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2: EX-10.1 Material Contract HTML 80K
3: EX-31.1 Certification -- §302 - SOA'02 HTML 24K
4: EX-31.2 Certification -- §302 - SOA'02 HTML 24K
5: EX-32.1 Certification -- §906 - SOA'02 HTML 23K
12: R1 Cover HTML 71K
13: R2 Condensed Consolidated Balance Sheets HTML 112K
14: R3 Condensed Consolidated Balance Sheets HTML 38K
(Parenthetical)
15: R4 Condensed Consolidated Statements of Comprehensive HTML 111K
Loss (Unaudited)
16: R5 Condensed Consolidated Statements of Stockholders' HTML 91K
Equity (Unaudited)
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19: R8 Significant Accounting Policies HTML 22K
20: R9 Cash, Cash Equivalents, Restricted Cash and HTML 44K
Marketable Securities
21: R10 Fair Value Measurements HTML 32K
22: R11 Balance Sheet Details HTML 118K
23: R12 Credit Agreements HTML 25K
24: R13 Commitments and Contingencies HTML 41K
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Marketable Securities (Details)
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net (Details)
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Implementation Costs (Details)
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47: R36 Balance Sheet Details - Warranty Reserve (Details) HTML 34K
48: R37 Balance Sheet Details - Restructuring (Details) HTML 53K
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Liability (Details)
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(Address of Principal Executive Offices) (Zip Code)
(i408)
i514-3000
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title
of Each Class
Trading Symbol
Name of Each Exchange on Which Registered
iCommon Stock, par value $0.025 per share
iCALX
iNew
York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes: x No: o
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes: x No: o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
☐
iAccelerated
Filer
☒
Non-accelerated filer
☐
Smaller Reporting Company
i☐
Emerging
Growth Company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section
13(a) of the Exchange Act. o
Preferred
stock, $ii0.025/ par value;
ii5,000/ shares authorized;
iiiino///
shares issued and outstanding as of September 26, 2020 and December 31, 2019
i—
i—
Common
stock, $ii0.025/ par value; ii100,000/
shares authorized; ii61,770/ shares issued
and outstanding as of September 26, 2020, and i61,778 shares issued and i56,448 shares outstanding as of December
31, 2019
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. iCompany
and Basis of Presentation
Company
Calix, Inc. (together with its subsidiaries, “Calix” or the “Company”) was incorporated in August 1999 and is a Delaware corporation. The Company is a leading global provider of cloud and software platforms, systems and services required to deliver the unified access network and smart home and business services of tomorrow. The Company’s platforms and services help its customers build next generation networks by embracing a DevOps operating model, optimizing the subscriber experience by leveraging big data analytics and turn the complexity of the smart home and business
into new revenue streams. The Company's cloud and software platforms, systems and services enable communication service providers (“CSPs”) to provide a wide range of revenue-generating services, from basic voice and data to advanced broadband services, over legacy and next-generation access networks. The Company focuses on CSP access networks, the portion of the network that governs available bandwidth and determines the range and quality of services that can be offered to subscribers.
i
Basis
of Presentation
The accompanying unaudited condensed consolidated financial statements, including the accounts of Calix, Inc. and its wholly-owned subsidiaries, have been prepared in accordance with the requirements of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. generally accepted accounting principles (“GAAP”) can be condensed or omitted. In the opinion of management, the financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of the Company’s financial position and operating results. All intercompany balances and transactions
have been eliminated in consolidation. The Condensed Consolidated Balance Sheet at December 31, 2019 has been derived from the audited financial statements at that date.
The results of the Company’s operations can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year or any future periods. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
The
Company’s fiscal year begins on January 1st and ends on December 31st. Quarterly periods are based on a 4-4-5 calendar with the first quarter ending on the Saturday closest to March 31st. As a result, the Company had one less day in the nine months ended September 26, 2020 than for the nine months ended September 28, 2019. The preparation of financial statements in conformity with GAAP for interim financial reporting requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
i
Risks
and Uncertainties
The Company is subject to risks and uncertainties as a result of the recent COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on the Company's business is highly uncertain and difficult to predict. Since March 2020, the Company has instituted and continued to maintain office closures, travel restrictions and instituted a mandatory work-from-home policy for substantially all of its employees. The spread of COVID-19 has impacted the Company's supply chain operations through restrictions and shutdown of business activities by suppliers whom the
Company relies on for sourcing components and materials and third-party partners whom the Company relies on for manufacturing, warehousing and logistics services. Although demand for the Company's products may remain strong in the short-term as subscribers seek more bandwidth and better WiFi, customers’ purchasing decisions over the longer-term may be impacted by the pandemic and its impact on the economy, which could in turn impact the Company's revenue and results of operations. Furthermore, the Company’s supply chain continues to face challenges in sourcing components and materials to manufacture its products, and future
outbreaks could cause further supply chain disruptions. As of the issuance date of these condensed consolidated financial statements, the extent to which the COVID-19 pandemic may materially impact the Company's financial condition, liquidity or results of operations is uncertain.
The Company’s significant accounting policies are disclosed in its Annual Report on Form 10-K for the year ended December 31, 2019. The Company’s significant accounting policies did not change during the nine months ended September 26, 2020.
There have been no additional accounting pronouncements or changes in accounting pronouncements during the nine months ended September 26, 2020, as compared to the recent accounting pronouncements described in the Company's Annual Report on
Form 10-K for the year ended December 31, 2019, that are significant or potentially significant to the Company.
3. iCash, Cash Equivalents, Restricted Cash and Marketable Securities
The
Company has invested its excess cash primarily in money market funds and highly liquid marketable securities such as 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 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.
Cash equivalents are stated at amounts that approximate fair value based on quoted market prices. Marketable securities are recorded at their fair values.
The
Company’s investments have been classified and accounted for as available-for-sale. Such investments are recorded at fair value and unrealized holding gains and losses are reported as a separate component of accumulated other comprehensive loss in the stockholders’ equity until realized. Realized gains and losses on sales of marketable securities, if any, are determined on the specific identification method and are reclassified from accumulated other comprehensive income (loss) to results of operations as other income (expense), net.
i
Cash, cash equivalents,
restricted cash and marketable securities consisted of the following (in thousands):
The
carrying amounts of the Company’s money market funds approximate their fair values due to their nature, duration and short maturities.
i
As of September 26, 2020, all marketable securities were due in one year or less; and the amortized cost and fair value of marketable securities were as follows (in thousands):
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.
i
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):
In March 2018, the Company entered into an agreement with a vendor to develop certain software product and related enhancements pursuant to which the Company may be obligated to make minimum revenue-share payments under the program of up to $i15.8 million over the ithree
years following availability for sale. The payments are based on a revenue-share rate applied to revenue from the developed-product and the corresponding hardware sales subject to a minimum and a maximum aggregate amount over the three-year sales period. The Company had its first sale in August 2019, and as a result, the Company capitalized an intangible asset with a value of $i13.2 million
in the third quarter of 2019. The Company also recognized a liability, of which $i11.5 million is included in other long-term liabilities and $i2.5 million
in accrued liabilities in the accompanying Condensed Consolidated Balance Sheet as of September 26, 2020. The intangible asset has an estimated five-year useful life and is being amortized using the greater of the ratio of current gross revenue for the products to the total of current and anticipated future gross revenue for the products or the straight-line method.
Capitalized Cloud Implementation Costs
In January 2020, the Company went live with its cloud-based enterprise resource planning (“ERP”) system. As a result, the Company capitalized $i7.5
million of implementation costs in both prepaid expenses and other current assets and other long-term assets in the Company's Condensed Consolidated Balance Sheet. This amount is being amortized over a period of i29 months, representing the remaining contractual term. The amortization expense for the three and nine months ended September 26, 2020 was $i0.7
million and $i2.3 million, respectively.
i
Accrued liabilities consisted of the following (in thousands):
The Company provides a standard warranty for its hardware products. Hardware generally has a one- or five-year standard warranty from the date of shipment. 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 upon identification of such product failures. The Company accrues for potential warranty and retrofit claims based on the
Company’s historical product failure rates and historical costs incurred in correcting product failures along with other relevant information related to any specifically identified product failures. The Company’s warranty and retrofit accruals are based on estimates of losses that are probable based on information available. The adequacy of the accrual is reviewed on a periodic basis and adjusted, if necessary, based on additional information as it becomes available. iChanges
in the Company’s warranty and retrofit accrual are as follows (in thousands):
Provision
for warranty and retrofit charged to cost of revenue
i1,716
i1,025
i4,341
i2,591
Utilization
of reserve
(i892)
(i1,651)
(i3,079)
(i3,854)
Balance
at end of period
$
i8,556
$
i7,284
$
i8,556
$
i7,284
Accrued
Restructuring Charges
Responding to trends caused by the COVID-19 pandemic, the Company initiated a restructuring plan in June 2020 to accelerate the Company’s all platform future and to align with a work-from-anywhere culture. The Company incurred restructuring charges of approximately $i6.3 million,
consisting of facilities-related charges and severance and other termination related benefits for the nine months ended September 26, 2020.
As part of its work-from-anywhere culture, many of the Company’s employees elected to work remotely on a permanent basis. In light of this shift, the Company evaluated its space needs and determined that a portion of the Company's leased office spaces in Richardson, Texas and San Jose, California would no longer be utilized. As a result, the right-of-use assets related to these leases were written down, resulting in a charge of $ii3.5/ million
during the nine months ended September 26, 2020. In addition, the Company wrote off assets with net book value of $ii0.3/ million
and accrued common areas maintenance fees and property taxes related to the unused office space totaling $ii1.4/ million
during nine months ended September 26, 2020.
i
The following table summarizes the activities pursuant to the above restructuring plan (in thousands):
In January 2020, the Company terminated its loan and security agreement with Silicon Valley Bank and entered into a new loan and security agreement with Bank of America, N.A. (“BofA Loan Agreement”). The BofA Loan Agreement provides for a revolving facility up to a principal amount of $i35.0 million, including a $i10.0
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 the Company’s assets, including the Company’s intellectual property. Effective July 1, 2020, loans under the credit facility will bear interest at a rate per annum equal to either LIBOR (customarily defined) plus an applicable margin between i1.5% to i2.0% or
Prime Rate (customarily defined) plus an applicable margin between i0.5% to i1.0%, 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 the Company’s availability is less than $i5.0 million, the Company must maintain a minimum fixed charge coverage ratio (“FCCR”) of i1.0 to
1.0. As of September 26, 2020, the Company was in compliance with these requirements, had no
outstanding borrowings and had full availability of $i35.0
million. The Company's interest rate on the line of credit was i3.75% as of September 26, 2020.
Financing Arrangements
During 2018, the Company entered into financing arrangements to purchase lab and test equipment for approximately $i5.1
million. Each agreement is to be paid over i36 months with a weighted average interest rate of i6.2%. As of September 26, 2020, there was $i1.7
million outstanding under these financing arrangements, which is included in accrued liabilities and other long-term liabilities in the accompanying Condensed Consolidated Balance Sheet.
From 2017 to 2020, the Company entered into financing arrangements for consulting services of $i5.5 million in connection with the Company’s ERP implementation. The current amounts due under this agreement are to be paid over a weighted
average term of i2.4 years with a weighted average interest rate of i6.3%. As of September 26, 2020, there was $i1.6
million outstanding under these arrangements, which is included in accrued liabilities and other long-term liabilities in the accompanying Condensed Consolidated Balance Sheet.
7. iCommitments 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. iFuture minimum payments under the non-cancelable operating leases consisted of the following as of September 26, 2020 (in thousands):
Period
Minimum
Future Lease Payments
Remainder of 2020
$
i922
2021
i3,478
2022
i3,682
2023
i3,597
2024
i3,388
Thereafter
i2,881
Total
future minimum lease payments
i17,948
Less imputed interest
(i2,836)
$
i15,112
i
Operating
lease liability consisted of the following (in thousands):
Accrued liabilities - current portion of operating leases
$
i2,756
Operating
leases
i12,356
$
i15,112
/
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 $i12.4 million and are included in the table above.
The weighted average discount rate for the Company's operating leases as of September 26, 2020 was i7.0%.
The weighted average remaining lease term as of September 26, 2020 was i4.4 years.
For the three and nine months ended September 26, 2020, total rent expense of the Company was $i0.9
million and $i3.1 million, respectively. For the three and nine months ended September 28, 2019, total rent expense of the Company was $i1.1 million
and $i3.6 million, respectively. Cash paid within operating cash flows for operating leases was $i2.5 million and $i2.8
million for nine months ended September 26, 2020 and September 28, 2019, respectively.
Purchase Commitments
The Company’s contract manufacturers (“CMs”) and original design manufacturers (“ODMs”) place orders for certain component inventory in advance based upon the Company’s build forecasts in order to reduce manufacturing lead times and ensure adequate component supply. The components are used by the CMs and ODMs to build the products included in the build forecasts. The
Company generally does not take ownership of the components held by CMs and ODMs. The Company places purchase orders with its CMs and ODMs in order to fulfill its monthly finished product inventory requirements. The Company
incurs a liability when the CMs and ODMs convert the component inventory to a finished product and takes ownership of the finished goods
inventory. In the event of termination of services with a manufacturing partner, the Company has purchased, and may be required to purchase in the future, certain of the remaining components inventory held by the CM or ODM as well as any outstanding orders pursuant to the contractual provisions with such CM or ODM. As of September 26, 2020, the Company had approximately $i119.9
million of outstanding purchase commitments for inventories to be delivered by its suppliers, including CMs and ODMs, within one year.
The Company has from time to time, and subject to certain conditions, reimbursed certain suppliers for component inventory purchases when this inventory has been rendered excess or obsolete, for example due to manufacturing and engineering change orders resulting from design changes, manufacturing discontinuation of products by its suppliers, or in cases where the Company has committed inventory levels that greatly exceed projected demand. The estimated excess and obsolete inventory liabilities related to such manufacturing and engineering change orders and other factors, which are included in accrued liabilities in the
accompanying balance sheets, were $i5.1 million and $i1.9 million
as of September 26, 2020 and December 31, 2019, respectively. The Company records the related charges in cost of systems revenue in its Condensed Consolidated Statements of Comprehensive Income (Loss).
Litigation
From time to time, the Company is involved in various legal proceedings arising from the normal course of business activities. The Company is not currently a party to any legal proceedings that, if determined adversely to the Company,
in management’s opinion, are currently expected to individually or in the aggregate have a material adverse effect on the Company’s business, operating results or financial condition taken as a whole.
8. iStockholders’ Equity
Stock Offering
In
August 2020, the Company completed an underwritten public offering of i3,220,000 shares of its common stock, $i20.00
per share, including a full exercise by the underwriters of their option to purchase an additional i420,000 shares of Common Stock, resulting in net proceeds of $i60.1 million,
after deducting the underwriting discount and estimated expenses payable by the Company.
Treasury Stock Retirement
In August 2020, the Company’s Board of Directors authorized the retirement of the i5,329,817 shares of common stock held as treasury stock. Under Delaware law these shares return to the authorized
but unissued common stock pool. As a result, the Company eliminated the $i40.0 million treasury stock balance, offsetting this against common stock by $i0.1 million
and additional paid-in capital by $i39.9 million.
2019 Equity Incentive Award Plan
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. No further awards will
be granted under the 2010 Plan following the effectiveness of the 2019 Plan; however, 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, as well as members of the Company's Board of Directors, are eligible to receive awards under the 2019 Plan. The 2019 Plan provides for the grant of stock options, including incentive stock options and nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), other stock or cash-based awards and dividend equivalents to eligible individuals.
The
number of shares available for issuance under the 2019 Plan included an initial reserve of i1.7 million shares of common stock, any shares of common stock that are available for issuance under the 2010 Plan as of the effective date of the 2019 Plan and any shares of common stock subject to issued and outstanding awards under the 2010 Plan that expire, are cancelled or otherwise terminate following the effective date of the 2019
Plan. At the Company’s 2020 annual meeting of stockholders, the stockholders approved an increase in the number of shares of common stock issuable under the 2019 Plan by i3.5 million shares. As of September 26, 2020, there were i4.9
million shares available for issuance under the 2019 Plan.
Stock Options
During the three months ended September 26, 2020, stock option awards exercisable for up to an aggregate of i0.1 million shares of common stock were granted with a grant date fair value of $i21.09
per share. During the nine months ended September 26, 2020, stock option awards exercisable for up to an aggregate of i1.0 million shares of common stock were granted with a grant date fair value of $i13.27
per share.
During the three months ended March 28, 2020, performance-based stock option awards exercisable for up to an aggregate of i0.8
million shares of common stock were granted to certain Company executives with a grant date fair value of $i9.16 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 2020 (collectively, the “2020 Performance Targets”) during the one-year performance period. These
performance-based stock option awards will vest, subject to certification by the Compensation Committee of the Company’s Board of Directors upon the achievement of the 2020 Performance Targets, as to i25% of the shares of common stock earned on the date of such certification, and as to the remaining i75%
of the shares of common stock earned, in substantially equal quarterly installments over the subsequent i36 months, subject to the executive’s continuous service with the Company through the respective vesting dates. Under the 2020 Performance Targets, if non-GAAP net income is below i80%
of target and bookings are below i90% of target, ino
shares are awarded. From this base, shares are awarded on a i50% weighting for both non-GAAP net income and bookings up to i100%
for each 2020 Performance Target using a sliding scale. The probability of meeting the performance conditions related to these performance-based stock option awards was assessed to be probable as of September 26, 2020, and stock-based compensation expense of $i0.4 million was recognized for the three months ended September 26, 2020. For the nine months ended September 26, 2020 stock-based compensation expense of $i1.2 million
was recognized.
During the three months ended March 30, 2019, performance-based stock option awards exercisable for up to an aggregate of i2.0 million shares of common stock were granted to Company executives with a grant date fair value of $i8.03
per share. These performance-based stock option awards contained a one-year performance period and a subsequent three-year service period. The actual number of shares earned was contingent upon achievement of both annual and quarterly corporate financial targets for revenue, non-GAAP gross margin and non-GAAP net income per share for 2019 (collectively, the “2019 Performance Targets”) during the one-year performance period. In February 2020, following the review of the Company’s financial performance for 2019, the Compensation Committee of the Company’s Board of Directors certified that the 2019 Performance Targets (as modified) for the 2019 performance-based stock options were partially met, resulting in an award to each
Company executive of i30% of their target shares. One quarter of these performance-based stock option awards vested on this date, and the remaining i75%
of the shares of common stock earned will vest in substantially equal quarterly installments over the subsequent i36 months, subject to the executive’s continuous service with the Company through the respective vesting dates.
During the three months ended September 26, 2020, i0.2 million
shares of common stock were issued pursuant to the exercise of stock options at a weighted-average exercise price of $i9.72 per share. During the nine months ended September 26, 2020, i1.0 million
shares of common stock were issued pursuant to the exercise of stock options at a weighted-average exercise price of $i8.00 per share. As of September 26, 2020, unrecognized stock-based compensation expense of $i11.0
million related to stock options, net of estimated forfeitures, is expected to be recognized over a weighted-average period of i2.9 years.
Restricted Stock Units
During the nine months ended September 26, 2020, RSUs of ii0.1/ million
were granted with a grant date fair value of $ii11.22/
per share. During the three months ended September 26, 2020, RSUs for i18 thousand shares of common stock vested. During the nine months ended September 26, 2020, RSUs for i0.3 million
shares of common stock vested. As of September 26, 2020, unrecognized stock-based compensation expense of $i0.9 million related to RSUs, net of estimated forfeitures, was expected to be recognized over a weighted-average period of i0.6
years.
Employee Stock Purchase Plans
The Company maintains itwo employee stock purchase plans - the Amended and Restated Employee Stock Purchase Plan (the “ESPP”) and the Amended and Restated 2017 Nonqualified Employee Stock Purchase Plan (the “NQ ESPP”).
The ESPP allows eligible employees to purchase shares of the
Company’s common stock through payroll deductions of up to i15% of their annual compensation subject to certain Internal Revenue Code limitations. In addition, no participant may purchase more than i2,000
shares of common stock in each offering period.
During this quarter, the Company revised the ESPP’s two six-month offering periods to August 15th through February 14th and February 15th through August 14th of each year, with an initial transition period that began on May 15th and ended on August 14, 2020. The price of common stock purchased under the ESPP is i85%
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. In May 2019, the stockholders approved an increase in the number of shares of common stock issuable under the ESPP by i2.5 million shares. The total shares authorized for issuance under the ESPP increased from i7.3
million shares to i9.8 million shares. As of September 26, 2020, there were i2.6
million shares available for issuance under the ESPP. During the three and nine months ended September 26, 2020, i0.2 million and i0.6 million
shares were purchased under the ESPP, respectively. As of September 26, 2020, unrecognized stock-based compensation expense of $i1.1 million related to the ESPP is expected to be recognized over a remaining service period of i0.4
years.
The NQ ESPP allows eligible employees to purchase shares of the Company’s common stock through payroll deductions of up to i25%
of their annual 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 ione
year period immediately following the purchase date. Beginning in the fourth quarter of 2020, the NQ ESPP’s itwosix-month offering periods will be changed to November 15th through May 14th and May 15th through November 14th of each year,
with a transition period that began on June 21st and will end on November 14, 2020. In May 2020, the stockholders approved an amendment of certain terms and an increase in the number of shares of common stock issuable under the NQ ESPP by i1.2 million shares. The maximum number of shares of common stock currently authorized for issuance under the NQ ESPP
is i4.7 million shares, with a maximum of i0.5
million shares allocated per purchase period. As of September 26, 2020, there were i2.5 million shares available for issuance under the NQ ESPP, including the stockholder-approved i1.2 million
share increase. During the nine months ended September 26, 2020, iiii0.3/// million
shares were purchased and issued. As of September 26, 2020, unrecognized stock-based compensation expense of $i3.5 million related to the NQ ESPP is expected to be recognized over a remaining weighted-average service period of i0.9
years.
Stock-Based Compensation
i
The following table summarizes stock-based compensation expense (in thousands):
The
Company derives revenue from contracts with customers primarily from the following and categorizes its revenue as follows:
•Systems include revenue from the sale of access and premises systems, software platform licenses and cloud-based software subscriptions; and
•Services include revenue from professional services, customer support, software- and cloud-based maintenance, extended warranty subscriptions, training and managed services.
i
The
following is a summary of revenue disaggregated by geographic region based upon the location of the customers (in thousands):
The primary contract asset is revenue recognized on professional services contracts where the services are transferred to the customer over time, which has yet to be billed, and is classified within accounts receivable. Amounts are billed in accordance with the agreed-upon contractual terms. The balance at December 31, 2019 was $i5.0
million of which $i0.8 million remained in the Company's Condensed Consolidated Balance Sheet at September 26, 2020. The closing balance at September 26, 2020 was $i3.8
million of which the Company expects to bill i28% of the balance during the remainder of 2020. The decrease in the
contract asset was driven by billings for past services as well as the timing and volume of professional services contracts during the nine months ended September 26, 2020.
The increase in
the deferred revenue balance for the three months ended September 26, 2020 is primarily driven by cash payments received or due in advance of satisfying the Company's performance obligation offset by $i7.6 million of revenue recognized that was included in the deferred revenue balance at the beginning of that period. The decrease in the deferred revenue balance for the nine months ended September
26, 2020 is primarily driven by $i16.9 million of revenue recognized that was included in the deferred revenue balance at the beginning of that period offset by cash payments received or due in advance of satisfying the Company's performance obligations.
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 $i69.0 million as of September 26, 2020, and the Company expects to recognize i43%
of such revenue over the next 12 months and the remainder thereafter.
The Company capitalizes certain sales commissions related primarily to extended warranty support for which the expected amortization period is greater than one year. As of September 26, 2020, the unamortized balance of deferred commissions was $i0.7
million. For the three and nine months ended September 26, 2020, the amount of amortization was $i46,000 and $i0.1
million, respectively, and there was iino/
impairment loss in relation to the costs capitalized.
Concentration of Customer Risk
Lumen Technologies, Inc. (formerly CenturyLink, Inc.) represented i12% and i14%
of total revenue for the three and nine months ended September 26, 2020, respectively, and i16% and i15% for the three and nine months ended September 28,
2019, respectively. Verizon accounted for 10% of total revenue for the three months ended September 28, 2019. No other customers accounted for more than 10% of the Company’s total revenue for these periods.
The following table presents the provision for income taxes from operations and the effective tax rates for the periods indicated (in thousands, except percentages):
The
effective tax rate for the three months ended September 26, 2020 was determined using an estimated annual effective tax rate adjusted for discrete items, if any, that occurred during the respective periods.
Deferred tax assets are recognized if realization of such assets is more likely than not. The Company has established and continues to maintain a full valuation allowance against its net deferred
tax assets, with the exception of certain foreign deferred tax assets, as the Company does not believe that realization of those assets is more likely than not.
The Company’s effective tax rate may be subject to fluctuation during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as the mix of forecasted pre-tax earnings in the various jurisdictions in which it operates, valuation allowances against deferred tax assets, the recognition or de-recognition of tax benefits related to uncertain tax positions and changes in or the interpretation of tax laws in jurisdictions where it conducts business.
11. iNet
Income (Loss) Per Common Share
i
The following table sets forth the computation of basic and diluted net income (loss) per common share for the periods indicated (in thousands, except per share data):
Weighted-average
common shares outstanding used to compute basic net income (loss) per share
i60,307
i55,466
i58,053
i54,718
Effect
of dilutive common stock equivalents
i3,142
i—
i2,278
i—
Weighted-average
common shares outstanding used to compute diluted net income (loss) per share
i63,449
i55,466
i60,331
i54,718
Net
income (loss) per common share:
Basic net income (loss) per common share
$
i0.34
$
(i0.06)
$
i0.16
$
(i0.33)
Diluted
net income (loss) per common share
$
i0.32
$
(i0.06)
$
i0.16
$
(i0.33)
Potentially
dilutive shares, weighted average
i169
i6,611
i579
i6,500
/
Potentially
dilutive shares have been excluded from the computation of diluted net income (loss) per common share when their effect is antidilutive. These antidilutive shares were primarily from stock options, restricted stock units and performance restricted stock units. For each of the periods presented where the Company reported a net loss, the effect of all potentially dilutive securities would be antidilutive, and as a result diluted net loss per common share is the same as basic net loss per common share.
ITEM 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities and Exchange Act of 1934, as amended. All statements other than statements of historical facts are “forward-looking statements” for purposes of these provisions, including any projections of earnings, revenue or other financial items, any statement of or concerning the following: the plans and objectives of management for future operations, proposed new products or licensing, product development, anticipated customer demand or capital expenditures, anticipated growth and trends in our business and industry, future economic and/or market conditions or performance and assumptions
underlying any of the above. In some cases, forward-looking statements can be identified by the use of terminology such as “could,”“may,”“will,”“would,”“expects,”“believes,”“intends,”“plans,”“anticipates,”“estimates,”“projects,”“predicts,”“potential,” or “continue” or the negative thereof or other comparable terminology. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and
results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including those identified in the Risk Factors discussed in Part II, Item 1A, of this report on Form 10-Q, as well as in other sections of this report and in our Annual Report on Form 10-K for the year ended December 31, 2019. All forward-looking statements and reasons why results may differ included in this Quarterly Report on Form 10-Q are made as of the date hereof, and we assume no obligation to update these forward-looking statements or reasons why actual results might differ.
Overview
We are a leading global provider of cloud and software platforms, systems and services for fiber- and copper-based
network architectures and a pioneer in software defined access and cloud products focused on access networks and the subscriber. Our portfolio allows for a broad range of subscriber services to be provisioned and delivered over a single unified network. Our access systems can deliver voice and data services, advanced broadband services, mobile broadband, as well as high-definition video and online gaming. Our most recent generation of premises systems enable CSPs to address the complexity of the smart home and business and offer new services to their device enabled subscribers. We have designed all of our current platforms and related systems so that they can be monitored, analyzed, managed and supported by Calix Cloud.
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 $6.2 million in 2019 and $2.3 million the first nine months of 2020. 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 is expected to take until the end of 2020 to complete.
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, including from market segments such as cable MSOs, WISPs, fiber overbuilders, municipalities and electric cooperatives, in the United States and internationally.
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 including as a result of uncertainty related to the COVID-19 pandemic, non-availability of products due to supply chain challenges including business closures, manufacturing disruptions and component shortages due to 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. Our revenue is also dependent upon our customers’ timing of purchases, capital expenditure plans and decisions to upgrade their network or adopt new technologies, including adoption of our software and cloud platform solutions,
as well as our ability to grow our customer base.
Cost of revenue is strongly correlated to revenue and tends to fluctuate due to all of the above factors that may cause revenue fluctuations. Factors that impacted our cost of revenue for the three and nine months ended September 26, 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 product
warranty and incurrence of retrofit costs, 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, 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 historical 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 new product introductions or upgrades to existing products, 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, 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: changes in headcount
and personnel costs, which comprise a significant portion of our operating expenses; variable compensation due to fluctuations in shipment volumes or level of achievement against performance targets; timing of research and development expenses, including investments in innovative solutions and new customer segments, prototype builds and outsourced development resources; asset write-offs; investments in our business and information technology infrastructure; and fluctuations in stock-based compensation expenses due to timing of equity grants or other factors affecting vesting.
While our net income was $9.4 million for the nine months ended September 26, 2020, we have incurred significant losses since our inception, and as of September 26, 2020, we had an accumulated deficit of $693.2 million. Further, as a result of factors contributing
to the fluctuations described above among other factors, many of which are outside our control, our quarterly operating results fluctuate from period to period. Comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance.
COVID-19 Pandemic
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. There is still no vaccine, and treatments are limited. In March 2020, we instituted office closures, travel restrictions and a mandatory work-from-home policy for substantially all of our employees which continue today. The spread of COVID-19 has had a prolonged impact on our supply chain operations
through restrictions, reduced capacity and shutdown of business activities by suppliers whom we rely on for sourcing components and materials and third-party partners whom we rely on 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 WiFi, 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 to manufacture our products, including due to plant closures, and future outbreaks could exacerbate these constraints or cause further supply chain disruptions. The extent to which the COVID-19 pandemic may materially impact our financial condition, liquidity or results of operations is uncertain.
In
the second quarter of 2020, we made the decision to embrace a work-from-anywhere model, with many of our employees electing to work remotely on a permanent basis. This operating mode reduces our physical facilities requirements, and consequently, we established a restructuring plan to align our business to a work-from-anywhere model 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 component inventory accrual of $1.8 million and severance-related charges of $1.2 million.
Critical Accounting Policies and Estimates
Our
financial statements are prepared in accordance with U.S. GAAP. These accounting principles require us to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Management bases its estimates,
assumptions and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. To the extent
there are material differences between these estimates and actual results, our financial statements may be affected. Our management evaluates its estimates, assumptions and judgments on an ongoing basis.
Our critical accounting policies and estimates, which are revenue recognition and inventory valuation, are described under “Critical Accounting Policies and Estimates” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2019. For the nine months ended September 26, 2020, there have been no significant changes in our critical accounting policies and estimates.
Recent Accounting Pronouncements
There have been no additional
accounting pronouncements or changes in accounting pronouncements during the nine months ended September 26, 2020, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the year ended December 31, 2019, that are significant or potentially significant to us.
•Systems
include revenue from the sale of access and premises systems, software platform licenses and cloud-based software subscriptions; and
•Services include revenue from professional services, customer support, software- and cloud-based maintenance, extended warranty subscriptions, training and managed services.
The following table sets forth our revenue (dollars in thousands):
Our
revenue increased by $36.0 million and $67.1 million for the three and nine months ended September 26, 2020, respectively, as compared to the corresponding periods in 2019 mostly due to higher systems revenue of $36.2 million and $66.4 million, respectively. Services revenue declined $0.2 million and increased by $0.7 million, as compared to the corresponding periods in 2019, respectively. 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 demand for network capacity and relieve network capacity constraints. Services revenue was relatively flat due to continued ramp in our service offerings aligned with cloud and software products offset by lower professional services related to CAF deployments.
For the three
and nine months ended September 26, 2020, revenue generated in the United States was $128.2 million and $324.4 million, or 85% and 87% of our total revenue, respectively, compared to $101.0 million and $262.6 million, or 88% and 86% of our total revenue, respectively, for the same period in 2019. International revenue was $22.3 million and $46.8 million, or 15% and 13% of our total revenue, respectively, for the three and nine months ended September 26, 2020, as compared to $13.5 million and $41.5 million, or 12% and 14% of our total revenue, respectively, for the same period in 2019.
Lumen Technologies, Inc. (formerly CenturyLink, Inc.), or Lumen, accounted for more than 10% of the Company's total revenue, representing 12% and 14% for the
three and nine months ended September 26, 2020, respectively, and 16% and 15%
for the three and nine months ended September 28, 2019, respectively. Verizon accounted for 10% of total revenue for the three months ended September 28, 2019.
Cost of Revenue, Gross Profit and Gross Margin
The
following table sets forth our cost of revenue (dollars in thousands):
Our
cost of revenue increased by $10.3 million and $22.3 million for the three and nine months ended September 26, 2020, respectively, as compared with the corresponding periods in 2019. The $11.0 million and $24.3 million increases in our systems cost of revenue were less than the increases in revenue compared with the corresponding periods in 2019, and were due to continued growth in our All-Platform offerings along with favorable customer and product mix. The increase in costs of revenue for the nine months ended September 26, 2020 as compared with the corresponding period in 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 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 for the three and nine months ended September 26, 2020 compared with the corresponding period in 2019.
The following table sets forth our gross profit and gross margin (dollars in thousands):
Gross
profit increased to $76.0 million and $178.0 million for the three and nine months ended September 26, 2020, respectively, from $50.2 million and $133.2 million during the corresponding periods in 2019 primarily due to higher systems and services gross margin.
During the three and nine months ended September 26, 2020, systems gross margin was negatively impacted by U.S. tariff and tariff-related costs of $0.6 million and $2.3 million, or 45 and 65 basis points, respectively, and intangible asset amortization of $0.7 million and $2.0 million, or 45 and 60 basis points, respectively. Excluding the impact of U.S. tariff and tariff-related costs and intangible assets amortization, systems gross margin was 52.5% and 50.5% for the three and nine months ended September 26, 2020, respectively.
During the three and nine months ended September 28, 2019, systems gross margin was negatively impacted by U.S. tariff and tariff-related costs of $1.1 million and $5.1 million, or 100 and 180 basis points, respectively. The intangible asset amortization for the three and nine months ended September 28, 2019, which was initiated in the third quarter of 2019, was $0.4 million, or 35 and 15 basis points, respectively. Excluding the impact of U.S. tariff and tariff-related costs and intangible assets amortization, systems gross margin was 46.8% and 47.9% for the three and nine months ended September 28, 2019, respectively. The increase in systems gross margin excluding U.S. tariff and tariff-related costs and intangible assets amortization for the three months ended September 26,
2020 compared the corresponding period in 2019, was mainly due to continued growth in our all-platform offerings along with favorable product and customer mix.
Services gross margin increased for the three months ended September 26, 2020 compared to the corresponding period in 2019 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.
Sales and marketing expenses for the three months ended September 26, 2020 increased
by $3.0 million as compared with the corresponding period in 2019 primarily due to higher personnel expenses of $3.3 million, mainly related to higher sales incentive compensation expense and investments in sales headcount, higher marketing expenses of $0.8 million and higher stock-based compensation of $0.3 million. These increases were partially offset by a decrease in travel expenses of $1.3 million.
Sales and marketing expenses for the nine months ended September 26, 2020 increased by $5.9 million as compared with the corresponding period in 2019 primarily due to higher personnel expenses of $6.0 million, mainly related to investments in sales headcount and higher sales incentive compensation expense, higher marketing expenses of $2.2 million and higher stock-based compensation of $0.3 million. These increases were partially offset by a decrease in travel expenses of $2.9
million.
Research and Development Expenses
The following table sets forth our research and development expenses (dollars in thousands):
Research and development expenses for the three months ended September 26, 2020 decreased
by $0.5 million as compared with the corresponding period in 2019 mainly due to lower facilities expenses of $1.1 million, lower personnel expenses of $0.4 million, lower travel expenses of $0.2 million and decreases in depreciation and amortization expense of $0.2 million. These decreases were partially offset by increased outside services expenses of $1.4 million.
Research and development expenses for the nine months ended September 26, 2020 increased by $1.1 million as compared with the corresponding period in 2019 mainly due to higher outside services expenses of $2.2 million, higher personnel expenses of $1.3 million, primarily related to incentive compensation expense, and higher stock-based compensation of $0.4 million. These increases were partially offset by lower facilities expenses of $1.3 million, decreases in depreciation and amortization expense of $0.6 million,
lower travel expenses of $0.5 million and lower equipment expenses of $0.4 million.
General and Administrative Expenses
The following table sets forth our general and administrative expenses (dollars in thousands):
General and administrative expenses for the three months ended September 26, 2020 increased
by $1.2 million as compared with the corresponding period in 2019 mainly due to increased amortization and subscription expenses of $0.9 million, primarily related to our cloud-based ERP system that went live in January of 2020, and higher facilities expenses of $0.8 million. These increases were partially offset by decreases in professional services fees of $0.6 million.
General and administrative expenses for the nine months ended September 26, 2020 increased by
$5.1 million as compared with the corresponding period in 2019 mainly due to increased amortization and subscription expenses of $3.1 million, primarily related to our cloud-based ERP system that went live in January of 2020, an increase in personnel expenses of $1.9 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, and an increase in our bad debt allowance of $1.0 million. These increases were partially offset by lower professional services fees of $0.9 million.
Restructuring Charges
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. See Note 5, “Balance Sheet Details” of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details.
Provision for Income Taxes
The following table sets forth our provision for income taxes (dollars in thousands):
The effective tax rate for the three and nine months ended September 26, 2020 was determined
using an estimated annual effective tax rate adjusted for discrete items, if any, that occurred during the respective periods.
Deferred tax assets are recognized if realization of such assets is more likely than not. We have established and continue to maintain a full valuation allowance against our net deferred tax assets, with the exception of certain foreign deferred tax assets, as we do not believe that realization of those assets is more likely than not.
Our effective tax rate may be subject to fluctuation during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as the mix of forecasted pre-tax earnings in the various jurisdictions in which we operate, valuation allowances against deferred tax assets, the recognition or de-recognition of tax benefits related to uncertain tax positions
and changes in or the interpretation of tax laws in jurisdictions where we conduct business.
We have funded our operations and investing activities primarily through sales of our common stock, including an underwritten public offering in August 2020, cash generated from operations, borrowings on our line of credit and financing
arrangements for certain lab equipment and consulting services. As of September 26, 2020, we had cash, cash equivalents and marketable securities of $103.8 million, which consisted of deposits held at banks held at major financial institutions and highly liquid marketable securities such as U.S. government securities.
Operating Activities
Net cash provided by operating activities was $20.9 million for the nine months ended September 26, 2020 and consisted of $23.9 million of non-cash charges and net income of $9.4 million. This was partially offset by $12.3 million of cash flow decreases reflected in the net change in assets and liabilities. Cash flow decreases resulting from the net change in assets and liabilities primarily consisted of an increase in accounts receivable of $22.6
million, due to product shipment timing. In addition, there was increase in inventory of $1.5 million to support higher revenue. These changes were partially offset by an increase in accounts payable of $5.6 million due to increased inventory purchases, an increase in accrued liabilities of $3.8 million, mainly due to an increase our liability for components at certain suppliers, and an decrease in prepaid expenses and other assets of $3.7 million, due to amortization of the right-of-use asset.
Non-cash charges primarily consisted of depreciation and amortization of $10.3 million, stock-based compensation of $9.8 million and lease restructuring charges of $3.7 million.
During the nine months ended September 28, 2019, net cash provided by operating activities was $4.0 million and consisted of $18.5 million of non-cash charges and $3.8
million of cash flow increases reflected in the net change in assets and liabilities, partially offset by a net loss of $18.2 million. Cash flow increases resulting from the net change in assets and liabilities primarily consisted of a decrease in accounts receivable of $18.5 million, mainly due to increased linearity of shipments in the third quarter of 2019 resulting in higher collections in the quarter, a decrease in inventory of $3.8 million, primarily due to the transfer of raw material inventory to a new CM, an increase in deferred revenue of $2.6 million due to increased support contracts, software maintenance and Calix Cloud subscriptions and a decrease in prepaid expenses and other assets of $0.4 million, mainly due to operating lease asset amortization. This was partially offset by a decrease in accounts payable of $16.0 million, primarily due to timing of inventory
purchases, a decrease in accrued liabilities of $2.7 million, mainly related to incentive compensation payments to employees, and a decrease in other long-term liabilities of $2.8 million, mainly due to operating lease liability amortization.
Non-cash charges primarily consisted of stock-based compensation of $8.5 million, depreciation and amortization of $7.4 million and loss on asset retirements of $2.6 million.
Investing Activity
For the nine months ended September 26, 2020, we invested in purchasing marketable securities of $40.0 million and capital expenditures of $5.6 million, consisting primarily of purchases of test equipment and computer equipment.
For the nine months ended September 28, 2019,
we invested in capital expenditures of $12.4 million, consisting primarily of purchases of test equipment, computer equipment and software.
Financing Activities
Net cash provided by financing activities of $41.5 million for the nine months ended September 26, 2020 mainly consisted of proceeds from our common stock offering of $60.1 million, proceeds from the issuance of common stock from stock option exercises of $7.7 million and from our employee stock purchase plans of $6.4 million. These inflows were partially offset by the re-payment of our line of credit of $30.0 million, payments related to financing arrangements of $2.3 million and payments to originate the credit line of $0.3 million.
Net cash used in financing activities of $3.4 million for the nine months ended September 28,
2019 mainly related to reduced borrowing from the line of credit of $5.7 million and payments for financing arrangements of $2.0 million, partially offset by proceeds from the issuance of common stock under our employee stock purchase plans of $4.2 million and from stock option exercises of $0.3 million.
Working Capital and Capital Expenditure Needs
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 estimated expenses payable 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 our loan and security agreement with Bank of America, or BofA Loan Agreement, normal recurring trade payables, compensation-related and expense accruals, operating leases, minimum revenue-share obligations and obligations from financing arrangements. 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 intellectual property. Loans under the credit facility bear interest at a rate per annum equal to either LIBOR (customarily defined) plus an applicable margin between 1.5% to 2.0% or Prime Rate (customarily defined) plus an applicable margin between 0.5% to 1.0%, 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
September 26, 2020, we were in compliance with these requirements, had no outstanding borrowings and had availability of $35.0 million. Our interest rate on the line of credit was 3.75% as of the quarter ended September 26, 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 first quarter of 2020.
During 2018, we entered into financing arrangements to purchase lab equipment for approximately $5.1 million. Each agreement is to be paid over 36 months with a weighted average interest rate of 6.2%. As of September 26, 2020, we had $1.7 million outstanding under these financing arrangements.
From 2017 to 2020, in connection with our ERP implementation, we entered into financing arrangements for consulting services of $5.5 million. The current amounts due under this agreement are to be paid over a weighted average term of 2.4 years with a weighted average interest rate of 6.3%. As of September 26, 2020, there was $1.6 million outstanding under this arrangement.
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. 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. There is no assurance that any other sources of liquidity may be available to us on acceptable terms or at all. If we are unable to generate sufficient cash flows or obtain other sources of liquidity,
we will be forced to limit our development activities, reduce our investment in growth initiatives and institute cost-cutting measures, all of which may adversely impact our business and potential growth.
Our principal commitments as of September 26, 2020 consisted of financing arrangements, operating leases for office space and non-cancelable
outstanding purchase obligations. The following table summarizes our contractual obligations at September 26, 2020 (in thousands):
Payments
Due by Period
Total
Less Than 1 Year
1-3 Years
3-5 Years
More Than 5 Years
Non-cancelable purchase commitments (1)
$
119,875
$
119,875
$
—
$
—
$
—
Financing
arrangements (2)
19,068
5,214
13,854
—
—
Operating lease obligations (3)
17,948
3,712
7,068
6,540
628
$
156,891
$
128,801
$
20,922
$
6,540
$
628
(1) Represents
outstanding purchase commitments for inventory to be delivered by our third-party manufacturers. See Note 7, “Commitments and Contingencies” of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion regarding our outstanding purchase commitments.
(2) Represents installment payments, including interest, related to financing arrangements and estimated total minimum revenue-share obligations under the program, including imputed interest, of $15.8 million associated with the completion of developed software products and related enhancements. The schedule reflects our expected revenue-share payments based on our revenue projections for the developed products over a three-year sales period. If the minimum revenue-share payments are not achieved
by the end of the three-year sales period, a true-up payment will be due.
(3) Future minimum operating lease obligations in the table above include primarily payments for our office locations, which expire at various dates through 2025. See Note 7 “Commitments and Contingencies” of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion regarding our operating leases.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The primary objectives of our investment activity are to preserve principal, provide liquidity and maximize income without significantly increasing risk. By policy, we do not enter into investments for trading or speculative purposes. At September 26, 2020, we had cash, cash equivalents and marketable securities of $104.4 million, which was held primarily in cash, money market funds and highly liquid marketable securities such U.S. government securities. Due to the nature of these money market funds and highly liquid marketable securities, we believe that we do not have any material exposure to changes in the fair value of our cash equivalents and marketable securities
as a result of changes in interest rates.
Our exposure to interest rate risk also relates to the amount of interest we must pay on our borrowings under our Loan Agreement with BofA. Borrowings under the BofA Loan Agreement will bear interest through maturity at a variable annual rate based upon an annual rate of either a prime rate or a LIBOR rate, plus an applicable margin between 0.5% to 1.0% for prime rate advances and between 1.5% and 2.0% for LIBOR advances based on our FCCR. As of September 26, 2020, we had no outstanding borrowings under the BofA Loan Agreement.
Foreign Currency Exchange Risk
Our primary foreign currency exposures are described below.
Economic Exposure
The direct effect of foreign
currency fluctuations on our sales and expenses has not been material because our sales and expenses are primarily denominated in U.S. dollars, or USD. However, we are indirectly exposed to changes in foreign currency exchange rates to the extent of our use of foreign CMs whom we pay in USD. Increases in the local currency rates of these vendors in relation to USD could cause an increase in the price of products that we purchase. Additionally, if the USD strengthens relative to other currencies, such strengthening could have an indirect effect on our sales to the extent it raises the cost of our products to non-U.S. customers and thereby reduces demand. A weaker USD could have the opposite effect. The precise indirect effect of currency fluctuations is difficult to measure or predict because our sales are influenced by many factors in addition to the impact of such currency fluctuations.
Translation Exposure
Our
sales contracts are primarily denominated in USD and, therefore, the majority of our revenue is not subject to foreign currency risk. We are directly exposed to changes in foreign exchange rates to the extent such changes affect our expenses related to our foreign assets and liabilities with our subsidiaries in China and the United Kingdom, whose functional currencies are Chinese Renminbi, or RMB, and British Pounds Sterling, or GBP.
Our operating expenses are incurred primarily in the United States, in China associated with our research and development operations that are maintained there and in the United Kingdom for our international sales and marketing activities. Our operating expenses are generally denominated in the functional currencies
of our subsidiaries in which the operations are located. The percentages of our operating expenses denominated in the following currencies for the indicated periods were as follows:
If
USD had appreciated or depreciated by 10%, relative to RMB and GBP, our operating expenses for the first nine months of 2020 would have decreased or increased by approximately $1.2 million, or approximately 1%. We do not currently enter into forward exchange contracts to hedge exposure denominated in foreign currencies or any derivative financial instruments. In the future, we may consider entering into hedging transactions to help mitigate our foreign currency exchange risk.
Foreign exchange rate fluctuations may also adversely impact our financial position as the assets and liabilities of our foreign operations are translated into USD in preparing our Condensed Consolidated Balance Sheets. The effect of foreign exchange rate fluctuations on our consolidated financial position for the nine months ended September 26,
2020 was a net translation gain of $0.2 million. This gain is recognized as an adjustment to stockholders’ equity through accumulated other comprehensive loss.
We have certain assets and liabilities, primarily receivables and accounts payable (including inter-company transactions) that are denominated in currencies other than the relevant entity’s functional currency. In certain circumstances, changes in the functional currency value of these
assets and liabilities create fluctuations in our reported consolidated financial position, cash flows and results of operations. Transaction gains and losses on these foreign currency denominated assets and liabilities are recognized each period within “Other expense, net” in our Condensed Consolidated Statements of Comprehensive Loss. During the nine months ended September 26, 2020, the net loss we recognized related to these foreign exchange assets and liabilities was approximately $0.7 million.
ITEM 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on their evaluation as of September 26,
2020, our Chief Executive Officer and Chief Financial Officer, with the participation of our management, have concluded that our disclosure controls and procedures (as defined in Rules 13a–15(e) and 15d–15(e) under the Exchange Act) were effective at the reasonable assurance level.
Limitations on the Effectiveness of Controls
Our disclosure controls and procedures provide our Chief Executive Officer and Chief Financial Officer reasonable assurance that our disclosure controls and procedures will achieve their objectives. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting can or will prevent all human error. Our management recognizes that a control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Furthermore, the design of a control system must reflect the fact that there are internal resource constraints, and the benefit of controls must be weighed relative to their corresponding costs. Because of the limitations in all control systems, no evaluation of controls can provide complete assurance that all control issues and instances of error, if any, within our company are detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur due to human error or mistake. Additionally, controls, no matter how well designed, could be circumvented by the individual acts of specific persons within the organization. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed
in achieving its stated objectives under all potential future conditions.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
For a description of our material pending legal proceedings, please refer to Note 6 “Commitments and Contingencies – Litigation” of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated by reference.
ITEM 1A. Risk Factors
We
have identified the following additional risks and uncertainties that may affect our business, financial condition and/or results of operations. The risks described below include any material changes to and supersede the description of the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission on February 21, 2020. Investors should carefully consider the risks described below, together with the other information set forth in this Quarterly Report on Form 10-Q, before making any investment decision. The risks described below are not the only ones we face. Additional risks not currently known to us or that we currently believe are immaterial may also significantly impair our business operations. Our business could be harmed by any of these risks. The trading price
of our common stock could decline due to any of these risks, and investors may lose all or part of their investment.
Risks Related to Our Business and Industry
Our business and results of operations may be negatively affected by the COVID-19 pandemic that has severely impacted the global economy.
In late 2019 a novel strain of coronavirus, identified as COVID-19, was reported in Wuhan, China. COVID-19 has since been declared a global pandemic by the World Health Organization and has severely impacted the global economy, disrupting financial markets, supply chains, customer spending and purchasing patterns and general business operations, and leading to higher than expected unemployment rates. In response, governments have implemented measures to attempt to contain and mitigate the transmission of COVID-19, including shelter in place orders,
travel restrictions, mandatory quarantines and shutdown of certain non-essential business activities, all of which have resulted in global business disruptions as well as significant impacts on societal interactions. A number of these restrictions remain in place in whole or in part and have extended longer than previously anticipated by many governments and businesses. Although some countries have re-opened business activities, no vaccine or definitive treatment has been announced and, in some cases, re-openings have led to outbreaks and reinstitution of restrictions. We cannot predict the continued impact of the pandemic and the degree to which our business and results of operations may be affected, particularly given the extended duration of the COVID-19 impacts on the U.S. and other locations in which we operate. There are no assurances that the global economy will recover quickly or at all, or that impacted areas will be able to fully contain COVID-19 to avoid new
waves of infections. The COVID-19 pandemic has also presented financial challenges to numerous businesses, which may result in liquidity issues leading to heightened difficulties with collections.
In consideration of the health and safety of our employees, we instituted office closures, travel restrictions and a mandatory work from home policy for substantially all of our employees. Furthermore, as a precaution for the well-being of our employees and customers, we replaced in-person meetings and conferences with virtual meetings and events and we are leveraging technology to host ConneXions, our annual user conference, virtually this fall. Furthermore, we have transitioned our workforce to a work-from-anywhere model, and are reorganizing our physical office requirements and embracing a virtual culture. While these measures help to contain and mitigate the transmission of COVID-19 and the impact on productivity, such measures
are disruptive, require transition to new business processes and detract our employees from normal business activities.
The spread of COVID-19 continues to impact our supply chain operations through restrictions and shutdown of business activities, suppliers whom we rely on for sourcing components and materials and third-party partners whom we rely on for manufacturing, warehousing and logistics services. Specifically, the manufacture of our products requires optical-electronic components, chipsets and materials with critical dependencies on manufacturing located primarily in China. Business disruptions due to factory shutdowns and other containment measures in China and, to a lesser extent, Mexico, parts of Southeast Asia and other locations have decreased productivity from these suppliers, resulting in competing demand and longer lead times for components and materials needed for the manufacture of our products. In addition,
shortages of fiber optics and other materials may delay planned fiber network buildouts by CSPs, which in turn could delay or lower demand for our products. If these containment measures continue for a prolonged period, we may experience a sustained shortage of components and materials, which may have a material negative impact our ability to supply products to meet customer requirements and could materially adversely affect our business and results of operations.
Similarly, our customers’ purchasing decisions may
be impacted by the pandemic, which could in turn impact our sales and results of operations. For example, CSPs may choose not to invest at this time in our new platforms, or delay infrastructure improvements due to the uncertainty in the global economy. The COVID-19 pandemic has disrupted global markets in unprecedented ways, leading to significant unemployment rates, limited visibility into supply chain performance and increasing uncertainty over fears of a global recession.
Adverse global economic conditions, geopolitical issues and other conditions that impact our increasingly global operations, including uncertainty around global trade policies and outbreaks of pandemic diseases, could have a negative effect on our business, results of operations and financial condition and liquidity.
As a global company, our performance is affected by global economic conditions as well as geopolitical
issues and other conditions with global reach. In recent years concerns about the global economic outlook have adversely affected market and business conditions in general. Macroeconomic weakness and uncertainty also make it more difficult for us to accurately forecast revenue, gross margin and expenses, which has been the case with the COVID-19 pandemic. Geopolitical issues, such as ongoing and escalating conflicts between the United States and China related to tariffs, trade policy changes, other international trade policy changes and the withdrawal of the United Kingdom from the European Union, as well as political positioning by each country, have resulted in increasing global tensions and create uncertainty for global commerce. In particular, we incurred substantial costs and diversion of resources in realigning our supply chain operations to move substantially all of our product manufacturing to locations outside of China as a result of these tariff and trade policy
changes. The uncertainty over the global COVID-19 pandemic, which has resulted in government-imposed travel restrictions across a number of countries and closures of numerous business operations globally, continues to disrupt and delay our and our global supply chain operations. Sustained uncertainty about, or worsening of, global economic conditions, geopolitical issues and other conditions with global impact may increase our cost of doing business or disrupt our supply chain operations and may cause our customers to reduce or delay spending and could intensify pricing pressures. Any or all of these factors could negatively affect demand for our products and our business, financial condition and result of operations.
We have a history of losses, and we may not be able to generate positive operating income and positive cash flows in the future.
We have experienced net losses in each
year of our existence. We incurred net losses of $17.7 million in 2019, $19.3 million in 2018 and $83.0 million in 2017. For the first nine months of 2020, we had a net income of $9.4 million. As of September 26, 2020, we had an accumulated deficit of $693.2 million.
We expect to continue to incur significant expenses and cash outlays for research and development associated with our platforms and systems, including our cloud and services operations, investments in innovative technologies, expansion of our product portfolio, sales and marketing, customer success, technical support and general and administrative functions as we expand our business and operations and target new customer opportunities, including a broader range of CSPs and cable MSOs as well as additional types of regional and local providers. Given our anticipated growth and the intense competitive pressures we
face, we may be unable to adequately control our operating costs or maintain positive operating income.
We cannot guarantee that we will achieve sustained profitability. We will have to generate and sustain significant and consistent increased revenue, while continuing to control our expenses, to maintain profitability. We may also incur significant losses in the future for a number of reasons, including the risks discussed in this “Risk Factors” section and other factors that we cannot anticipate. If we are unable to generate positive operating income and positive cash flows from operations, our liquidity, results of operations and financial condition will be adversely affected. If we are unable to generate cash flows to support our operational needs, we may need to seek other sources of liquidity, including additional borrowings, to support our working capital needs. 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. There is no assurance that any other sources of liquidity may be available to us on acceptable terms or at all. If we are unable to generate sufficient cash flows or obtain other sources of liquidity, we will be forced to limit our development activities, reduce our investment in growth initiatives and institute cost-cutting measures, all of which would adversely impact our business and growth.
Our quarterly and annual operating results may fluctuate significantly, which may make it difficult to predict our future performance and could cause the market price of our stock to decline.
A number of factors, many of which are outside of our control, may cause or contribute to significant fluctuations in our quarterly and annual operating results. These fluctuations may make financial
planning and forecasting difficult. Comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. If our revenue or operating results fall below the expectations of investors or securities analysts, or below any guidance we may provide to the market, the market price of our stock would likely decline.
In addition to the other risk factors listed in this “Risk Factors” section, factors that have in
the past and may continue to contribute to the variability of our operating results include:
•our ability to predict our revenue and reduce and control our costs;
•our ability to predict product functions and features desired by our customers;
•the impact of global economic conditions, including the impact of the COVID-19 pandemic;
•our ability to effectively manage our global supply chain operations to mitigate the impact of the COVID-19 pandemic, U.S. tariffs and other trade policies;
•our ability to manage our relationships with our third-party vendors, including CMs, ODMs, logistics providers, component suppliers and development
partners;
•our ability to forecast our manufacturing and product supply requirements and manage our inventory;
•our dependence on sole-, single- and limited-source suppliers and supply chain partners, including suppliers with significant dependencies on suppliers located in China where there are a number of factors that could negatively impact our supply chain;
•the capital spending patterns of CSPs and any decrease or delay in capital spending by CSPs due to macro-economic conditions, regulatory uncertainties or other reasons;
•the impact of government-sponsored programs on our customers and the impact to our customers of U.S. federal government disruptions, such as government shutdowns, on such
programs;
•intense competition, including market entrants whose products may be substitutes to ours;
•our ability to develop new products or enhancements that support technological advances and meet changing CSP requirements;
•our ability to ramp sales and achieve market acceptance of our new products and platforms and CSPs’ willingness to adopt and deploy our new products and platforms;
•the concentration of our customer base as well as our dependence on a limited number of key customers;
•the length and unpredictability of our sales cycles and timing of orders;
•our
lack of long-term, committed-volume purchase contracts with our customers;
•our ability to increase our sales and market acceptance of our products and platforms globally and to increase our customer base;
•our exposure to the credit risks of our customers;
•fluctuations in our gross margin;
•the interoperability of our products with CSP networks;
•our products’ compliance with industry standards and regulatory requirements that apply to our products and services;
•our ability
to expand our international operations;
•our ability to protect our intellectual property and the cost of doing so;
•the quality of our products, including any undetected hardware defects or bugs in our software;
•our ability to manage data security risks as we grow our cloud and software portfolio;
•our ability to estimate future warranty and service obligations;
•our ability to obtain necessary third-party technology licenses at reasonable costs;
•the regulatory and physical impacts of climate change and other natural events;
•the
attraction and retention of qualified employees and key management personnel; and
•our ability to maintain proper and effective internal controls.
Our gross margin may fluctuate over time, and our current level of gross margin may not be sustainable.
Our current level of gross margin may not be sustainable and may be adversely affected by numerous factors, including:
•changes
in customer, geographic or product mix, including the mix of configurations within each product group;
•the pursuit or addition of new large customers;
•increased price competition, including the impact of customer discounts and rebates;
•our ability to effectively manage our global supply chain operations to mitigate the impact of U.S. tariffs, continued disruptions from the COVID-19 pandemic, trade disagreements and tension between the U.S. and China;
•our ability to reduce and control product costs;
•our ability to ramp and grow revenue from software licenses and cloud services;
•changes
in component pricing;
•changes in pricing and commercial terms with our third-party manufacturing partners;
•charges incurred due to inventory holding periods if parts ordering does not correctly anticipate product demand;
•introduction of new products and new technologies, which may involve higher component costs;
•our ability to scale our services business in order to gain desired efficiencies;
•changes in shipment volume;
•changes in or increased reliance on distribution channels;
•potential
liabilities associated with increased reliance on third-party vendors;
•increased expansion efforts into new or emerging markets;
•increased warranty and maintenance and support costs;
•excess and obsolete inventory and inventory holding charges;
•expediting costs incurred to meet customer delivery requirements; and
•potential costs associated with contractual obligations.
Our customer base is concentrated, and there are a limited number of potential customers for our products. The loss of any of our key customers, a decrease in purchases by our key customers, pricing pressures or our
inability to grow our customer base would adversely impact our revenue and results of operations and any delays in payment by a key customer could negatively impact our cash flows and working capital.
Historically, a large portion of our sales has been to a limited number of customers. For example, Lumen accounted for 15% of total revenue in 2019, 18% of total revenue in 2018 and 31% of total revenue in 2017. However, we cannot anticipate the same level of purchases in the future by these or other customers who have historically comprised a larger percentage of our revenue. Although these customers now comprise a smaller percentage of our revenue, we expect that changes in the CSP market, such as financial difficulties, spending cuts or corporate consolidations that impact purchasing decisions by these customers may continue to adversely impact our revenue, and as a result, revenue from such customers may remain flat or continue
to decline. For example, Lumen completed a large acquisition at the end of 2017, which disrupted its historical levels of purchases with us and we have continued to experience significantly reduced levels of purchases by Lumen compared to historical levels and in recent months reorganized and rebranded its business as Lumen. There is no assurance that purchasing levels by Lumen will increase from current levels or return to historical levels, and we expect continued uncertainty as it continues to complete its transition activities and corporate strategies. We have experienced and expect to continue to experience delays or declines in purchases by certain CSPs due to deterioration and weakness in their financial condition. For example, Windstream, another one of our larger customers, recently completed a financial restructuring and emerged from Chapter 11 bankruptcy after filing a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in February 2019
after it was found in default of certain debt instruments. In April 2020, another customer, Frontier, filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in order to facilitate a financial restructuring plan, which was recently confirmed by the U.S. Bankruptcy Court for the Southern District of New York. Frontier expects to complete its restructuring and emerge from Chapter 11 following the completion of the regulatory process. Any decrease or delay in purchases and/or capital expenditure plans of any of our key customers, particularly if prolonged or sustained, or our inability to grow our sales with existing customers, may have a material negative impact on our revenue and results of operations.
We anticipate that a large portion of our revenue will continue to depend on sales to a limited number of customers. In addition, some larger customers may demand discounts and rebates or desire to purchase
their access systems and software from multiple providers. As a result of these factors, our future revenue opportunities may be limited, and we may face pricing pressures, which in turn could adversely impact our margins and our profitability. The loss of, reduction in or pricing discounts associated
with, orders from any key customer would significantly reduce our revenue and harm our business. Furthermore, delays in payment and/or extended payment terms from any of our key or larger customers could have a material
negative impact on our cash flows and working capital to support our business operations.
Furthermore, over the years the CSP market has undergone substantial consolidation. Industry consolidation generally has negative implications for equipment suppliers, including a reduction in the number of potential customers, a decrease in aggregate capital spending and greater pricing leverage on the part of CSPs over equipment suppliers. Continued consolidation of the CSP industry and among independent local exchange carriers and IOC customers, who represent a large part of our business, could make it more difficult for us to grow our customer base, increase sales of our products and maintain adequate gross margin.
Our new products and platform offerings are early in their life cycles and subject to uncertain market demand. If our customers are unwilling to adopt our platforms, install our
new products or deploy our new services, or we are unable to achieve market acceptance of our new products and platforms, our business and financial results will be harmed.
Our new products and platform offerings are early in their life cycles and subject to uncertain market demand. They also may face obstacles in development, manufacturing, deployment and competitive response. Adoption of our new products, such as our smart home and business systems, is dependent on the success of our customers in investing, deploying and selling broader services—including ancillary services—to their subscribers, and our ability to differentiate our products from competing or substitutive product and service offerings. Our products support a variety of advanced broadband services, such as high-speed Internet, managed Wi-Fi, connected home, IPTV, mobile broadband, high-definition video and online gaming. If we are unable to ramp sales of our
new products, or if subscriber demand for our services does not grow as expected or declines, or our customers are unable or unwilling to invest in our platforms to deploy and market these services, particularly in light of the COVID-19 pandemic, demand for our products may decrease or fail to grow at rates we anticipate.
If we fail to manage our supply chain effectively, or if the federal government increases the imposition of tariffs to goods imported from countries where we do business, our ability to conduct our business will be materially impaired, which would adversely impact our gross margins and results of operations.
Up until 2018, substantially all of our products were manufactured in China. In the first half of 2019, we completed activities to realign our supply chain operations to move substantially all of our product manufacturing to locations outside of China. The transition
of global supply chain operations is complex, requires significant resources and unanticipated costs, involves significant third-party dependencies and carries numerous risks of disruptions to the manufacture and supply of our products, including exacerbation of the risks associated with our reliance upon third-party manufacturing and supply partners. In particular, in the first quarter of 2019, we experienced product shortages due to production delays associated with the transition of our global supply chain operations that impaired our ability to fulfill customer orders and resulted in revenue below our plan. The manufacture of our products requires components and materials sourced from suppliers in China, including optical-electronic components and materials manufactured in China. We continue to face increasing competition for components and resources from third-party manufacturing and supply partners as more companies seek to transition manufacturing operations out
of China due to the ongoing uncertainty of the escalating tariff wars. We may experience further disruptions, product unavailability, delays or unanticipated costs associated with the supply of our products, particularly in light of the current COVID-19 pandemic, which would adversely affect the demand for our products and have a material adverse effect on our business, gross margins and results of operations if we are unable to manage our supply chain effectively, secure our desired rates for the manufacture and supply of our products with new supply chain partners or if the federal government increases the imposition of tariffs or other restrictions to goods imported from additional countries where we produce some of our products.
We depend on sole-source, single-source and limited-source suppliers for some key components. If we and our business partners are unable to source these components on a timely or cost-effective
basis, we will not be able to deliver our products to our customers.
We depend on sole-source, single-source and limited-source suppliers for some key components of our products. For example, certain of our application-specific integrated circuit processors and resistor networks are purchased from sole-source suppliers, including certain components sourced solely through suppliers located in China.
Any of the sole-source, single-source and limited-source suppliers upon whom we or our business partners rely could stop producing our components, be subject to tariffs, epidemics or other conditions that disrupt their operations, cease operations or enter into exclusive arrangements with our competitors. For example, we are encountering disruptions in our supply of certain components that are sourced from suppliers in China, Southeast Asia, Mexico and countries as a result of the COVID-19
pandemic, which have resulted in production delays for our products due to production disruptions and longer lead times for such components, and from continued uncertainty around trade and tariff policies between the U.S. and China. Disruptions of manufacturing activities in China and elsewhere, particularly if prolonged, may adversely affect our ability to obtain components and materials needed to manufacture our products at acceptable prices or at all, which would in turn harm our
business and results of operations.
We may also experience shortages or delay of critical components as a result of growing demand in the industry or other sectors. For example, growth in electronic and IoT devices, wireless products, automotive electronics and artificial intelligence all drive increased demand for certain components, such as chipsets and memory products, which may result in lower availability and increased prices for such components. The cost of components may also be impacted by regulatory requirements.
In addition, purchase volumes of such components may be too low for Calix to be considered a priority customer by these suppliers, and we may not be able to negotiate commercially reasonable terms for our business needs. As a result, these suppliers could stop selling to us and our business partners at commercially reasonable prices, or at all. Any such interruption or delay may force us and our business partners to seek similar components from
alternative sources, which may not be available, or result in higher than anticipated prices for such components. Switching suppliers could also require that we redesign our products to accommodate new components and could require us to re-qualify our products with our customers, which would be costly and time consuming. Any interruption in the supply of sole-source, single-source or limited-source components for our products would adversely affect our ability to meet scheduled product deliveries to our customers, could result in lost revenue or higher expenses and would harm our business.
We do not have manufacturing capabilities, and therefore we depend solely upon a small number of third-party manufacturing partners to manufacture and supply our products. Consequently, our operations are highly dependent upon our third-party manufacturing partners and our business could be disrupted if we encounter problems with any of these
partners.
We do not have internal manufacturing capabilities and rely upon a small number of third-party design and manufacturing partners such as CMs and ODMs to supply our hardware products to meet customer needs. Our reliance on a small number of manufacturing partners makes us vulnerable to possible supply and capacity constraints and reduced direct control over component availability, delivery schedules, quality, manufacturing yields and costs. Our business operations and ability to supply our products are highly dependent upon our manufacturing partners, and if these manufacturing disruptions and constraints are prolonged, or if these manufacturing partners do not have adequate capabilities or business continuity plans to fulfill their obligations to us and our customers, our business could be disrupted.
In some cases, we do not have supply contracts
with our manufacturing partners and these manufacturers are not contractually obligated to supply products to us for any specific period, in any specific quantity or at any certain price. In addition, we are dependent upon our manufacturing partners’ quality systems and controls and the adherence of such systems and controls to applicable standards. If our manufacturing partners fail to maintain levels of quality manufacture suitable for us or our customers, we may incur higher costs and our relationships with our customers may be harmed.
The revenue that our manufacturing partners generate from our orders represent a relatively small percentage of their overall revenue. As a result, fulfilling our orders may not be considered a priority if such manufacturers are constrained in their ability to fulfill all of their customer obligations in a timely manner. In addition, a substantial part of our manufacturing is done in our manufacturers’
facilities that are located outside of the United States. We believe that the location of these facilities outside of the United States increases supply risk, including the risk of supply interruptions or reductions in manufacturing quality or controls. Moreover, regulatory changes or government actions relating to export or import regulations, economic sanctions or related legislation, or the possibility of such changes or actions, may create uncertainty or result in changes to or disruption in our operations with our manufacturers.
If any of our manufacturing partners were unable or unwilling to continue manufacturing our products in required volumes and at high quality levels, we would have to identify, qualify and select acceptable alternative manufacturers which could disrupt our ability to maintain continuous supply of product to meet customer requirements. An alternative manufacturer may not be available to us when needed
or may not be in a position to satisfy our production requirements at commercially reasonable prices and quality. Any significant interruption in manufacturing, including labor shortages or competition for components, would require us to reduce our supply of products to our customers, which in turn would reduce our revenue and harm our relationships with our customers.
We utilize domestic and international third-party vendors to assist in the design, development and manufacture of certain of our products, and to provide logistics services in the distribution of our products. If these vendors fail to provide these services, we could incur additional costs and delays or lose revenue.
From time to time we enter into agreements for the design, development and/or manufacture of certain of our products in order to enable us to offer products on an accelerated basis. We also rely upon limited
third-party vendors for logistics services to distribute our products. If any of these third-party vendors stop providing their services, for any reason, we would have to obtain similar services from alternative sources, which may not be available on commercially reasonable terms, if at all. We also have limited control over disruptions that may occur at the facilities of these third-party partners, such as supply interruptions, labor shortages, strikes, design and manufacturing failures, quality control issues, systems failures or even facility
closures
arising from the COVID-19 pandemic that may interrupt transportation and logistics services. In addition, switching development firms or manufacturers could require us to extend our development timeline and/or re-qualify our products with our customers, which would also be costly and time-consuming.
Any interruption in the development, supply or distribution of our products would adversely affect our ability to meet scheduled product deliveries to our customers, or exacerbate delays in customer order fulfillment that have already resulted from recent product unavailability related to the supply chain transition efforts described above, and could result in lost revenue or higher costs, which would negatively impact our margins and operating results and harm our business.
If we fail to forecast our manufacturing requirements accurately or fail to properly manage our inventory with our
third-party manufacturers, we could incur additional costs, experience manufacturing delays and lose revenue.
We bear inventory risk under our third-party manufacturing arrangements. Lead times for the materials and components that we order through our manufacturers vary significantly and depend on numerous factors, including the specific supplier and market demand for a component at a given time. Lead times for certain key materials and components incorporated into our products are currently lengthy and further exacerbated by the COVID-19 pandemic, requiring our manufacturers to order materials and components several months in advance of manufacture, which impacts the lead time for our products.
If we overestimate our production requirements, our manufacturers may purchase excess components and build excess inventory, and we could be required to pay for these excess parts or products
and their storage costs. We have in the past had to reimburse our primary CM for certain inventory purchases that have been rendered excess or obsolete. Examples of when inventory may be rendered excess or obsolete include manufacturing and engineering change orders resulting from design changes or in cases where inventory levels greatly exceed projected demand. If we incur payments to our manufacturers associated with excess or obsolete inventory, this may have an adverse effect on our gross margins, financial condition and results of operations.
We have experienced unanticipated increases in demand from customers, including from higher consumer demand for internet services due to COVID-19, which in turn has resulted in delayed shipments and variable shipping patterns. If we underestimate our product requirements, our manufacturers may have inadequate component inventory, which could interrupt manufacturing of our products,
increase our cost of product revenue associated with expedite fees and air freight and/or result in delays or cancellation of sales. If we are unable to deliver products in a timely fashion to our customers, we may lose customer goodwill or our customers may choose to purchase from other vendors, all of which may have a material negative impact on our revenue and operating results.
Furthermore, while we have largely transitioned our global supply chain operations to mitigate the impact of U.S. tariffs imposed on goods imported from China, we have experienced and may continue to experience production interruptions from our manufacturers, particularly in light of the current COVID-19 pandemic.
Our business is dependent on the capital spending patterns of CSPs, and any decrease or delay in capital spending by CSPs in response to economic conditions, seasonality, uncertainties associated
with the implementation of regulatory reform or otherwise would reduce our revenue and harm our business.
Demand for our products depends on the magnitude and timing of capital spending by CSPs as they construct, expand, upgrade and maintain their access networks, as well as CSPs’ adoption of our platforms and cloud-based services. Current disruptions to the global economy due to the COVID-19 pandemic and any future economic downturns or economic uncertainty may cause a slowdown in telecommunications industry spending or adoption of new technologies or services, including in the specific geographies and markets in which we operate. In response to reduced consumer spending, challenging capital markets or declining liquidity trends, capital spending for network infrastructure projects of CSPs could be delayed or canceled. In addition, capital spending is cyclical in our industry, sporadic among individual CSPs and can change
on short notice. As a result, we may not have visibility into changes in spending behavior until nearly the end of a given quarter.
CSP spending on network construction, maintenance, expansion and upgrades is also affected by reductions in their budgets, delays in their purchasing cycles, access to external capital (such as government grants and loan programs or the capital markets), limited windows of availability to government funding (such as limitations in funding under the CARES Act) and seasonality and delays in capital allocation decisions. For example, our CSP customers tend to spend less in the first quarter as they are still finalizing their annual budgets and in certain regions customers are also challenged by winter weather conditions that inhibit outside fiber deployment, resulting in weaker demand for our products in the first quarter of our fiscal year. Also, softness in demand across any of our customer markets,
including due to macro-economic conditions beyond our control or uncertainties associated with the implementation of regulatory reform, has in the past and could in the future lead to unexpected slowdown in capital expenditures by service providers.
Many factors affecting our results of operations are beyond our control, particularly in the case of large CSP orders and network infrastructure deployments involving multiple vendors and technologies where the achievement of certain thresholds for
acceptance
is subject to the readiness and performance of the CSP or other providers and changes in CSP requirements or installation plans. Further, CSPs may not pursue investment for our new platforms or infrastructure upgrades that require our access systems and software. Infrastructure improvements may be delayed or prevented by a variety of factors including cost, regulatory obstacles (including uncertainties associated with the implementation of regulatory reforms), mergers, lack of consumer demand for advanced communications services and alternative approaches to service delivery. Reductions in capital expenditures by CSPs, particularly CSPs that are significant customers, may have a material negative impact on our revenue and results of operations and slow our rate of revenue growth. As a consequence, our results for a particular period may be difficult to predict, and our prior results are not necessarily indicative of results in future periods.
Our
markets are rapidly changing, which makes it difficult to predict our future revenue and plan our expenses appropriately.
We compete in markets characterized by rapid technological change, changing needs of CSPs, evolving industry standards and frequent introductions of new products and services. We invest significant amounts to pursue innovative technologies that we believe will be adopted by CSPs. For example, we have invested and continue to invest resources and funds in our cloud and software platforms. In addition, on an ongoing basis we expect to reposition our product and service offerings and introduce new products and services as we encounter rapidly changing CSP requirements and increasing competitive pressures. If we cannot increase sales of our new products and services, keep pace with rapid technological developments to meet our customers’ needs and compete with evolving industry standards or if the technologies
we choose to invest in fail to meet customer needs or are not adopted by customers in the timeframes that we expect, it would be difficult to forecast our future revenue and plan our operating expenses.
Government-sponsored programs and U.S. federal government shutdowns could impact the timing and buying patterns of CSPs, which may cause fluctuations in our operating results.
We sell to CSPs, which include U.S.-based IOCs, which have revenue that is particularly dependent upon interstate and intrastate access charges and federal and state subsidies. The FCC and some states may consider changes to such payments and subsidies, and these changes could reduce IOC revenue. Furthermore, many IOCs use or expect to use government-supported loan programs or grants, such as Rural Utility Service loans and grants, to finance capital spending. These government-supported loan programs and grants
generally include conditions such as deployment criteria, domestic preference provisions and other requirements that apply to the project and selected equipment as conditions for funding. Changes to the terms or administration of these programs, including uncertainty from government and administrative change, potential funding limitations that impact our ability to meet program requirements or funding delays due to U.S. federal government shutdowns could reduce the ability of IOCs to access capital or secure funding under government-funded programs to purchase our products and services and thus reduce our revenue opportunities.
Many of our customers were awarded grants or loans under government stimulus programs or funds distributed, such as funds under the FCC’s CAF program or CARES Act, and have purchased and will continue to purchase products from us or other suppliers while such programs and funding are available. However,
customers may substantially curtail purchases as funding winds down or as planned purchases are completed.
In addition to the impact of U.S. federal government shutdowns, any changes in government regulations and subsidies could also cause our customers to change their purchasing decisions, which could have an adverse effect on our operating results and financial condition. For example, the federal government has announced the Rural Digital Opportunity Fund, or RDOF, as an extension to the CAF program with a funding process that differs from some earlier CAF programs.
We face intense competition that could reduce our revenue and adversely affect our financial results.
The market for our products is highly competitive, and we expect competition from both established and new companies to increase. Our competitors include companies such as
ADTRAN, Inc.; Amazon.com, Inc.; Casa Systems; Ciena Corporation; Cisco Systems Inc.; CommScope Inc.; DASAN Zhone Solutions, Inc.; Huawei Technologies Co. Ltd.; Juniper Networks, Inc.; Nokia Corporation; Plume Design, Inc. and ZTE Corporation, among others.
Our ability to compete successfully depends on a number of factors, including:
•the successful development of new products;
•our ability to anticipate CSP and market requirements and changes in technology and industry standards;
•our ability to differentiate our products from our competitors’ offerings based on performance, cost-effectiveness or other factors;
•our ability to meet increased customer demand
for services and support for their network requirements;
•our ability to gain customer acceptance of our products; and
The broadband access equipment market has undergone and continues to undergo consolidation, as participants have merged, made acquisitions or entered into partnerships or other strategic relationships with one another
to offer more comprehensive solutions than they individually had offered. Examples include Arris Group’s acquisition of Pace plc in January 2016; Nokia’s acquisition of Alcatel-Lucent in January 2016; the merger of DASAN Zhone Solutions with DASAN Network Solutions in September 2016; and CommScope’s acquisition of Arris in April 2019. We expect this trend to continue as companies attempt to strengthen or maintain their market positions in an evolving industry.
Many of our current or potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than we do and are better positioned to acquire and offer complementary products and services. Many of our competitors have broader product lines and can offer bundled solutions, which may appeal to certain customers. Our competitors may also invest additional
resources in developing more compelling product offerings. Potential customers may also prefer to purchase from their existing suppliers rather than a new supplier, regardless of product performance or features, because the products that we and our competitors offer require a substantial investment of time and funds to qualify and install. Moreover, the recent demand on network capacity as a result of shelter-in-place restrictions and shift towards remote workforces may attract new market entrants with competitive or substitutive products, which may lead to increased sales cycles, cause pricing pressure and impact CSP adoption of our platforms due to the availability of broader product offerings in the home networking market.
Some of our competitors may offer substantial discounts or rebates to win new customers or to retain existing customers. If we are forced to reduce prices in order to secure customers, we may be unable
to sustain gross margin at desired levels or achieve profitability. Competitive pressures could result in increased pricing pressure, reduced profit margin, increased sales and marketing expenses and failure to increase, or the loss of, market share, any of which could reduce our revenue and adversely affect our financial results.
Product development is costly, and if we fail to develop new products or enhancements that meet changing CSP requirements, we could experience lower sales.
Our industry is characterized by rapid technological advances, frequent new product introductions, evolving industry standards and unanticipated changes in subscriber requirements. Our future success will depend significantly on our ability to anticipate and adapt to such changes, and to offer, on a timely and cost-effective basis, products and features that meet changing CSP demands and industry standards.
We intend to continue to invest in developing new products and enhancing the functionality of our platforms, including to reach a broader set of customers. Developing our products is expensive and complex and involves uncertainties, including pricing risks from sourcing sufficient quantities of custom components from limited suppliers on terms which may not be commercially acceptable for us. We may not have sufficient resources to successfully manage lengthy product development cycles. Our research and development expenses were $62.0 million, or 17% of our revenue, for the first nine months of 2020, $81.2 million, or 19% of total revenue, in 2019, $90.0 million, or 20% of total revenue, in 2018 and $127.5 million, or 25% of total revenue, in 2017. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts, including increased reliance on third-party partners to maintain our competitive position. As we continue
to invest in third-party partners to develop additional features to our product and service platforms, we may experience increased challenges in design, integration and support of such third-party features in our product and service offerings. These investments may take several years to generate positive returns, if ever. Furthermore, certain of our engineering services arrangements impose future payment obligations, in the form of minimum revenue-share payments on the sale of the developed products, that are set based on our expectations of future customer demand associated with the developed products, and require us to make minimum payments whether or not we achieve the desired customer demand. If our forecasts for the developed products fall short of expectations, we may have an asset impairment related to said products, which could adversely affect our financial results. In addition, we may experience design, manufacturing, software development quality, support,
marketing and other difficulties that could delay or prevent the development, introduction or marketing of new products and enhancements. If we fail to meet our development targets, demand for our products will decline.
In addition, the introduction of new or enhanced products also requires that we manage the transition from older products to these new or enhanced products in order to minimize disruption in customer ordering patterns, fulfill ongoing customer commitments and ensure that adequate supplies of new products are available for delivery to meet anticipated customer demand. If we fail to maintain compatibility with other software or equipment found in our customers’ existing and planned networks, or if our products cannot be effectively deployed in our customer networks to provide desired services, we may face substantially reduced demand for our products, which would reduce our revenue opportunities and market share.
Moreover, as customers complete infrastructure deployments, they may require greater levels of service and support than we have provided in the past. We may not be able to provide products, services and support to compete effectively for these market opportunities. If we are unable to anticipate and develop new products or enhancements to our existing products on a timely and cost-effective
basis, our products may become technologically obsolete more rapidly than anticipated over time, resulting in lower sales
which would harm our business.
Our sales cycles can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, our sales are difficult to predict and may vary substantially from quarter to quarter, which may cause our operating results to fluctuate significantly.
The timing of our revenue is difficult to predict. Our sales efforts often involve educating CSPs about the use and benefits of our products, platforms and services. CSPs typically undertake a significant evaluation process, which frequently involves not only our products, platforms and services, but also those of our competitors and results in a lengthy sales cycle. Sales cycles for larger customers are relatively longer and require considerably more time and expense. We spend substantial time, effort and money in our sales efforts without any assurance that our efforts will produce
sales. In addition, product purchases are frequently subject to budget constraints, multiple approvals and unplanned administrative, processing and other delays. The timing of revenue related to sales of products and services that have installation requirements may be difficult to predict due to interdependencies that may be beyond our control, such as CSP testing and turn-up protocols or other vendors’ products, services or installations of equipment upon which our products and services rely. Such delays may result in fluctuations in our quarterly revenue. If sales expected from a specific customer for a particular quarter are not realized in that quarter or at all, we may not achieve our revenue forecasts and our financial results would be adversely affected.
Our focus on CSPs with relatively small networks limits our revenue from sales to any one customer and makes our future operating results difficult to predict.
A
large portion of our sales efforts continue to be focused on CSPs with relatively small networks, cable MSOs and selected international CSPs. A portion of our current and potential customers generally operate small networks with limited capital expenditure budgets. Accordingly, we believe the potential revenue from the sale of our products to any one of these customers is limited. As a result, we must identify and sell products to new customers each quarter to continue to increase our sales. In addition, the spending patterns of many of these customers are generally less formal and often characterized by small and sporadic purchases, which may make our future operating results difficult to predict.
We do not have long-term, committed-volume purchase contracts with our customers, and therefore have no guarantee of future revenue from
any customer.
We typically have not entered into long-term, committed-volume purchase contracts with our customers, including our key customers which account for a material portion of our revenue. As a result, any of our customers may cease to purchase our products at any time. In addition, our customers may attempt to renegotiate terms of sale, including price and quantity. If any of our key customers stop purchasing our access platforms, systems and software for any reason, our business and results of operations would be harmed.
Our efforts to increase our sales to CSPs globally, including cable MSOs, may be unsuccessful.
Our sales and marketing efforts have been focused on CSPs in North America. Part of our long-term strategy is to increase sales
to CSPs globally, including cable MSOs. We have devoted and continue to devote substantial technical, marketing and sales resources to these larger CSPs, who have lengthy equipment qualification and sales cycles, without any assurance of generating sales. In particular, sales to these larger CSPs may require us to upgrade our products to meet more stringent performance criteria and interoperability requirements, develop new customer-specific features or adapt our products to meet international standards. Implementing these requirements and features is costly and could negatively impact our operating results, financial condition and cash flows. Moreover, if we are unable to obtain materials at favorable costs, our margins and profitability could be adversely impacted. For example, we work with large CSPs in testing and laboratory trials for our NG-PON2 technology and cable MSO applications. We have invested and expect to continue to invest considerable time, effort and
expenditures, including investment in product research and development, related to these opportunities without any assurance that our efforts will produce orders or revenue. If we are unable to successfully increase our sales to larger CSPs, our operating results, financial condition, cash flows and long-term growth may be negatively impacted.
Increasing data privacy regulations could impact our business and expose us to increased liability.
Government and regulatory authorities
in the United States and around the world have implemented and are continuing to implement broader and more stringent laws and regulations concerning data protection. The interpretation and application of these data protection laws and regulations are often uncertain and in flux, and it is possible that they may be interpreted and applied in a manner that is inconsistent with our data practices. For example, the General Data Protection Regulation, or GDPR, adopted by the European Parliament became effective in May 2018 to harmonize data privacy laws across Europe. Among other requirements, the GDPR imposes specific duties and requirements upon companies that collect, process or control personal data of European Union residents. Although we currently do not have material operations or business in the European Union, the GDPR regulations could cause us to incur substantial costs in order to expand our business or deliver certain services in the European Union. Furthermore,
the GDPR imposes penalties for noncompliance of up to the greater of €20 million or 4% of a company’s worldwide revenue; accordingly, any non-compliance with the GDPR could result in a material adverse effect on our business, financial condition and results of operations. In addition, the United Kingdom’s exit from the European Union creates uncertainty with respect to whether the United Kingdom will enact data protection laws or regulations designed to be consistent with the GDPR. In January 2020, the California Consumer Privacy Act became effective in California and provides new data privacy rights for consumers and new operational requirements for companies. More recently, in July 2020 the Court of Justice of the European Union invalidated the EU-U.S. Privacy Shield as a valid mechanism for the transfer of personal data from the European Union to the United States, which the European Commission had previously adopted in July 2016. Complying with emerging and changing
laws could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.
Concerns about or regulatory actions involving our practices with regard to the collection, storage, processing, use or disclosure of customer information or other privacy related matters, even if unfounded, could damage our reputation and adversely affect operating results. While we strive to provide transparency about our collection, use, disclosure and security over any personal data and to comply with all applicable data protection laws and regulations, the failure or perceived failure to comply may result in inquiries and other proceedings or actions against us by government entities or others, or could cause us to lose customers, which could potentially have an adverse effect on our business.
Security breaches and data loss may expose us to liability,
harm our reputation and adversely affect our business.
As part of our business operations, we collect, store, process, use and/or disclose sensitive data relating to our business, including in connection with the provision of our cloud services and in our information systems and data centers (including third-party data centers). In some cases, we use third-party service providers for services that may include the collection, handling, processing and/or storage of personal data on our behalf. In addition, we host our customers’ subscriber data in third-party data centers in the course of providing services and solutions to our customers through our cloud and smart home and business subscriptions. While we and our service providers apply multiple layers of security to control access to data and use encryption and authentication technologies to secure data from unauthorized access, use, alteration and disclosure, these security
measures may be compromised. Malicious hackers may attempt to gain access to our network or data centers; steal proprietary information related to our business, products, employees, and customers; or interrupt our systems and services or those of our customers or others. In particular, there has been a spike in cybersecurity attacks as shelter in place orders and work from home requirements have led businesses to increase reliance on virtual environments and communications systems, which have been subjected to increasing third-party vulnerabilities and security risks. Although we monitor our networks and continue to enhance our security protections, particularly as we transition to a work-from-anywhere workforce, hackers are increasingly more sophisticated and aggressive, and our efforts may be inadequate to prevent all incidents of data breach or theft. The theft, loss, or misuse of personal data collected, stored or processed by us or our service providers to run our
business could result in significantly increased security and remediation costs or costs related to defending legal claims. If we or our service providers do not allocate and effectively implement and manage the resources necessary to maintain adequate security measures, we could be subjected to data loss, unauthorized data disclosure or a compromise or breach of our systems or those of our third-party data centers. As we transition to a work-from-anywhere workforce and continue to grow our cloud and software portfolio, risks arising from or related to security breaches or data loss are likely to increase. Any loss of data or compromise of our systems or data centers could result in a loss of confidence in the security of our offerings, damage our reputation, cause the loss of current or potential customers or partners, lead to legal and regulatory liability and adversely affect our business, financial condition, operating results and cash flows.
If
we experience protracted disruption in functionality or processing capabilities of our newly migrated enterprise resource planning system, or ERP system, we may not be able to effectively transact our business or produce our financial statements on a timely basis and without incurrence of additional costs, which would adversely affect our business, results of operations and cash flows.
In January 2020, we migrated our Oracle ERP system to Oracle’s cloud platform. This migration involved significant complexity, requiring us to move and reconfigure all of our current system processes, transactions, data and controls to a new
Oracle platform. We may experience difficulties and delays in transacting our business due to system challenges, limitations in functionality, inadequate change management or process deficiencies in the production use of the ERP system. With the migration to Oracle’s cloud platform, we are highly dependent upon Oracle to host, manage and maintain our ERP system and any disruptions to their business or processes, or delays in their ability to provide services to us, may in turn disrupt our business operations or increase costs. Furthermore, we will receive quarterly system updates and enhancements on the cloud platform according to Oracle’s release timeline and change management processes, which if not managed properly may disrupt our business operations and delay our ability to process transactions and produce reports necessary to conduct our business. We are highly dependent upon our ERP
system for critical business functions, including order processing and management, supply chain and procurement operations, financial planning, accounting and reporting; accordingly, protracted disruption in functionality or processing capabilities of the ERP system could materially impair our ability to conduct our business, process transactions timely or to produce accurate financial statements on a timely basis. If our ability to conduct our business, process transactions or to produce accurate financial statements on a timely basis remains impaired, our business, results of operations and cash flows would be adversely affected.
We are exposed to the credit risks of our customers; if we have inadequately assessed their creditworthiness, we may have more exposure to accounts receivable risk than we anticipate. Failure to collect our accounts receivable in amounts that we anticipate could adversely affect our operating results
and financial condition.
In the course of our sales to customers, we may encounter difficulty collecting accounts receivable and could be exposed to risks associated with uncollectible accounts receivable. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability or unwillingness of our customers to make required payments. However, these allowances are based on our judgment and a variety of factors and assumptions.
We perform credit evaluations of our customers’ financial condition. However, our evaluation of the creditworthiness of customers may not be accurate if they do not provide us with timely and accurate financial information, or if their situations change after we evaluate their credit. Furthermore, some of our international customers operate in countries with developing economies, which from time to time, experience financial crises
and become unable to make payments in U.S. dollars. The COVID-19 pandemic has also presented financial challenges to numerous businesses, which may result in liquidity issues leading to heightened difficulties with collections. While we attempt to monitor these situations carefully, adjust our allowances for doubtful accounts as appropriate and take measures to collect accounts receivable balances, we have written down accounts receivable and written off doubtful accounts in prior periods and may be unable to avoid additional write-downs or write-offs of doubtful accounts in the future. Such write-downs or write-offs could negatively affect our operating results for the period in which they occur and could harm our cash flow or our financial condition.
Our products must interoperate with many software applications and hardware products found in our customers’ networks. If we are unable to ensure that our products interoperate
properly, our business will be harmed.
Our products must interoperate with our customers’ existing and planned networks, which often have varied and complex specifications, utilize multiple protocol standards, include software applications and customizations and products from multiple vendors and contain multiple generations of products that have been added over time. As a result, we must continually ensure that our products interoperate properly with these existing and planned networks. To meet these requirements, we must undertake development efforts, including test protocols, that require substantial capital investment and employee resources. We may not accomplish these development goals quickly or cost-effectively, if at all. If we fail to maintain compatibility with other software or equipment found in our customers’ existing and planned networks, we may face substantially reduced demand for our products, which would reduce
our revenue opportunities and market share.
We have entered into interoperability arrangements with a number of equipment and software vendors for the use or integration of their technology with our products. These arrangements give us access to and enable interoperability with various products that we do not otherwise offer. If these relationships fail, we may have to devote substantially more resources to the development of alternative products and processes and our efforts may not be as effective as the combined solutions under our current arrangements. In some cases, these other vendors are either companies that we compete with directly or companies that have extensive relationships with our existing and potential customers and may have influence over the purchasing decisions of those customers. Some of our competitors have stronger relationships with some of our existing and other potential interoperability partners, and
as a result, our ability to have successful interoperability arrangements with these companies may be harmed. Our failure to establish or maintain key relationships with third-party equipment and software vendors may harm our ability to successfully sell and market our products.
The quality of our support and services offerings is important to our customers, and if we fail to continue to offer high quality support and services, we could lose customers, which would harm our business.
Once our products are deployed within our customers’ networks, they depend on our support organization to resolve any issues relating to those products. A high level of support is critical for the successful marketing and sale of our products. Furthermore,
our services to customers have increasingly broadened to include network optimization, integration and development services and remote monitoring to help our customers deploy our products within their networks. If we do not effectively assist our customers in deploying our products, succeed in helping them quickly resolve post-deployment issues or provide effective ongoing support, it could adversely affect our ability to sell our products to existing customers and harm our reputation with potential new customers. As a result, our failure to maintain high quality support and services could result in the loss of customers, which would harm our business.
An increase in revenue mix towards services may adversely affect our gross margin.
In response to greater customer demand for certain services for our
products, we continue to invest and grow our services business while de-prioritizing lower gross margin deployment services. Our services include product warranty and support services, customer success services, customer enablement services, managed services to help our customers manage and optimize their networks, education and certification services and, to a lesser extent, deployment services. Services typically have a lower gross margin than our products, particularly as we invest in growing our service organization. Certain services, such as deployment services, may tend to involve higher costs and increased risk of cost overruns, which can negatively impact our gross margin. Moreover, if we are unable to achieve desired efficiencies and scale as we ramp and develop our services business, we may incur higher than expected costs, which can further adversely impact our gross margin.
Our products are highly technical and
may contain undetected hardware defects or software bugs, which could harm our reputation and adversely affect our business.
Our products, including our smart home and business systems and our cloud and software platforms, are highly technical and, when deployed, are critical to the operation of many networks. Our products have contained and may contain undetected defects, bugs or security vulnerabilities, which risks may be exacerbated as we continue to expand our cloud and software portfolio. Some defects in our products may only be discovered after a product has been installed and used by customers and may in some cases only be detected under certain circumstances or after extended use. Any errors, bugs, defects or security vulnerabilities discovered in our products after commercial release could result in loss of revenue or delay in revenue recognition, loss of customers and increased service and warranty and retrofit costs,
any of which could adversely affect our business, operating results and financial condition. In addition, we could face claims for security and data breach, product liability, tort or breach of warranty. Our contracts with customers contain provisions relating to warranty disclaimers and liability limitations, which may not be upheld. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention and adversely affect the market’s perception of us and our products. In addition, if our business liability insurance coverage proves inadequate or future coverage is unavailable on acceptable terms or at all, our business, operating results and financial condition could be adversely impacted.
Our estimates regarding future warranty or product obligations may change due to product failure rates, shipment volumes,
field service obligations and rework costs incurred in correcting product failures. If our estimates change, the liability for warranty or product obligations may be increased, impacting future cost of revenue.
Our products are highly complex, and our product development, manufacturing and integration testing may not be adequate to detect all defects, errors, failures and quality issues. Quality or performance problems for products covered under warranty could adversely impact our reputation and negatively affect our operating results and financial position. The development and production of new products with high complexity often involves problems with software, components and manufacturing methods. If significant warranty or other product obligations arise due to reliability or quality issues arising from defects in software, faulty components or improper manufacturing methods, our operating results and financial position
could be negatively impacted by:
•cost associated with fixing software or hardware defects;
•high service and warranty expenses;
•high inventory obsolescence expense;
•delays in collecting accounts receivable;
•payment of liquidated damages for performance failures; and
•declining sales to existing customers.
As the market for our products evolves, changing customer requirements may adversely affect the valuation of our inventory.
Customer demand for our products can change
rapidly in response to market and technology developments. Demand can be affected not only by customer- or market-specific issues, but also by broader economic and/or geopolitical factors. We may, from time to time, adjust inventory valuations downward or end of life certain of our products in response to our assessment of
our business strategy as well as consideration of demand from our customers for specific products or product lines. The related excess inventory charges may have an adverse effect on our gross
margin, financial condition and results of operations.
If we fail to comply with evolving industry standards, sales of our existing and future products would be adversely affected.
The markets for our products are characterized by a significant number of standards, both domestic and international, which are evolving as new technologies are developed and deployed. As we expand into adjacent markets and increase our international footprint, we are likely to encounter additional standards. Our products must comply with these standards in order to be widely marketable. In some cases, we are compelled to obtain certifications or authorizations before our products can be introduced, marketed or sold in new markets or to customers that we have not historically served. For example, our ability to maintain Operations System Modification for Intelligent Network Elements certification for our
products will affect our ongoing ability to continue to sell our products to large CSPs.
In addition, our ability to expand our international operations and create international market demand for our products may be limited by regulations or standards adopted by other countries that may require us to redesign our existing products or develop new products suitable for sale in those countries. Although we believe our products are currently in compliance with domestic and international standards and regulations in countries in which we currently sell, we may not be able to design our products to comply with evolving standards and regulations in the future. This ongoing evolution of standards and differing foreign regulations may directly affect our ability to market or sell our products, particularly with regards to our cloud and software platforms in international markets. Further, the cost of complying with the evolving standards
and regulations or the failure to obtain timely domestic or foreign regulatory approvals or certification could prevent us from selling our products where these standards or regulations apply, which would result in lower revenue and lost market share.
We may be unable to successfully expand our international operations. In addition, we may be subject to a variety of international risks that could harm our business.
We currently generate most of our sales from customers in North America and have more limited experience marketing, selling and supporting our products and services outside North America or managing the administrative aspects of a worldwide operation. Our ability to expand our international operations is dependent on our ability to create or maintain international market demand for our products. In addition, as we expand our operations internationally, our support organization
will face additional challenges including those associated with delivering support, training and documentation in languages other than English. If we invest substantial time and resources to expand our international operations and are unable to do so successfully and in a timely manner, our business, financial condition and results of operations may suffer.
In the course of expanding our international operations and operating overseas, we will be subject to a variety of risks, including:
•differing regulatory requirements, including tax laws, trade laws, data privacy laws, labor regulations, tariffs, export quotas, custom duties or other trade restrictions;
•liability or damage to our reputation resulting from corruption or unethical business practices in some countries;
•exposure
to effects of fluctuations in currency exchange rates if, over time, international customer contracts are increasingly denominated in local currencies;
•longer collection periods and difficulties in collecting accounts receivable;
•greater difficulty supporting and localizing our products;
•added costs of supporting cloud infrastructure outside of the United States;
•different or unique competitive pressures as a result of, among other things, the presence of local equipment suppliers;
•challenges inherent in efficiently managing an increased
number of employees over large geographic distances, including the need to implement appropriate systems, policies and compensation, benefits and compliance programs;
•limited or unfavorable intellectual property protection;
•risk of change in international political or economic conditions, terrorist attacks or acts of war; and
We
engage resellers to promote, sell, install and support our products to some customers in North America and internationally. Their failure to do so or our inability to recruit or retain appropriate resellers may reduce our sales and thus harm our business.
We engage some value-added resellers, or VARs, who provide sales and support services for our products. We compete with other telecommunications systems providers for our VARs’ business and many of our VARs are free to market competing products. Our use of VARs and other third-party support partners and the associated risks of doing so are likely to increase as we expand sales outside of North America. If a VAR promotes a competitor’s products to the detriment of our products or otherwise fails to market our products and services effectively, we could lose market share. In addition, the loss of a key VAR or the failure of VARs to provide adequate customer service could have
a negative effect on customer satisfaction and could cause harm to our business. If we do not properly recruit and train VARs to sell, install and service our products, our business, financial condition and results of operations may suffer.
We may have difficulty evolving and scaling our business and operations to meet customer and market demand, which could result in lower profitability or cause us to fail to execute on our business strategies.
In order to grow our business, we will need to continually evolve and scale our business and operations to meet customer and market demand. Evolving and scaling our business and operations places increased demands on our management as well as our financial and operational resources to effectively:
•manage organizational change;
•manage
a larger organization;
•accelerate and/or refocus research and development activities;
•expand our manufacturing, supply chain and distribution capacity;
•increase our sales and marketing efforts;
•broaden our customer-support and services capabilities;
•maintain or increase operational efficiencies;
•scale support operations in a cost-effective manner;
•implement appropriate operational and financial systems; and
•maintain effective
financial disclosure controls and procedures.
If we cannot evolve and scale our business and operations effectively, we may not be able to execute our business strategies in a cost-effective manner and our business, financial condition, profitability and results of operations could be adversely affected.
We may not be able to protect our intellectual property, which could impair our ability to compete effectively.
We depend on certain proprietary technology for our success and ability to compete. We rely on intellectual property laws as well as nondisclosure agreements, licensing arrangements and confidentiality provisions to establish and protect our proprietary rights. U.S. patent, copyright and trade secret laws afford us only limited protection, and the laws of some foreign countries do not protect proprietary rights to the same extent.
Our pending patent applications may not result in issued patents, and our issued patents may not be enforceable. Any infringement of our proprietary rights could result in significant litigation costs. Further, any failure by us to adequately protect our proprietary rights could result in our competitors offering similar products, resulting in the loss of our competitive advantage and decreased sales.
It may become more difficult to adequately protect our intellectual property as we expand our reliance on third parties for the design, development and/or manufacture of our products and as we transition to a work-from-anywhere workforce. While our contracts with such third parties contain provisions relating to intellectual property rights, indemnification and liability, they may not be adequately enforced. Our third-party providers may
also be subject to unauthorized third-party copying or use of our proprietary rights. In addition, as we transition to a work-from-anywhere workforce and implement different technologies for a distributed workforce, we may become subject to increased risks arising from or related to security breaches or data loss.
Despite our efforts to protect our proprietary rights, attempts may be made to copy or reverse engineer aspects of our products or to obtain and use information that we regard as proprietary. Accordingly, we may be unable to protect our proprietary rights against unauthorized third-party copying or use. Furthermore, policing the unauthorized use of our intellectual property is difficult and costly. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Litigation could result in
substantial costs, diversion of resources and harm to our business.
We could become subject to litigation regarding intellectual property rights and other disputes that could harm our business.
We may be subject to intellectual property infringement claims that are costly to defend and could limit our ability to use some technologies in the future. The risk of such claims could increase as we expand our product portfolio and increasingly rely on more technologies. Third
parties may assert patent, copyright, trademark or other intellectual property rights to technologies or rights that are important to our business. Increasingly, patent infringement claims are asserted by patent holding companies (commonly referred to as “patent trolls”) whose sole business is to purchase patents and other intellectual property assets in order to make claims of infringement for monetary gain. Since these patent holding companies have no relevant product revenue and do not use the technology, our own issued and pending patents may provide little or no deterrence to suit from these entities.
We have received in the past and expect that in the future we may receive communications from competitors, patent holding companies and other third parties alleging that we may be infringing their patents, trade secrets or other intellectual property rights; offering licenses to such intellectual property; threatening
litigation or requiring us to act as a third-party witness in litigation. In addition, we have agreed, and may in the future agree, to indemnify our customers for expenses or liabilities resulting from certain claimed infringements of patents, trademarks or copyrights of third parties. Such indemnification may require us to be financially responsible for claims made against our customers, including costs of litigation and damages awarded, which could negatively impact our results of operations. Any claims asserting that our products infringe the proprietary rights of third parties, with or without merit, could be time-consuming, result in costly litigation and divert the efforts of our engineering teams and management. These claims could also result in product shipment delays or require us to modify our products or enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available to us on acceptable terms, if at all.
Our
use of open source software could impose limitations on our ability to commercialize our products.
We incorporate open source software into our products. Although we closely monitor our use of open source software, the terms of many open source software licenses have not been interpreted by the courts, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to sell our products. In such event, we could be required to make our proprietary software generally available to third parties, including competitors, at no cost, to seek licenses from third parties in order to continue offering our products, to re-engineer our products or to discontinue the sale of our products in the event re-engineering cannot be accomplished on a timely basis or at all, any of which could adversely affect our revenue and operating expenses.
If
we are unable to obtain necessary third-party technology licenses, our ability to develop new products or product enhancements may be impaired.
We may from time to time be required to license technology from third parties to develop new products or product enhancements either directly or through a partner. These third-party licenses may be unavailable to us or our partners on commercially reasonable terms, if at all. The inability to obtain necessary third-party licenses may force us to accept substitute technology of lower quality or performance standards or at greater cost or may increase the time-to-market of our products or product enhancements, any of which could harm the competitiveness of our products and result in lost revenue.
Our ability to incur debt and the use of our funds could be limited by borrowing base restrictions and restrictive covenants in our loan and security
agreement for our revolving credit facility.
In January 2020, we entered into the BofA Loan Agreement, which provides for a revolving credit facility up to a principal amount of $35.0 million, with the availability of borrowings subject to certain conditions and requirements, including the maintenance of Availability (as defined in the BofA Loan Agreement) of at least $5.0 million. We are dependent on our existing cash, cash equivalents and borrowings available under the BofA Loan Agreement to provide adequate funds for ongoing operations, planned capital expenditures and working capital requirements for at least the next twelve months. If our financial position deteriorates, our borrowing capacity under the credit facility may be reduced, which would adversely impact our business and growth. In addition, the BofA Loan Agreement includes covenants that place certain restrictions on our ability to, among other things, borrow
secured debt or unsecured debt beyond a certain amount, create or suffer to exist any liens, sell or transfer any assets, make distributions, liquidate, dissolve, merge, amalgamate, combine or consolidate, or become a party to certain agreements restricting our ability to incur or repay debt, grant liens, make distributions or modify loan agreements, in each case subject to certain exceptions. Failure to maintain these covenants can limit the amount of borrowings that are available to us, increase the cost of borrowings under the facility, and/or require us to make immediate payments to reduce borrowings.
Given our current financial position and history of operating losses, it is possible that we may fail to meet the minimum levels required by the financial covenants, which would constitute an event of default under the BofA Loan Agreement. Events beyond our control could have a material adverse impact on our results of operations,
financial condition or liquidity, in which case we may not be able to meet our financial covenants. For example, prior to the BofA Loan Agreement, we were party to a
loan agreement with Silicon Valley Bank, or the SVB Loan Agreement, that provided us a revolving credit facility based on a customary accounts receivable borrowing base, subject to certain exceptions and conclusions. During the term of the SVB Loan Agreement, we were not able to meet the financial covenants in several of the quarters due to variability
in our results of operations and financial position and had to request waivers and amendments to the SVB Loan Agreement to avoid an event of default. The BofA Loan Agreement covenants may also affect our ability to obtain future financing and to pursue attractive business opportunities and our flexibility in planning for, and reacting to, changes in business conditions. These covenants could place us at a disadvantage compared to some of our competitors, who may have fewer restrictive covenants and may not be required to operate under these restrictions.
Our failure or the failure of our manufacturers to comply with environmental and other legal regulations could adversely impact our results of operations.
The manufacture, assembly and testing of our products may require the use of hazardous materials that are subject to environmental, health and safety regulations, or materials subject
to laws restricting the use of conflict minerals. Our failure or the failure of our third-party manufacturers to comply with any of these requirements could result in regulatory penalties, legal claims or disruption of production. In addition, our failure or the failure of our manufacturers to properly manage the use, transportation, emission, discharge, storage, recycling or disposal of hazardous materials could subject us to increased costs or liabilities. Existing and future environmental regulations and other legal requirements may restrict our use of certain materials to manufacture, assemble and test products. Any of these consequences could adversely impact our results of operations by increasing our expenses and/or requiring us to alter our manufacturing processes.
Regulatory and physical impacts of climate change and other natural events may affect our customers and our manufacturers, resulting in adverse effects on
our operating results.
As emissions of greenhouse gases continue to alter the composition of the atmosphere, affecting large-scale weather patterns and the global climate, any new regulation of greenhouse gas emissions may result in additional costs to our customers and our manufacturers. In addition, the physical impacts of climate change and other natural events, including changes in weather patterns, drought, rising ocean and temperature levels, earthquakes and tsunamis may impact our customers, suppliers and manufacturers, and our operations. These potential physical effects may adversely affect our revenue, costs, production and delivery schedules, and cause harm to our results of operations and financial condition.
We have in the past pursued, and may in the future continue to pursue, acquisitions which involve a number of risks and uncertainties. If we are unable to address
and resolve these risks and uncertainties successfully, such acquisitions could disrupt our business and result in higher costs than we anticipate.
We may in the future acquire businesses, products or technologies to expand our product offerings and capabilities, customer base and business. We have evaluated and expect to continue to evaluate a wide array of potential strategic transactions. We have limited experience making such acquisitions or integrating these businesses after such acquisitions. Any anticipated and unanticipated costs to us related to future transactions could exceed amounts that are covered by insurance and could have a material adverse impact on our financial condition and results of operations. In addition, the anticipated benefit of any acquisitions may never materialize or the process of integrating acquired businesses, products or technologies may create unforeseen operating difficulties and expenditures.
Some
of the areas where we have experienced and may in the future experience acquisition-related risks include:
•expenses and distractions, including diversion of management time related to litigation;
•expenses and distractions related to potential claims resulting from any possible future acquisitions, whether or not they are completed;
•retaining and integrating employees from acquired businesses;
•issuance of dilutive equity securities or incurrence of debt;
•integrating various accounting, management, information, human resource and other systems to permit effective management;
•incurring
possible write-offs, impairment charges, contingent liabilities, amortization expense of intangible assets or impairment of goodwill and intangible assets with finite useful lives;
•difficulties integrating and supporting acquired products or technologies;
•unexpected capital expenditure requirements;
•insufficient revenue to offset increased expenses associated with acquisitions; and
•opportunity costs associated with committing capital to such acquisitions.
If our goodwill becomes impaired, we may be required to record a significant charge to our results of operations. We review our goodwill for impairment annually or when events or changes in circumstances indicate the carrying value may not be recoverable, such as a sustained or significant decline in stock price and market capitalization. If the carrying value of goodwill was deemed to be impaired, an impairment loss equal to the amount by which the carrying amount exceeds the estimated fair value would be recognized. Any such impairment could materially and adversely affect our financial condition and results of operations.
Foreign acquisitions would involve risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, currency risks and the particular economic, political
and regulatory risks associated with specific countries. We may not be able to address these risks and uncertainties successfully, or at all, without incurring significant costs, delays or other operating problems.
Our inability to address or anticipate any of these risks and uncertainties could disrupt our business and could have a material impact on our financial condition and results of operations.
Our use of and reliance upon development resources in China may expose us to unanticipated costs or liabilities.
We operate a wholly foreign owned enterprise in Nanjing, China, where a dedicated team of engineers performs product development, quality assurance, cost reduction and other engineering work. Our reliance upon development resources in China may not enable us to achieve meaningful product cost reductions or greater resource efficiency.
Further, our development efforts and other operations in China involve significant risks, including:
•difficulty hiring and retaining appropriate engineering resources due to intense competition for such resources and resulting wage inflation;
•the knowledge transfer related to our technology and exposure to misappropriation of intellectual property or confidential information, including information that is proprietary to us, our customers and third parties;
•heightened exposure to changes in the economic, security, political and pandemic conditions that may arise in China;
•fluctuation in currency exchange rates and tax risks associated with international operations;
•development
efforts that do not meet our requirements because of differences associated with international operations, resulting in errors or delays; and
•uncertainty with respect to tariffs imposed by the federal government on products imported from China and future actions the federal government may take with respect to international trade agreements and U.S. tax provisions related to international commerce that could adversely affect our international operations.
Difficulties resulting from the factors above and other risks related to our operations in China could expose us to increased expense, impair our development efforts, harm our competitive position and damage our reputation. For example, the COVID-19 outbreak first reported in Wuhan, China in December 2019 impacted our research and development operations in Nanjing, and may continue to impact our operations,
including our ability to meet our desired development timelines. Government-imposed travel restrictions and closures of certain business operations in China in response to COVID-19 have disrupted and delayed the supply of component parts sourced from China and our supply chain and our suppliers’ operations in and outside of China, which may reoccur in the foreseeable future if the pandemic is not contained.
Our customers are subject to government regulation, and changes in current or future laws or regulations that negatively impact our customers could harm our business.
The FCC has jurisdiction over all of our U.S. customers. FCC regulatory policies that create disincentives for investment in access network infrastructure or impact the competitive environment in which our customers operate may harm our business. For example, future FCC regulation affecting providers of broadband
Internet access services could impede the penetration of our customers into certain markets or affect the prices they may charge in such markets. Similarly, changes to regulatory tariff requirements or other regulations relating to pricing or terms of carriage on communication networks could slow the development or expansion of network infrastructures. Consequently, such changes could adversely affect the sale of our products and services. Furthermore, many of our customers are subject to FCC rate regulation of interstate telecommunications services and are recipients of CAF capital incentive payments, which are intended to subsidize broadband and telecommunications services in areas that are expensive to serve. Changes to these programs, rules and regulations that could affect the ability of IOCs to access capital, and which could in turn reduce our revenue opportunities, remain possible.
In addition, many of our customers
are subject to state regulation of intrastate telecommunications services, including rates for such services, and may also receive funding from state universal service funds. Changes in rate regulations or universal service funding rules, either at the U.S. federal or state level, could adversely affect our customers’ revenue and capital spending plans.
Moreover, various international regulatory bodies have jurisdiction over certain of our non-U.S. customers. Changes in these domestic and international standards,
laws and regulations, or judgments in favor of plaintiffs in lawsuits against CSPs based on changed standards, laws and regulations could adversely affect the development of broadband networks and services. This, in turn, could directly or indirectly adversely impact the communications industry in which our customers operate.
Many jurisdictions, including international governments and regulators, are also evaluating, implementing and enforcing regulations relating to cyber security, privacy and data protection, which can affect the market and requirements for networking and communications equipment. To the extent our customers are adversely affected by laws or regulations regarding their business, products or service offerings, our business, financial condition and results of operations would suffer.
We are subject to governmental export and import controls that could subject us to
liability or impair our ability to compete in additional international markets.
Our products are subject to U.S. export and trade controls and restrictions. International shipments of certain of our products may require export licenses or are subject to additional requirements for export. In addition, the import laws of other countries may limit our ability to distribute our products, or our customers’ ability to buy and use our products, in those countries. Changes in our products or changes in export and import regulations or duties may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products or, in some cases, prevent the export or import of our products to certain countries altogether. Any change in export or import regulations, duties or related legislation, shift in approach to the enforcement or scope of existing regulations,
or change in the countries, persons or technologies targeted by such regulations, could negatively impact our ability to sell, profitably or at all, our products to existing or potential international customers.
If we lose any of our key personnel, or are unable to attract, train and retain qualified personnel, our ability to manage our business and continue our growth would be negatively impacted.
Our success depends, in large part, on the continued contributions of our key personnel, many of whom are highly skilled and would be difficult to replace. None of our key personnel are bound by a written employment contract to remain with us for a specified period. In addition, we do not currently maintain key person life insurance covering our key personnel. If we lose the services of any key personnel,
our business, financial condition and results of operations may suffer.
Competition for skilled personnel is intense. We cannot be certain that we will be successful in attracting and retaining qualified personnel, or that newly hired personnel will function effectively, both individually and as a group. If we are unable to effectively recruit, hire and utilize new employees to align with our company objectives, execution of our business strategy and our ability to react to changing market conditions may be impeded, and our business, financial condition and results of operations may suffer.
Volatility or lack of performance in our stock price may also affect our ability to attract and retain our key personnel. Our executive officers and employees hold a substantial number of shares of our common
stock and vested stock options. Employees may be more likely to leave us if the shares they own or the shares underlying their equity awards decline in value, or if the exercise prices of stock options that they hold are significantly above the market price of our common stock. If we are unable to retain our employees, our business, operating results and financial condition will be harmed.
If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired, which would adversely affect our operating results, our ability to operate our business and our stock price.
Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Our
recent migration of our ERP system to Oracle’s cloud platform required us to expend substantial time to re-evaluate and update our internal controls. We have in the past discovered, and may in the future discover, areas of our internal financial and accounting controls and procedures that need improvement, particularly as we adjust to our new ERP platform.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our management does not expect that our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that
the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company will have been detected.
We are required to comply with Section 404 of the Sarbanes-Oxley Act, or SOX, which requires us to expend significant resources in developing the required documentation and testing procedures. We cannot be certain that the actions we have taken and are taking to improve our internal controls over financial reporting will be sufficient to maintain effective internal controls
over financial reporting in subsequent reporting periods or that we will be able to implement our planned processes and procedures in a timely manner. In addition, new and revised accounting standards and financial reporting requirements may occur in the future and implementing changes required by new standards, requirements or laws may require a significant expenditure of our management’s time, attention and resources which may adversely affect our reported financial results. If we are unable to produce accurate financial statements on a timely basis, investors could lose confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline and make it more difficult for us to finance our operations and growth.
We incur significant costs as a result of operating as a public company, which
may adversely affect our operating results and financial condition.
As a public company, we incur significant accounting, legal and other expenses, including costs associated with our public company reporting and compliance requirements. We also anticipate that we will continue to incur costs associated with corporate governance requirements, including requirements and rules under SOX and the Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank, among other rules and regulations implemented by the SEC, as well as listing requirements of the New York Stock Exchange, or NYSE. Furthermore, these laws and regulations could make it difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these requirements
could also make it difficult for us to attract and retain qualified persons to serve on our Board of Directors, our board committees or as executive officers.
New laws and regulations as well as changes to existing laws and regulations affecting public companies, including the provisions of SOX and the Dodd-Frank Act and rules adopted by the SEC and the NYSE, would likely result in increased costs to us as we respond to their requirements. We continue to invest resources to comply with evolving laws and regulations, and this investment may result in increased general and administrative expense.
Risks Related to Ownership of Our Common Stock
Our stock price may continue to be volatile, and the value of an investment in our common stock may decline.
The trading price of our common stock has been,
and is likely to continue to be, volatile, which means that it could decline substantially within a short period of time and could fluctuate widely in response to various factors, some of which are beyond our control. These factors include those discussed above under “Risks Related to Our Business and Industry” and others such as:
•quarterly variations in our results of operations or those of our competitors;
•failure to meet any guidance that we have previously provided regarding our anticipated results;
•changes in earnings estimates or recommendations by securities analysts;
•failure to meet securities analysts’ estimates;
•announcements
by us or our competitors of new products, significant contracts, commercial relationships, acquisitions or capital commitments;
•developments with respect to intellectual property rights;
•our ability to develop and market new and enhanced products on a timely basis;
•our commencement of, or involvement in, litigation and developments relating to such litigation;
•changes in governmental regulations; and
•a slowdown in the communications industry or the general economy.
In recent years, the stock
market in general, and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our actual operating performance. Recently, the COVID-19 pandemic has severely impacted U.S. markets, causing dramatic swings in the U.S. stock exchanges that resulted in increased volatility in the trading price of our common stock. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
If securities or industry analysts do not publish research or reports about our business or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If any of the analysts who cover us issue an adverse or misleading opinion regarding our stock, our stock price would likely decline. If several of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
Provisions
in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable and may lead to entrenchment of our management and Board of Directors.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could have the effect of delaying or preventing changes in control or changes in our management or our Board of Directors. These provisions include:
•a classified Board of Directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority of our Board of Directors;
•no
cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
•the exclusive right of our Board of Directors to elect a director to fill a vacancy created by the expansion of the Board of Directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our Board of Directors;
•the ability of our Board of Directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;
•a prohibition on stockholder action by written consent, which forces stockholder action
to be taken at an annual or special meeting of our stockholders;
•the requirement that a special meeting of stockholders may be called only by the chairman of the Board of Directors, the chief executive officer or the Board of Directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and
•advance notice procedures that stockholders must comply with in order to nominate candidates to our Board of Directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.
We are also subject to certain anti-takeover
provisions under Delaware law. Under Delaware law, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the Board of Directors has approved the transaction.
We may need additional capital in the future to finance our business.
We may need to raise additional capital to fund operations in the future. Our working capital needs and cash use have continued to increase to support our growth initiatives, and we may need additional capital if our current plans and assumptions change. While we have transitioned our supply chain operations to mitigate the impact of U.S. tariffs on goods imported from China, failure to effectively manage the transition or unanticipated further expenditures associated with mitigation efforts could negatively impact
our cash flows and result of operations. Failure to maintain certain restrictive covenants and requirements under the BofA Loan Agreement could result in limiting the amount of borrowings that are available to us, increase the cost of borrowings under the credit facility, and/or cause us to make immediate payments to reduce borrowings or result in an event of default. If future financings involve the issuance of equity securities, our then-existing stockholders would suffer dilution. If we raise additional debt financing, we may be subject to restrictive covenants that limit our ability to conduct our business. If we are unable to generate positive operating income and positive cash flows from operations, our liquidity, results of operations and financial condition will be adversely affected. Furthermore, if we are unable to generate sufficient cash flows to support our operational needs, we may need to seek additional sources of liquidity, including borrowings, to support
our working capital needs. 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. There is no assurance that any other sources of liquidity may be available to us on acceptable terms or at all. If we are unable to generate sufficient cash flows or obtain other sources of liquidity, we will be forced to limit our development activities, reduce our investment in growth initiatives and institute cost-cutting measures, all of which would adversely impact our business and growth.
We
do not currently intend to pay dividends on our common stock and, consequently, our stockholders’ ability to achieve a return on their investment will depend on appreciation in the price of our common stock.
We do not currently intend to pay any cash dividends on our common stock for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Additionally, the terms of our credit facility restrict our ability to pay dividends under certain circumstances. Therefore, our stockholders are not likely to receive any dividends on our common stock for the foreseeable future.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.