, unaudited) Six Months Ended July 2, 2022 July 3, 2021 Operating activities: Net income $ 15,640 $ 41,073 Adjustments to reconcile net income to net cash provided by operating activities: Stock-based compensation 20,475 11,394 Depreciation and amortization 7,671 7,737 Deferred income taxes 1,034 — Changes in operating assets and liabilities: Accounts receivable, net ( 909 ) ( 10,745 ) Inventory ( 9,445 ) ( 24,868 ) Prepaid expenses and other assets ( 23,268 ) ( 6,390 ) Accounts payable ( 6,060 ) 21,918 Accrued liabilities 4,222 ( 10,184 ) Deferred revenue 8,725 6,164 Other long-term liabilities ( 3,721 ) ( 2,742 ) Net cash provided by operating activities 14,364 33,357 Investing activities Purchases of property and equipment ( 5,866 ) ( 3,928 ) Purchases of marketable securities ( 103,286 ) ( 147,277 ) Maturities of marketable securities 81,452 83,000 Net cash used in investing activities ( 27,700 ) ( 68,205 ) Financing activities: Proceeds from common stock issuances related to employee benefit plans 14,527 12,837 Payments related to financing arrangements ( 632 ) ( 212 ) Net cash provided by financing activities 13,895 12,625 Effect of exchange rate changes on cash and cash equivalents ( 376 ) 6 Net increase (decrease) in cash and cash equivalents 183 ( 22,217 ) Cash and cash equivalents at beginning of period 51,333 80,807 Cash and cash equivalents at end of period $ 51,516 $ 58,590 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, 2021 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, 2021. 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 one less day in the six months ended July 2, 2022 than for the six months ended July 3, 2021. 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 become endemic. The COVID-19 pandemic 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. The Company’s supply chain continues to face constraints primarily due to closures affecting suppliers and manufacturers in China that have led to challenges in sourcing components and materials. Shortages and delays relating to the Company’s components and materials have also caused, and may continue to cause, difficulties in managing global logistics, and transport and warehousing services for the Company’s products. The prolonged impact of COVID-19 could exacerbate these constraints or cause further supply chain disruptions. 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, 2021. The Company’s significant accounting policies did not change during the six months ended July 2, 2022. 8 Table of Contents Newly Adopted Accounting Standard The Company did not adopt any new accounting standards during the six months ended July 2, 2022 that were significant to the Company. Recent Accounting Pronouncements Not Yet Adopted There have been no additional accounting pronouncements or changes in accounting pronouncements during the six months ended July 2, 2022 as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, 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 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. There were no realized gains and losses for the three and six months ended July 2, 2022 and July 3, 2021, respectively. Cash, cash equivalents and marketable securities consisted of the following (in thousands): July 2, 2022 December 31, 2021 Cash and cash equivalents: Cash $ 24,113 $ 26,442 Commercial paper 24,616 21,582 Money market funds 2,787 2,320 Corporate debt securities — 989 Total cash and cash equivalents 51,516 51,333 Marketable securities: U.S. government securities 99,808 60,279 Commercial paper 63,040 80,812 U.S. government agency securities 9,028 5,527 Corporate debt securities 799 3,576 Municipal securities 694 2,808 Total marketable securities 173,369 153,002 $ 224,885 $ 204,335 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 The amortized cost and fair value of marketable securities as of July 2, 2022 were as follows (in thousands): Amortized Cost Gross Unrealized Losses Fair Value U.S. government securities $ 101,289 $ ( 1,481 ) $ 99,808 Commercial paper 87,725 ( 69 ) 87,656 U.S. government agency securities 9,117 ( 89 ) 9,028 Corporate debt securities 803 ( 4 ) 799 Municipal securities 696 ( 2 ) 694 Total marketable securities $ 199,630 $ ( 1,645 ) $ 197,985 Unrealized gains and losses were de minimis as of December 31, 2021. 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 July 2, 2022 Level 1 Level 2 Total Money market funds $ 2,787 $ — $ 2,787 U.S. government securities 99,808 — 99,808 Commercial paper — 87,656 87,656 U.S. government agency securities — 9,028 9,028 Corporate debt securities — 799 799 Municipal securities — 694 694 $ 102,595 $ 98,177 $ 200,772 As of December 31, 2021 Level 1 Level 2 Total Money market funds $ 2,320 $ — $ 2,320 U.S. government securities 60,279 — 60,279 Commercial paper — 102,394 102,394 U.S. government agency securities — 5,527 5,527 Corporate debt securities — 4,565 4,565 Municipal securities — 2,808 2,808 $ 62,599 $ 115,294 $ 177,893 10 Table of Contents 5. Balance Sheet Details Accounts receivable, net consisted of the following (in thousands): July 2, 2022 December 31, 2021 Accounts receivable $ 86,788 $ 85,944 Allowance for doubtful accounts ( 660 ) ( 725 ) $ 86,128 $ 85,219 Inventory consisted of the following (in thousands): July 2, 2022 December 31, 2021 Raw materials $ 674 $ 130 Finished goods 97,650 88,750 $ 98,324 $ 88,880 Property and equipment, net consisted of the following (in thousands): July 2, 2022 December 31, 2021 Test equipment $ 41,290 $ 39,476 Computer equipment 11,079 11,156 Software 9,623 9,013 Leasehold improvements 1,678 1,351 Furniture and fixtures 1,074 1,812 Total 64,744 62,808 Accumulated depreciation and amortization ( 42,715 ) ( 41,025 ) $ 22,029 $ 21,783 Other long-term assets consisted of the following (in thousands): July 2, 2022 December 31, 2021 Intangible asset, net $ 5,569 $ 6,885 Other long-term assets 9,307 6,800 $ 14,876 $ 13,685 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 July 2, 2022, the liability, including accrued interest, was $ 12.9 million, of which $ 5.7 million is included in “Accrued liabilities” and $ 7.2 million in “Other long-term liabilities” in the accompanying Condensed Consolidated Balance Sheet. As of December 31, 2021, the liability, including accrued interest, was $ 13.2 million, of which $ 4.7 million was included in “Accrued liabilities” and $ 8.5 million in other “Other long-term liabilities.” 11 Table of Contents Accrued liabilities consisted of the following (in thousands): July 2, 2022 December 31, 2021 Compensation and related benefits $ 20,314 $ 23,165 Component inventory held by suppliers 9,310 7,611 Current portion of warranty and retrofit 6,777 7,076 Current portion of revenue share payments 5,747 4,731 Professional and consulting fees 5,678 4,819 Freight 5,201 3,997 Customer advances or rebates 5,118 4,742 Operating leases 3,822 3,596 Taxes payable 3,395 4,251 Product returns 2,804 1,836 Operations 1,765 1,400 Other 4,851 4,373 $ 74,782 $ 71,597 Changes in the Company’s accrued warranty and retrofit liability were as follows (in thousands): Three Months Ended Six Months Ended July 2, 2022 July 3, 2021 July 2, 2022 July 3, 2021 Balance at beginning of period $ 9,570 $ 9,650 $ 9,594 $ 9,208 Accruals for product warranty and retrofit ( 351 ) 1,003 177 2,205 Cost of warranty and retrofit claims ( 565 ) ( 742 ) ( 1,117 ) ( 1,502 ) Balance at end of period $ 8,654 $ 9,911 $ 8,654 $ 9,911 6. Commitments and Contingencies Lease Commitments The Company leases office space under non-cancelable operating leases. Certain of the Company’s operating leases contain renewal options and rent acceleration clauses. Future minimum payments under the non-cancelable operating leases consisted of the following as of July 2, 2022 (in thousands): Period Future Minimum Lease Payments Remainder of 2022 $ 2,263 2023 4,680 2024 4,510 2025 4,010 2026 562 Total future minimum lease payments 16,025 Less imputed interest ( 1,619 ) $ 14,406 As of July 2, 2022, the operating lease liability consisted of the following (in thousands): Accrued liabilities - current portion of operating leases $ 3,822 Operating leases 10,584 $ 14,406 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 $ 8.5 million and are included in the table above. The weighted average discount rate for the Company’s operating leases as of July 2, 2022 was 6.1 %. The weighted average remaining lease term as of July 2, 2022 was 3.5 years. 12 Table of Contents For the three and six months ended July 2, 2022, total rent expense of the Company was $ 1.1 million and $ 2.2 million, respectively. For the three and six months ended July 3, 2021, total rent expense of the Company was $ 0.9 million and $ 2.1 million, respectively. Cash paid within operating cash flows for operating leases was $ 2.3 million and $ 2.0 million for the six months ended July 2, 2022 and July 3, 2021, respectively. Purchase Commitments The Company’s suppliers, including contract manufacturers (“CMs”) and original design manufacturers (“ODMs”), place orders for certain component inventory in advance based upon the Company’s build forecasts in order to reduce manufacturing lead times and ensure adequate component supply. The components are used by the CMs and ODMs to build the products included in the build forecasts. The Company generally does not take ownership of the components held by CMs and ODMs. The Company places purchase orders with its CMs and ODMs in order to fulfill its monthly finished product inventory requirements. The Company incurs a liability when the CMs and ODMs convert the component inventory to a finished product and takes ownership of the finished goods inventory. In the event of termination of services with a manufacturing partner, the Company has purchased, and may be required to purchase in the future, certain of the remaining components inventory held by the CM or ODM as well as any outstanding orders pursuant to the contractual provisions with such CM or ODM. As of July 2, 2022 and December 31, 2021, the Company had approximately $ 324.2 million and $ 247.3 million, respectively, of outstanding purchase commitments for inventories to be delivered by its suppliers, including CMs and ODMs, within two years . 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 $ 9.3 million and $ 7.6 million as of July 2, 2022 and December 31, 2021, respectively. The Company records the related charges in cost of systems revenue in its Condensed Consolidated Statements of Comprehensive Income. 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. 7. 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 2022 annual meeting of stockholders, the stockholders approved an increase in the number of shares of common stock issuable under the 2019 Plan by 1.5 million shares. As of July 2, 2022, there were 7.0 million shares available for issuance under the 2019 Plan. Stock Options During the three months ended July 2, 2022, stock option awards exercisable for up to an aggregate of 0.4 million shares of common stock were granted with a grant date weighted-average exercise price of $ 33.46 per share. During the six months ended July 2, 2022, stock option awards exercisable for up to an aggregate of 0.8 million shares of common stock were granted with a grant date weighted-average exercise price of $ 43.15 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 2022, 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 $ 55.96 per share. The actual number of shares earned is contingent upon achievement of annual corporate financial targets for bookings and non-GAAP net operating income for 2022 (collectively, the “2022 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 2022 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 13 Table of Contents 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 operating 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 operating income and 90 % of target for bookings, then the shares are awarded at 50 % of the granted shares, with an increasing percentage of shares awarded above the minimum thresholds up to 100 % of the granted shares if both targets are achieved at 100 % or more of target. The probability of meeting the performance conditions related to these performance-based stock option awards was assessed to be probable as of July 2, 2022, and stock-based compensation expense of $ 2.9 million was recognized for the three months ended July 2, 2022. For the six months ended July 2, 2022, stock-based compensation expense of $ 4.5 million was recognized. During the three months ended July 2, 2022, 0.3 million shares of common stock were issued pursuant to the exercise of stock options at a weighted-average exercise price of $ 7.51 per share. During the six months ended July 2, 2022, 0.5 million shares of common stock were issued pursuant to the exercise of stock options at a weighted-average exercise price of $ 7.56 per share. As of July 2, 2022, unrecognized stock-based compensation expense of $ 55.3 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, participants may purchase up to 2,000 shares of common stock during 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 Company’s 2022 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, 2022 and ending on February 14, 2023. The total shares authorized for issuance under the ESPP increased from 11.1 million shares to 12.4 million shares. As of July 2, 2022, there were 3.5 million shares available for issuance under the ESPP. During the six months ended July 2, 2022, 0.1 million shares were purchased under the ESPP. As of July 2, 2022, unrecognized stock-based compensation expense of $ 0.3 million related to the ESPP is expected to be recognized over a remaining service period of 0.1 years. The NQ ESPP allows eligible employees to purchase shares of the Company’s common stock through payroll deductions of up to 25 % of their eligible compensation. Eligible employees have the right to (a) purchase the maximum number of whole shares of common stock that can be purchased with the elected payroll deductions during each offering period for which the employee is enrolled at a purchase price equal to the closing price of the Company’s common stock on the last day of such offering period and (b) receive an equal number of shares of the Company’s common stock that are subject to a risk of forfeiture in the event the employee terminates employment within the one year period immediately following the purchase date. Beginning in the second quarter of 2022, the NQ ESPP provides quarterly offering periods from February 8 th through May 7 th , May 8 th through August 7 th , August 8 th through November 7 th and November 8 th through February 7 th of each year. A transition period began on May 15 th and will end on August 7 th . At the Company’s 2022 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 6.3 million shares, with a maximum of 0.5 million shares allocated per purchase period. As of July 2, 2022, there were 3.3 million shares available for issuance under the NQ ESPP, including the stockholder-approved 0.8 million share increase. During the three and six months ended July 2, 2022, 0.4 million shares were purchased and issued. As of July 2, 2022, unrecognized stock-based compensation expense of $ 6.9 million related to the NQ ESPP is expected to be recognized over a remaining weighted-average service period of 0.9 years. 14 Table of Contents Stock-Based Compensation The following table summarizes stock-based compensation expense (in thousands): Three Months Ended Six Months Ended July 2, 2022 July 3, 2021 July 2, 2022 July 3, 2021 Cost of revenue: Products $ 419 $ 186 $ 793 $ 348 Services 231 157 473 307 Sales and marketing 2,848 1,723 5,330 3,170 Research and development 2,259 1,644 6,004 3,227 General and administrative 4,250 2,513 7,875 4,342 $ 10,007 $ 6,223 $ 20,475 $ 11,394 8. 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 Six Months Ended July 2, 2022 July 3, 2021 July 2, 2022 July 3, 2021 United States $ 183,932 $ 138,587 $ 349,563 $ 277,934 Americas ex U.S. 10,808 14,457 19,679 25,860 Europe 2,954 9,844 9,527 13,259 Middle East & Africa 4,099 5,172 7,717 12,260 Asia Pacific 249 610 504 1,431 $ 202,042 $ 168,670 $ 386,990 $ 330,744 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, 2021 was $ 1.7 million of which $ 0.4 million remained in the Company’s Condensed Consolidated Balance Sheet as of July 2, 2022. The closing balance as of July 2, 2022 was $ 1.7 million of which the Company expects to bill 60 % of the balance during the remainder of 2022. The contract asset balance may fluctuate depending on the timing of professional services contracts with the Company's customers. 15 Table of Contents Contract Liability Deferred revenue consisted of the following (in thousands): July 2, 2022 December 31, 2021 Current: Products and services $ 28,535 $ 22,586 Extended warranty 4,976 4,892 33,511 27,478 Long-term: Products and services 6,453 3,137 Extended warranty 18,256 18,879 24,709 22,016 $ 58,220 $ 49,494 The increase in the deferred revenue balance for the three and six months ended July 2, 2022 is primarily driven by cash payments received or due in advance of satisfying the Company’s performance obligations offset by $ 12.9 million of revenue recognized that was included in the deferred revenue balance at the beginning of the period. Revenue allocated to remaining performance obligations (“RPOs”) 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 but excludes variable consideration where the monthly invoicing is based on usage or where actual usage exceeds the minimum commitment. RPOs were $ 162.8 million as of July 2, 2022, and the Company expects to recognize as revenue 34 % of this amount over the next 12 months and the remainder thereafter. Contract Costs The Company capitalizes certain sales commissions related primarily to multi-year subscriptions and extended warranty support for which the expected amortization period is greater than one year. As of July 2, 2022 and December 31, 2021, the unamortized balance of deferred commissions was $ 7.7 million and $ 7.4 million, respectively. For the three and six months ended July 2, 2022, the amount of amortization was $ 0.9 million and $ 1.6 million, respectively, compared to $ 0.2 million and $ 0.3 million for the three and six months ended July 3, 2021, respectively. There was no impairment loss in relation to the costs capitalized for either period. Concentration of Customer Risk No customer accounted for more than 10% of the Company’s total revenue for the three or six months ended July 2, 2022 or July 3, 2021. No customer represented more than 10% of the Company’s accounts receivable as of July 2, 2022. One customer represented 12 % of the Company’s accounts receivable as of December 31, 2021. 9. Income Taxes The following table presents income taxes and the effective tax rates for the periods indicated (in thousands, except percentages): Three Months Ended Six Months Ended July 2, 2022 July 3, 2021 July 2, 2022 July 3, 2021 Income before income taxes $ 9,669 $ 20,665 $ 19,489 $ 41,430 Income taxes $ 2,148 $ 207 $ 3,849 $ 357 Effective tax rate 22.2 % 1.0 % 19.7 % 0.9 % The Company’s income taxes for the three months ended July 2, 2022 and July 3, 2021 were determined using an estimated effective tax rate adjusted for discrete items that occurred during the respective periods. The Company's effective tax rate for the three and six months ended July 2, 2022 differs from the statutory federal corporate tax rate of 21% primarily due to U.S. federal research tax credits and excess tax benefits from stock-based compensation partially offset by state taxes, the inclusion of income from certain foreign operations and the effect of non-deductible stock-based compensation for executive officers. 16 Table of Contents The Company's effective tax rate for the three and six months ended July 3, 2021 was significantly lower than 2022 as the Company maintained a full valuation allowance until the third quarter of 2021. 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. Management continues to believe that it is more likely than not we will utilize a significant portion of our deferred tax assets. The Company continues to maintain a valuation allowance of $ 30.8 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. 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, benefits from stock option exercises, further investments in the Company’s foreign operations, 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. 10. 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 Six Months Ended July 2, 2022 July 3, 2021 July 2, 2022 July 3, 2021 Numerator: Net income $ 7,521 $ 20,458 $ 15,640 $ 41,073 Denominator: Weighted-average common shares outstanding used to compute basic net income per share 64,836 63,042 64,662 62,795 Effect of dilutive common stock equivalents 3,333 4,592 3,623 4,552 Weighted-average common shares outstanding used to compute diluted net income per share 68,169 67,634 68,285 67,347 Net income per common share: Basic net income per common share $ 0.12 $ 0.32 $ 0.24 $ 0.65 Diluted net income per common share $ 0.11 $ 0.30 $ 0.23 $ 0.61 Potentially dilutive shares, weighted average 2,617 1,096 2,196 752 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. 11. Subsequent Event In July 2022, the Company’s Board of Directors authorized a one-year stock repurchase program for up to $ 100 million of the Company’s common stock. Under the repurchase program, repurchases can be made from time to time using a variety of methods, which may include open market purchases, privately negotiated transactions or otherwise, all in accordance with the rules of the SEC and other applicable legal requirements. The specific timing, price and size of the purchases will depend on prevailing stock prices, general economic and market conditions, and other considerations consistent with the Company’s capital allocation strategy. The repurchase program does not obligate the Company to acquire a particular amount of common stock, and the repurchase program may be suspended or discontinued at any time at the Company’s discretion. 17 Table of Contents