CALIX, INC 10-K

ITEM 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm 35 Consolidated Balance Sheets, As of December 31, 202 2 and 202 1 37 Consolidated Statements of Comprehensive Income , Years Ended December 31, 202 2 , 202 1 and 20 20 38 Consolidated Statements of Stockholders’ Equity, Years Ended December 31, 202 2 , 202 1 and 20 20 39 Consolidated Statements of Cash Flows, Years Ended December 31, 20 2 2 , 20 2 1 and 20 20 40 Notes to Consolidated Financial Statements 41 34 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Calix, Inc.: Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting We have audited the accompanying consolidated balance sheets of Calix, Inc. and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Evaluation of net realizable value of inventory and excess and obsolete inventory liabilities 35 Table of Contents As discussed in Notes 1, 4 and 5 to the consolidated financial statements, the Company has inventories with a carrying value of $149.2 million and excess and obsolete inventory liabilities of $10.3 million as of December 31, 2022. The Company adjusts the inventory carrying value for excess or obsolete inventory based on assumptions about future demand for products, potential obsolescence of technology, product life cycle, and whether pricing trends or forecasts indicate that the carrying value of inventory exceeds the estimated selling price. These factors are impacted by market and economic conditions, technology changes and new product introductions and require significant estimates that may include elements that are uncertain. The Company also records a liability and a charge to cost of revenue for estimated losses on inventory the Company is obligated to purchase from its manufacturers when the inventory has been rendered excess and obsolete 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. We identified the evaluation of net realizable value of inventory and excess and obsolete inventory liabilities as a critical audit matter. Evaluation of the Company’s forecasted demand, including the Company’s determination of the effect of market and economic conditions, technology and design changes, new product introductions, and discontinuation of products by its suppliers required significant auditor judgment. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s inventory process. This included controls over the reviews of the estimates of the net realizable value of excess or obsolete inventory and liabilities for losses on inventory the Company is obligated to purchase from its manufacturers. For a selection of inventory items, we (1) reperformed the analysis provided by the Company to assess the accuracy of the net realizable value of inventory by comparing historical sales activity, customer order backlog, or demand forecasts to the inventory on hand quantities, and (2) performed inquiries of Company’s personnel and inspected documents regarding market and economic conditions, technology and design changes, and new product introductions. We evaluated the reasonableness of management’s assumptions used to estimate the excess and obsolete inventory liabilities considering (1) inquiries of Company’s personnel and inspection of documents regarding market and economic conditions, technology and design changes, or supplier discontinuations, (2) historical reimbursements to suppliers for excess and obsolete component inventory, and (3) the excess and obsolete liabilities and purchase commitment trends. /s/ KPMG LLP We have served as the Company’s auditor since 2015. Santa Clara, California February 21, 2023 36 Table of Contents CALIX, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except par value) December 31, 2022 2021 ASSETS Current assets: Cash and cash equivalents $ 79,073 $ 51,333 Marketable securities 162,642 153,002 Accounts receivable, net 93,804 85,219 Inventory 149,160 88,880 Prepaid expenses and other current assets 62,691 30,811 Total current assets 547,370 409,245 Property and equipment, net 25,834 21,783 Right-of-use operating leases 9,283 12,182 Deferred tax assets 167,031 168,962 Goodwill 116,175 116,175 Other assets 19,142 13,685 $ 884,835 $ 742,032 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 41,407 $ 29,061 Accrued liabilities 90,474 71,597 Deferred revenue 33,541 27,478 Total current liabilities 165,422 128,136 Long-term portion of deferred revenue 25,072 22,016 Operating leases 8,442 12,376 Other long-term liabilities 6,332 11,076 Total liabilities 205,268 173,604 Commitments and contingencies (See Note 5) Stockholders’ equity: Preferred stock, $ 0.025 par value; 5,000 shares authorized; no shares issued and outstanding as of December 31, 2022 and 2021 — — Common stock, $ 0.025 par value; 100,000 shares authorized; 65,735 shares issued and outstanding as of December 31, 2022, and 64,274 shares issued and outstanding as of December 31, 2021 1,644 1,607 Additional paid-in capital 1,070,100 997,855 Accumulated other comprehensive loss ( 2,473 ) ( 320 ) Accumulated deficit ( 389,704 ) ( 430,714 ) Total stockholders’ equity 679,567 568,428 $ 884,835 $ 742,032 See accompanying notes to consolidated financial statements. 37 Table of Contents CALIX, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands, except per share data) Years Ended December 31, 2022 2021 2020 Revenue $ 867,827 $ 679,394 $ 541,239 Cost of revenue 432,399 322,807 274,220 Gross profit 435,428 356,587 267,019 Operating expenses: Sales and marketing 174,549 125,909 94,185 Research and development 131,994 101,747 85,258 General and administrative 76,275 55,779 44,444 Restructuring charges (benefit) — ( 786 ) 6,286 Total operating expenses 382,818 282,649 230,173 Operating income 52,610 73,938 36,846 Interest and other income (expense), net: Interest income (expense), net 2,009 ( 402 ) ( 1,585 ) Other expense, net ( 577 ) ( 882 ) ( 977 ) Total interest and other income (expense), net 1,432 ( 1,284 ) ( 2,562 ) Income before income taxes 54,042 72,654 34,284 Income taxes 13,032 ( 165,724 ) 800 Net income $ 41,010 $ 238,378 $ 33,484 Net income per common share: Basic $ 0.63 $ 3.77 $ 0.57 Diluted $ 0.60 $ 3.51 $ 0.54 Weighted-average number of shares used to compute net income per common share: Basic 65,058 63,277 59,074 Diluted 68,911 67,856 61,998 Net income $ 41,010 $ 238,378 $ 33,484 Other comprehensive income (loss), net of tax: Unrealized loss on available-for-sale marketable securities, net ( 1,521 ) ( 179 ) — Foreign currency translation adjustments, net ( 632 ) 50 663 Total other comprehensive income (loss), net of tax ( 2,153 ) ( 129 ) 663 Comprehensive income $ 38,857 $ 238,249 $ 34,147 See accompanying notes to consolidated financial statements. 38 Table of Contents CALIX, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands) Accumulated Additional Other Total Common Stock Paid-in Comprehensive Accumulated Treasury Stockholders’ Shares Amount Capital Loss Deficit Stock Equity Balance as of December 31, 2019 56,448 $ 1,545 $ 895,899 $ ( 854 ) $ ( 702,576 ) $ ( 39,986 ) $ 154,028 Stock-based compensation — — 13,960 — — — 13,960 Issuance of common stock under equity incentive plans, net of forfeitures 2,454 60 18,067 — — — 18,127 Issuance of common stock in connection with public offering, net of expenses 3,220 82 59,981 — — — 60,063 Treasury stock retirement ( 134 ) ( 39,852 ) — — 39,986 — Net income — — — — 33,484 — 33,484 Other comprehensive income — — — 663 — — 663 Balance as of December 31, 2020 62,122 1,553 948,055 ( 191 ) ( 669,092 ) — 280,325 Stock-based compensation — — 24,230 — — — 24,230 Issuance of common stock under equity incentive plans, net of forfeitures 2,152 54 25,570 — — — 25,624 Net income — — — — 238,378 — 238,378 Other comprehensive loss — — — ( 129 ) — — ( 129 ) Balance as of December 31, 2021 64,274 1,607 997,855 ( 320 ) ( 430,714 ) — 568,428 Stock-based compensation — — 44,826 — — — 44,826 Issuance of common stock under equity incentive plans, net of forfeitures 1,461 37 27,419 — — — 27,456 Net income — — — — 41,010 — 41,010 Other comprehensive loss — — — ( 2,153 ) — — ( 2,153 ) Balance as of December 31, 2022 65,735 1,644 1,070,100 ( 2,473 ) ( 389,704 ) — 679,567 See accompanying notes to consolidated financial statements. 39 Table of Contents CALIX, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Years Ended December 31, 2022 2021 2020 Operating activities: Net income $ 41,010 $ 238,378 $ 33,484 Adjustments to reconcile net income to net cash provided by operating activities: Stock-based compensation 44,826 24,230 13,960 Depreciation and amortization 14,315 15,012 13,718 Deferred income taxes 1,932 ( 168,426 ) — Net accretion of available-for-sale securities ( 1,146 ) — — Asset retirements and write-downs — — 3,914 Changes in operating assets and liabilities: Accounts receivable, net ( 8,585 ) ( 15,800 ) ( 22,910 ) Inventory ( 60,280 ) ( 36,612 ) ( 12,116 ) Prepaid expenses and other assets ( 38,359 ) ( 27,074 ) 773 Accounts payable 12,111 16,025 2,190 Accrued liabilities 20,919 3,273 11,922 Deferred revenue 9,118 10,400 3,596 Other long-term liabilities ( 8,678 ) ( 2,613 ) 2,878 Net cash provided by operating activities 27,183 56,793 51,409 Investing activities: Purchases of property and equipment ( 14,067 ) ( 10,463 ) ( 7,819 ) Purchases of marketable securities ( 191,403 ) ( 298,092 ) ( 72,982 ) Maturities of marketable securities 181,388 197,894 20,000 Net cash used in investing activities ( 24,082 ) ( 110,661 ) ( 60,801 ) Financing activities: Proceeds from common stock issuances related to employee benefit plans 27,456 25,624 18,127 Payments related to financing arrangements ( 2,393 ) ( 1,241 ) ( 5,758 ) Proceeds from the sale of common stock in connection with public offering, net of expenses — — 60,063 Proceeds from line of credit — — 30,000 Payments related to the line of credit — — ( 60,285 ) Net cash provided by financing activities 25,063 24,383 42,147 Effect of exchange rate changes on cash and cash equivalents ( 424 ) 11 595 Net increase (decrease) in cash and cash equivalents 27,740 ( 29,474 ) 33,350 Cash and cash equivalents at beginning of year 51,333 80,807 47,457 Cash and cash equivalents at end of year $ 79,073 $ 51,333 $ 80,807 Supplemental disclosures of cash flow information: Interest paid $ 577 $ 631 $ 1,686 Income taxes paid $ 9,607 5,197 751 Non-cash investing activities: Changes in accounts payable and accrued liabilities related to purchases of property and equipment $ 586 $ 194 $ ( 597 ) See accompanying notes to consolidated financial statements. 40 Table of Contents CALIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Description of Business and Significant Accounting Policies 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 a platform (cloud, software and systems) and managed services that focus on the subscriber-facing network, the portion of the network that governs available bandwidth and determines the range and quality of services that can be offered to subscribers. This platform and managed services enable broadband service providers (“BSPs”) of all sizes to innovate and transform their businesses. The Company’s BSP customers are empowered to utilize real-time data and insights from the Calix platform 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 and Accounting Guidance The accompanying consolidated financial statements have been prepared in accordance with the requirements of the U.S. Securities and Exchange Commission (“SEC”) and U.S. generally accepted accounting principles (“GAAP”). All significant intercompany balances and transactions have been eliminated in consolidation. Any reference in these notes to applicable accounting guidance is meant to refer to the authoritative U.S. GAAP as found in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). Use of Estimates The preparation of financial statements is in conformity with U.S. GAAP, which requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. For the Company, these estimates include, but are not limited to: allowances for doubtful accounts and sales returns, excess and obsolete inventory, allowances for obligations to its contract manufacturers, valuation of stock-based compensation, useful lives assigned to long-lived assets, standard and extended warranty costs, realizability of deferred tax assets and uncertain tax positions and contingencies. Actual results could differ from those estimates, and such differences could be material to the Company’s financial position and results of operations. Revenue Recognition Revenue is recognized when a performance obligation is satisfied, which occurs when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Revenue from sales of access and premises systems is recognized when control is transferred to the customer, which is generally when the products are shipped. Revenue from software platform licenses, which provides the customer with a right to use the software as it exists, is generally recognized upfront when made available to the customer. Revenue from cloud-based software subscriptions, customer support, maintenance, extended warranty subscriptions and managed services is generally recognized ratably over the contract term. Revenue from professional services and training is recognized as the services are delivered. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company’s hardware products contain both software and non-software components that function together to deliver the products’ essential functionality and therefore constitutes a single performance obligation as the promise to transfer the individual software and non-software components is not separately identifiable and, therefore, not distinct. Cloud-based software subscriptions can include multi-year agreements with a fixed annual fee for a minimum committed usage level. To the extent that minimum committed usage level each year varies, the Company has concluded that each year represents a distinct stand-ready performance obligation and the transaction price allocated to each performance obligation is recognized as revenue ratably over each annual period. The Company’s contracts may include multiple performance obligations. For such arrangements, the Company allocates the contract’s transaction price to each performance obligation using the relative stand-alone selling price of each distinct good or service in the contract. The Company generally determines stand-alone selling prices based on the prices charged to customers or its best estimate of stand-alone selling price. The Company’s estimate of stand-alone selling price is established considering multiple factors including, but not limited to, geographies, market conditions, competitive landscape, internal costs, gross margin objectives, characteristics of targeted customers and pricing practices. The determination of estimated stand-alone selling price is made through consultation with and formal approval by management, taking into consideration the go-to-market strategy. 41 Table of Contents Cost of Revenue Cost of revenue consists primarily of finished goods inventory purchased from the Company’s contract manufacturers, payroll and related expenses associated with managing the relationships with contract manufacturers, depreciation of manufacturing test equipment, warranty and retrofit costs, excess and obsolete inventory costs, allowances for obligations to its contract manufacturers, shipping charges and amortization of certain intangible assets. It also includes contractor and other costs of services incurred directly related to the delivery of services to customers. Warranty and Retrofit The Company offers limited warranties for its hardware products for a period of one , three or five years , depending on the product type. The Company recognizes estimated costs related to warranty activities as a component of cost of revenue upon product shipment or upon identification of a specific product failure. Under certain circumstances, the Company also provides fixes on specifically identified performance failures for products that are outside of the standard warranty period and recognizes estimated costs related to retrofit activities as a component of cost of revenue upon identification of such product failures. The Company recognizes estimated warranty and retrofit costs when it is probable that a liability has been incurred and the amount of loss is reasonably estimable. The estimates are based upon historical and projected product failure and claim rates, historical costs incurred in correcting product failures and information available related to any specifically identified product failures. Judgment is required in estimating costs associated with warranty and retrofit activities, and the Company's estimates are limited to information available to the Company at the time of such estimates. In some cases, such as when a specific product failure is first identified or a new product is introduced, the Company may initially have limited information and limited historical failure and claim rates upon which to base its estimates, and such estimates may require revision in future periods. The recorded amount is adjusted from time to time for specifically identified warranty and retrofit exposure. Actual warranty and retrofit expenses are charged against the Company’s estimated warranty and retrofit liability when incurred. Factors that affect the Company’s warranty and retrofit liability include the number of active installed units and historical and anticipated rates of warranty and retrofit claims and cost per claim. Stock-Based Compensation Stock-based compensation expense associated with stock options and purchase rights under the Amended and Restated Employee Stock Purchase Plan (the “ESPP”) and the Amended and Restated 2017 Nonqualified Employee Stock Purchase Plan (the “NQ ESPP”) is measured at the grant date based on the fair value of the award and is recognized, net of forfeitures, as expense over the remaining requisite service period (generally the vesting period) on a straight-line basis. The fair value of stock option and employee stock purchase right under the ESPP is estimated at the grant date using the Black-Scholes option valuation model. The fair value of the employee stock purchase right under the NQ ESPP is based on closing market price of the Company’s common stock on the date of grant. Stock-based compensation expense associated with performance stock options (“PSOs”) with graded vesting features and which contain both a performance and a service condition is measured based on fair value of stock options estimated at the grant date using the Black-Scholes option valuation model, and is recognized, net of forfeitures, as expense over the requisite service period using the graded vesting attribution method. Compensation expense is only recognized if the Company has determined that it is probable that the performance condition will be met. The Company reassesses the probability of vesting at each reporting period and adjusts compensation expense based on its probability assessment. Loss Contingencies From time to time, the Company is involved in legal proceedings arising from the normal course of business activities. The Company evaluates the likelihood of an unfavorable outcome of legal proceedings to which it is a party and accrues a loss contingency when the loss is probable and reasonably estimable. Assessing legal contingencies involves significant judgment and estimates, and the outcome of litigation is inherently uncertain and subject to numerous factors outside the Company’s control. Significant judgment is required when the Company assesses the likelihood of any adverse judgments or outcomes, including the potential range of possible losses, and whether losses are probable and reasonably estimable. Because of uncertainties related to these matters, the Company bases its estimates of whether a loss contingency is probable or reasonably possible, as well as the reasonable range of possible losses associated with each loss contingency, only on the information available at the time. As additional information becomes available, and at least quarterly, the Company reassesses the potential liability on each significant matter and may revise its estimates. These revisions could have a material impact on the Company’s business, operating results or financial condition. The actual outcome of these legal proceedings may materially differ from the Company’s estimates of potential liability, which could have a material adverse effect on the Company’s business, operating results or financial condition. 42 Table of Contents Credit Risk and Inventory Supplier Concentrations Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, marketable securities and accounts receivable. Cash equivalents consist of money market funds and marketable securities with a maturity at the date of purchase of ninety days or less, which are invested through financial institutions in the United States. Deposits in and investments held by these financial institutions may, at times, exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company also has approximately $ 2.7 million of cash held by its foreign subsidiaries in India, China and the United Kingdom. Management believes that the financial institutions that hold the Company’s cash and cash equivalents are financially sound and, accordingly, minimal credit risk exists with respect to these cash and cash equivalents. The Company depends primarily on a small number of outside contract manufacturers (“CMs”) and original design manufacturers (“ODMs”) for the bulk of its finished goods inventory. The Company generally purchases its products through purchase orders with its suppliers. While the Company seeks to maintain a sufficient supply of its products, the Company’s business and results of operations could be adversely affected by a stoppage or delay in receiving such products, the receipt of defective parts, an increase in price of such products or the Company’s inability to obtain lower prices from its CMs, ODMs and other suppliers in response to competitive pressures. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, trade receivables, accounts payable and other accrued liabilities approximate their fair value due to their relatively short-term nature. Marketable securities are valued using quoted market prices in active markets to determine fair value. Cash, Cash Equivalents and Marketable Securities Cash equivalents and marketable securities are stated at amounts that approximate fair value based on quoted market prices. The Company has invested its excess cash primarily in money market funds and highly liquid marketable securities such as U.S. treasury securities, corporate debt instruments, commercial paper and U.S. government securities. The Company considers all investments with maturities of three months or less when purchased to be cash equivalents. Marketable securities represent highly liquid U.S. treasury securities, corporate debt instruments, commercial paper and U.S. government securities with maturities greater than 90 days at date of purchase. Marketable securities with maturities greater than one year are classified as current because management considers all marketable securities to be available for current operations. 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 comprehensive loss in the stockholders’ equity until realized. Realized gains and losses on sales of marketable securities, if any, are determined on the specific identification method and are reclassified from accumulated other comprehensive loss to results of operations as “Other income (expense), net.” Realized gains and losses were not significant for the years ended December 31, 2022 and 2021, respectively. For the Company’s available-for-sale debt securities in an unrealized loss position, the Company determines whether a credit loss exists. In this assessment, among other factors, the Company considers the extent to which the fair value is less than the amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security. If factors indicate a credit loss exists, an allowance for credit loss will be recorded to “Other income (expense), net,” limited by the amount that the fair value is less than the amortized cost basis. The amount of fair value change relating to all other factors will be recognized in other comprehensive loss. See Note 2 “ Cash, Cash Equivalents and Marketable Securities.” Allowance for Doubtful Accounts The Company maintains an allowance for doubtful accounts for expected credit losses at contract inception resulting from the inability of its customers to make required payments. The Company records a specific allowance and revises the expected loss based on an analysis of individual past-due balances. Additionally, based on historical write-offs and the Company’s collection experience, the Company records an additional allowance based on a percentage of outstanding receivables. The Company performs credit evaluations of its customers’ financial condition. These evaluations require judgment and are based on a variety of factors including, but not limited to, current economic trends, payment history and a financial review of the customer. Actual collection losses may differ from management’s estimates, and such differences could be material to the Company's financial position and results of operations. Inventory Valuation and Supplier Purchase Commitments Inventory, which primarily consists of finished goods purchased from CMs or ODMs, is stated at the lower of cost (determined by the first-in, first-out method) or market value. Inbound shipping costs and U.S. tariffs are included in cost of inventory. In 43 Table of Contents addition, from time to time, the Company procures component inventory primarily as a result of manufacturing discontinuation of critical components by suppliers. The Company regularly monitors inventory quantities on hand and records write-downs for excess and obsolete inventories based on the Company’s estimate of demand for its products, potential obsolescence of technology, product life cycles and whether pricing trends or forecasts indicate that the carrying value of inventory exceeds its estimated selling price. The Company also evaluates its supplier purchase commitments, which have increased significantly due to extended lead-times in the current supply chain environment, and records a liability for excess and obsolete components based on its estimated demand of our products, potential obsolescence of technology and product life cycles. These factors are impacted by market and economic conditions, technology changes and new product introductions and require significant estimates that may include elements that are uncertain. Actual demand may differ from forecasted demand and may have a material effect on gross profit. If inventory is written down, a new cost basis is established that cannot be increased in future periods. Shipments from suppliers before the Company receives them are recorded as in-transit inventory when title and the significant risks and rewards of ownership have passed to the Company. Contract Costs The Company capitalizes certain sales commissions related primarily to multi-year cloud-based software subscriptions and extended warranty support contracts. Capitalized commissions are amortized as sales and marketing expenses over the period that the related revenue is recognized, which can be up to five years for extended warranty. The Company classifies the unamortized portion of deferred commissions as current or noncurrent based on the timing of when the Company expects to recognize the expense. The current and noncurrent portions of deferred commissions are included in “Prepaid expenses and other current assets” and “Other assets,” respectively, in the Company’s Consolidated Balance Sheets. Property and Equipment Property and equipment are stated at cost, less accumulated depreciation, and are depreciated using the straight-line method over the estimated useful life of each asset. Generally, computer equipment is depreciated over two years ; purchased software is depreciated over three to five years ; test equipment is depreciated over three years ; furniture and fixtures are depreciated over seven years ; and leasehold improvements are depreciated over the shorter of the respective lease term or the estimated useful life of the asset. Maintenance and repairs are charged to expense as incurred. Goodwill Goodwill was recorded as a result of the Company’s acquisitions of Occam Networks, Inc. in February 2011 and Optical Solutions, Inc. in February 2006. The Company records goodwill when consideration paid in a business acquisition exceeds the fair value of the net tangible assets and the identified intangible assets acquired. Goodwill is not amortized but instead is subject to an annual impairment test or more frequently if events or changes in circumstances indicate that it may be impaired. The Company evaluates goodwill on an annual basis as of the end of the second quarter of each fiscal year. Management has determined that it operates as a single reporting unit and, therefore, evaluates goodwill impairment at the enterprise level. At the end of the second quarter of 2022, the Company completed its annual goodwill impairment test. Based on its assessment of certain qualitative factors such as market capitalization, management concluded that the fair value of the Company was more likely than not greater than its carrying amount as of July 2, 2022. As such, it was not necessary to perform the two-step quantitative goodwill impairment test at the time. There have been no significant events or changes in circumstances subsequent to the 2022 annual impairment test that would more likely than not indicate that the carrying value of goodwill may have been impaired as of December 31, 2022. There were no impairment losses for goodwill for the years ended December 31, 2022, 2021 or 2020. Deferred Revenue Deferred revenue results from transactions where the Company billed the customer for products or services and when cash payments are received or due prior to transferring control of the promised goods or services to the customer. Payment terms to customers typically range from net 30 to net 90 days and vary by the size and location of customer and the products or services offered. The period between the transfer of control of the promised good or service to a customer and when payment is due is not significant. Income Taxes The Company evaluates its tax positions and estimates its 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 the Company’s Consolidated Balance Sheets, which are estimated based upon the 44 Table of Contents 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 the Company’s Consolidated Statements of Comprehensive Income become deductible expenses under applicable income tax laws or loss or credit carryforwards are utilized. Accordingly, realization of the Company’s deferred tax assets is dependent on future taxable income against which these deductions, losses and credits can be utilized. The Company must assess the likelihood that deferred tax assets will be recovered from future taxable income, and if the Company determines that recovery is not more likely than not, the Company must establish a valuation allowance. Management judgment is required in determining its provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against its net deferred tax assets. In the third quarter of 2021, the Company reversed the majority of its valuation allowance and recorded on its balance sheet U.S. federal and certain state deferred tax assets of $ 162.0 million. As of December 31, 2022, the Company determined that positive evidence continues to outweigh negative evidence and concluded that it was more likely than not that its U.S. federal and state (with the exception of California) deferred tax assets are realizable. The Company currently maintains a valuation allowance of $ 29.9 million for certain U.S. federal and California deferred tax assets. Newly Adopted Accounting Standards The Company did not adopt any new accounting standards in 2022 that were significant to the Company. Recent Accounting Pronouncements Not Yet Adopted There have been no accounting pronouncements or changes in accounting pronouncements that are significant or potentially significant to the Company. 2. Cash, Cash Equivalents and Marketable Securities Cash, cash equivalents and marketable securities consisted of the following (in thousands): December 31, 2022 2021 Cash and cash equivalents: Cash $ 39,189 $ 26,442 Commercial paper 33,199 21,582 U.S. government securities 5,990 — Money market funds 555 2,320 Corporate debt securities 140 989 Total cash and cash equivalents 79,073 51,333 Marketable securities: U.S. government securities 106,750 60,279 Commercial paper 28,992 80,812 U.S. government agency securities 23,632 5,527 Corporate debt securities 3,168 3,576 Municipal securities 100 2,808 Total marketable securities 162,642 153,002 $ 241,715 $ 204,335 The carrying amounts of the Company’s money market funds approximate their fair values due to their nature, duration and short maturities. As of December 31, 2022, all marketable securities were due in two years or less. 45 Table of Contents The amortized cost and fair value of marketable securities as of December 31, 2022 were as follows (in thousands): Amortized Cost Gross Unrealized Losses Fair Value U.S. government securities $ 114,119 $ ( 1,379 ) $ 112,740 Commercial paper 62,262 ( 71 ) 62,191 U.S. government agency securities 23,876 ( 244 ) 23,632 Corporate debt securities 3,312 ( 4 ) 3,308 Municipal securities 101 ( 1 ) 100 Total marketable securities $ 203,670 $ ( 1,699 ) $ 201,971 Unrealized gains and losses were not significant as of December 31, 2021. 3. 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 December 31, 2022 Level 1 Level 2 Total Money market funds $ 555 $ — $ 555 U.S. government securities 112,740 — 112,740 Commercial paper — 62,191 62,191 U.S. government agency securities — 23,632 23,632 Corporate debt securities — 3,308 3,308 Municipal securities — 100 100 $ 113,295 $ 89,231 $ 202,526 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 46 Table of Contents 4. Balance Sheet Details Accounts receivable, net consisted of the following (in thousands): December 31, 2022 2021 Accounts receivable $ 94,201 $ 85,944 Allowance for doubtful accounts ( 397 ) ( 725 ) $ 93,804 $ 85,219 The table below summarizes the changes in allowance for doubtful accounts and product return liability for the periods indicated (in thousands): Balance at Beginning of Year Additions Charged to Expenses or Revenue Net of Recoveries Write Offs and Returns Balance at End of Year Year Ended December 31, 2022: Allowance for doubtful accounts $ 725 $ ( 276 ) $ ( 52 ) $ 397 Product return liability 1,836 5,622 ( 4,497 ) 2,961 Year Ended December 31, 2021: Allowance for doubtful accounts $ 1,405 $ ( 201 ) $ ( 479 ) $ 725 Product return liability 1,888 3,681 ( 3,733 ) 1,836 Year Ended December 31, 2020: Allowance for doubtful accounts $ 374 $ 1,085 $ ( 54 ) $ 1,405 Product return liability 919 3,391 ( 2,422 ) 1,888 Inventory consisted of the following (in thousands): December 31, 2022 2021 Raw materials $ 640 $ 130 Finished goods 148,520 88,750 $ 149,160 $ 88,880 Prepaid expenses and other current assets consisted of the following (in thousands): December 31, 2022 2021 Supplier deposits $ 39,064 $ 6,191 Prepaid expenses and other current assets 23,627 24,620 $ 62,691 $ 30,811 Property and equipment, net consisted of the following (in thousands): December 31, 2022 2021 Test equipment $ 44,106 $ 39,476 Computer equipment 13,396 11,156 Software 10,389 9,013 Leasehold improvements 1,730 1,351 Furniture and fixtures 1,153 1,812 70,774 62,808 Accumulated depreciation and amortization ( 44,940 ) ( 41,025 ) $ 25,834 $ 21,783 Depreciation and amortization expenses were $ 14.3 million, $ 15.0 million and $ 13.7 million for the years ended December 31, 2022, 2021 and 2020, respectively. 47 Table of Contents Other long-term assets consisted of the following (in thousands): December 31, 2022 2021 Intangible asset $ 4,253 $ 6,885 Other long-term assets 14,889 6,800 $ 19,142 $ 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. As of December 31, 2022, the liability, including accrued interest, was $ 11.4 million, of which $ 7.2 million is included in “Accrued liabilities” and $ 4.2 million in “Other long-term liabilities” in the accompanying 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.” Accrued liabilities consisted of the following (in thousands): December 31, 2022 2021 Compensation and related benefits $ 27,813 $ 23,165 Component inventory held by suppliers 10,280 7,611 Professional and consulting fees 7,307 4,819 Current portion of revenue-share payments 7,210 4,731 Current portion of warranty and retrofit 6,377 7,076 Customer advances or rebates 5,653 4,742 Taxes payable 4,581 4,251 Operating leases 3,949 3,596 Freight 3,649 3,997 Business events 3,167 — Product returns 2,961 1,836 Other 7,527 5,773 $ 90,474 $ 71,597 Changes in the Company’s accrued warranty and retrofit liability were as follows (in thousands): Years Ended December 31, 2022 2021 2020 Balance at beginning of year $ 9,594 $ 9,208 $ 7,294 Provision for warranty and retrofit charged to cost of revenue 1,315 3,370 5,888 Utilization of reserve ( 2,523 ) ( 2,984 ) ( 3,974 ) Balance at end of year $ 8,386 $ 9,594 $ 9,208 Accrued Restructuring Charges The Company initiated a restructuring plan in 2020 to accelerate the Company’s platform future and to align with a work-from-anywhere culture. The Company incurred restructuring charges of approximately $ 6.3 million, consisting of facilities-related charges and severance and other termination related benefits for the year ended December 31, 2020. In the fourth quarter of 2021, as a result of subleasing the abandoned portion of the Company’s San Jose headquarters, the Company reversed $ 0.8 million in facilities-related charges due to the expected recovery of accrued common areas maintenance fees. 48 Table of Contents As of December 31, 2022, the Company had no accrued restructuring charges in the accompanying Consolidated Balance Sheet. 5. 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 December 31, 2022 (in thousands): Year Ending December 31, Future Minimum Lease Payments 2023 $ 4,629 2024 4,458 2025 3,955 2026 and thereafter 531 Total future minimum lease payments 13,573 Less imputed interest ( 1,182 ) $ 12,391 As of December 31, 2022, the operating lease liability consisted of the following (in thousands): Accrued liabilities - current portion of operating leases $ 3,949 Operating leases 8,442 $ 12,391 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 $ 7.3 million and are included in the table for the year ended December 31, 2022 above. The above tables also include future minimum lease payments for the Company's office facilities in Petaluma, California; Plymouth, Minnesota; Richardson, Texas; Bangalore, India; Nanjing, China; and West Jordan, Utah, which expire at various dates through 2027. In November 2021, the Company entered into a sublease for a portion of the San Jose headquarters office space that was previously abandoned. The sublease commenced in August 2022 for a term of 39 months. The Company received $ 0.3 million in sublease income in 2022. Future minimum payments consisted of the following as of December 31, 2022 (in thousands): Year Ending December 31, Future Minimum Sublease Payments 2023 750 2024 773 2025 661 Total future minimum sublease payments $ 2,184 The weighted average discount rate for the Company’s operating leases as of December 31, 2022 was 6.1 %. The weighted average remaining lease term as of December 31, 2022 was 3.0 years. For the years ended December 31, 2022, 2021 and 2020, total rent expense of the Company was $ 4.6 million, $ 4.1 million and $ 4.0 million, respectively. Cash paid within operating cash flows for operating leases was $ 4.5 million, $ 3.9 million and $ 3.8 million for years ended December 31, 2022, 2021 and 2020, respectively. Purchase Commitments The Company’s CMs and ODMs place orders for certain component inventory in advance based upon the Company’s build forecasts in order to reduce manufacturing lead times and ensure adequate component supply. The components are used by the CMs and ODMs to build the products included in the build forecasts. The Company generally does not take ownership of the components held by CMs and ODMs. The Company places purchase orders with its CMs and ODMs in order to fulfill its monthly finished product inventory requirements. The Company incurs a liability when the CMs and ODMs convert the component inventory to a finished product 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 49 Table of Contents remaining components inventory held by the CM or ODM as well as any outstanding orders pursuant to the contractual provisions with such CM or ODM. As of December 31, 2022 and 2021, the Company had approximately $ 340.6 million and $ 247.3 million, respectively, of outstanding purchase commitments for inventories to be delivered by its suppliers, including CMs and ODMs. The Company has from time to time, and subject to certain conditions, reimbursed certain suppliers for component inventory purchases when this inventory has been rendered excess or obsolete, for example due to manufacturing and engineering change orders resulting from design changes, manufacturing discontinuation of products by its suppliers, or in cases where the Company has committed inventory levels that greatly exceed projected demand. The estimated excess and obsolete inventory liabilities related to such manufacturing and engineering change orders and other factors, which are included in accrued liabilities in the accompanying Consolidated Balance Sheets, were $ 10.3 million and $ 7.6 million as of December 31, 2022 and 2021, respectively. The Company records the related charges in cost of systems revenue in its 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. Indemnifications The Company from time to time enters into contracts that require it to indemnify various parties against claims from third parties. These contracts primarily relate to (i) certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises, (ii) agreements with the Company’s officers, directors and certain employees, under which the Company may be required to indemnify such persons for liabilities arising out of their relationship with the Company, (iii) contracts under which the Company may be required to indemnify customers against third-party claims that a Company product infringes a patent, copyright or other intellectual property right and (iv) agreements under which the Company may be required to indemnify the counterparty for certain claims that may be brought against them arising from the Company’s acts or omissions with respect to the transactions contemplated by such agreements. Because any potential obligation associated with these types of contractual provisions are not quantified or stated, the overall maximum amount of the obligation cannot be reasonably estimated. Historically, the Company has not been required to make payments under these obligations, and no liabilities have been recorded for these obligations in the accompanying Consolidated Balance Sheets. 6. Stockholders’ Equity Preferred Stock The Board of Directors has the authority, without a further vote of the stockholders, to designate and issue up to 5.0 million shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. These rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series, any or all of which may be greater than the rights of common stock. The issuance of the Company’s preferred stock could adversely affect the voting power of holders of common stock and the likelihood that such holders will receive dividend payments and payments upon liquidation. In addition, the issuance of preferred stock could have the effect of delaying, deferring or preventing a change in control of the Company or other corporate action. Since the Company’s initial public offering, the Board of Directors has not designated any rights, preference or powers of any preferred stock, and no shares of preferred stock have been issued. Common Stock Holders of the Company’s common stock are entitled to receive dividends, if any, as may be declared from time to time by the Board of Directors out of legally available funds. No dividends have been declared or paid as of December 31, 2022. In August 2020, the Company completed an underwritten public offering of 3,220,000 shares of its common stock at $ 20.00 per share, including a full exercise by the underwriters of their option to purchase an additional 420,000 shares of Common Stock, resulting in net proceeds of $ 60.1 million, after deducting the underwriting discount and expenses paid by the Company. Stock Repurchase Program 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 50 Table of Contents 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. During the year ended December 31, 2022, no repurchases were made under the program. Equity Incentive Plans Stock Options At the Company’s 2019 annual meeting of stockholders, the stockholders approved the 2019 Equity Incentive Award Plan (the “2019 Plan”). The 2019 Plan supersedes and replaces the 2010 Equity Incentive Award Plan (the “2010 Plan”) and preceding plans. The terms and conditions of the 2010 Plan will continue to govern any outstanding awards granted under the 2010 Plan. Employees and consultants of the Company, its subsidiaries and affiliates and the Company’s Board of Directors members are eligible to receive awards under the 2019 Plan. The 2019 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units or 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 December 31, 2022, there were 6.0 million shares available for issuance under the 2019 Plan. Stock options granted under the 2019 Plan are granted at a price not less than 100 % of the fair market value of the common stock on the date of grant. Stock options issued under the 2019 Plan generally vest 25 % on the first anniversary of the vesting commencement date and on a quarterly basis thereafter for a period of an additional three years . The options have a maximum term of ten years . In February 2021, PSOs 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. Under the 2021 Performance Targets, if the non-GAAP net income is below 80 % of target or bookings are below 90 % of target, no shares would be awarded. From this base, shares are awarded on a 50 % weighting for both non-GAAP net income and bookings up to 100 % for each 2021 Performance Target using a sliding scale. In February 2022, the Compensation Committee of the Company’s Board of Directors certified the results against the 2021 Performance Targets and awarded 97 % of PSOs subject to the four-year services condition. As such, 25 % of the awarded shares of the PSOs were vested on that date, and the remaining 75 % of the shares of common stock will vest 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. Stock-based compensation expense of $ 3.6 million and $ 6.3 million was recognized for the years ended December 31, 2022 and 2021, respectively, related to these awards. Also, in February 2022, the Compensation Committee granted PSOs exercisable for up to an aggregate of 0.7 million shares of common stock to certain Company executives with a grant date exercise price of $ 55.96 per share, using the same plan design as 2021 but with 2022 annual corporate financial targets for bookings and non-GAAP net operating income (collectively, the “2022 Performance Targets”). In February 2023, the Compensation Committee of the Company’s Board of Directors certified the results against the 2022 Performance Targets and awarded 100 % of PSOs subject to the four-year service condition. As such, 25 % of the awarded shares of the PSOs were vested on that date, and the remaining 75 % of the shares of common stock will vest 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. Stock-based compensation expense of $ 10.1 million was recognized for the year ended December 31, 2022 related to these awards. 51 Table of Contents The following table summarizes the stock option activity under the Company’s equity incentive plans (in thousands, except per share data): Weighted- Average Weighted- Remaining Average Contractual Aggregate Number of Exercise Price Life Intrinsic Stock Options Shares Per Share (in years) Value (1) Outstanding as of December 31, 2021 6,648 $ 17.46 Granted 2,423 56.04 Exercised ( 721 ) 9.28 Canceled ( 63 ) 35.74 Outstanding as of December 31, 2022 8,287 $ 29.31 7.5 $ 325,828 Vested and expected to vest as of December 31, 2022 8,028 $ 28.64 7.4 $ 321,015 Options exercisable as of December 31, 2022 4,010 $ 14.04 6.1 $ 218,143 (1) Amounts represent the difference between the exercise price and the fair market value of common stock at December 31, 2022 of $ 68.43 per share for all “in-the-money” options outstanding. During the years ended December 31, 2022, 2021 and 2020, total intrinsic value of stock options exercised was $ 31.0 million, $ 59.6 million and $ 6.7 million, respectively. Cash received from employee stock option exercises in 2022, 2021 and 2020 was $ 6.7 million, $ 11.2 million and $ 0.9 million, respectively. Employee Stock Purchase Plans 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 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 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. The total shares authorized for issuance under the ESPP increased from 11.1 million shares to 12.4 million shares. As of December 31, 2022, there were 4.7 million shares available for issuance under the ESPP. During the year ended December 31, 2022, 0.2 million shares were purchased under the ESPP. As of December 31, 2022, unrecognized stock-based compensation expense of $ 0.4 million related to the ESPP is expected to be recognized over a remaining service period of 0.1 years. The NQ ESPP allows eligible employees to purchase shares of the Company’s common stock through payroll deductions of up to 25 % of their 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 May 8 th through August 7 th , August 8 th through November 7 th , November 8 th through February 7 th and February 8 th through May 7 th of each year. A transition period began on May 15 th and ended 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 0.3 million shares allocated per purchase period. As of December 31, 2022, there were 3.0 million shares available for issuance under the NQ ESPP, including the stockholder-approved 0.8 million share increase. During the year ended December 31, 2022, 0.6 million shares were purchased and issued. As of December 31, 2022, unrecognized stock-based compensation expense of $ 9.3 million related to the NQ ESPP is expected to be recognized over a remaining weighted-average service period of 0.8 years. 52 Table of Contents Stock-Based Compensation The following table summarizes stock-based compensation expense (in thousands): Years Ended December 31, 2022 2021 2020 Cost of revenue: Products $ 1,666 $ 790 $ 575 Services 1,034 668 450 Sales and marketing 12,001 6,728 4,273 Research and development 12,165 6,769 4,736 General and administrative 17,960 9,275 3,926 $ 44,826 $ 24,230 $ 13,960 Income tax benefits recognized $ 11,501 $ 16,929 $ — The following table summarizes the weighted-average grant date fair values of the Company’s stock-based awards granted in the periods indicated: Years Ended December 31, 2022 2021 2020 Stock options $ 31.86 $ 26.55 $ 8.55 ESPP $ 18.51 $ 12.93 $ 5.52 NQ ESPP $ 52.91 $ 55.50 $ 19.40 The Company values employee stock purchase rights under the NQ ESPP at the closing market price of the Company’s common stock on the date of grant. The Company estimates the fair value of stock options and employee stock purchase right under the ESPP at the grant date using the Black-Scholes option-pricing model. This model requires the use of the following assumptions: (i) Expected volatility of the Company’s common stock – The Company computes its expected volatility assumption based on a blended volatility ( 50 % historical volatility and 50 % implied volatility from traded options on the Company’s common stock). The selection of a blended volatility assumption was based upon the Company’s assessment that a blended volatility is more representative of the Company’s future stock price trend as it weighs the historical volatility with the future implied volatility. (ii) Expected life of the option award – Represents the weighted-average period that the stock options are expected to remain outstanding. The Company’s computation of expected life utilizes the simplified method in accordance with Staff Accounting Bulletin No. 110 due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. The mid-point between the vesting date and the expiration date is used as the expected term under this method. (iii) Expected dividend yield – The assumption is zero based on the Company’s history of not paying dividends and no future expectations of dividend payouts. (iv) Risk-free interest rate – Based on the U.S. Treasury yield curve in effect at the time of grant with maturities approximating the grant’s expected life. The following table summarizes the weighted-average assumptions used in estimating the grant-date fair value of stock options and of each employee’s purchase right under the ESPP in the periods indicated: Years Ended December 31, Stock Options 2022 2021 2020 Expected volatility 58 % 56 % 53 % Expected life (years) 6.1 6.0 6.1 Risk-free interest rate 3.15 % 1.11 % 0.48 % Years Ended December 31, ESPP 2022 2021 2020 Expected volatility 62 % 63 % 70 % Expected life (years) 0.5 0.5 0.4 Risk-free interest rate 2.16 % 0.05 % 0.12 % 53 Table of Contents In addition, the Company applies an estimated forfeiture rate to awards granted and records stock-based compensation expense only for those awards that are expected to vest. Forfeiture rates are estimated at the time of grant based on the Company’s historical experience. Further, to the extent the Company’s actual forfeiture rate is different from management’s estimate, stock-based compensation is adjusted accordingly. As of December 31, 2022, unrecognized stock-based compensation expense by award type, net of estimated forfeitures, and their expected weighted-average recognition periods are summarized in the following table (in thousands). Stock Option ESPPs Unrecognized stock-based compensation expense $ 73,095 $ 9,781 Weighted-average amortization period (in years) 2.3 0.8 The Company expects to recognize stock-based compensation expense of $ 37.2 million in 2023, $ 22.0 million in 2024, $ 16.0 million in 2025 and $ 7.7 million in 2026. Shares Reserved for Future Issuance As of December 31, 2022, the Company had common shares reserved for future issuance as follows (in thousands): Stock options outstanding 8,287 Shares available for future grant under 2019 Plan 5,986 Shares available for future issuance under ESPP 4,712 Shares available for future issuance under NQ ESPP 3,043 22,028 7. Employee Benefit Plan The Company sponsors a 401(k) tax-deferred savings plan for all employees who meet certain eligibility requirements. Participants may contribute, on a pre-tax basis, a percentage of their annual compensation, but not to exceed a maximum contribution amount pursuant to Section 401(k) of the Internal Revenue Code. The Company, at the discretion of the Board of Directors, may make additional matching contributions on behalf of the participants. The Company made matching contributions totaling $ 4.1 million, $ 3.2 million and $ 2.7 million in 2022, 2021 and 2020, respectively. 8. Accumulated Other Comprehensive Loss The table below summarizes the changes in accumulated other comprehensive loss by component: Unrealized Gains and Losses on Available-for-Sale Marketable Securities Foreign Currency Translation Adjustments Total Balance as of December 31, 2020 $ — $ ( 191 ) $ ( 191 ) Other comprehensive income (loss) ( 179 ) 50 ( 129 ) Balance as of December 31, 2021 ( 179 ) ( 141 ) ( 320 ) Other comprehensive loss ( 1,521 ) ( 632 ) ( 2,153 ) Balance as of December 31, 2022 $ ( 1,700 ) $ ( 773 ) $ ( 2,473 ) Assets and liabilities of the Company’s wholly owned foreign subsidiaries are translated from their respective functional currencies at exchange rates in effect at the balance sheet date, and revenue and expenses are translated at the monthly average exchanges rates. These translations result in differences called foreign currency translation adjustments. Realized foreign currency transaction gains or losses were not significant during the years ended December 31, 2022, 2021 and 2020 and are recorded in “Other income (expense), net” in the Company's Consolidated Statements of Comprehensive Income. Realized gains and losses on sales of available-for-sale marketable securities, if any, are reclassified from accumulated other comprehensive loss to “Other income (expense), net” in our Consolidated Statements of Comprehensive Income. 54 Table of Contents 9. Income Taxes The domestic and foreign components of income before incomes taxes were as follows (in thousands): Years Ended December 31, 2022 2021 2020 Domestic $ 51,442 $ 70,776 $ 33,777 Foreign 2,600 1,878 507 $ 54,042 $ 72,654 $ 34,284 Income taxes consisted of the following (in thousands): Years Ended December 31, 2022 2021 2020 Current: Federal $ 3,671 $ — $ — State 6,555 2,818 285 Foreign 874 438 507 Current income tax 11,100 3,256 792 Deferred: Federal 6,336 ( 157,355 ) — State ( 4,372 ) ( 11,631 ) — Foreign ( 32 ) 6 8 Deferred income tax 1,932 ( 168,980 ) 8 $ 13,032 $ ( 165,724 ) $ 800 The differences between the statutory and effective tax rates, expressed as a percentage of net income before income taxes, were as follows: Years Ended December 31, 2022 2021 2020 Federal statutory rate 21.0 % 21.0 % 21.0 % Impact of state taxes 1.4 ( 15.6 ) 0.1 Foreign operations — ( 0.2 ) 0.6 R&D tax credits ( 7.4 ) 1.4 ( 4.8 ) Foreign income inclusion 1.0 — — Stock-based compensation — ( 12.8 ) ( 4.1 ) Other permanent items ( 0.2 ) ( 0.3 ) 0.6 Tax true-up — ( 0.2 ) ( 0.4 ) Valuation allowance ( 4.0 ) ( 208.3 ) ( 48.1 ) Net operating loss expiration / attribute expiration 5.5 ( 13.1 ) 37.4 Base erosion anti-abuse tax 6.8 — — 24.1 % ( 228.1 ) % 2.3 % 55 Table of Contents The significant components of the Company’s deferred tax assets were as follows (in thousands): December 31, 2022 2021 Deferred tax assets: Net operating loss carryforwards $ 44,189 $ 82,672 Tax credit carryforwards 56,717 52,538 Accruals and reserves 11,679 10,302 Deferred revenue 13,156 11,351 Stock-based compensation 7,417 4,921 Capitalized R&D 67,932 38,842 Gross deferred tax assets 201,090 200,626 Valuation allowance ( 29,914 ) ( 29,236 ) Total deferred tax assets 171,176 171,390 Deferred tax liabilities: Fixed assets ( 2,648 ) ( 1,511 ) Intangible assets ( 1,497 ) ( 917 ) Total deferred tax liabilities ( 4,145 ) ( 2,428 ) $ 167,031 $ 168,962 All deferred taxes, along with any related valuation allowance, are classified in the Consolidated Balance Sheet as long-term. 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 2021, the Company released its valuation allowance for federal and state (with the exception of California) 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 valuation allowance increased by $ 0.7 million from 2021 to 2022. The Company continues to maintain a valuation allowance of $ 29.9 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. As of December 31, 2022, the Company had U.S. federal and state net operating losses of approximately $ 205.2 million and $ 24.0 million, respectively. The U.S. federal net operating loss carryforwards will expire at various dates through 2039 if not utilized. The state net operating loss carryforwards will expire at various dates through 2039 if not utilized. Additionally, the Company has U.S. federal, California and other U.S. states research and development credits of approximately $ 40.7 million, $ 47.0 million and $ 2.7 million as of December 31, 2022, respectively. The U.S. federal research and development credits have begun to expire in 2022 and will continue to expire at various dates through 2042. The California research and development credits have no expiration date. The credits related to other various U.S. states have begun to expire and will continue to expire at various dates through 2036. Uncertain Tax Positions ASC 740, “Income Taxes,” prescribes a recognition threshold and measurement attribute to the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The guidance also provides guidance on derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The standard requires the Company to recognize the financial statement effects of an uncertain tax position when it is more likely than not that such position will be sustained upon audit. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as interest expense and income tax expense, respectively, in its Consolidated Statements of Comprehensive Income. 56 Table of Contents The following table reconciles the Company’s unrecognized tax benefits (in thousands): Years Ended December 31, 2022 2021 Balance at beginning of year $ 25,992 $ 23,516 Reduction for tax positions related to prior year ( 905 ) ( 1,427 ) Additions for tax positions related to prior year 1,232 1,947 Additions for tax positions related to current year 2,896 1,956 Balance at end of year $ 29,215 $ 25,992 As of December 31, 2022 and 2021, the Company had unrecognized tax benefits of $ 29.2 million and $ 26.0 million, respectively, $ 15.3 million of which would affect the Company’s effective tax rate if recognized. There were no accrued interest or penalties for uncertain income tax as of December 31, 2022. The Company files tax returns in the United States and various state jurisdictions, China, India and the United Kingdom. The tax years 2000 through 2021 remain open and subject to examination by the appropriate governmental agencies due to tax attribute carryforwards. 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): Years Ended December 31, 2022 2021 2020 Numerator: Net income $ 41,010 $ 238,378 $ 33,484 Denominator: Weighted-average common shares — basic 65,058 63,277 59,074 Effect of dilutive potential common shares 3,853 4,579 2,924 Weighted-average common shares — diluted 68,911 67,856 61,998 Basic net income per common share $ 0.63 $ 3.77 $ 0.57 Diluted net income per common share $ 0.60 $ 3.51 $ 0.54 Potentially dilutive shares excluded, weighted-average 1,758 1,006 753 Unvested restricted stock awards are included in the calculation of basic weighted-average shares because such shares are participating securities; however, the impact was immaterial. Potentially dilutive shares have been excluded from the computation of diluted net income per common share when their effect is antidilutive. These antidilutive shares were primarily from stock options. 11. Revenue from Contracts with Customers The Company develops, markets and sells a broadband platform and managed services, and there are no segment managers who are held accountable for operations, operating results and plans for levels or components below the Company unit level. Accordingly, the Company is considered to be in a single reporting segment and operating unit structure. The Company’s chief operating decision maker is the Company’s Chief Executive Officer, who reviews financial information presented on a Company-wide basis, for purposes of allocating resources and evaluating financial performance. 57 Table of Contents Geographic Information: The following is a summary of revenue disaggregated by geographic region based upon the location of the customers (in thousands): Years Ended December 31, 2022 2021 2020 United States $ 786,802 $ 565,964 $ 473,779 Americas excluding U.S. 41,892 45,719 27,802 Europe 26,916 45,879 22,925 Middle East & Africa 10,885 19,018 14,075 Asia Pacific 1,332 2,814 2,658 $ 867,827 $ 679,394 $ 541,239 The Company’s property and equipment, net of accumulated depreciation, are located in the following geographical areas (in thousands): December 31, 2022 2021 United States $ 21,785 $ 19,900 China 3,220 1,840 India 829 43 $ 25,834 $ 21,783 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 to remaining performance obligations within accounts receivable. Amounts are billed in accordance with the agreed-upon contractual terms. The balance as of December 31, 2022 was $ 2.3 million of which the Company expects to bill 81 % of the balance during 2023. The balance as of December 31, 2021 was $ 1.7 million of which $ 0.3 million remained in the Company's Consolidated Balance Sheet at December 31, 2022. The increase in the contract asset was driven by the timing and volume of professional services contracts. Contract Liability Deferred revenue was $ 58.6 million and $ 49.5 million as of December 31, 2022 and 2021, respectively. The increase in deferred revenue of $ 9.1 million is primarily driven by cash payments received or due in advance of satisfying the Company's performance obligations during the year being greater than the $ 26.8 million of revenue recognized that was included in the deferred revenue balance at the beginning of the year. Revenue allocated to remaining performance obligations represent contract revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. This amount was $ 199.0 million as of December 31, 2022, and the Company expects to recognize 35 % 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 December 31, 2022 and 2021, the unamortized balance of deferred commissions was $ 11.2 million and $ 7.4 million, respectively. For the year ended December 31, 2022 the amount of amortization was $ 4.0 million, compared to $ 1.4 million for the year ended December 31, 2021. 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 revenue for the years ended December 31, 2022 and 2021. Lumen Technologies, Inc. (formerly CenturyLink, Inc.), the Company’s only greater-than-10%-of-revenue customer, represented 11 % of revenue for the year ended December 31, 2020. One customer represented 11 % of the Company’s accounts receivable as of December 31, 2022. Another customer represented 12 % of the Company’s accounts receivable as of December 31, 2021. 58 Table of Contents ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in nor any disagreements with accountants on accounting principles or practices, financial statement disclosure, auditing scope or procedures, or other reportable events requiring disclosure pursuant to Item 304(b) of Regulation S-K.