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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts and projections about the industry in which we operate and the beliefs and assumptions of our management. In some cases, forward-looking statements can be identified by the use of words such as “believe,” “could,” “expect,” “may,” “estimate,” “continue,” “anticipate,” “intend,”“should,” “plan,”“predict,” “will,” “would,” “project,” “potential,”or the negative thereof or other comparable terminology. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business and industry and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict, including those identified in the Risk Factors discussed in Item 1A, in the discussion below, as well as in other sections of this Annual Report on Form 10-K. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. All forward-looking statements and reasons why results may differ included in this report 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 the leading global provider of cloud and software platforms, systems and services that focus on the access network, the portion of the network that governs available bandwidth and determines the range and quality of services that can be offered to subscribers. These cloud and software platforms enable CSPs of all types and sizes to innovate and transform their businesses. Our CSP customers are empowered to utilize real-time data and insights from Calix platforms to simplify their businesses and deliver experiences that excite their subscribers. These insights enable CSPs to grow their businesses through increased subscriber acquisition, loyalty and revenue, thereby increasing the value of their businesses and contributions to their communities.

We market our cloud and software platforms, systems and services to CSPs globally through our direct sales force as well as select resellers. Our customers range from smaller, regional CSPs to some of the world’s largest CSPs. We have enabled approximately 1,600 CSP customers purchasing directly and through partners to deploy passive optical, Active Ethernet and point-to-point Ethernet fiber access networks.

In the third quarter of 2020, we completed an underwritten public offering of 3,220,000 shares of our common stock at $20.00 per share, including a full exercise by the underwriters of their option to purchase an additional 420,000 shares of common stock, for net proceeds of $60.1 million after deducting the underwriting discount and estimated expenses payable by us.

Beginning in 2018, the United States enacted a series of tariffs on certain goods manufactured in China. As a result of these tariffs, we incurred U.S. tariff and tariff-related costs of $2.8 million in 2020, $6.2 million in 2019 and $3.2 million in 2018. In order to mitigate the impact of the tariffs enacted by the United States, we undertook a broad plan to realign our global supply chain by moving substantially all of our production outside of China in addition to other supply chain improvements in the first half of 2019. As a result of the tariffs imposed on a broader list of products in September 2019, we expanded the scope of our global supply chain realignment plan, which was substantially completed in 2020.

Our revenue increased to $541.2 million in 2020 from $424.3 million in 2019 and $441.3 million in 2018. Our revenue and potential revenue growth will depend on our ability to sell and license our cloud and software platforms, systems and services to strategically aligned customers of all types such as wireless internet service providers, fiber overbuilders, cable MSOs, municipalities and electric cooperatives in the United States and internationally.

Revenue fluctuations result from many factors, including, but not limited to: increases or decreases in customer orders for our products and services, market, financial or other factors that may delay or materially impact customer purchasing decisions, non-availability of products due to supply chain challenges, including disruptions as a result of the COVID-19 pandemic, contractual terms with customers that result in delayed revenue recognition and varying budget cycles and seasonal buying patterns of our customers. 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 in 2020, and that we expect will impact cost of revenue in future periods, also include: changes in the mix of products delivered, customer location and regional mix, changes in the cost of our

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inventory, including higher costs due to materials shortages including components, supply constraints or unfavorable changes in trade policies, investments to support expansion of cloud and customer support offerings, changes in product warranty and incurrence of retrofit costs, tariffs and associated costs to mitigate the impact of tariffs, amortization of intangibles, asset write-offs, silicon support fees and inventory write-downs. In particular, given the recent supply chain disruptions due to the COVID-19 pandemic, we have seen increases in our global freight charges as we have elected to ship by air in order to meet delivery commitments to our customers as well as air freight rates have increased from prior year levels. Cost of revenue also includes fixed expenses related to our internal operations, which could increase our cost of revenue as a percentage of revenue if there are declines in revenue.

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

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.

We had net income of $33.5 million in 2020 and net losses of $17.7 million in 2019 and $19.3 million in 2018. As of December 31, 2020, we had an accumulated deficit of $669.1 million as a result of losses in previous years. 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. The availability of vaccines has been limited, and there are no assurances as to when the pandemic will be contained. Since March 2020, we have instituted office closures, travel restrictions and a mandatory work-from-home policy for substantially all of our employees. The spread of COVID-19 has had a prolonged impact on our supply chain operations due to restrictions, reduced capacity and limited availability from suppliers whom we rely on for sourcing components and materials and from third-party partners whom we rely on for manufacturing, warehousing and logistics services. Although demand for our products has been strong in the short-term as subscribers seek more bandwidth and better Wi-Fi, customers’ purchasing decisions over the long-term may be impacted by the pandemic and its impact on the economy, which could in turn impact our revenue and results of operations. Furthermore, our supply chain continues to face constraints primarily due to challenges in sourcing components and materials for our products, including due to plant closures. The prolonged impact of COVID-19 could exacerbate these constraints or cause further supply chain disruptions.

In the second quarter of 2020, we transitioned to a work-from-anywhere culture, and many of our employees elected to work remotely on a permanent basis. This operating model reduces our physical facilities requirements, and consequently, we established and implemented a restructuring plan to align our business to a work-from-anywhere culture and incurred facilities-related restructuring charges of $5.1 million. Furthermore, in the second quarter of 2020, we realigned our product portfolio to reduce and consolidate certain legacy product lines as customers accelerated their interest in our all-platform offerings. These actions resulted in a charge of $1.8 million related to our reduction and consolidation of legacy product lines and severance-related charges of $1.2 million.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with U.S. generally accepted accounting principles. 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. We base our 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. We evaluate our estimates, assumptions and judgments on an ongoing basis.

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We believe the following critical accounting policies affect our significant judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

We derive revenue from contracts with customers primarily from the following and categorize our revenue as follows:

•Systems include revenue from the sale of access and premises systems, software platform licenses and cloud-based software subscriptions.

•Services include revenue from professional services, customer support, software- and cloud-based maintenance, extended warranty subscriptions, training and managed services.

Revenue is recognized when a performance obligation is satisfied, which occurs when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Specifically, revenue from software platform licenses, which provides the customer with a right to use the software as it exists, is generally recognized upfront when product is made available to the customer. Revenue from cloud-based software subscriptions, customer support, maintenance, extended warranty subscriptions and managed services is generally recognized ratably over the contract term. Revenue from professional services and training is recognized as the services are delivered.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Our hardware products contain both software and non-software components that function together to deliver the products’ essential functionality and therefore constitutes a single performance obligation as the promise to transfer the individual software and non-software components is not separately identifiable and, therefore, not distinct. Our contracts may include multiple performance obligations. For such arrangements, we allocate the contract’s transaction price to each performance obligation using the relative stand-alone selling price of each distinct good or service in the contract. We generally determine stand-alone selling prices based on the prices charged to customers or our best estimate of stand-alone selling price. Our estimate of stand-alone selling price is established considering multiple factors including, but not limited to, geographies, market conditions, competitive landscape, internal costs, gross margin objectives, characteristics of targeted customers and pricing practices. The determination of estimated stand-alone selling price is made through consultation with and formal approval by management, taking into consideration the go-to-market strategy.

For certain revenue arrangements involving delivery of both systems and professional services, each is considered a distinct performance obligation. Systems revenue is recognized at a point in time when management has determined that control over systems has transferred to the customer, which is generally when legal title has transferred to the customer. For the same revenue arrangements, management believes that the output of the associated professional services is transferred to the customer over time. As such, professional services revenue is recognized over the period in which the services are provided using a cost input measure. We recognize revenue when control of the systems and services has been transferred to the customer, which may be earlier than system installation or customer acceptance, in accordance with the agreed-upon specifications in the contract.

Inventory Valuation

Inventory, which primarily consists of finished goods purchased from CMs or ODMs, is stated at the lower of cost (determined by the first-in, first-out method) and net realizable value. Inbound shipping costs and tariffs are included in the cost of inventory. In addition, we, from time to time, procure component inventory primarily as a result of manufacturing discontinuation of critical components by suppliers. We regularly monitor inventory quantities on-hand and record write-downs for excess and obsolete inventory based on our estimate of demand for our products, potential obsolescence of technology, product life cycle and whether pricing trends or forecasts indicate that the carrying value of inventory exceeds our estimated selling price. These factors are impacted by market and economic conditions, technology changes and new product introductions and require estimates that may include elements that are uncertain. Actual demand may differ from forecasted demand and may have a material effect on gross profit. If inventory is written down, a new cost basis is established that cannot be increased in future periods. The sale of previously reserved inventory has not had a material impact on our gross margin.

Recent Accounting Pronouncements Not Yet Adopted

There have been no additional accounting pronouncements or changes in accounting pronouncements that are significant or potentially significant to us.

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Results of Operations for Years Ended December 31, 2020 and 2019

Revenue

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

Revenue:

Percent of total revenue:

Services 6 % 7 %

Our revenue is principally derived in the United States. Revenue generated in the United States represented approximately 87% of our total revenue in 2020 and 86% in 2019.

Our revenue increased by $116.9 million during 2020 compared with 2019 mostly due to higher systems revenue of $115.3 million. Services revenue increased $1.6 million in 2020 compared with 2019. The increase in systems revenue was primarily due to higher revenue from our small, regional customers and, to a lesser extent, our large-sized customers, as service providers accelerated some deployments to respond to increased demand for network capacity and relieve network capacity constraints as well as provide a better Wi-Fi experience. The increase in services revenue was due to the continued ramp in our service offerings aligned with cloud and software products partially offset by lower professional services related to CAF deployments.

Lumen accounted for more than 10% of our total revenue in 2020 and 2019. See Note 12 “Revenue from Contracts with Customers” to the Consolidated Financial Statements set forth in this report for more details on concentration of revenue for the periods presented.

Cost of Revenue, Gross Profit and Gross Margin

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

Cost of revenue:

Cost of revenue increased by $37.8 million during 2020 as compared with 2019. The $40.3 million increase in systems cost of revenue was less than the percentage increase in revenue compared with 2019 and was due to continued growth in our All Platform offerings along with favorable customer and product mix. The increase in costs of revenue in 2020 as compared to 2019 includes a charge of $1.8 million related to our reduction and consolidation of legacy product lines taken in the second quarter of 2020. The $2.5 million decrease in services cost of revenue was mainly due to improved mix towards our higher gross margin support services versus lower gross margin deployment services.

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

Gross profit:

Gross margin:

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Gross profit increased by $79.1 million to $267.0 million during 2020 from $187.9 million during 2019. Gross margin increased to 49.3% during 2020 from 44.3% during 2019. During 2020 and 2019, systems gross margin was negatively impacted by U.S. tariff and tariff-related costs of $2.8 million and $6.2 million, or 55 and 160 basis points, respectively, and intangible asset amortization of $2.6 million and $1.0 million, or 50 and 25 basis points, respectively. Excluding the impact of U.S. tariff and tariff-related costs and intangible assets amortization, systems gross margin was 51.6% and 48.1% for 2020 and 2019, respectively. This increase of 350 basis points was mainly due to continued growth in our all-platform offerings along with favorable product and customer mix.

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

Operating Expenses

Sales and Marketing Expenses

Sales and marketing expenses consist of personnel costs, employee sales commissions, marketing programs and events, software tools and travel-related expenses. The following table sets forth our sales and marketing expenses (dollars in thousands):

Percent of total revenue 17 % 19 %

Sales and marketing expenses increased by $11.6 million during 2020 compared with 2019 primarily due to higher personnel expenses of $12.2 million, mainly related to investments in sales headcount and higher sales incentive compensation expense, higher marketing expenses of $2.3 million and higher stock-based compensation of $0.9 million. These increases were partially offset by a decrease in travel expenses of $4.9 million.

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

Research and Development Expenses

Research and development expenses include personnel costs, outside contractor and consulting services, depreciation on lab equipment, costs of prototypes and overhead allocations. The following table sets forth our research and development expenses (dollars in thousands):

Percent of total revenue 16 % 19 %

The increase in research and development expenses of $4.1 million during 2020 compared with 2019 was primarily due to higher outside services expenses of $5.2 million, higher personnel expenses of $1.8 million, primarily related to incentive compensation expense, and higher stock-based compensation of $0.8 million. These increases were partially offset by lower facilities expenses of $2.1 million, decreases in depreciation and amortization expense of $0.6 million, lower travel expenses of $0.6 million and lower equipment expenses of $0.4 million.

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

General and Administrative Expenses

General and administrative expenses consist primarily of personnel costs related to our executive, finance, human resources, information technology and legal organizations, outside consulting services, insurance, allocated facilities and fees for professional services. Professional services consist of outside audit, legal, accounting and tax services. The following table sets forth our general and administrative expenses (dollars in thousands):

Percent of total revenue 8 % 9 %

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The increase in general and administrative expenses of $7.3 million during 2020 compared with 2019 was primarily due to increased amortization and subscription expenses of $4.1 million, primarily related to our cloud-based ERP system that went live in January of 2020, personnel expenses of $2.8 million, primarily related to the capitalization of internal resources related to our cloud-based ERP implementation that lowered personnel expenses in 2019 as well as an increase in incentive compensation expense in 2020, stock-based compensation of $1.0 million and bad debt allowance of $0.8 million. These increases were partially offset by lower professional services fees of $1.4 million.

Restructuring Charges

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

Loss on Asset Retirement

During 2019, we recognized a charge of $2.5 million relating to the retirement of an asset consisting of licensed software. Please refer to Note 4 “Balance Sheet Details” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

Interest and Other Expense, Net

The following table sets forth our interest and other expense, net (dollars in thousands):

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

Provision for Income Taxes

The provision for income taxes primarily consist of state and foreign income taxes. The following table sets forth our provision for income taxes (dollars in thousands):

Effective tax rate 2.3 % (7.0) %

The provision for income taxes decreased by $0.4 million from $1.2 million in 2019 to $0.8 million in 2020. The decrease was primarily due to a decrease in accrued withholding taxes related to the anticipated repatriation of foreign subsidiary earnings.

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

2019 Compared to 2018

For a comparison of our results of operations for the years ended December 31, 2019 and 2018, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 21, 2020.

Liquidity and Capital Resources

We have funded our operations and investing activities primarily through cash generated from operations, borrowings on our line of credit, financing arrangements for certain lab equipment and consulting services and sales of our common stock. As of December 31, 2020, we had cash, cash equivalents and marketable securities of $133.8 million. This includes $3.0 million of cash primarily held by our foreign subsidiaries. As of December 31, 2020, our liability for taxes that would be payable as a result of repatriation of undistributed earnings of our foreign subsidiaries to the United States was not significant and limited to withholding taxes considering our existing net operating loss carryovers.

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The following table presents the cash inflows and outflows by activity during 2020 and 2019 (in thousands):

Years Ended December 31,

Net cash provided by operating activities $ 51,409 $ 4,654

Net cash used in investing activities (60,801) (13,353)

Net cash provided by financing activities 42,147 5,971

Operating Activities

Our operating activities provided cash of $51.4 million in 2020 and $4.7 million in 2019. The increase in net cash provided by operating activities during 2020 as compared to 2019 was due primarily to a favorable change in our net operating results of $58.6 million after adjustment of non-cash charges partially offset by a $11.9 million net cash outflow resulting from changes in operating assets and liabilities.

In 2020, cash outflows from changes in operating assets and liabilities primarily consisted of increases in accounts receivable of $22.9 million due to higher sales in the fourth quarter of 2020 as compared to 2019 and in inventory of $12.1 million to support revenue growth. Cash inflows from changes in operating assets and liabilities primarily consisted of increases in accrued liabilities of $11.9 million due to higher incentive compensation, inventory held at suppliers and warranty costs, in deferred revenue of $3.6 million due to support contracts, software maintenance and Calix Cloud subscriptions, in other long-term liabilities of $2.9 million due to accrued payroll taxes and restructuring charges, and in accounts payable of $2.2 million, primarily due to timing of inventory purchases. Non-cash charges primarily consisted of stock-based compensation of $14.0 million, depreciation and amortization of $13.7 million and asset retirements and write-downs of $3.9 million.

Investing Activities

In 2020 cash used in investing activities of $60.8 million consisted of net purchases of marketable securities of $53.0 million and capital expenditures of $7.8 million, primarily related to purchases of test equipment and computer equipment.

Financing Activities

In 2020, net cash provided by financing activities of $42.1 million primarily consisted of proceeds from our common stock offering of $60.1 million, proceeds from the issuance of common stock under our employee stock purchase plans of $9.1 million and from stock option exercises of $9.0 million. These inflows were partially offset by the re-payment of our line of credit of $30.0 million and payments related to financing arrangements of $5.8 million.

2019 Compared to 2018

For a discussion of our liquidity and capital resources and our cash flow activities for the years ended December 31, 2019 and 2018, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 21, 2020.

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

Our material cash commitments include non-cancelable firm purchase commitments, contractual obligations under the BofA Loan Agreement, normal recurring trade payables, compensation-related and expense accruals, operating leases and minimum revenue-share obligations. We believe that our outsourced approach to manufacturing provides us significant flexibility in both managing inventory levels and financing our inventory. In the event that our revenue plan does not meet our expectations, we may be required to curtail or eliminate expenditures to mitigate the impact on our working capital.

In January 2020, we terminated our Silicon Valley Bank loan and security agreement and entered into a new loan and security agreement with Bank of America, N.A. The BofA Loan Agreement provides for a revolving facility up to a principal amount of up to $35.0 million, including a $10.0 million sublimit for letters of credit. The BofA Loan Agreement matures, and all outstanding amounts become due and payable, in January 2023. The BofA Loan Agreement is secured by substantially all of our assets, including our IP. Loans under the credit facility bear interest at a rate per annum equal to either LIBOR (customarily defined) plus an applicable margin between 1.5% to 2.0% or Prime Rate (customarily defined) plus an applicable margin between 0.5% to 1.0%, in each case largely based on a fixed charge coverage ratio measured at the end of each fiscal quarter. The availability of borrowings under the BofA Loan Agreement is subject to certain conditions and requirements, including among others, if at any time our availability is less than $5.0 million, we must maintain a minimum fixed charge coverage ratio,

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of 1.0 to 1.0. As of December 31, 2020, we were in compliance with these requirements, had no outstanding borrowings and had the full availability of $35.0 million. Our interest rate on the line of credit was 3.75% as of December 31, 2020.

In March 2018, we entered into an agreement with a vendor to develop software products pursuant to which we would become obligated, if the vendor delivered software that meets our technical requirements for commercial sale, to make minimum revenue-share payments of $15.8 million over the subsequent three years. The payments are based on a revenue-share rate applied to revenue from developed product sales subject to a minimum and a maximum aggregate amount over the three-year sales period. We had our first sale in August 2019. Revenue-share payments are paid quarterly in arrears, and we began making payments in the fourth quarter of 2020. In December 2020, we amended the agreement to increase the revenue-share rate, limit the revenue-share payments to $15.8 million and extend the revenue-share period until March 2024.

During 2018, we entered into financing arrangements to purchase lab equipment for approximately $5.1 million. In the fourth quarter of 2020, we paid $1.4 million to settle the remainder of the balance.

From 2019 to 2020, in connection with our ERP implementation, we entered into financing arrangements for consulting services of $3.8 million. In the fourth quarter of 2020, we paid $1.4 million to settle the remainder of the balance.

We believe, based on our current operating plan and expected operating cash flows, that our existing cash, cash equivalents and marketable securities, along with available borrowings under our BofA Loan Agreement, will be sufficient to meet our anticipated cash needs for at least the next twelve months. If we are unable to execute on our current operating plan or continue to generate operating income and positive cash flows, our liquidity, results of operations and financial condition will be adversely affected, and we may need to seek other sources of liquidity, including the sale of additional equity or incremental borrowings, to support our working capital needs. 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.

Contractual Obligations and Commitments

Our principal commitments as of December 31, 2020 consisted of our contractual obligations under non-cancelable outstanding purchase obligations, operating lease obligations for office space and a revenue share obligation. The following table summarizes our contractual obligations as of December 31, 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) $ 123,660 $ 123,660 $ — $ — $ —

(1) Represents outstanding purchase commitments to be delivered by our third-party manufacturers or other vendors. See Note 6 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion regarding our outstanding purchase commitments.

(2)Future minimum operating lease obligations in the table above include primarily payments for our office locations, which expire at various dates through 2026. See Note 6 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion regarding our operating leases.

(3)Represents remaining payments related to a revenue-share obligation, including imputed interest associated with developed software product and related enhancements by an engineering service provider. The schedule reflects our expected revenue-share payments based on our revenue projections for the developed products over a sales period through March 2024. If the minimum revenue-share payments are not achieved by the end of that period, a true-up payment will be due. See Note 4 “Balance Sheet Details” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion regarding our outstanding liability.

Off-Balance Sheet Arrangements

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

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ITEM 7A. 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. As of December 31, 2020, we had cash, cash equivalents and marketable securities of $133.8 million, which was held primarily in cash, money market funds and highly liquid marketable securities such as 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 fixed charge coverage ratio. As of December 31, 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 fiscal years were as follows:

Years Ended December 31,

If USD had appreciated or depreciated by 10%, relative to RMB and GBP, our operating expenses for 2020 would have decreased or increased by approximately $1.8 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 Consolidated Balance Sheets. The effect of foreign exchange rate fluctuations on our consolidated financial position for the year ended December 31, 2020 was a net translation gain of $0.7 million. This gain is recognized as an adjustment to stockholders’ equity through accumulated other comprehensive loss.

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Transaction Exposure

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 income (expense), net” in our Consolidated Statements of Comprehensive Income (Loss). During the year ended December 31, 2020, we recognized a net loss related to these foreign exchange assets and liabilities of approximately $0.6 million.

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ITEM 8. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm 40

Consolidated Balance Sheets, As of December 31, 2020 and 2019 42

Notes to Consolidated Financial Statements 46

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Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Calix, Inc.:

Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting

We have audited the accompanying consolidated balance sheets of Calix, Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Financial Accounting Standard Board (FASB), Accounting Standards Update No. 2016-02, Leases (Topic 842).

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanyingManagement’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a

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critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Evaluation of net realizable value of inventory

As discussed in Note 4 to the consolidated financial statements, the Company has finished goods inventories with a carrying value of $52,234 thousand as of December 31, 2020. As discussed in Note 1 to the consolidated financial statements, the Company adjusts the inventory carrying value for excess or obsolete inventory based on assumptions about future demand for products, potential obsolescence of technology, product life cycle, and whether pricing trends or forecasts indicate that the carrying value of inventory exceeds the estimated selling price.

We identified the evaluation of net realizable value of inventory for excess and obsolescence as a critical audit matter. Evaluation of the Company’s forecasted demand, including the Company’s determination of the effect of market and economic conditions and technology changes, required significant auditor judgment.

The following are primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s inventory process. This included controls over the forecasted demand and the Company’s determination of the effect of market and economic conditions and technology changes. For a sample of inventory, we reperformed the analysis provided by the Company to assess the accuracy of the net realizable value. We evaluated the Company’s forecasted demand for a selection of certain inventory by assessing historical sales trends and customer orders. We inquired of Company’s personnel and inspected documents regarding market and economic conditions and technology changes for a selection of certain inventory. We compared the Company’s forecasted demand to analyst reports.

/s/ KPMG LLP

We have served as the Company’s auditor since 2016.

San Francisco, California

February 22, 2021

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CALIX, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

December 31,

ASSETS

Current assets:

Restricted cash — 628

Marketable securities 52,982 —

Prepaid expenses and other current assets 11,414 9,698

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Long-term portion of deferred revenue 19,904 18,340

Commitments and contingencies (See Note 6)

Stockholders’ equity:

Accumulated other comprehensive loss (191) (854)

See accompanying notes to consolidated financial statements.

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CALIX, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share data)

Years Ended December 31,

Revenue:

Cost of revenue:

Operating expenses:

Loss on asset retirement — 2,474 —

Gain on sale of product line — — (6,704)

Interest and other expense, net:

Total interest and other expense, net (2,562) (1,131) (254)

Net income (loss) per common share:

See accompanying notes to consolidated financial statements.

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CALIX, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

Accumulated

Additional Other Total

Common Stock Paid-in Comprehensive Accumulated Treasury Stockholders’

Shares Amount Capital Loss Deficit Stock Equity

Stock issued under employee stock purchase plans 1,476 38 7,259 — — — 7,297

Cumulative effect of accounting change — — — — 1,773 — 1,773

Other comprehensive loss — — — (584) — — (584)

Stock issued under employee stock purchase plans 1,807 46 8,387 — — — 8,433

Other comprehensive loss — — — (101) — — (101)

Stock issued under employee stock purchase plans 1,052 26 9,117 — — — 9,143

Other comprehensive income — — — 663 — — 663

See accompanying notes to consolidated financial statements.

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CALIX, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Years Ended December 31,

Operating activities:

Gain on sale of product line — — (6,704)

Changes in operating assets and liabilities:

Prepaid expenses and other assets 773 (63) 3,579

Investing activities:

Purchases of marketable securities (72,982) — —

Maturities of marketable securities 20,000 — —

Proceeds from sale of product line — — 10,350

Financing activities:

Proceeds from exercise of stock options 8,984 442 384

Proceeds from employee stock purchase plans 9,143 8,433 7,297

Taxes paid for awards vested under equity incentive plan — (167) (74)

Payments related to financing arrangements (5,758) (2,737) —

Payments to originate the line of credit (285) — (115)

Effect of exchange rate changes on cash and cash equivalents 595 (89) (477)

Supplemental disclosures of cash flow information:

Non-cash investing activities:

See accompanying notes to consolidated financial statements.

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CALIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business and Significant Accounting Policies

Company

Calix, Inc. (together with its subsidiaries, “Calix” or the “Company”) was incorporated in August 1999 and is a Delaware corporation. The Company is the leading global provider of cloud and software platforms, systems and services that focus on the access network, the portion of the network that governs available bandwidth and determines the range and quality of services that can be offered to subscribers. These cloud and software platforms enable communications service providers (“CSPs”) of all types and sizes to innovate and transform their businesses. The Company’s CSP customers are empowered to utilize real-time data and insights from Calix platforms to simplify their businesses and deliver experiences that excite their subscribers. These insights enable CSPs to grow their businesses through increased subscriber acquisition, loyalty and revenue, thereby increasing the value of their businesses and contributions to their communities.

Basis of Presentation and Accounting Guidance

The accompanying consolidated financial statements have been prepared in accordance with the requirements of the U.S. Securities and Exchange Commission (“SEC”) and U.S. generally accepted accounting principles (“GAAP”). All significant intercompany balances and transactions have been eliminated in consolidation. Any reference in these notes to applicable accounting guidance (“guidance”) is meant to refer to the authoritative U.S. GAAP as found in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”).

Risks and Uncertainties

The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on the Company's business is highly uncertain and difficult to predict as coronavirus continues to spread around the world. The availability of vaccines has been limited, and there are no assurances as to when the pandemic will be contained. Since March 2020, the Company has instituted office closures, travel restrictions and a mandatory work-from-home policy for substantially all of its employees. The spread of COVID-19 has had a prolonged impact on the Company's supply chain operations due to restrictions, reduced capacity and limited availability from suppliers whom the Company relies on for sourcing components and materials and from third-party partners whom the Company relies on for manufacturing, warehousing and logistics services. Although demand for the Company's products has been strong in the short-term as subscribers seek more bandwidth and better Wi-Fi, customers’ purchasing decisions over the long-term may be impacted by the pandemic and its impact on the economy, which could in turn impact the Company's revenue and results of operations. Furthermore, the Company's supply chain continues to face constraints primarily due to challenges in sourcing components and materials for the Company's products, including due to plant closures. The prolonged impact of COVID-19 could exacerbate these constraints or cause further supply chain disruptions. As of the issuance date of these 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.

Use of Estimates

The preparation of financial statements is in conformity with U.S. GAAP, which requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. For the Company, these estimates include, but are not limited to: allowances for doubtful accounts and sales returns, excess and obsolete inventory, allowances for obligations to its contract manufacturers, valuation of stock-based compensation, useful lives assigned to long-lived assets, standard and extended warranty costs and contingencies. Actual results could differ from those estimates, and such differences could be material to the Company’s financial position and results of operations.

Revenue Recognition

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.

•Services include revenue from professional services, customer support, software- and cloud-based maintenance, extended warranty subscriptions, training and managed services.

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those goods or services. Specifically, revenue from software platform licenses, which provides the customer with a right to use the software as it exists, is generally recognized upfront when made available to the customer. Revenue from cloud-based software subscriptions, customer support, maintenance, extended warranty subscriptions and managed services is generally recognized ratably over the contract term. Revenue from professional services and training is recognized as the services are delivered.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company’s hardware products contain both software and non-software components that function together to deliver the products’ essential functionality and therefore constitutes a single performance obligation as the promise to transfer the individual software and non-software components is not separately identifiable and, therefore, not distinct. The Company’s contracts may include multiple performance obligations. For such arrangements, the Company allocates the contract’s transaction price to each performance obligation using the relative stand-alone selling price of each distinct good or service in the contract. The Company generally determines stand-alone selling prices based on the prices charged to customers or its best estimate of stand-alone selling price. The Company’s estimate of stand-alone selling price is established considering multiple factors including, but not limited to, geographies, market conditions, competitive landscape, internal costs, gross margin objectives, characteristics of targeted customers and pricing practices. The determination of estimated stand-alone selling price is made through consultation with and formal approval by management, taking into consideration the go-to-market strategy.

For certain revenue arrangements involving delivery of both systems and professional services, each is considered a distinct performance obligation. Systems revenue is recognized at a point in time when management has determined that control over systems has transferred to the customer, which is generally when legal title has transferred to the customer. For the same revenue arrangements, management believes that the output of the associated professional services is transferred to the customer over time. As such, professional services revenue is recognized over the period in which the services are provided using a cost input measure. The Company recognizes revenue when control of the systems and services has been transferred to the customer, which may be earlier than system installation or customer acceptance, in accordance with the agreed-upon specifications in the contract.

Cost of Revenue

Cost of revenue consists primarily of finished goods inventory purchased from the Company’s contract manufacturers, payroll and related expenses associated with managing the relationships with contract manufacturers, depreciation of manufacturing test equipment, warranty and retrofit costs, excess and obsolete inventory costs, shipping charges and amortization of certain intangible assets. It also includes contractor and other costs of services incurred directly related to the delivery of services to customers.

Warranty and Retrofit

The Company offers limited warranties for its hardware products for a period of one, three or five years, depending on the product type. The Company recognizes estimated costs related to warranty activities as a component of cost of revenue upon product shipment or upon identification of a specific product failure. Under certain circumstances, the Company also provides fixes on specifically identified performance failures for products that are outside of the standard warranty period and recognizes estimated costs related to retrofit activities as a component of cost of revenue upon identification of such product failures. The Company recognizes estimated warranty and retrofit costs when it is probable that a liability has been incurred and the amount of loss is reasonably estimable. The estimates are based upon historical and projected product failure and claim rates, historical costs incurred in correcting product failures and information available related to any specifically identified product failures. Judgment is required in estimating costs associated with warranty and retrofit activities, and the Company's estimates are limited to information available to the Company at the time of such estimates. In some cases, such as when a specific product failure is first identified or a new product is introduced, the Company may initially have limited information and limited historical failure and claim rates upon which to base its estimates, and such estimates may require revision in future periods. The recorded amount is adjusted from time to time for specifically identified warranty and retrofit exposure. Actual warranty and retrofit expenses are charged against the Company’s estimated warranty and retrofit liability when incurred. Factors that affect the Company’s warranty and retrofit liability include the number of active installed units and historical and anticipated rates of warranty and retrofit claims and cost per claim.

Stock-Based Compensation

Stock-based compensation expense associated with stock options, performance stock options (“PSOs”), restricted stock units (“RSUs”) and purchase rights under the Amended and Restated Employee Stock Purchase Plan (the “ESPP”) and the Amended and Restated 2017 Nonqualified Employee Stock Purchase Plan (the “NQ ESPP”) is measured at the grant date based on the

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fair value of the award, and is recognized, net of forfeitures, as expense over the remaining requisite service period (generally the vesting period) on a straight-line basis.

The fair value of stock option and employee stock purchase right under the ESPP is estimated at the grant date using the Black-Scholes option valuation model. The fair value of RSUs and employee stock purchase right under the Nonqualified ESPP is based on closing market price of the Company’s common stock on the date of grant.

Stock-based compensation expense associated with PSOs with graded vesting features and which contain both a performance and a service condition is measured based on fair value of stock options estimated at the grant date using the Black-Scholes option valuation model, and is recognized, net of forfeitures, as expense over the requisite service period using the graded vesting attribution method.

Compensation expense is only recognized if the Company has determined that it is probable that the performance condition will be met. The Company reassesses the probability of vesting at each reporting period and adjusts compensation expense based on its probability assessment.

Loss Contingencies

From time to time, the Company is involved in legal proceedings arising from the normal course of business activities. The Company evaluates the likelihood of an unfavorable outcome of legal proceedings to which it is a party and accrues a loss contingency when the loss is probable and reasonably estimable. Assessing legal contingencies involves significant judgment and estimates, and the outcome of litigation is inherently uncertain and subject to numerous factors outside the Company’s control. Significant judgment is required when the Company assesses the likelihood of any adverse judgments or outcomes, including the potential range of possible losses, and whether losses are probable and reasonably estimable.

Because of uncertainties related to these matters, the Company bases its estimates of whether a loss contingency is probable or reasonably possible, as well as the reasonable range of possible losses associated with each loss contingency, only on the information available at the time. As additional information becomes available, and at least quarterly, the Company reassesses the potential liability on each significant matter and may revise its estimates. These revisions could have a material impact on the Company’s business, operating results or financial condition. The actual outcome of these legal proceedings may materially differ from the Company’s estimates of potential liability, which could have a material adverse effect on the Company’s business, operating results or financial condition.

Credit Risk and Inventory Supplier Concentrations

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, marketable securities and accounts receivable. Cash equivalents consist of money market funds and marketable securities with a maturity at the date of purchase of ninety days or less, which are invested through financial institutions in the United States. Deposits in and investments held by these financial institutions may, at times, exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company also has approximately $3.0 million of cash held by its foreign subsidiaries in Brazil, China and the United Kingdom. Management believes that the financial institutions that hold the Company’s cash and cash equivalents are financially sound and, accordingly, minimal credit risk exists with respect to these cash and cash equivalents.

The Company depends primarily on a small number of outside contract manufacturers (“CMs”) and original design manufacturers (“ODMs”) for the bulk of its finished goods inventory. The Company generally purchases its products through purchase orders with its suppliers. While the Company seeks to maintain a sufficient supply of its products, the Company’s business and results of operations could be adversely affected by a stoppage or delay in receiving such products, the receipt of defective parts, an increase in price of such products or the Company’s inability to obtain lower prices from its CMs, ODMs and other suppliers in response to competitive pressures.

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, trade receivables, accounts payable, line of credit and other accrued liabilities approximate their fair value due to their relatively short-term nature. Marketable securities are valued using quoted market prices in active markets to determine fair value.

Cash, Cash Equivalents and Marketable Securities

Cash equivalents and marketable securities are stated at amounts that approximate fair value based on quoted market prices.

The Company has invested its excess cash primarily in money market funds and highly liquid marketable securities such as U.S. treasury bonds, corporate debt instruments, commercial paper and U.S. government securities. The Company considers all investments with maturities of three months or less when purchased to be cash equivalents. Marketable securities represent highly liquid U.S. treasury bonds, corporate debt instruments, commercial paper and U.S. government securities with maturities

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greater than 90 days at date of purchase. Marketable securities with maturities greater than one year are classified as current because management considers all marketable securities to be available for current operations.

The Company’s investments have been classified and accounted for as available-for-sale. Such investments are recorded at fair value and unrealized holding gains and losses are reported as a separate component of comprehensive loss in the stockholders’ equity until realized. Realized gains and losses on sales of marketable securities, if any, are determined on the specific identification method and are reclassified from accumulated other comprehensive loss to results of operations as “Other income (expense), net”. The Company had no investments as of December 31, 2019. See Note 2 “Cash, Cash Equivalents, Restricted Cash and Marketable Securities”.

Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts for expected credit losses at contract inception resulting from the inability of its customers to make required payments. The Company records a specific allowance and revises the expected loss based on an analysis of individual past-due balances. Additionally, based on historical write-offs and the Company’s collection experience, the Company records an additional allowance based on a percentage of outstanding receivables. The Company performs credit evaluations of its customers’ financial condition. These evaluations require judgment and are based on a variety of factors including, but not limited to, current economic trends, payment history and a financial review of the customer. Actual collection losses may differ from management’s estimates, and such differences could be material to the Company's financial position and results of operations.

Inventory Valuation

Inventory, which primarily consists of finished goods purchased from CMs or ODMs, is stated at the lower of cost (determined by the first-in, first-out method) or market value. Inbound shipping costs and U.S. tariffs are included in cost of inventory. In addition, the Company, from time to time, procures component inventory primarily as a result of manufacturing discontinuation of critical components by suppliers. The Company regularly monitors inventory quantities on hand and records write-downs for excess and obsolete inventories based on the Company’s estimate of demand for its products, potential obsolescence of technology, product life cycles and whether pricing trends or forecasts indicate that the carrying value of inventory exceeds its estimated selling price. These factors are impacted by market and economic conditions, technology changes and new product introductions and require significant estimates that may include elements that are uncertain. Actual demand may differ from forecasted demand and may have a material effect on gross profit. If inventory is written down, a new cost basis is established that cannot be increased in future periods. Shipments from suppliers before the Company receives them are recorded as in-transit inventory when title and the significant risks and rewards of ownership have passed to the Company.

Contract Costs

The Company capitalizes sales commissions primarily related to extended warranty for which the expected amortization period is greater than one year.

Capitalized commissions are amortized as sales and marketing expenses over the period that the related revenue is recognized, which can be up to five years for extended warranty. The Company classifies the unamortized portion of deferred commissions as current or noncurrent based on the timing of when the Company expects to recognize the expense. The current and noncurrent portions of deferred commissions are included in prepaid expenses and other current assets and other assets, respectively, in the Company’s Consolidated Balance Sheets.

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation, and are depreciated using the straight-line method over the estimated useful life of each asset. Generally, computer equipment is depreciated over two years; purchased software is depreciated over three to five years; test equipment is depreciated over three years; furniture and fixtures are depreciated over seven years; and leasehold improvements are depreciated over the shorter of the respective lease term or the estimated useful life of the asset. Maintenance and repairs are charged to expense as incurred.

Goodwill

Goodwill was recorded as a result of the Company’s acquisitions of Occam Networks, Inc. in February 2011 and Optical Solutions, Inc. in February 2006. The Company records goodwill when consideration paid in a business acquisition exceeds the fair value of the net tangible assets and the identified intangible assets acquired. Goodwill is not amortized but instead is subject to an annual impairment test or more frequently if events or changes in circumstances indicate that it may be impaired. The Company evaluates goodwill on an annual basis as of the end of the second quarter of each fiscal year. Management has determined that it operates as a single reporting unit and, therefore, evaluates goodwill impairment at the enterprise level.

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At the end of the second quarter of 2020, the Company completed its annual goodwill impairment test. Based on its assessment of certain qualitative factors such as market capitalization, management concluded that the fair value of the Company was more likely than not greater than its carrying amount as of June 27, 2020. As such, it was not necessary to perform the two-step quantitative goodwill impairment test at the time.

There have been no significant events or changes in circumstances subsequent to the 2020 annual impairment test that would more likely than not indicate that the carrying value of goodwill may have been impaired as of December 31, 2020. There were no impairment losses for goodwill for the years ended December 31, 2020, 2019 or 2018.

Deferred Revenue

Deferred revenue results from transactions where the Company billed the customer for products or services and when cash payments are received or due prior to transferring control of the promised goods or services to the customer.

Payment terms to customers typically range from net 30 to net 90 days and vary by the size and location of customer and the products or services offered. The period between the transfer of control of the promised good or service to a customer and when payment is due is not significant.

Income Taxes

The Company evaluates its tax positions and estimates its current tax exposure along with assessing temporary differences that result from different book to tax treatment of items not currently deductible for tax purposes. These differences result in deferred tax assets and liabilities on the Company’s Consolidated Balance Sheets, which are estimated based upon the difference between the financial statement and tax bases of assets and liabilities using the enacted tax rates that will be in effect when these differences reverse. In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in the Company’s Consolidated Statements of Comprehensive Loss become deductible expenses under applicable income tax laws or loss or credit carryforwards are utilized. Accordingly, realization of the Company’s deferred tax assets is dependent on future taxable income against which these deductions, losses and credits can be utilized.

The Company must assess the likelihood that the Company’s deferred tax assets will be recovered from future taxable income, and to the extent the Company believes that recovery is not more likely than not, the Company must establish a valuation allowance. Management judgment is required in determining the Company’s provision for income taxes, the Company’s deferred tax assets and liabilities and any valuation allowance recorded against the Company’s net deferred tax assets. Excluding foreign operations, the Company recorded a full valuation allowance at each balance sheet date presented because, based on the available evidence, the Company believes it is more likely than not that it will not be able to utilize all of its deferred tax assets in the future. The Company intends to maintain the full valuation allowance until sufficient evidence exists to support the reversal of the valuation allowance.

Newly Adopted Accounting Standards

The Company did not adopt any new accounting standard in 2020 that were significant to the Company.

Leases

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842), which requires recognition of an asset and liability for lease arrangements longer than twelve months. The Company adopted the new standard effective January 1, 2019 using the effective date approach which eliminates the need to restate amounts presented prior to that date. The Company also elected the package of practical expedients but not the hindsight practical expedient. The adoption had a material impact on the Company's Consolidated Balance Sheets but did not impact the Company's Consolidated Statements of Comprehensive Loss, Cash Flows or Stockholders' Equity. Upon adoption on January 1, 2019, the Company recognized an operating lease right-of-use asset of $15.8 million and a lease liability of $16.7 million.

Recent Accounting Pronouncements Not Yet Adopted

There have been no accounting pronouncements or changes in accounting pronouncements that are significant or potentially significant to the Company.

2. Cash, Cash Equivalents, 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.

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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. Realized and unrealized gains and losses were de minimis for 2020.

Cash, cash equivalents, restricted cash and marketable securities consisted of the following (in thousands):

December 31,

Cash and cash equivalents:

U.S. government securities 39,994 —

Restricted cash — 628

Total cash, cash equivalents and restricted cash 80,807 47,457

Marketable securities – U.S. government securities 52,982 —

The carrying amounts of the Company’s money market funds approximate their fair values due to their nature, duration and short maturities. As of December 31, 2020, all marketable securities were due in one year or less.

3. Fair Value Measurements

The Company measures its cash equivalents and marketable securities at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The Company utilizes the following three-tier value hierarchy which prioritizes the inputs used in measuring fair value:

Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 – Observable inputs other than quoted prices included in Level 1 for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-driven valuations in which all significant inputs and significant value drivers are observable in active markets.

Level 3 – Unobservable inputs to the valuation derived from fair valuation techniques in which one or more significant inputs or significant value drivers are unobservable. The fair value hierarchy also requires the Company to maximize the use of observable inputs, when available, and to minimize the use of unobservable inputs when determining inputs and determining fair value.

The following tables sets forth the Company’s financial assets measured at fair value on a recurring basis based on the three-tier fair value hierarchy (in thousands):

Money market funds $ 10,068

U.S. government securities 92,976

Money market funds $ 14

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4. Balance Sheet Details

Accounts receivable, net consisted of the following (in thousands):

December 31,

Allowance for doubtful accounts (1,405) (374)

The table below summarizes the changes in allowance for doubtful accounts and product return liability for the periods indicated (in thousands):

Allowance for doubtful accounts $ 579 $ (5) $ (204) $ 370

Inventory consisted of the following (in thousands):

December 31,

Property and equipment, net consisted of the following (in thousands):

December 31,

Accumulated depreciation and amortization (45,858) (51,344)

Depreciation and amortization expenses were $13.7 million, $10.3 million and $9.2 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Loss on Asset Retirement

In July 2018, in connection with establishing a direct relationship with Verizon Communications, Inc. (“Verizon”), the Company licensed software from a former partner to support the Company's deployments at Verizon. During the third quarter of 2019, Verizon informed the Company that it no longer required this software. As a result, the Company wrote off the software in the third quarter of 2019, resulting in a $2.5 million charge in the Company's Consolidated Statements of Comprehensive Income (Loss).

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Other long-term assets consisted of the following (in thousands):

December 31,

Capitalized cloud implementation costs 1,287 6,089

Intangible Asset Acquisition

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 $15.8 million over the three 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 $13.2 million in the third quarter of 2019 and also recognized a liability of $13.2 million (a non-cash investing activity). The liability balance is $13.9 million of which $2.9 million is included in accrued liabilities and $11.0 million in other long-term liabilities in the accompanying Consolidated Balance Sheet as of December 31, 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. In December 2020, the Company amended the agreement to increase the revenue-share rate, limit the revenue-share payments to $15.8 million and extend the revenue-share period until March 2024.

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 $7.5 million of implementation costs in both prepaid expenses and other current assets and other long-term assets in the Company's Consolidated Balance Sheet. This amount is being amortized over a period of 29 months, representing the remaining contractual term. The amortization expense for the year ended December 31, 2020 was $3.1 million.

Accrued liabilities consisted of the following (in thousands):

December 31,

Compensation and related benefits $ 23,740 $ 19,010

Professional and consulting fees 4,497 4,996

Component inventory held by suppliers 3,992 1,925

Current portion of financing arrangements 2,925 4,044

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Changes in the Company’s accrued warranty and retrofit liability were as follows (in thousands):

Years Ended December 31,

Provision for warranty and retrofit charged to cost of revenue 5,888 4,425 5,215

Accrued Restructuring Charges

Responding to trends caused by the COVID-19 pandemic, the Company initiated a restructuring plan in June 2020 to accelerate the Company’s all platform future and to align with a work-from-anywhere culture. The Company incurred restructuring charges of approximately $6.3 million, consisting of facilities-related charges and severance and other termination related benefits for the year ended December 31, 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 $3.5 million for the year ended December 31, 2020. In addition, the Company wrote off assets with net book value of $0.3 million and accrued common areas maintenance fees and property taxes related to the unused office space totaling $1.4 million for the year ended December 31, 2020.

The following table summarizes the activities pursuant to the above restructuring plans (in thousands):

Facilities Severance and Related Benefits Total

Balance as of March 28, 2020 $ — $ — $ —

The Company initiated a restructuring plan in February 2018 to further align its business resources based on the production releases of its platform offerings. The Company incurred restructuring charges of approximately $5.7 million for the year ended December 31, 2018, consisting primarily of severance and other termination related benefits.

5. Credit Agreements

Line of Credit

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 $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 the Company’s assets, including the Company’s 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 interest rate on the line of credit was 3.75% as of December 31, 2020.

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 $5.0 million, the Company must maintain a minimum fixed charge coverage ratio of 1.0 to 1.0. As of December 31, 2020, the Company was in compliance with these requirements, had no outstanding borrowings and had full availability to $35.0 million.

Financing Arrangements

During 2018, the Company entered into financing arrangements to purchase lab and test equipment for approximately $5.1 million, which were non-cash investing activities. In the fourth quarter of 2020, the Company paid $1.4 million to settle the remainder of the balance. The weighted average interest rate was 6.2%.

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During 2018 and 2019, the Company entered into financing arrangements for consulting services of $3.8 million in connection with the Company’s ERP implementation. These were non-cash investing activities of $2.0 million and $1.8 million for years ended December 31, 2019 and 2018, respectively. In the fourth quarter of 2020, the Company paid $1.4 million to settle the remainder of the balance. The weighted average interest rate was 6.3%.

6. Commitments and Contingencies

Lease Commitments

The Company leases office space under non-cancelable operating leases. Certain of the Company’s operating leases contain renewal options and rent acceleration clauses. Future minimum payments under the non-cancelable operating leases consisted of the following as of December 31, 2020 (in thousands):

Year Ending December 31, Future Minimum Lease Payments

Thereafter 42

Total future minimum lease payments 18,653

Less imputed interest (2,713)

As of December 31, 2020, the operating lease liability consisted of the following (in thousands):

Accrued liabilities - current portion of operating leases $ 2,994

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 $11.9 million and are included in the table for the year ended December 31, 2020 above.

In October 2020, the Company entered into a lease extension for its facility in Nanjing, China. The lease extension will commence in February 2021 for a term of 60 months. The future minimum lease payments of $1.7 million are included in the table for the year ended December 31, 2020 above. The Company recorded a right-of-use operating lease asset and operating lease liability of $1.5 million in the fourth quarter of 2020. The Company’s previous lease in Nanjing, China expires in February 2021.

The above tables also include future minimum lease payments for the Company's office facilities in Petaluma, California; Plymouth, Minnesota; Richardson, Texas; and West Jordan, Utah, which expire at various dates through 2025.

The weighted average discount rate for the Company's operating leases as of December 31, 2020 was 6.7%. The weighted average remaining lease term as of December 31, 2020 was 4.2 years.

For the years ended December 31, 2020, 2019 and 2018, total rent expense of the Company was $4.0 million, $4.7 million and $3.4 million, respectively. Cash paid within operating cash flows for operating leases was $3.8 million for year ended December 31, 2020.

Purchase Commitments

The Company’s CMs and ODMs place orders for certain component inventory in advance based upon the Company’s build forecasts in order to reduce manufacturing lead times and ensure adequate component supply. The components are used by the CMs and ODMs to build the products included in the build forecasts. The Company generally does not take ownership of the components held by CMs and ODMs. The Company places purchase orders with its CMs and ODMs in order to fulfill its monthly finished product inventory requirements. The Company incurs a liability when the CMs and ODMs convert the component inventory to a finished product and takes ownership of the finished goods inventory. In the event of termination of services with a manufacturing partner, the Company has purchased, and may be required to purchase in the future, certain of the remaining components inventory held by the CM or ODM as well as any outstanding orders pursuant to the contractual provisions with such CM or ODM. As of December 31, 2020, the Company had approximately $123.7 million of outstanding purchase commitments for inventories to be delivered by its suppliers, including CMs and ODMs, within one year.

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The Company has from time to time, and subject to certain conditions, reimbursed certain suppliers for component inventory purchases when this inventory has been rendered excess or obsolete, for example due to manufacturing and engineering change orders resulting from design changes, manufacturing discontinuation of products by its suppliers, or in cases where the Company has committed inventory levels that greatly exceed projected demand. The estimated excess and obsolete inventory liabilities related to such manufacturing and engineering change orders and other factors, which are included in accrued liabilities in the accompanying Consolidated Balance Sheets, were $4.0 million and $1.9 million as of December 31, 2020 and 2019, respectively. The Company records the related charges in cost of systems revenue in its 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.

Indemnifications

The Company from time to time enters into contracts that require it to indemnify various parties against claims from third parties. These contracts primarily relate to (i) certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises, (ii) agreements with the Company’s officers, directors and certain employees, under which the Company may be required to indemnify such persons for liabilities arising out of their relationship with the Company, (iii) contracts under which the Company may be required to indemnify customers against third-party claims that a Company product infringes a patent, copyright or other intellectual property right and (iv) agreements under which the Company may be required to indemnify the counterparty for certain claims that may be brought against them arising from the Company’s acts or omissions with respect to the transactions contemplated by such agreements.

Because any potential obligation associated with these types of contractual provisions are not quantified or stated, the overall maximum amount of the obligation cannot be reasonably estimated. Historically, the Company has not been required to make payments under these obligations, and no liabilities have been recorded for these obligations in the accompanying Consolidated Balance Sheets.

7. Stockholders’ Equity

Stock Offering

In August 2020, the Company completed an underwritten public offering of 3,220,000 shares of its common stock at $20.00 per share, including a full exercise by the underwriters of their option to purchase an additional 420,000 shares of Common Stock, resulting in net proceeds of $60.1 million, after deducting the underwriting discount and expenses paid by the Company.

Treasury Stock Retirement

In August 2020, the Company’s Board of Directors authorized the retirement of the 5,329,817 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 $40.0 million treasury stock balance, offsetting this against common stock by $0.1 million and additional paid-in capital by $39.9 million.

Preferred Stock

The Board of Directors has the authority, without action by stockholders with the exception of stockholders who hold board positions, to designate and issue up to 5.0 million shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. These rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series, any or all of which may be greater than the rights of common stock. The issuance of the Company’s preferred stock could adversely affect the voting power of holders of common stock and the likelihood that such holders will receive dividend payments and payments upon liquidation. In addition, the issuance of preferred stock could have the effect of delaying, deferring or preventing a change in control of the Company or other corporate action. Since the Company’s initial public offering, the Board of Directors has not designated any rights, preference or powers of any preferred stock and no shares of preferred stock have been issued.

Common Stock

Holders of the Company’s common stock are entitled to receive dividends, if any, as may be declared from time to time by the Board of Directors out of legally available funds. No dividends have been declared or paid as of December 31, 2020. In the

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event of the Company’s liquidation, dissolution or winding up, holders of the Company’s common stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all of the Company’s debts and other liabilities and the satisfaction of any liquidation preference granted to the holders of any then outstanding shares of preferred stock.

Equity Incentive Plans

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, stock appreciation rights, restricted stock, RSUs or other stock or cash-based awards and dividend equivalents to eligible individuals.

The number of shares available for issuance under the 2019 Plan includes an initial reserve of 1.7 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 3.5 million shares. As of December 31, 2020, there were 4.3 million shares available for issuance under the 2019 Plan.

Stock options granted under the 2019 Plan are granted at a price not less than 100% of the fair market value of the common stock on the date of grant. Stock options issued under the 2019 Plan generally vest 25% on the first anniversary of the vesting commencement date and on a quarterly basis thereafter for a period of an additional three years. The options have a maximum term of ten years.

Each RSU granted under the 2019 Plan represents a right to receive one share of the Company’s common stock (subject to adjustment for certain specified changes in the capital structure of the Company) upon the completion of a specific period of continued service.

In February 2019, PSOs exercisable for up to an aggregate of 2.0 million shares of common stock were granted to Company executives with a grant date fair value of $8.03 per share. These PSOs contain a one-year performance period and a subsequent three-year service period. The actual number of shares earned was contingent upon the 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 August 2019, the Compensation Committee of the Company’s Board of Directors amended the 2019 Performance Targets to provide for the award of up to 40% of the total number of shares subject to a stock option award in the event the annual corporate financial targets are not met but the quarterly corporate financial targets are met. In February 2020, the Compensation Committee of the Company’s Board of Directors certified that 30% of the PSOs were earned, of which 25% of the shares of common stock vested on that date and the remaining 75% of the shares of common stock earned will vest in substantially equal quarterly installments over the subsequent 3 years, subject to the executive’s continuous service with the Company through the respective vesting dates.

In February 2020, PSOs exercisable for up to an aggregate of 0.8 million shares of common stock were granted to certain Company executives with a grant date fair value of $9.16 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. Under the 2020 Performance Targets, if non-GAAP net income is below 80% of target and bookings are below 90% of target, no shares are awarded. From this base, shares are awarded on a 50% weighting for both non-GAAP net income and bookings up to 100% for each 2020 Performance Target using a sliding scale. In February 2021, the Compensation Committee of the Company’s Board of Directors certified the full achievement of the 2020 Performance Targets subject to the four year services condition. As such, 25% of the shares of the PSOs were vested on that date, and the remaining 75% of the shares of common stock will vest substantially equal quarterly installments over the subsequent 36 months, subject to the executive’s continuous service with the Company through the respective vesting dates. Stock-based compensation expense of $1.6 million was recognized for the year ended December 31, 2020 related to these awards.

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Stock Options

The following table summarizes the activity of stock options under the Company’s equity incentive plans (in thousands, except per share data):

Weighted-

Average

Weighted- Remaining

Average Contractual Aggregate

Number of Exercise Price Life Intrinsic

Stock Options Shares Per Share (in years) Value (1)

During the years ended December 31, 2020, 2019 and 2018, total intrinsic value of stock options exercised was $6.7 million, $0.2 million and $0.1 million, respectively. Total cash received from employees as a result of stock option exercises in 2020, 2019 and 2018 was $9.0 million, $0.4 million and $0.4 million, respectively. Total fair values of stock options vested during 2020, 2019 and 2018 were $4.4 million, $7.6 million and $2.7 million, respectively.

Restricted Stock Units

The following table summarizes the activities of the Company’s RSUs under the Company’s equity incentive plans (in thousands, except per share data):

RSUs

Weighted-

Average

Grant Date

Number of Fair Value

Shares Per Share

Employee Stock Purchase Plans

The Company maintains two employee stock purchase plans - the Amended and Restated Employee Stock Purchase Plan (the “ESPP”) and the Amended and Restated 2017 Nonqualified Employee Stock Purchase Plan (the “NQ ESPP”).

The ESPP allows eligible employees to purchase shares of the Company’s common stock through payroll deductions of up to 15% of their annual compensation subject to certain Internal Revenue Code limitations. In addition, no participant may purchase more than 2,000 shares of common stock in each offering period.

During 2020, 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 a transition period that began on May 15th and ended on August 14, 2020. The price of common stock purchased under the ESPP is 85% of the lower of the fair market value of the common stock on the commencement date and the end date of each six-month offering period. In May 2019, the stockholders approved an increase in the number of shares of common stock issuable under the ESPP by 2.5 million shares. The total shares authorized for issuance under the ESPP increased from 7.3 million shares to 9.8 million shares. As of December 31, 2020, there were 2.6 million shares available for issuance under the ESPP. During the year ended December 31, 2020, 0.6 million shares were purchased under the

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ESPP, respectively. As of December 31, 2020, unrecognized stock-based compensation expense of $0.4 million related to the ESPP is expected to be recognized over a remaining service period of 0.1 years.

The NQ ESPP allows eligible employees to purchase shares of the Company’s common stock through payroll deductions of up to 25% of their 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 one year period immediately following the purchase date. Beginning in the fourth quarter of 2020, the NQ ESPP’s twosix-month offering periods changed to November 15th through May 14th and May 15th through November 14th of each year, with a transition period that began on June 21, 2020 and ended 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 1.2 million shares. The maximum number of shares of common stock currently authorized for issuance under the NQ ESPP is 4.7 million shares, with a maximum of 0.5 million shares allocated per purchase period. As of December 31, 2020, there were 2.3 million shares available for issuance under the NQ ESPP, including the stockholder-approved 1.2 million share increase. During the year ended December 31, 2020, 0.5 million shares were purchased and issued. As of December 31, 2020, unrecognized stock-based compensation expense of $5.2 million related to the NQ ESPP is expected to be recognized over a remaining weighted-average service period of 1.1 years.

Stock-Based Compensation

During the years ended December 31, 2020, 2019 and 2018, the Company recorded stock-based compensation expense of $14.0 million, $11.2 million and $17.5 million, respectively.

The following table summarizes stock-based compensation expense (in thousands):

Years Ended December 31,

Cost of revenue:

The following table summarizes the weighted-average grant date fair values of the Company’s stock-based awards granted in the periods indicated:

Years Ended December 31,

The Company values the RSUs and employee stock purchase rights under the Nonqualified ESPP at the closing market price of the Company’s common stock on the date of grant.

The Company estimates the fair value of stock options and employee stock purchase right under the ESPP at the grant date using the Black-Scholes option-pricing model. This model requires the use of the following assumptions:

(i)Expected volatility of the Company’s common stock – The Company computes its expected volatility assumption based on a blended volatility (50% historical volatility and 50% implied volatility from traded options on the Company’s common stock). The selection of a blended volatility assumption was based upon the Company’s assessment that a blended volatility is more representative of the Company’s future stock price trend as it weighs the historical volatility with the future implied volatility.

(ii)Expected life of the option award – Represents the weighted-average period that the stock options are expected to remain outstanding. The Company’s computation of expected life utilizes the simplified method in accordance with Staff Accounting Bulletin No. 110 due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. The mid-point between the vesting date and the expiration date is used as the expected term under this method.

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(iii)Expected dividend yield – Assumption is based on the Company’s history of not paying dividends and no future expectations of dividend payouts.

(iv)Risk-free interest rate – Based on the U.S. Treasury yield curve in effect at the time of grant with maturities approximating the grant’s expected life.

The following table summarizes the weighted-average assumptions used in estimating the grant-date fair value of stock options and of each employee’s purchase right under the ESPP in the periods indicated:

Years Ended December 31,

Expected volatility 53 % 47 % 50 %

Expected dividend yield — — —

Years Ended December 31,

Expected volatility 70 % 48 % 42 %

Expected dividend yield — — —

In addition, the Company applies an estimated forfeiture rate to awards granted and records stock-based compensation expense only for those awards that are expected to vest. Forfeiture rates are estimated at the time of grant based on the Company’s historical experience. Further, to the extent the Company’s actual forfeiture rate is different from management’s estimate, stock-based compensation is adjusted accordingly.

As of December 31, 2020, unrecognized stock-based compensation expense by award type, net of estimated forfeitures, and their expected weighted-average recognition periods are summarized in the following table (in thousands).

Stock Option RSU ESPPs

Unrecognized stock-based compensation expense $ 15,604 $ 518 $ 5,530

Weighted-average amortization period (in years) 3.0 0.4 1.0

The Company expects to recognize stock-based compensation expense of $10.6 million in 2021, $5.1 million in 2022, $4.0 million in 2023 and $2.0 million in 2024.

Shares Reserved for Future Issuance

As of December 31, 2020, the Company had common shares reserved for future issuance as follows (in thousands):

Stock options outstanding 6,801

Restricted stock units outstanding 127

Shares available for future grant under 2019 Plan 4,344

Shares available for future issuance under ESPP 2,596

Shares available for future issuance under Nonqualified ESPP 2,274

8. Employee Benefit Plan

The Company sponsors a 401(k) tax-deferred savings plan for all employees who meet certain eligibility requirements. Participants may contribute, on a pre-tax basis, a percentage of their annual compensation, but not to exceed a maximum contribution amount pursuant to Section 401(k) of the Internal Revenue Code. The Company, at the discretion of the Board of Directors, may make additional matching contributions on behalf of the participants. The Company made matching contributions totaling $2.7 million, $2.5 million and $2.5 million in 2020, 2019 and 2018, respectively.

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9. Accumulated Other Comprehensive Loss

The table below summarizes the changes in accumulated other comprehensive loss by component:

` Foreign Currency Translation Adjustments

Other comprehensive loss (101)

Other comprehensive income 663

Assets and liabilities of the Company’s wholly owned foreign subsidiaries are translated from their respective functional currencies at exchange rates in effect at the balance sheet date, and revenue and expenses are translated at the monthly average exchanges rates. These translations result in differences called foreign currency translation adjustments. Realized foreign currency transaction gains or losses were not significant during the years ended December 31, 2020, 2019 and 2018 and are recorded in “Other income (expense), net” in the Company's Consolidated Statements of Comprehensive Loss.

10. Income Taxes

The domestic and foreign components of income (loss) before provision for incomes taxes were as follows (in thousands):

Years Ended December 31,

Provision for income taxes consisted of the following (in thousands):

Years Ended December 31,

Current:

Deferred foreign income tax 8 14 65

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The differences between the statutory and effective tax rates, expressed as a percentage of net income (loss) before income taxes, were as follows:

Years Ended December 31,

State statutory rate 0.1 5.6 5.7

Foreign operations 0.6 (2.8) 0.3

Foreign income inclusion — (1.3) (1.2)

Stock-based compensation (4.1) (5.1) (4.3)

Other permanent items 0.6 (2.0) (1.6)

Net operating loss expiration 37.4 — —

ASC 606 adjustment — — (2.0)

The significant components of the Company’s deferred tax assets were as follows (in thousands):

December 31,

Deferred tax assets:

Depreciation and amortization 681 1,541

All deferred taxes, along with any related valuation allowance, are classified in the Consolidated Balance Sheet as long-term.

Management reviews the recognition of deferred tax assets to determine if realization of such assets is more likely than not. The realization of the Company’s deferred tax assets is dependent upon the evaluation of historic losses, reversing temporary differences, and future earnings. As of December 31, 2020, the positive evidence includes 3 years of cumulative U.S. profitability. The negative evidence includes historic cumulative losses from 1999 through the third quarter of 2020, expiring attributes that are unavailable for utilization, uneven financial results from year to year, and uncertainly related to the COVID-19 pandemic which makes the evaluation of future earnings challenging. Using the more likely than not criteria specified in the applicable accounting guidance, this negative evidence cannot be overcome by positive evidence currently available to the Company. As a result, the Company has maintained a full valuation allowance against its deferred tax assets with the exception of certain foreign deferred tax assets. The Company’s valuation allowance decreased by $16.5 million in 2020 and increased by $2.8 million in 2019.

As of December 31, 2020, the Company had U.S. federal and state net operating losses of approximately $518.4 million and $110.6 million, respectively. The U.S. federal net operating loss carryforwards have begun to expire and will continue to expire at various dates through 2040 if not utilized. The state net operating loss carryforwards have begun to expire and will continue to expire at various dates through 2040, if not utilized. Additionally, the Company has U.S. federal, California and other U.S. states research and development credits of approximately $37.3 million, $38.0 million and $3.1 million, respectively, as of December 31, 2020. The U.S. federal research and development credits will begin to expire in 2020 and the California research

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and development credits have no expiration date. The credits related to other various U.S. states have begun to expire and will continue to expire at various dates through 2035.

In 2019, the Company reassessed its plan to continue to reinvest its foreign earnings overseas. The Company no longer asserts ASC 740-30 indefinite reinvestment of its historical non-U.S. earnings or future non-U.S. earnings. As such, for the year ended December 31, 2020, the Company recorded a current and cumulative tax expense of $0.1 million and $0.6 million, respectively, for the estimated withholding, state income tax and foreign income tax associated with repatriating non-U.S. earnings back to the United States.

Uncertain Tax Positions

ASC 740, “Income Taxes,” prescribes a recognition threshold and measurement attribute to the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The guidance also provides guidance on derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The standard requires the Company to recognize the financial statement effects of an uncertain tax position when it is more likely than not that such position will be sustained upon audit. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as interest expense and income tax expense, respectively, in statements of comprehensive loss.

The following table reconciles the Company’s unrecognized tax benefits (in thousands):

Years Ended December 31,

Addition (reduction) for tax positions related to prior year (163) (382)

Additions for tax positions related to current year 1,415 648

As of December 31, 2020 and 2019, the Company had unrecognized tax benefits of $23.5 million and $22.3 million, respectively, none of which would affect the Company’s effective tax rate if recognized. There were no accrued interest or penalties for uncertain income tax as of December 31, 2020.

The Company files tax returns in the United States and various state jurisdictions, the United Kingdom, China and Brazil. The tax years 2000 through 2020 remain open and subject to examination by the appropriate governmental agencies due to tax attribute carryforwards.

11. Net Income (Loss) Per Common Share

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):

Years Ended December 31,

Numerator:

Denominator:

Effect of dilutive potential common shares 2,924 — —

Basic net income (loss) per common share $ 0.57 $ (0.32) $ (0.37)

Diluted net income (loss) per common share $ 0.54 $ (0.32) $ (0.37)

Potentially dilutive shares excluded, weighted-average 753 6,607 5,833

Unvested restricted stock awards are included in the calculation of basic weighted-average shares because such shares are participating securities; however, the impact was immaterial.

Potentially dilutive shares have been excluded from the computation of diluted net income (loss) per common share when their effect is antidilutive. These antidilutive shares were primarily from stock options and RSUs. 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.

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12. Revenue from Contracts with Customers

The Company develops, markets and sells communications access systems and software, and there are no segment managers who are held accountable for operations, operating results and plans for levels or components below the Company unit level. Accordingly, the Company is considered to be in a single reporting segment and operating unit structure. The Company’s chief operating decision maker is the Company’s Chief Executive Officer, who reviews financial information presented on a Company-wide basis, for purposes of allocating resources and evaluating financial performance.

Geographic Information:

The following is a summary of revenue by geographic region based upon the location of the customers (in thousands):

Years Ended December 31,

The Company’s property and equipment, net of accumulated depreciation, are located in the following geographical areas (in thousands):

December 31,

Contract Asset

The primary contract asset is revenue recognized on professional services contracts where the services are transferred to the customer over time, which has yet to be billed, and is classified within accounts receivable. Amounts are billed in accordance with the agreed-upon contractual terms. The balance at December 31, 2019 was $5.0 million of which $0.4 million remained in the Company's Consolidated Balance Sheet at December 31, 2020. The closing balance as of December 31, 2020 was $2.3 million of which the Company expects to bill 92% of the balance during 2021. The decrease in the contract asset was driven by billings for past services as well as the timing and volume of professional services contracts.

Contract Liability

Deferred revenue consisted of the following (in thousands):

December 31,

Current:

Long-term:

The increase in the deferred revenue balance for the year ended December 31, 2020 is primarily driven by cash payments received or due in advance of satisfying the Company's performance obligations, offset by $15.8 million of revenue recognized that was included in the deferred revenue balance at the beginning of the year.

Revenue allocated to remaining performance obligations represent contract revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. This amount was

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$71.1 million as of December 31, 2020, and the Company expects to recognize 40% of such revenue over the next 12 months and the remainder thereafter.

Contract Costs

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 December 31, 2020, the unamortized balance of deferred commissions was $0.7 million. For the year ended December 31, 2020, the amount of amortization was $0.2 million, and there was no impairment loss in relation to the costs capitalized.

Concentration of Customer Risk

Concentrations of credit risk in relation to customers with an accounts receivable balance of 10% or greater of total accounts receivable and customers with net revenue of 10% or greater of total revenue are presented below for the periods indicated.

Percentage of Accounts Receivable Percentage of Revenue

CALX US Equity

CALX · 10-K · period ended 2020-12-31

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

ITEM 8. Financial Statements and Supplementary Data

CALX US Equity☆

CALX · 10-K · period ended 2020-12-31

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

ITEM 8. Financial Statements and Supplementary Data

CALX US Equity