What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-22 compared with 2021-02-22 · 106 added, 117 removed, 160 unchanged (58% of the section changed)

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We are 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 CSPs of all types and sizes to innovate and transform their businesses.

Our CSP 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 CSPs to grow their businesses through increased subscriber acquisition, loyalty and revenue, thereby increasing the value of their businesses and contributions to their communities.

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

Our customers range from smaller, regional CSPs to some of the world’s largest CSPs.

We have enabled approximately 1,600 CSP customers purchasing directly and through partners to deploy passive optical, Active Ethernet and point-to-point Ethernet fiber access networks.

In the third quarter of 2020, we completed an underwritten public offering of 3,220,000 shares of our 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, for net proceeds of $60.1 million after deducting the underwriting discount and estimated expenses payable by us.

Beginning in 2018, the United States enacted a series of tariffs on certain goods manufactured in China.

As a result of these tariffs, we incurred U.S.

tariff and tariff-related costs of $2.8 million in 2020, $6.2 million in 2019 and $3.2 million in 2018.

In order to mitigate the impact of the tariffs enacted by the United States, we undertook a broad plan to realign our global supply chain by moving substantially all of our production outside of China in addition to other supply chain improvements in the first half of 2019.

As a result of the tariffs imposed on a broader list of products in September 2019, we expanded the scope of our global supply chain realignment plan, which was substantially completed in 2020.

These cloud and software platforms enable BSPs of all types and sizes to innovate and transform their businesses.

Our BSP customers are empowered to utilize real-time data and insights from Calix platforms to simplify their businesses and deliver experiences that excite their subscribers.

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

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

Our customers range from smaller, regional BSPs to some of the world’s largest BSPs.

We have enabled approximately 1,700 BSP customers purchasing directly and through partners to deploy passive optical, Active Ethernet and point-to-point Ethernet fiber access networks.

Our revenue increased to $679.4 million in 2021 from $541.2 million in 2020 and $424.3 million in 2019.

Our revenue and potential revenue growth will depend on our ability to sell and license our cloud and software platforms, systems and services to strategically aligned customers of all types such as wireless internet service providers, fiber overbuilders, cable MSOs, municipalities and electric cooperatives in the United States and internationally.

Our growth is also highly dependent on the speed and willingness of customers to adopt these platforms.

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

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

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

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

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

Factors that impacted our cost of revenue in 2020, and that we expect will impact cost of revenue in future periods, also include:

changes in the mix of products delivered, customer location and regional mix, changes in the cost of our

inventory, including higher costs due to materials shortages including components, supply constraints or unfavorable changes in trade policies, investments to support expansion of cloud and customer support offerings, changes in product warranty and incurrence of retrofit costs, tariffs and associated costs to mitigate the impact of tariffs, amortization of intangibles, asset write-offs, silicon support fees and inventory write-downs.

In particular, given the recent supply chain disruptions due to the COVID-19 pandemic, we have seen increases in our global freight charges as we have elected to ship by air in order to meet delivery commitments to our customers as well as air freight rates have increased from prior year levels.

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

Our gross profit and gross margin fluctuate based on timing of factors such as changes in customer mix and changes in the mix of products demanded and sold (and any related write-downs of existing inventory) and have in the past been negatively impacted by increases in mix of revenue towards professional services, increases in mix of revenue from channel sales rather than direct sales or other unfavorable customer or product mix, shipment volumes and any related volume discounts, changes in our product and services costs, pricing decreases or discounts, new product introductions or upgrades to existing products, customer rebates and incentive programs due to competitive pressure or materials shortages, supply constraints, investments to support expansion of cloud and customer support offerings, tariffs or unfavorable changes in trade policies.

Factors that have impacted our cost of revenue, and that we expect will impact cost of revenue in future periods, also include:

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

Given the ongoing supply chain disruptions related to component shortages, longer lead times as a result of increased

global demand for certain components and disruptions related to the COVID-19 pandemic, we have experienced and are continuing to experience product supply delays and related challenges, and we expect these delays and related challenges to persist in the foreseeable future.

Similarly, challenges in supply chain logistics have persisted due to greater global demand for transport services as well as labor shortages and resulted in increases in our global freight charges.

In addition, we periodically elect to ship by air in order to meet delivery commitments to our customers, and air freight rates have increased from prior year levels.

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

Our gross profit and gross margin fluctuate based on timing of factors such as changes in customer mix and changes in the mix of products demanded and sold (and any related write-downs of existing inventory) and have in the past been negatively impacted by increases in mix of revenue from channel sales rather than direct sales or other unfavorable customer or product mix, shipment volumes and any related volume discounts, changes in our product and services costs, pricing decreases or discounts, new product introductions or upgrades to existing products, customer rebates and incentive programs due to competitive pressure or materials shortages, supply constraints, investments to support expansion of cloud and customer support offerings, tariffs or unfavorable changes in trade policies.

Our operating expenses fluctuate based on the following factors among others:

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timing of research and development expenses, including investments in innovative solutions and new customer segments, prototype builds and outsourced development resources;

investments in marketing programs;

asset write-offs;

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

We had net income of $33.5 million in 2020 and net losses of $17.7 million in 2019 and $19.3 million in 2018.

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

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

profitability in the current and future periods.

We had net income of $238.4 million in 2021 and $33.5 million in 2020 and a net loss of $17.7 million in 2019.

As of December 31, 2021, we had an accumulated deficit of $430.7 million as a result of losses in previous years.

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We are subject to risks and uncertainties as a result of the COVID-19 pandemic.

The extent of the impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict as coronavirus continues to spread around the world.

The availability of vaccines has been limited, and there are no assurances as to when the pandemic will be contained.

Since March 2020, we have instituted office closures, travel restrictions and a mandatory work-from-home policy for substantially all of our employees.

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

The extent of the impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict, particularly as variants of the coronavirus continue to spread around the world.

In March 2020, we instituted office closures, travel restrictions and a work-from-anywhere policy for substantially all our employees due to shelter-in-place mandates.

In July 2021, we reopened our U.S.

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

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

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

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

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

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

In the second quarter of 2020, we transitioned to a work-from-anywhere culture, and many of our employees elected to work remotely on a permanent basis.

This operating model reduces our physical facilities requirements, and consequently, we established and implemented a restructuring plan to align our business to a work-from-anywhere culture and incurred facilities-related restructuring charges of $5.1 million.

Furthermore, in the second quarter of 2020, we realigned our product portfolio to reduce and consolidate certain legacy product lines as customers accelerated their interest in our all-platform offerings.

These actions resulted in a charge of $1.8 million related to our reduction and consolidation of legacy product lines and severance-related charges of $1.2 million.

Critical Accounting Policies and Estimates

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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 we expect to be entitled to in exchange for those goods or services.

Specifically, revenue from software platform licenses, which provides the customer with a right to use the software as it exists, is generally recognized upfront when product is made available to the customer.

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 product is 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.

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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.

For certain revenue arrangements involving delivery of both systems and professional services, each is considered a distinct performance obligation.

Systems revenue is recognized at a point in time when management has determined that control over systems has transferred to the customer, which is generally when legal title has transferred to the customer.

For the same revenue arrangements, management believes that the output of the associated professional services is transferred to the customer over time.

As such, professional services revenue is recognized over the period in which the services are provided using a cost input measure.

We recognize revenue when control of the systems and services has been transferred to the customer, which may be earlier than system installation or customer acceptance, in accordance with the agreed-upon specifications in the contract.

Inventory Valuation

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) and net realizable value.

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In addition, we, from time to time, procure component inventory primarily as a result of manufacturing discontinuation of critical components by suppliers.

We regularly monitor inventory quantities on-hand and record write-downs for excess and obsolete inventory based on our estimate of demand for our products, potential obsolescence of technology, product life cycle and whether pricing trends or forecasts indicate that the carrying value of inventory exceeds our estimated selling price.

We regularly monitor inventory quantities on-hand and record write-downs for excess and obsolete inventory based on our estimate of demand for our products, potential obsolescence of technology, product life cycles and whether pricing trends or forecasts indicate that the carrying value of inventory exceeds our estimated selling price.

We also evaluate our supplier purchase commitments, which have increased significantly due to extended lead-times in the current supply chain environment, and record a liability for excess and obsolete components based on our 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 estimates that may include elements that are uncertain.

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The sale of previously reserved inventory has not had a material impact on our gross margin.

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

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

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

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

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

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

Prior to the third quarter of 2021, we maintained a full valuation allowance against all deferred tax assets, because there was insufficient positive evidence to overcome the existing negative evidence, primarily consisting of

several years of consecutive reported pre-tax losses, such that it was not more likely than not that the deferred tax assets were realizable.

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

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

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

federal and certain other state deferred tax assets were realizable.

We currently maintain a valuation allowance of $29.2 million for certain U.S.

federal and California state deferred tax assets.

Recent Accounting Pronouncements Not Yet Adopted

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Revenue generated in the United States represented approximately 83% of our total revenue in 2021 and 88% in 2020.

Our revenue increased by $116.9 million during 2020 compared with 2019 mostly due to higher systems revenue of $115.3 million.

Our revenue increased by $138.2 million, or 26%, during 2021 compared with 2020 mostly due to higher systems revenue of $134.0 million.

Services revenue increased $4.1 million in 2021 compared with 2020.

The increase in systems revenue was primarily due to higher revenue from our small, regional customers and, to a lesser extent, our large-sized customers, as service providers accelerated some deployments to respond to increased demand for network capacity and relieve network capacity constraints as well as provide a better Wi-Fi experience.

The increase in services revenue was due to the continued ramp in our service offerings aligned with cloud and software products partially offset by lower professional services related to CAF deployments.

Lumen accounted for more than 10% of our total revenue in 2020 and 2019.

See Note 12 “Revenue from Contracts with Customers” to the Consolidated Financial Statements set forth in this report for more details on concentration of revenue for the periods presented.

Cost of Revenue, Gross Profit and Gross Margin

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

Years Ended December 31, 2020 vs 2019 Change

Cost of revenue:

Systems $ 251,638 $ 211,309 $ 40,329 19 %

Services 22,582 25,096 (2,514) (10) %

$ 274,220 $ 236,405 $ 37,815 16 %

Cost of revenue increased by $37.8 million during 2020 as compared with 2019.

The $40.3 million increase in systems cost of revenue was less than the percentage increase in revenue compared with 2019 and was due to continued growth in our All Platform offerings along with favorable customer and product mix.

The increase in costs of revenue in 2020 as compared to 2019 includes a charge of $1.8 million related to our reduction and consolidation of legacy product lines taken in the second quarter of 2020.

The $2.5 million decrease in services cost of revenue was mainly due to improved mix towards our higher gross margin support services versus lower gross margin deployment services.

The increase in systems revenue was primarily due to higher revenue from our small, regional customers and, to a lesser extent, our medium-sized customers, as service providers adopted our All Platform offerings and sought to provide a better Wi-Fi experience, partially offset by a decrease in revenue to large customers.

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

No customer accounted for more than 10% of our total revenue for 2021.

Lumen accounted for more than 10% of our total revenue in 2020.

See Note 12 “Revenue from Contracts with Customers” to the Consolidated Financial Statements set forth in this report for more details on concentration of revenue for the years presented.

Gross Profit and Gross Margin

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

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Gross margin increased to 52.5% during 2021 from 49.3% during 2020.

During 2020 and 2019, systems gross margin was negatively impacted by U.S.

tariff and tariff-related costs of $2.8 million and $6.2 million, or 55 and 160 basis points, respectively, and intangible asset amortization of $2.6 million and $1.0 million, or 50 and 25 basis points, respectively.

Excluding the impact of U.S.

tariff and tariff-related costs and intangible assets amortization, systems gross margin was 51.6% and 48.1% for 2020 and 2019, respectively.

This increase of 350 basis points was mainly due to continued growth in our all-platform offerings along with favorable product and customer mix.

Services gross margin increased in 2020 primarily due to lower personnel costs as our service revenue mix shifts away from low gross margin deployment services to higher gross margin software maintenance and services aligned with our platform offerings.

The increase in systems gross margin in 2021 compared to the 2020 was mainly due to continued growth in our All Platform offerings along with favorable product and customer mix as well as a credit for previously paid tariffs due to product re-export of $4.3 million, or 70 basis points.

This was partially offset by increased costs due to higher component costs and global freight charges due to the global supply-chain disruption and shortages.

Services gross margin decreased in 2021 due to continued investments in our customer success organization.

This was partially offset by better service revenue mix as we shifted away from low gross margin deployment services to higher gross margin services aligned with our platform offerings.

Operating Expenses

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Percent of total revenue 19 % 17 %

Sales and marketing expenses increased by $11.6 million during 2020 compared with 2019 primarily due to higher personnel expenses of $12.2 million, mainly related to investments in sales headcount and higher sales incentive compensation expense, higher marketing expenses of $2.3 million and higher stock-based compensation of $0.9 million.

These increases were partially offset by a decrease in travel expenses of $4.9 million.

We expect to increase our investments in sales and marketing in absolute dollars in order to extend our market reach and grow our business in support of our key strategic initiatives.

Sales and marketing expenses increased by $31.7 million during 2021 compared with 2020 primarily due to increases in personnel expenses of $19.7 million, mainly related to investments in sales headcount and higher sales incentive compensation, marketing expenses of $4.9 million, stock-based compensation of $2.5 million, software costs of $1.8 million, travel expenses of $1.1 million and outside services expenses of $0.9 million.

We expect our investments in sales and marketing will increase in absolute dollars, but be relatively consistent as a percentage of revenue, as we extend our market reach and grow our business in support of our key strategic initiatives.

Research and Development Expenses

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Percent of total revenue 15 % 16 %

The increase in research and development expenses of $4.1 million during 2020 compared with 2019 was primarily due to higher outside services expenses of $5.2 million, higher personnel expenses of $1.8 million, primarily related to incentive compensation expense, and higher stock-based compensation of $0.8 million.

These increases were partially offset by lower facilities expenses of $2.1 million, decreases in depreciation and amortization expense of $0.6 million, lower travel expenses of $0.6 million and lower equipment expenses of $0.4 million.

We expect to increase our investments in research and development in absolute dollars to expand the functionality and capabilities of our platforms.

The increase in research and development expenses of $16.5 million during 2021 compared with 2020 was mainly due to increases in outside services expenses of $7.7 million, personnel expenses of $6.7 million, stock-based compensation of $2.0 million and depreciation and amortization of $1.2 million.

These increases were partially offset by lower facilities expenses of $1.2 million.

We expect our investments in research and development to increase in absolute dollars, but remain relatively consistent as a percentage of systems gross profit, as we expand the functionality and capabilities of our platforms.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel costs related to our executive, finance, human resources, information technology and legal organizations, outside consulting services, insurance, allocated facilities and fees for professional services.

Professional services consist of outside audit, legal, accounting and tax services.

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Percent of total revenue 8 % 8 %

The increase in general and administrative expenses of $7.3 million during 2020 compared with 2019 was primarily due to increased amortization and subscription expenses of $4.1 million, primarily related to our cloud-based ERP system that went live in January of 2020, personnel expenses of $2.8 million, primarily related to the capitalization of internal resources related to our cloud-based ERP implementation that lowered personnel expenses in 2019 as well as an increase in incentive compensation expense in 2020, stock-based compensation of $1.0 million and bad debt allowance of $0.8 million.

These increases were partially offset by lower professional services fees of $1.4 million.

Restructuring Charges

The increase in general and administrative expenses of $11.3 million during 2021 compared with 2020 was mainly due to increases in stock-based compensation of $5.3 million, personnel expenses of $3.1 million, outside services expenses of $1.6 million and unallocated-facilities expenses of $1.4 million.

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

These increases were partially offset by a decrease in our bad debt expense of $1.0 million.

We expect our general and administrative investments to increase in absolute dollars but decline slightly as a percentage of revenue over time as revenue continues to grow.

Restructuring Charges (Benefit)

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

We incurred restructuring charges of $6.3 million, consisting of facilities-related charges and severance and other termination related benefits.

We incurred restructuring charges of $6.3 million in 2020, consisting of facilities-related charges and severance and other termination related benefits.

In 2021, we reversed $0.8 million in facilities-related charges as a result of subleasing the abandoned portion of our San Jose headquarters.

See Note 4 “Balance Sheet Details” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

Loss on Asset Retirement

During 2019, we recognized a charge of $2.5 million relating to the retirement of an asset consisting of licensed software.

Please refer to Note 4 “Balance Sheet Details” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

Interest and Other Expense, Net

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Interest and other expense, net $ (1,284) $ (2,562) $ 1,278 (50) %

Interest and other expense increased by $1.4 million in 2020 compared with 2019 mainly due to higher interest expense related to the line of credit being outstanding for nearly six months more than in 2019 and foreign currency losses due to the weakening of the U.S.

dollar to the Chinese Renminbi and higher interest expense related to the early settlement our financing agreements in 2020.

Provision for Income Taxes

The provision for income taxes primarily consist of state and foreign income taxes.

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

Interest and other expense, net increased by $1.3 million in 2021 compared with 2020 mainly due to lower interest expenses and lower foreign currency losses.

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

Years Ended December 31, 2021 vs 2020 Change

2021 2020 $ %

Provision for income taxes $ 800 $ 1,162 $ (362) (31) %

Income taxes $ (165,724) $ 800 $ (166,524) (20,816) %

Effective tax rate (228) % 2 %

The provision for income taxes decreased by $0.4 million from $1.2 million in 2019 to $0.8 million in 2020.

The decrease was primarily due to a decrease in accrued withholding taxes related to the anticipated repatriation of foreign subsidiary earnings.

As of December 31, 2020, we had unrecognized tax benefits of $23.5 million, none of which would affect our effective tax rate if recognized.

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

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

profitability in the current and future periods.

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

We continue to maintain a valuation allowance of $29.2 million on certain U.S.

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

As of December 31, 2020, the total expense was primarily related to foreign activity.

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

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

2020 Compared to 2019

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Liquidity and Capital Resources

We have funded our operations and investing activities primarily through cash generated from operations, borrowings on our line of credit, financing arrangements for certain lab equipment and consulting services and sales of our common stock.

As of December 31, 2020, we had cash, cash equivalents and marketable securities of $133.8 million.

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

As of December 31, 2021, we had cash, cash equivalents and marketable securities of $204.3 million, which consisted of deposits held at banks and major financial institutions and highly liquid marketable securities such as U.S.

government agency securities and commercial paper.

This includes $3.6 million of cash primarily held by our foreign subsidiaries.

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The increase in net cash provided by operating activities during 2021 as compared to 2020 was due primarily to a favorable change in our net operating results of $44.1 million after adjustment of non-cash charges partially offset by a $38.7 million net cash outflow resulting from changes in operating assets and liabilities.

In 2020, cash outflows from changes in operating assets and liabilities primarily consisted of increases in accounts receivable of $22.9 million due to higher sales in the fourth quarter of 2020 as compared to 2019 and in inventory of $12.1 million to support revenue growth.

Cash inflows from changes in operating assets and liabilities primarily consisted of increases in accrued liabilities of $11.9 million due to higher incentive compensation, inventory held at suppliers and warranty costs, in deferred revenue of $3.6 million due to support contracts, software maintenance and Calix Cloud subscriptions, in other long-term liabilities of $2.9 million due to accrued payroll taxes and restructuring charges, and in accounts payable of $2.2 million, primarily due to timing of inventory purchases.

Non-cash charges primarily consisted of stock-based compensation of $14.0 million, depreciation and amortization of $13.7 million and asset retirements and write-downs of $3.9 million.

We had a non-cash benefit from deferred income taxes of $168.4 million offset by non-cash charges of stock-based compensation of $24.2 million and depreciation and amortization of $15.0 million.

In 2021, cash outflows from changes in operating assets and liabilities primarily consisted of increases in inventory of $36.6 million to support revenue growth and to mitigate supply chain shortages and disruptions;

in prepaid expenses and other assets of $27.1 million mainly due to advance payments to our supply chain partners and capitalized sales commissions;

and in accounts receivable of $15.8 million due to increased revenue.

These changes were partially offset by increases in accounts payable of $16.0 million due to increased inventory purchases;

in deferred revenue of $10.4 million due to Calix Cloud subscriptions, support contracts and extended warranties;

and in total accrued liabilities of $0.7 million, mainly related to component inventory held at suppliers and accrued freight.

Investing Activities

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Financing Activities

In 2020, net cash provided by financing activities of $42.1 million primarily consisted of proceeds from our common stock offering of $60.1 million, proceeds from the issuance of common stock under our employee stock purchase plans of $9.1 million and from stock option exercises of $9.0 million.

These inflows were partially offset by the re-payment of our line of credit of $30.0 million and payments related to financing arrangements of $5.8 million.

In 2021, net cash provided by financing activities of $24.4 million primarily consisted of proceeds from the issuance of common stock related to our equity plans of $25.6 million.

This was partially offset by payments related to a financing arrangement of $1.2 million.

2020 Compared to 2019

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Working Capital and Capital Expenditure Needs

We generated positive operating cash flow for three consecutive years and ended fiscal 2021 with $204.3 million in cash, cash equivalents and marketable securities.

In January 2022, we terminated our loan and security agreement with Bank of America, N.A.

The BofA Loan Agreement provided for a revolving facility up to a principal amount of up to $35.0 million and would have expired in January 2023.

As of December 31, 2021 and 2020, we had no outstanding borrowings.

In the third quarter of fiscal 2020, we completed an underwritten public offering of 3,220,000 shares of our 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, for net proceeds of $60.1 million after deducting the underwriting discount and expenses paid by us.

We believe this additional cash position will allow us to invest in future growth needs.

Our material cash commitments include non-cancelable firm purchase commitments, contractual obligations under the BofA Loan Agreement, normal recurring trade payables, compensation-related and expense accruals, operating leases and minimum revenue-share obligations.

We used the net proceeds to repay the line of credit and increase our capital available to invest in our future growth, especially during uncertain times.

Our material cash commitments include non-cancelable firm purchase commitments, normal recurring trade payables, compensation-related and expense accruals, operating leases and revenue-share obligations.

We believe that our outsourced approach to manufacturing provides us significant flexibility in both managing inventory levels and financing our inventory.

In the event that our revenue plan does not meet our expectations, we may be required to curtail or eliminate expenditures to mitigate the impact on our working capital.

In January 2020, we terminated our Silicon Valley Bank loan and security agreement and entered into a new loan and security agreement with Bank of America, N.A.

The BofA Loan Agreement provides for a revolving facility up to a principal amount of up to $35.0 million, including a $10.0 million sublimit for letters of credit.

The BofA Loan Agreement matures, and all outstanding amounts become due and payable, in January 2023.

The BofA Loan Agreement is secured by substantially all of our assets, including our IP.

Loans under the credit facility bear interest at a rate per annum equal to either LIBOR (customarily defined) plus an applicable margin between 1.5% to 2.0% or Prime Rate (customarily defined) plus an applicable margin between 0.5% to 1.0%, in each case largely based on a fixed charge coverage ratio measured at the end of each fiscal quarter.

The availability of borrowings under the BofA Loan Agreement is subject to certain conditions and requirements, including among others, if at any time our availability is less than $5.0 million, we must maintain a minimum fixed charge coverage ratio,

of 1.0 to 1.0.

As of December 31, 2020, we were in compliance with these requirements, had no outstanding borrowings and had the full availability of $35.0 million.

Our interest rate on the line of credit was 3.75% as of December 31, 2020.

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

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

We had our first sale in August 2019.

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

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

During 2018, we entered into financing arrangements to purchase lab equipment for approximately $5.1 million.

In the fourth quarter of 2020, we paid $1.4 million to settle the remainder of the balance.

From 2019 to 2020, in connection with our ERP implementation, we entered into financing arrangements for consulting services of $3.8 million.

In the fourth quarter of 2020, we paid $1.4 million to settle the remainder of the balance.

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

If we are unable to execute on our current operating plan or continue to generate operating income and positive cash flows, our liquidity, results of operations and financial condition will be adversely affected, and we may need to seek other sources of liquidity, including the sale of additional equity or incremental borrowings, to support our working capital needs.

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

In addition, we may choose to seek other sources of liquidity even if we believe we have generated sufficient cash flows to support our operational needs.

5 unchanged sentences

Payments Due by Period

Total Less Than 1 Year 1-3 Years 3-5 Years More Than 5 Years

Total Less Than 1 Year 1-3 Years 3-5 Years

Non-cancelable purchase commitments (1)

6 unchanged sentences

(1) Represents outstanding purchase commitments to be delivered by our third-party manufacturers or other vendors.

See Note 6 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion regarding our outstanding purchase commitments.

(2) Future minimum operating lease obligations in the table above include primarily payments for our office locations, which expire at various dates through 2026.

(2) Future minimum operating lease obligations in the table above primarily include payments for our office locations, which expire at various dates through 2026.

See Note 6 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion regarding our operating leases.

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

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

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

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

See Note 4 “Balance Sheet Details” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion regarding our outstanding liability.

Off-Balance Sheet Arrangements

As of December 31, 2020 and 2019, we did not have any off-balance sheet arrangements.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis