Attached files
| file | filename |
|---|---|
| EX-32.1 - EXHIBIT 32.1 - CALIX, INC | calx_20q1ex321.htm |
| EX-31.2 - EXHIBIT 31.2 - CALIX, INC | calx_20q1ex312.htm |
| EX-31.1 - EXHIBIT 31.1 - CALIX, INC | calx_20q1ex311.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 28, 2020
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-34674
Calix, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 68-0438710 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
2777 Orchard Parkway, San Jose, CA 95134
(Address of Principal Executive Offices) (Zip Code)
(408) 514-3000
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||
Common Stock, par value $0.025 per share | CALX | New York Stock Exchange (NYSE) | ||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: x No: o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes: x No: o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | o | Accelerated Filer | x | ||||
Non-accelerated filer | o | Smaller Reporting Company | o | ||||
Emerging Growth Company | o | ||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes: o No: x
As of April 23, 2020, there were 56,624,351 shares of the Registrant’s common stock, par value $0.025 outstanding.
CALIX, INC.
FORM 10-Q
TABLE OF CONTENTS
3
PART I. FINANCIAL INFORMATION
ITEM 1. | Financial Statements |
CALIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
March 28, 2020 | December 31, 2019 | |||||||
(Unaudited) | (See Note 1) | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 46,189 | $ | 46,829 | ||||
Restricted cash | 628 | 628 | ||||||
Accounts receivable, net | 67,136 | 46,509 | ||||||
Inventory | 30,539 | 40,153 | ||||||
Prepaid expenses and other current assets | 11,223 | 9,698 | ||||||
Total current assets | 155,715 | 143,817 | ||||||
Property and equipment, net | 20,402 | 21,527 | ||||||
Right-of-use operating leases | 15,212 | 15,864 | ||||||
Goodwill | 116,175 | 116,175 | ||||||
Other assets | 16,550 | 19,440 | ||||||
$ | 324,054 | $ | 316,823 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 20,464 | $ | 10,789 | ||||
Accrued liabilities | 57,975 | 57,546 | ||||||
Deferred revenue | 19,912 | 17,158 | ||||||
Line of credit | 30,000 | 30,000 | ||||||
Total current liabilities | 128,351 | 115,493 | ||||||
Long-term portion of deferred revenue | 17,656 | 18,340 | ||||||
Operating leases | 13,642 | 14,337 | ||||||
Other long-term liabilities | 13,490 | 14,625 | ||||||
Total liabilities | 173,139 | 162,795 | ||||||
Commitments and contingencies (See Note 6) | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, $0.025 par value; 5,000 shares authorized; no shares issued and outstanding as of March 28, 2020 and December 31, 2019 | — | — | ||||||
Common stock, $0.025 par value; 100,000 shares authorized; 61,958 shares issued and 56,628 shares outstanding as of March 28, 2020, and 61,778 shares issued and 56,448 shares outstanding as of December 31, 2019 | 1,549 | 1,545 | ||||||
Additional paid-in capital | 899,978 | 895,899 | ||||||
Accumulated other comprehensive loss | (1,106 | ) | (854 | ) | ||||
Accumulated deficit | (709,520 | ) | (702,576 | ) | ||||
Treasury stock, 5,330 shares as of March 28, 2020 and December 31, 2019 | (39,986 | ) | (39,986 | ) | ||||
Total stockholders’ equity | 150,915 | 154,028 | ||||||
$ | 324,054 | $ | 316,823 | |||||
See accompanying notes to condensed consolidated financial statements.
4
CALIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands, except per share data)
(Unaudited)
Three Months Ended | ||||||||
March 28, 2020 | March 30, 2019 | |||||||
Revenue: | ||||||||
Systems | $ | 94,509 | $ | 82,360 | ||||
Services | 7,173 | 6,990 | ||||||
Total revenue | 101,682 | 89,350 | ||||||
Cost of revenue: | ||||||||
Systems | 50,708 | 44,601 | ||||||
Services | 5,350 | 6,406 | ||||||
Total cost of revenue | 56,058 | 51,007 | ||||||
Gross profit | 45,624 | 38,343 | ||||||
Operating expenses: | ||||||||
Research and development | 20,671 | 19,330 | ||||||
Sales and marketing | 20,624 | 19,339 | ||||||
General and administrative | 10,669 | 8,787 | ||||||
Total operating expenses | 51,964 | 47,456 | ||||||
Loss from operations | (6,340 | ) | (9,113 | ) | ||||
Interest and other expense, net: | ||||||||
Interest expense, net | (290 | ) | (108 | ) | ||||
Other income (expense), net | 15 | (391 | ) | |||||
Total interest and other expense, net | (275 | ) | (499 | ) | ||||
Loss before provision for income taxes | (6,615 | ) | (9,612 | ) | ||||
Provision for income taxes | 329 | 155 | ||||||
Net loss | $ | (6,944 | ) | $ | (9,767 | ) | ||
Net loss per common share: | ||||||||
Basic and diluted | $ | (0.12 | ) | $ | (0.18 | ) | ||
Weighted-average number of shares used to compute | ||||||||
net loss per common share: | ||||||||
Basic | 56,540 | 54,048 | ||||||
Diluted | 56,540 | 54,048 | ||||||
Net loss | $ | (6,944 | ) | $ | (9,767 | ) | ||
Other comprehensive income (loss), net of tax - foreign currency translation adjustments, net | (252 | ) | 266 | |||||
Comprehensive loss | $ | (7,196 | ) | $ | (9,501 | ) | ||
See accompanying notes to condensed consolidated financial statements.
5
CALIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, unaudited)
Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Treasury Stock | Total Stockholders’ Equity | |||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||
Balance at December 31, 2019 | 56,448 | $ | 1,545 | $ | 895,899 | $ | (854 | ) | $ | (702,576 | ) | $ | (39,986 | ) | $ | 154,028 | ||||||||||
Stock-based compensation | — | — | 2,984 | — | — | — | 2,984 | |||||||||||||||||||
Exercise of stock options | 157 | 4 | 1,095 | — | — | — | 1,099 | |||||||||||||||||||
Issuance of vested performance restricted stock units and restricted stock units, net of taxes withheld | 48 | 1 | (1 | ) | — | — | — | — | ||||||||||||||||||
Stock forfeited under employee stock purchase plans prior to vesting | (25 | ) | (1 | ) | 1 | — | — | — | — | |||||||||||||||||
Net loss | — | — | — | — | (6,944 | ) | — | (6,944 | ) | |||||||||||||||||
Other comprehensive loss | — | — | — | (252 | ) | — | — | (252 | ) | |||||||||||||||||
Balance at March 28, 2020 | 56,628 | $ | 1,549 | $ | 899,978 | $ | (1,106 | ) | $ | (709,520 | ) | $ | (39,986 | ) | $ | 150,915 | ||||||||||
Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Treasury Stock | Total Stockholders’ Equity | |||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||
Balance at December 31, 2018 | 53,955 | $ | 1,482 | $ | 876,073 | $ | (753 | ) | $ | (684,882 | ) | $ | (39,986 | ) | $ | 151,934 | ||||||||||
Stock-based compensation | — | — | 3,145 | — | — | — | 3,145 | |||||||||||||||||||
Exercise of stock options | 49 | 1 | 289 | — | — | — | 290 | |||||||||||||||||||
Issuance of vested performance restricted stock units and restricted stock units, net of taxes withheld | 167 | 5 | (32 | ) | — | — | — | (27 | ) | |||||||||||||||||
Stock forfeited under employee stock purchase plans prior to vesting | (7 | ) | — | — | — | — | — | — | ||||||||||||||||||
Net loss | — | — | — | — | (9,767 | ) | — | (9,767 | ) | |||||||||||||||||
Other comprehensive income | — | — | — | 266 | — | — | 266 | |||||||||||||||||||
Balance at March 30, 2019 | 54,164 | $ | 1,488 | $ | 879,475 | $ | (487 | ) | $ | (694,649 | ) | $ | (39,986 | ) | $ | 145,841 | ||||||||||
See accompanying notes to condensed consolidated financial statements.
6
CALIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
Three Months Ended | ||||||||
March 28, 2020 | March 30, 2019 | |||||||
Operating activities: | ||||||||
Net loss | $ | (6,944 | ) | $ | (9,767 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Stock-based compensation | 2,984 | 3,145 | ||||||
Depreciation and amortization | 3,544 | 2,281 | ||||||
Loss on asset retirements | — | 95 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable, net | (20,627 | ) | 11,823 | |||||
Inventory | 9,614 | 2,925 | ||||||
Prepaid expenses and other assets | 758 | (1,935 | ) | |||||
Accounts payable | 9,472 | (6,349 | ) | |||||
Accrued liabilities | 1,367 | (1,614 | ) | |||||
Deferred revenue | 2,071 | 719 | ||||||
Other long-term liabilities | (990 | ) | (1,696 | ) | ||||
Net cash provided by (used in) operating activities | 1,249 | (373 | ) | |||||
Investing activities: | ||||||||
Purchases of property and equipment | (1,729 | ) | (5,039 | ) | ||||
Net cash used in investing activities | (1,729 | ) | (5,039 | ) | ||||
Financing activities: | ||||||||
Proceeds from exercise of stock options | 1,099 | 290 | ||||||
Taxes paid for awards vested under equity incentive plan | — | (27 | ) | |||||
Payments related to financing arrangements | (842 | ) | (653 | ) | ||||
Proceeds from line of credit | 30,000 | 30,000 | ||||||
Repayment of line of credit | (30,000 | ) | (30,000 | ) | ||||
Payments to originate the line of credit | (177 | ) | — | |||||
Net cash provided by (used in) financing activities | 80 | (390 | ) | |||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (240 | ) | 223 | |||||
Net decrease in cash, cash equivalents and restricted cash | (640 | ) | (5,579 | ) | ||||
Cash, cash equivalents and restricted cash at beginning of period | 47,457 | 50,274 | ||||||
Cash, cash equivalents and restricted cash at end of period | $ | 46,817 | $ | 44,695 | ||||
See accompanying notes to condensed consolidated financial statements.
7
CALIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Company and Basis of Presentation
Company
Calix, Inc. (together with its subsidiaries, “Calix” or the “Company”) was incorporated in August 1999 and is a Delaware corporation. The Company is a leading global provider of cloud and software platforms, systems and services required to deliver the unified access network and smart home and business services of tomorrow. The Company’s platforms and services help its customers build next generation networks by embracing a DevOps operating model, optimizing the subscriber experience by leveraging big data analytics and turn the complexity of the smart home and business into new revenue streams. The Company's cloud and software platforms, systems and services enable communication service providers (“CSPs”) to provide a wide range of revenue-generating services, from basic voice and data to advanced broadband services, over legacy and next-generation access networks. The Company focuses on CSP access networks, the portion of the network that governs available bandwidth and determines the range and quality of services that can be offered to subscribers.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements, including the accounts of Calix, Inc. and its wholly-owned subsidiaries, have been prepared in accordance with the requirements of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. generally accepted accounting principles (“GAAP”) can be condensed or omitted. In the opinion of management, the financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of the Company’s financial position and operating results. All intercompany balances and transactions have been eliminated in consolidation. The Condensed Consolidated Balance Sheet at December 31, 2019 has been derived from the audited financial statements at that date.
The results of the Company’s operations can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year or any future periods. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
The Company’s fiscal year begins on January 1st and ends on December 31st. Quarterly periods are based on a 4-4-5 calendar with the first, second and third quarters ending on the 13th Saturday of each fiscal period. As a result, the Company had one less day in the three months ended March 28, 2020 than for the three months ended March 30, 2019. The preparation of financial statements in conformity with GAAP for interim financial reporting requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Risks and Uncertainties
The Company is subject to risks and uncertainties as a result of the recent COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on the Company's business is highly uncertain and difficult to predict. The Company has instituted office closures, implemented shelter-in-place orders and restrictions and instituted a mandatory work from home policy for substantially all of its employees. The spread of COVID-19 has impacted the Company's supply chain operations through restrictions and shutdown of business activities by suppliers whom the Company relies on for sourcing components and materials and third-party partners whom the Company relies on for manufacturing, warehousing and logistics services. Although demand for the Company's products have remained strong as subscribers seek more bandwidth and better WiFi, customers’ purchasing decisions may be impacted by the pandemic, which could in turn impact the Company's revenue and results of operations. As of the date of issuance of these condensed consolidated financial statements, the extent to which the COVID-19 pandemic may materially impact the Company's financial condition, liquidity, or results of operations is uncertain.
2. Significant Accounting Policies
The Company’s significant accounting policies are disclosed in its Annual Report on Form 10-K for the year ended December 31, 2019. The Company’s significant accounting policies did not change during the three months ended March 28, 2020.
8
Newly Adopted Accounting Standard
The Company did not adopt any new accounting standards during the three months ended March 28, 2020 that were significant to the Company.
Recent Accounting Pronouncements Not Yet Adopted
There have been no additional accounting pronouncements or changes in accounting pronouncements during the three months ended March 28, 2020, as compared to the recent accounting pronouncements described in the Company's Annual Report on Form 10-K for the year ended December 31, 2019, that are significant or potentially significant to the Company.
3. Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash consisted of the following (in thousands):
March 28, 2020 | December 31, 2019 | |||||||
Cash and cash equivalents: | ||||||||
Cash | $ | 46,189 | $ | 46,815 | ||||
Money market funds | — | 14 | ||||||
Total cash and cash equivalents | 46,189 | 46,829 | ||||||
Restricted cash | 628 | 628 | ||||||
$ | 46,817 | $ | 47,457 | |||||
The carrying amounts of the Company’s money market funds approximate their fair values due to their nature, duration and short maturities.
4. Balance Sheet Details
Accounts receivable, net consisted of the following (in thousands):
March 28, 2020 | December 31, 2019 | |||||||
Accounts receivable | $ | 67,574 | $ | 46,883 | ||||
Allowance for doubtful accounts | (438 | ) | (374 | ) | ||||
$ | 67,136 | $ | 46,509 | |||||
Inventory consisted of the following (in thousands):
March 28, 2020 | December 31, 2019 | |||||||
Raw materials | $ | 206 | $ | 656 | ||||
Finished goods | 30,333 | 39,497 | ||||||
$ | 30,539 | $ | 40,153 | |||||
Property and equipment, net consisted of the following (in thousands):
March 28, 2020 | December 31, 2019 | |||||||
Test equipment | $ | 37,216 | $ | 37,001 | ||||
Software | 20,879 | 20,646 | ||||||
Computer equipment | 11,063 | 10,835 | ||||||
Furniture and fixtures | 2,340 | 2,342 | ||||||
Leasehold improvements | 2,031 | 2,047 | ||||||
Total | 73,529 | 72,871 | ||||||
Accumulated depreciation and amortization | (53,127 | ) | (51,344 | ) | ||||
$ | 20,402 | $ | 21,527 | |||||
9
Other long-term assets consisted of the following (in thousands):
March 28, 2020 | December 31, 2019 | |||||||
Intangible asset | $ | 11,491 | $ | 12,148 | ||||
Capitalized cloud implementation costs | 3,638 | 6,089 | ||||||
Other long-term assets | 1,421 | 1,203 | ||||||
$ | 16,550 | $ | 19,440 | |||||
Intangible Asset
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 intangible asset has an estimated five-year useful life and is being amortized using the greater of the ratio of current gross revenue for the products to the total of current and anticipated future gross revenue for the products or the straight-line method.
Capitalized Cloud Implementation Costs
In January 2020, the Company went live with its cloud-based enterprise resource planning (“ERP”) system. As a result the Company capitalized $7.5 million of implementation costs in both prepaid expenses and other current assets and other long-term assets in the Company's Condensed Consolidated Balance Sheet. This amount is being amortized over a period of 29 months, representing the remaining contractual term. The amortization expense for the three months ended March 28, 2020 was $0.8 million.
Accrued liabilities consisted of the following (in thousands):
March 28, 2020 | December 31, 2019 | |||||||
Compensation and related benefits | $ | 15,854 | $ | 19,010 | ||||
Customer advances or rebates | 7,767 | 7,252 | ||||||
Warranty and retrofit | 7,430 | 7,294 | ||||||
Professional and consulting fees | 5,722 | 4,996 | ||||||
Current portion of financing arrangements | 4,618 | 4,044 | ||||||
Component inventory held by suppliers | 4,234 | 1,925 | ||||||
Operating leases | 2,728 | 2,663 | ||||||
Taxes payable | 2,729 | 2,021 | ||||||
Operations | 1,163 | 1,053 | ||||||
Freight | 883 | 808 | ||||||
Product returns | 801 | 919 | ||||||
Insurance | 671 | 852 | ||||||
Other | 3,375 | 4,709 | ||||||
$ | 57,975 | $ | 57,546 | |||||
10
Warranty and Retrofit
The Company provides a standard warranty for its hardware products. Hardware generally has a one- or five-year standard warranty from the date of shipment. Under certain circumstances, the Company also provides fixes on specifically identified performance failures for products that are outside of the standard warranty period and recognizes estimated costs related to retrofit activities upon identification of such product failures. The Company accrues for potential warranty and retrofit claims based on the Company’s historical product failure rates and historical costs incurred in correcting product failures along with other relevant information related to any specifically identified product failures. The Company’s warranty and retrofit accruals are based on estimates of losses that are probable based on information available. The adequacy of the accrual is reviewed on a periodic basis and adjusted, if necessary, based on additional information as it becomes available. Changes in the Company’s warranty and retrofit accrual are as follows (in thousands):
Three Months Ended | ||||||||
March 28, 2020 | March 30, 2019 | |||||||
Balance at beginning of period | $ | 7,294 | $ | 8,547 | ||||
Provision for warranty and retrofit charged to cost of revenue | 1,349 | 706 | ||||||
Utilization of reserve | (1,213 | ) | (1,087 | ) | ||||
Balance at end of period | $ | 7,430 | $ | 8,166 | ||||
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 will bear interest at a rate per annum equal to LIBOR (customarily defined) plus an applicable margin between 1.50% to 2.25% and Prime Rate (customarily defined) plus an applicable margin between 0.50% to 1.25%, in each case largely based on a fixed charge coverage ratio measured at the end of each fiscal quarter. The availability of borrowings under the BofA Loan Agreement is subject to certain conditions and requirements, including among others, if at any time the Company’s availability is less than $5.0 million, the Company must maintain a minimum fixed charge coverage ratio (“FCCR”) of 1.0 to 1.0. As of March 28, 2020, the Company was in compliance with these requirements, had borrowings outstanding of $30.0 million, availability of $5.0 million and an FCCR of 7.9 to 1.0. The Company's interest rate on the line of credit was 4.5% as of March 28, 2020.
Financing Arrangements
During 2018, the Company entered into financing arrangements to purchase lab and test equipment for approximately $5.1 million. Each agreement is to be paid over 36 months with a weighted average interest rate of 6.2%. As of March 28, 2020, there was $2.5 million outstanding under these financing arrangements, which is included in accrued liabilities and other long-term liabilities in the accompanying Condensed Consolidated Balance Sheet.
During 2017, 2018 and 2019, the Company entered into financing arrangements for consulting services of $5.4 million in connection with the Company’s ERP implementation. The current amounts due under this agreement are to be paid over a weighted average term of 2.4 years with a weighted average interest rate of 6.5%. As of March 28, 2020, there was $1.8 million outstanding under these arrangements, which is included in accrued liabilities and other long-term liabilities in the accompanying Condensed Consolidated Balance Sheet.
11
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 March 28, 2020 (in thousands):
Period | Minimum Future Lease Payments | |||
Remainder of 2020 | $ | 2,846 | ||
2021 | 3,604 | |||
2022 | 3,461 | |||
2023 | 3,578 | |||
2024 | 3,388 | |||
Thereafter | 2,881 | |||
Total future minimum lease payments | 19,758 | |||
Less imputed interest | (3,388 | ) | ||
$ | 16,370 | |||
Operating lease liability consisted of the following (in thousands):
March 28, 2020 | ||||
Accrued liabilities - current portion of operating leases | $ | 2,728 | ||
Operating leases | 13,642 | |||
$ | 16,370 | |||
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 $13.5 million and are included in the table above.
The weighted average discount rate for the Company's operating leases as of March 28, 2020 was 7.0%. The weighted average remaining lease term as of March 28, 2020 was 4.9 years.
For the three months ended March 28, 2020 and March 30, 2019, total rent expense of the Company was $1.1 million and $1.2 million, respectively. Cash paid within operating cash flows for operating leases was $1.0 million and $0.8 million for three months ended March 28, 2020 and March 30, 2019, respectively.
Purchase Commitments
The Company’s contract manufacturers (“CMs”) and original design manufacturers (“ODMs”) place orders for certain component inventory in advance based upon the Company’s build forecasts in order to reduce manufacturing lead times and ensure adequate component supply. The components are used by the CMs and ODMs to build the products included in the build forecasts. The Company generally does not take ownership of the components held by CMs and ODMs. The Company places purchase orders with its CMs and ODMs in order to fulfill its monthly finished product inventory requirements. The Company incurs a liability when the CMs and ODMs convert the component inventory to a finished product and takes ownership of the finished goods inventory. In the event of termination of services with a manufacturing partner, the Company has purchased, and may be required to purchase in the future, certain of the remaining components inventory held by the CM or ODM as well as any outstanding orders pursuant to the contractual provisions with such CM or ODM. As of March 28, 2020, the Company had approximately $74.9 million of outstanding purchase commitments for inventories to be delivered by its suppliers, including CMs and ODMs, within one year.
The Company has from time to time, and subject to certain conditions, reimbursed its 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 parts by its suppliers, or in cases where inventory levels greatly exceed projected demand. The estimated excess and obsolete inventory liabilities related to such manufacturing and engineering change orders and other factors, which are included in accrued liabilities in the accompanying balance sheets, were $4.2 million and $1.9 million as of March 28, 2020 and December 31, 2019, respectively. The Company records the related charges in cost of systems revenue in its Condensed Consolidated Statements of Comprehensive Loss.
12
Litigation
From time to time, the Company is involved in various legal proceedings arising from the normal course of business activities. The Company is not currently a party to any legal proceedings that, if determined adversely to the Company, in management’s opinion, are currently expected to individually or in the aggregate have a material adverse effect on the Company’s business, operating results or financial condition taken as a whole.
7. Stockholders’ Equity
2019 Equity Incentive Award Plan
At the annual meeting of stockholders of the Company in May 2019, 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; however, the terms and conditions of the 2010 Plan will continue to govern any outstanding awards granted under the 2010 Plan.
Employees and consultants of the Company, its subsidiaries and affiliates, as well as members of the Company's Board of Directors, are eligible to receive awards under the 2019 Plan. The 2019 Plan provides for the grant of stock options, including incentive stock options and nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), other stock or cash-based awards and dividend equivalents to eligible individuals.
The number of shares available for issuance under the 2019 Plan 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. As of March 28, 2020, there were 2.4 million shares available for issuance under the 2019 Plan.
Stock Options
During the three months ended March 28, 2020, performance-based stock option awards 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. These performance-based stock option awards will vest, subject to certification by the Compensation Committee of the Company’s Board of Directors upon the achievement of the 2020 Performance Targets, as to 25% of the shares of common stock earned on the date of such certification, and as to the remaining 75% of the shares of common stock earned, in substantially equal quarterly installments over the subsequent 36 months, subject to the executive’s continuous service with the Company through the respective vesting dates. 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. The probability of meeting the performance conditions related to these performance-based stock option awards was assessed to be probable as of March 28, 2020, and stock-based compensation expense of $0.3 million was recognized for the three months ended March 28, 2020.
During the three months ended March 30, 2019, performance-based stock option awards 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 performance-based stock option awards contained a one-year performance period and a subsequent three-year service period. The actual number of shares earned was contingent upon achievement of both annual and quarterly corporate financial targets for revenue, non-GAAP gross margin and non-GAAP net income per share for 2019 (collectively, the “2019 Performance Targets”) during the one-year performance period. In February 2020, following the review of the Company’s financial performance for 2019, the Compensation Committee of the Company’s Board of Directors certified that the 2019 Performance Targets (as modified) for the 2019 performance-based stock options were partially met, resulting in an award to each Company executive of 30% of their target shares. One quarter of these performance-based stock option awards vested on this date, and the remaining 75% of the shares of common stock earned will vest in substantially equal quarterly installments over the subsequent 36 months, subject to the executive’s continuous service with the Company through the respective vesting dates.
During the three months ended March 28, 2020, stock options exercisable for up to an aggregate of 50,000 shares were granted with a grant date fair value of $9.16 per share. During the three months ended March 28, 2020, 0.2 million shares of common stock were issued pursuant to the exercise of stock options at a weighted-average exercise price of $7.01 per share. As of March 28, 2020, unrecognized stock-based compensation expense of $7.5 million related to stock options, net of estimated forfeitures, is expected to be recognized over a weighted-average period of 2.8 years.
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Restricted Stock Units
During the three months ended March 28, 2020, RSUs for 48,000 shares of common stock vested. As of March 28, 2020, unrecognized stock-based compensation expense of $0.6 million related to RSUs, net of estimated forfeitures, was expected to be recognized over a weighted-average period of 0.3 years.
Employee Stock Purchase Plans
The Company maintains two employee stock purchase plans - the Amended and Restated Employee Stock Purchase Plan (the “ESPP”) and the Amended and Restated 2017 Nonqualified Employee Stock Purchase Plan (the “NQ ESPP”).
The ESPP allows eligible employees to purchase shares of the Company’s common stock through payroll deductions of up to 15% of their 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.
The offering periods under the ESPP are six-month periods commencing on May 15 and November 15 of each year. The price of common stock purchased under the ESPP is 85% of the lower of the fair market value of the common stock on the commencement date and the end date of each six-month offering period. 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 March 28, 2020, there were 3.2 million shares available for issuance under the ESPP. As of March 28, 2020, unrecognized stock-based compensation expense of $0.2 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. The NQ ESPP provides two six-month offering periods, currently from December 21 through June 20 and June 21 through December 20 of each year. In May 2018, 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 2.5 million shares. The maximum number of shares of common stock currently authorized for issuance under the NQ ESPP is 3.5 million shares, with a maximum of 0.5 million shares allocated per purchase period. As of March 28, 2020, there were 1.6 million shares available for issuance under the NQ ESPP. As of March 28, 2020, unrecognized stock-based compensation expense of $2.7 million related to the NQ ESPP is expected to be recognized over a remaining weighted-average service period of 1.0 years.
Stock-Based Compensation
The following table summarizes stock-based compensation expense (in thousands):
Three months ended | |||||||||
March 28, 2020 | March 30, 2019 | ||||||||
Cost of revenue: | |||||||||
Products | $ | 107 | $ | 155 | |||||
Services | 115 | 99 | |||||||
Research and development | 1,010 | 1,016 | |||||||
Sales and marketing | 956 | 1,074 | |||||||
General and administrative | 796 | 801 | |||||||
$ | 2,984 | $ | 3,145 | ||||||
8. Revenue from Contracts with Customers
The Company derives revenue from contracts with customers primarily from the following and categorizes its revenue as follows:
• | Systems include revenue from the sale of access and premises systems, software platform licenses and cloud-based software subscriptions. |
• | Services include revenue from professional services, customer support, software- and cloud-based maintenance, extended warranty subscriptions, training and managed services. |
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The following is a summary of revenue disaggregated by geographic region based upon the location of the customers (in thousands):
Three Months Ended | ||||||||||
March 28, 2020 | March 30, 2019 | |||||||||
United States | $ | 88,050 | $ | 75,785 | ||||||
Europe | 4,121 | 2,439 | ||||||||
Canada | 3,563 | 3,415 | ||||||||
Caribbean | 2,372 | 2,266 | ||||||||
Middle East | 2,301 | 3,751 | ||||||||
Other | 1,275 | 1,694 | ||||||||
$ | 101,682 | $ | 89,350 | |||||||
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 $1.7 million remained in the Company's Condensed Consolidated Balance Sheet at March 28, 2020. The closing balance at March 28, 2020 was $2.9 million of which the Company expects to bill 58% of the balance during the remainder of 2020. The decrease in the contract asset was driven by billings for past services in the first quarter of 2020 as well as the timing and volume of professional services contracts during the quarter.
Contract Liability
Deferred revenue consisted of the following (in thousands):
March 28, 2020 | December 31, 2019 | |||||||
Current: | ||||||||
Products and services | $ | 15,667 | $ | 12,480 | ||||
Extended warranty | 4,245 | 4,678 | ||||||
19,912 | 17,158 | |||||||
Long-term: | ||||||||
Products and services | 423 | 790 | ||||||
Extended warranty | 17,233 | 17,550 | ||||||
17,656 | 18,340 | |||||||
$ | 37,568 | $ | 35,498 | |||||
The increase in the deferred revenue balance for the three months ended March 28, 2020 is primarily driven by cash payments received or due in advance of satisfying the Company's performance obligations, offset by $6.1 million of revenue recognized that was included in the deferred revenue balance at the beginning of each period, respectively.
Revenue allocated to remaining performance obligations represent contract revenue that has not yet been recognized for contracts greater than one year, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. This amount was $61.1 million as of March 28, 2020, and the Company expects to recognize 46% 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 March 28, 2020, the unamortized balance of deferred commissions was $0.7 million. For the three months ended March 28, 2020, the amount of amortization was less than $0.1 million, and there was no impairment loss in relation to the costs capitalized.
Concentration of Customer Risk
CenturyLink, Inc. represented 15% and 14% of total revenue for the three months ended March 28, 2020 and March 30, 2019, respectively. No other customers accounted for more than 10% of the Company’s total revenue for these periods.
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As of March 28, 2020, CenturyLink, Inc. accounted for 25% of the Company's accounts receivable and Verizon Communications Inc. accounted for 14% of the Company’s account receivable as of March 30, 2019.
9. Income Taxes
The following table presents the provision for income taxes from operations and the effective tax rates for the periods indicated (in thousands, except percentages):
Three Months Ended | ||||||||
March 28, 2020 | March 30, 2019 | |||||||
Provision for income taxes | $ | 329 | $ | 155 | ||||
Effective tax rate | (5.0 | )% | (1.6 | )% | ||||
The effective tax rate for the three months ended March 28, 2020 was determined using an estimated annual effective tax rate adjusted for discrete items, if any, that occurred during the respective periods.
Deferred tax assets are recognized if realization of such assets is more likely than not. The Company has established and continues to maintain a full valuation allowance against its net deferred tax assets, with the exception of certain foreign deferred tax assets, as the Company does not believe that realization of those assets is more likely than not.
The Company’s effective tax rate may be subject to fluctuation during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as the mix of forecasted pre-tax earnings in the various jurisdictions in which it operates, valuation allowances against deferred tax assets, the recognition or de-recognition of tax benefits related to uncertain tax positions and changes in or the interpretation of tax laws in jurisdictions where it conducts business.
10. Net Loss Per Common Share
The following table sets forth the computation of basic and diluted net loss per common share for the periods indicated (in thousands, except per share data):
Three Months Ended | ||||||||
March 28, 2020 | March 30, 2019 | |||||||
Numerator: | ||||||||
Net loss | $ | (6,944 | ) | $ | (9,767 | ) | ||
Denominator: | ||||||||
Weighted-average common shares outstanding used to compute basic net loss per share | 56,540 | 54,048 | ||||||
Basic and diluted net loss per common share | $ | (0.12 | ) | $ | (0.18 | ) | ||
Potentially dilutive shares, weighted average | 7,133 | 6,221 | ||||||
Potentially dilutive shares have been excluded from the computation of diluted net loss per common share when their effect is antidilutive. These antidilutive shares were primarily from stock options, restricted stock units and performance restricted stock units. For each of the periods presented where the Company reported a net loss, the effect of all potentially dilutive securities would be antidilutive, and as a result diluted net loss per common share is the same as basic net loss per common share.
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ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities and Exchange Act of 1934, as amended. All statements other than statements of historical facts are “forward-looking statements” for purposes of these provisions, including any projections of earnings, revenue or other financial items, any statement of or concerning the following: the plans and objectives of management for future operations, proposed new products or licensing, product development, anticipated customer demand or capital expenditures, anticipated growth and trends in our business and industry, future economic and/or market conditions or performance and assumptions underlying any of the above. In some cases, forward-looking statements can be identified by the use of terminology such as “could,” “may,” “will,” “would,” “expects,” “believes,” “intends,” “plans,” “anticipates,” “estimates,” “projects,” “predicts,” “potential,” or “continue” or the negative thereof or other comparable terminology. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including those identified in the Risk Factors discussed in Part II, Item 1A, of this report on Form 10-Q, as well as in other sections of this report and in our Annual Report on Form 10-K for the year ended December 31, 2019. All forward-looking statements and reasons why results may differ included in this Quarterly Report on Form 10-Q are made as of the date hereof, and we assume no obligation to update these forward-looking statements or reasons why actual results might differ.
Overview
We are a leading global provider of cloud and software platforms, systems and services for fiber- and copper-based network architectures and a pioneer in software defined access and cloud products focused on access networks and the subscriber. Our portfolio allows for a broad range of subscriber services to be provisioned and delivered over a single unified network. Our access systems can deliver voice and data services, advanced broadband services, mobile broadband, as well as high-definition video and online gaming. Our most recent generation of premises systems enable CSPs to address the complexity of the smart home and business and offer new services to their device enabled subscribers. We have designed all of our current platforms and related systems so that they can be monitored, analyzed, managed and supported by Calix Cloud.
We market our cloud and software platforms, systems and services to CSPs globally through our direct sales force as well as select resellers. Our customers range from smaller, regional CSPs to some of the world’s largest CSPs. We have enabled approximately 1,600 customers to deploy passive optical, Active Ethernet and point-to-point Ethernet fiber access networks.
Beginning in 2018, the United States enacted a series of tariffs on certain goods manufactured in China. As a result of these tariffs, we incurred U.S. tariff and tariff-related costs of $6.2 million in 2019 and $1.0 million in 2020. In order to mitigate the impact of the tariffs enacted by the United States, we undertook a broad plan to realign our global supply chain by moving substantially all of our production outside of China in addition to other supply chain improvements in the first half of 2019. As a result of the tariffs imposed on a broader list of products in September 2019, we expanded the scope of our global supply chain realignment plan, which is expected to take until the end of 2020 to complete.
Our revenue and potential revenue growth will depend on our ability to sell and license our cloud and software platforms, systems and services to strategically aligned customers, including from market segments such as cable MSOs, WISPs, fiber overbuilders, municipalities and electric cooperatives, in the United States and internationally.
Revenue fluctuations result from many factors, including, but not limited to: increases or decreases in customer orders for our products and services, market, financial or other factors that may delay or materially impact customer purchasing decisions including as a result of uncertainty related to the COVID-19 pandemic, non-availability of products due to supply chain challenges including business closures, manufacturing disruptions and component shortages due to the COVID-19 pandemic, contractual terms with customers that result in delayed revenue recognition and varying budget cycles and seasonal buying patterns of our customers. More specifically, our customers tend to spend less in the first quarter as they are finalizing their annual budgets, and in certain regions, customers are challenged by winter weather conditions that inhibit fiber deployment in outside infrastructure. Our revenue is also dependent upon our customers’ timing of purchases, capital expenditure plans and decisions to upgrade their network or adopt new technologies, including adoption of our software and cloud platform solutions, as well as our ability to grow our customer base.
Cost of revenue is strongly correlated to revenue and tends to fluctuate due to all of the above factors that may cause revenue fluctuations. Factors that impacted our cost of revenue for the three months ended March 28, 2020, and that we expect will impact cost of revenue in future periods, also include: changes in the mix of products delivered, customer location and regional mix, changes in product warranty and incurrence of retrofit costs, changes in the cost of our inventory, including higher costs due to materials shortages including components, supply constraints or unfavorable changes in trade policies, investments to
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support expansion of cloud and customer support offerings, tariffs and associated costs to mitigate the impact of tariffs, amortization of intangibles, asset write-offs, silicon support fees and inventory write-downs. In particular, recently we have seen increases in global freight charges following China’s reopening of manufacturing. Cost of revenue also includes fixed expenses related to our internal operations, which could increase our cost of revenue as a percentage of revenue if there are declines in revenue.
Our gross profit and gross margin fluctuate based on timing of factors such as new product introductions or upgrades to existing products, changes in customer mix and changes in the mix of products demanded and sold (and any related write-downs of existing inventory) and have in the past been negatively impacted by increases in mix of revenue towards professional services, increases in mix of revenue from channel sales rather than direct sales or other unfavorable customer or product mix, shipment volumes and any related volume discounts, changes in our product and services costs, pricing decreases or discounts, customer rebates and incentive programs due to competitive pressure or materials shortages, supply constraints, investments to support expansion of cloud and customer support offerings, tariffs or unfavorable changes in trade policies.
Our operating expenses fluctuate based on the following factors among others: changes in headcount and personnel costs, which comprise a significant portion of our operating expenses; variable compensation due to fluctuations in shipment volumes or level of achievement against performance targets; timing of research and development expenses, including investments in innovative solutions and new customer segments, prototype builds and outsourced development resources; asset write-offs; investments in our business and information technology infrastructure; and fluctuations in stock-based compensation expenses due to timing of equity grants or other factors affecting vesting.
Our net loss was $6.9 million for the three months ended March 28, 2020, respectively, compared to a net loss of $9.8 million for the three months ended March 30, 2019, respectively. Since our inception we have incurred significant losses, and as of March 28, 2020, we had an accumulated deficit of $709.5 million. Further, as a result of factors contributing to the fluctuations described above among other factors, many of which are outside our control, our quarterly operating results fluctuate from period to period. Comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance.
COVID-19 Pandemic
We are subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict, as the response to the pandemic is in its early stages and information is rapidly evolving. We have instituted office closures, implemented shelter-in-place orders and restrictions and instituted a mandatory work from home policy for substantially all of our employees. The spread of COVID-19 has impacted our supply chain operations through restrictions and shutdown of business activities by suppliers whom we rely on for sourcing components and materials and third-party partners whom we rely on for manufacturing, warehousing and logistics services. While we experienced and continue to experience the effects of a supply disruption, it did not have a significant impact on our first quarter of 2020 results. At the same time, the demand for products in the telecommunications industry, including for our products, has remained strong as subscribers seek more bandwidth and better WiFi, exacerbating the impact of the supply disruption. As the global response to address the COVID-19 pandemic evolves, we believe societal behaviors will accelerate and increase demands on the access infrastructure, which would have a favorable impact on the business outlook for Calix. However, in the near term, the impact to the overall economy and its effect on consumer buying decisions create significant uncertainty, which could in turn negatively impact our revenue and results of operations. The extent to which the COVID-19 pandemic may materially impact our financial condition, liquidity or results of operations is uncertain.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with U.S. GAAP. These accounting principles require us to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Management bases its estimates, assumptions and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. To the extent there are material differences between these estimates and actual results, our financial statements may be affected. Our management evaluates its estimates, assumptions and judgments on an ongoing basis.
Our critical accounting policies and estimates, which are revenue recognition and inventory valuation, are described under “Critical Accounting Policies and Estimates” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2019. For the three months ended March 28, 2020, there have been no significant changes in our critical accounting policies and estimates.
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Recent Accounting Pronouncements
There have been no additional accounting pronouncements or changes in accounting pronouncements during the three months ended March 28, 2020, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the year ended December 31, 2019, that are significant or potentially significant to us.
Results of Operations
Comparison of the Three Months Ended March 28, 2020 and March 30, 2019
Revenue
Our revenue is comprised of the following:
• | 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. |
The following table sets forth our revenue (dollars in thousands):
Three Months Ended | |||||||||||||||
March 28, 2020 | March 30, 2019 | Variance in Dollars | Variance in Percent | ||||||||||||
Revenue: | |||||||||||||||
Systems | $ | 94,509 | $ | 82,360 | $ | 12,149 | 15 | % | |||||||
Services | 7,173 | 6,990 | 183 | 3 | % | ||||||||||
$ | 101,682 | $ | 89,350 | $ | 12,332 | 14 | % | ||||||||
Percent of total revenue: | |||||||||||||||
Systems | 93 | % | 92 | % | |||||||||||
Services | 7 | % | 8 | % | |||||||||||
100 | % | 100 | % | ||||||||||||
Our revenue increased by $12.3 million for the three months ended March 28, 2020, as compared to the corresponding period in 2019 due to higher systems revenue of $12.1 million and higher services revenue of $0.2 million. The increase in systems revenue was primarily due to higher revenue from our small, regional customers and to a lesser extent our medium-sized incumbent local exchange carrier, or ILEC, customers. Revenue in first quarter of 2019 was impacted by production challenges and delays associated with our global supply chain realignment efforts. Services revenue was relatively flat compared to the same period in 2019.
For the three months ended March 28, 2020, revenue generated in the United States was $88.1 million, or 87% of our total revenue, compared to $75.8 million, or 85% of our total revenue, for the same period in 2019. International revenue was $13.6 million, or 13% of our total revenue, for the three months ended March 28, 2020, as compared to $13.6 million, or 15% of our total revenue, for the same period in 2019.
Only CenturyLink, Inc. accounted for more than 10% of the Company's total revenue, representing 15% and 14% of total revenue for the first quarter of 2020 and 2019, respectively.
Cost of Revenue, Gross Profit and Gross Margin
The following table sets forth our cost of revenue (dollars in thousands):
Three Months Ended | |||||||||||||||
March 28, 2020 | March 30, 2019 | Variance in Dollars | Variance in Percent | ||||||||||||
Cost of revenue: | |||||||||||||||
Systems | $ | 50,708 | $ | 44,601 | $ | 6,107 | 14 | % | |||||||
Services | 5,350 | 6,406 | (1,056 | ) | (16 | )% | |||||||||
$ | 56,058 | $ | 51,007 | $ | 5,051 | 10 | % | ||||||||
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Our cost of revenue increased by $5.1 million for the three months ended March 28, 2020 as compared with the corresponding period in 2019. The $6.1 million increase in our systems cost of revenue was consistent with the increase in revenue for the three months ended March 28, 2020 compared with the corresponding period in 2019. The decrease in services cost of revenue was mainly due to reduced personnel costs for the three months ended March 28, 2020 compared with the corresponding period in 2019.
The following table sets forth our gross profit and gross margin (dollars in thousands):
Three Months Ended | |||||||||||||||
March 28, 2020 | March 30, 2019 | Variance in Dollars | Variance in Percent | ||||||||||||
Gross profit: | |||||||||||||||
Systems | $ | 43,801 | $ | 37,759 | $ | 6,042 | 16 | % | |||||||
Services | 1,823 | 584 | 1,239 | 212 | % | ||||||||||
$ | 45,624 | $ | 38,343 | $ | 7,281 | 19 | % | ||||||||
Gross margin: | |||||||||||||||
Systems | 46.3 | % | 45.8 | % | |||||||||||
Services | 25.4 | % | 8.4 | % | |||||||||||
Overall | 44.9 | % | 42.9 | % | |||||||||||
Gross profit increased to $45.6 million for the three months ended March 28, 2020, from $38.3 million during the corresponding period in 2019 primarily due to higher systems and services gross margin.
During the three months ended March 28, 2020, systems gross margin was negatively impacted by U.S. tariff and tariff-related costs of $1.0 million, or 100 basis points, and intangible asset amortization of $0.7 million, or 70 basis points. Excluding the impact of U.S. tariff and tariff-related costs and intangible assets amortization, systems gross margin was 48.1% for the three months ended March 28, 2020. During the three months ended March 30, 2019, systems gross margin was negatively impacted by U.S. tariff and tariff-related costs of $2.2 million, or 260 basis points. There was no intangible asset amortization in the three months ended March 30, 2019. Excluding the impact of U.S. tariff and tariff-related costs, systems gross margin was 48.5% for the three months ended March 30, 2019. Systems gross margin excluding U.S. tariff and tariff-related costs and intangible assets amortization declined 40 basis points for the three months ended March 28, 2020 compared the corresponding period in 2019, mainly due to a less favorable customer and product mix, partially offset by continued growth in our all-platform offerings.
Services gross margin increased for the three months ended March 28, 2020 compared to the corresponding period in 2019 due to lower personnel costs as our service revenue mix shifts away from low gross margin deployment services to higher gross margin software maintenance and services aligned with our platform offerings.
Operating Expenses
Research and Development Expenses
The following table sets forth our research and development expenses (dollars in thousands):
Three Months Ended | |||||||||||||||
March 28, 2020 | March 30, 2019 | Variance in Dollars | Variance in Percent | ||||||||||||
Research and development | $ | 20,671 | $ | 19,330 | $ | 1,341 | 7 | % | |||||||
Percent of total revenue | 20 | % | 22 | % | |||||||||||
Research and development expenses for the three months ended March 28, 2020 increased by $1.3 million as compared with the corresponding period in 2019 mainly due to higher personnel expenses of $1.1 million, primarily related to incentive compensation expense in 2020 compared to no incentive compensation earned in the year ago period, and higher outside services expenses of $0.7 million. This increase was partially offset by decreases in equipment expenses of $0.2 million.
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Sales and Marketing Expenses
The following table sets forth our sales and marketing expenses (dollars in thousands):
Three Months Ended | |||||||||||||||
March 28, 2020 | March 30, 2019 | Variance in Dollars | Variance in Percent | ||||||||||||
Sales and marketing | $ | 20,624 | $ | 19,339 | $ | 1,285 | 7 | % | |||||||
Percent of total revenue | 20 | % | 22 | % | |||||||||||
Sales and marketing expenses for the three months ended March 28, 2020 increased by $1.3 million as compared with the corresponding period in 2019 primarily due to higher personnel costs of $1.0 million, resulting from increased headcount and to a lesser extent incentive compensation, and higher marketing costs of $0.6 million. This increase was partially offset by decreases in travel expenses of $0.2 million.
General and Administrative Expenses
The following table sets forth our general and administrative expenses (dollars in thousands):
Three Months Ended | |||||||||||||||
March 28, 2020 | March 30, 2019 | Variance in Dollars | Variance in Percent | ||||||||||||
General and administrative | $ | 10,669 | $ | 8,787 | $ | 1,882 | 21 | % | |||||||
Percent of total revenue | 10 | % | 10 | % | |||||||||||
General and administrative expenses for the three months ended March 28, 2020 increased by $1.9 million as compared with the corresponding period in 2019 mainly due to an increase in personnel costs of $1.2 million, primarily related to incentive compensation expense in 2020 compared to no incentive compensation earned in the year ago period, and the initial capitalized cloud-computing amortization of $0.8 million as our cloud-based ERP system went live in January of 2020.
Provision for Income Taxes
The following table sets forth our provision for income taxes (dollars in thousands):
Three Months Ended | |||||||||||||||
March 28, 2020 | March 30, 2019 | Variance in Dollars | Variance in Percent | ||||||||||||
Provision for income taxes | $ | 329 | $ | 155 | $ | 174 | 112 | % | |||||||
Effective tax rate | (5.0 | )% | (1.6 | )% | |||||||||||
The effective tax rate for the three months ended March 28, 2020 was determined using an estimated annual effective tax rate adjusted for discrete items, if any, that occurred during the respective periods.
Deferred tax assets are recognized if realization of such assets is more likely than not. We have established and continue to maintain a full valuation allowance against our net deferred tax assets, with the exception of certain foreign deferred tax assets, as we do not believe that realization of those assets is more likely than not.
Our effective tax rate may be subject to fluctuation during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as the mix of forecasted pre-tax earnings in the various jurisdictions in which we operate, valuation allowances against deferred tax assets, the recognition or de-recognition of tax benefits related to uncertain tax positions and changes in or the interpretation of tax laws in jurisdictions where we conduct business.
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 March 28, 2020, we had cash and cash equivalents of $46.2 million, which consisted of deposits held at banks held at major financial institutions.
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Operating Activities
Net cash provided by operating activities was $1.2 million for the three months ended March 28, 2020 and consisted of $6.5 million of non-cash charges and $1.7 million of cash flow increases reflected in the net change in assets and liabilities, partially offset by a net loss of $6.9 million. Cash flow increases resulting from the net change in assets and liabilities primarily consisted of an increase in accounts payable of $9.5 million, primarily due to timing of payments to our contract manufacturers, or CMs, a decrease in inventory of $9.6 million due to lower deliveries due to the supply disruption during of the quarter, an increase in deferred revenue of $2.1 million mainly due to increased Calix Cloud subscriptions and an increase in accrued liabilities of $1.4 million due to an increase in inventory held by suppliers. This was partially offset by an increase in accounts receivable of $20.6 million, mainly due to timing of shipments and delays in processing invoices due to the ERP migration.
Non-cash charges primarily consisted of stock-based compensation of $3.0 million and depreciation and amortization of $3.5 million.
During the three months ended March 30, 2019, net cash used in operating activities was $0.4 million and consisted of a net loss of $9.8 million partially offset by $3.9 million of cash flow increases reflected in the net change in assets and liabilities and by $5.5 million of non-cash charges. Cash flow increases resulting from the net change in assets and liabilities primarily consisted of a decrease in accounts receivable of $11.8 million, mainly due to lower sales, a decrease in inventory of $2.9 million, primarily due to unavailability of finished goods from our supply chain partners, and an increase in deferred revenue of $0.7 million due to increased sales of license subscriptions and related support. This was partially offset by a decrease in accounts payable of $6.3 million, primarily due to a commensurate decline in cost of revenue, an increase in prepaid expenses and other assets of $1.9 million, mainly due to inventory sold to a CM and not yet paid, a decrease in other long-term liabilities of $1.7 million, mainly due to the amortization of operating lease liabilities, and a decrease in accrued liabilities of $1.6 million, mainly related to a decrease in accrued professional and consulting fees and a decrease in accrued business events. Non-cash charges primarily consisted of stock-based compensation of $3.1 million and depreciation and amortization of $2.3 million.
Investing Activities
Net cash used in investing activities of $1.7 million for the three months ended March 28, 2020 consisted of capital expenditures primarily for purchases of test equipment, computer equipment and software.
Net cash used in investing activities of $5.0 million for the three months ended March 30, 2019 consisted of capital expenditures primarily for purchases of test equipment, computer equipment and software.
Financing Activities
Net cash provided by financing activities of $0.1 million for the three months ended March 28, 2020 mainly consisted of proceeds from the issuance of common stock from stock option exercises of $1.1 million offset by payments related to financing arrangements of $0.8 million and payments to originate the credit line of $0.2 million.
Net cash used in financing activities of $0.4 million for the three months ended March 30, 2019 mainly consisted of payments for financing arrangements of $0.7 million partially offset by proceeds from the issuance of common stock from stock option exercises of $0.3 million.
Working Capital and Capital Expenditure Needs
Our material cash commitments include contractual obligations under our Bank of America Loan Agreement, or BofA Loan Agreement, obligations from financing arrangements, minimum revenue-share obligations, normal recurring trade payables, compensation-related and expense accruals, operating leases and non-cancelable firm purchase commitments. 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 eliminate or curtail expenditures to mitigate the impact on our working capital.
In January 2020, we terminated the Silicon Valley Bank Loan Agreement and entered into a new loan and security agreement with Bank of America, N.A. The BofA Loan Agreement provides for a revolving facility up to a principal amount of up to $35.0 million, including a $10.0 million sublimit for letters of credit. The BofA Loan Agreement matures, and all outstanding amounts become due and payable, in January 2023. The BofA Loan Agreement is secured by substantially all of our assets, including our intellectual property. Loans under the credit facility will bear interest at a rate per annum equal to LIBOR (customarily defined) plus an applicable margin between 1.50% to 2.25% and Prime Rate (customarily defined) plus an applicable margin between 0.50% to 1.25%, 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, or FCCR, of 1.0 to 1.0. As of March 28, 2020, we were in compliance with these requirements, had
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borrowings outstanding of $30.0 million, availability of $5.0 million and an FCCR of 7.9 to 1.0. Our interest rate on the line of credit was 4.5% as of March 28, 2020.
During 2018, we entered into financing arrangements to purchase lab equipment for approximately $5.1 million. Each agreement is to be paid over 36 months with a weighted average interest rate of 6.2%. As of March 28, 2020, we had $2.5 million outstanding under these financing arrangements.
During 2017, 2018 and 2019, in connection with our ERP implementation, we entered into financing arrangements for consulting services of $5.4 million. The current amounts due under this agreement are to be paid over a weighted average term of 2.4 years with a weighted average interest rate of 6.5%. As of March 28, 2020, there was $1.8 million outstanding under this arrangement.
In March 2018, the Company entered into an agreement with a vendor to develop software products pursuant to which the Company will become obligated, if the vendor delivered software that meets the Company's technical requirements for commercial sale, to make minimum revenue-share payments of $15.8 million over the subsequent three years. The payments are based on a revenue-share rate applied to revenue from developed product sales subject to a minimum and a maximum aggregate amount over the three-year sales period. We had our first sale in August 2019. Revenue-share payments are paid quarterly in arrears, and we began making payments in the first quarter of 2020.
We believe, based on our current operating plan and expected operating cash flows, that our existing cash and cash equivalents, 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. Our future capital requirements will depend on many factors including our rate of revenue growth; timing of customer payments and payment terms, particularly of larger customers; the timing and extent of spending to support development efforts, particularly research and development related to growth initiatives such as our software and cloud platforms, and our ability to partner with third parties to outsource our research and development projects; our ability to manage product cost, including the cost impact of the U.S. tariffs as well as our ability to continue to mitigate the cost impact through supply chain re-engineering, the possibility of additional tariffs that may impact our product costs and higher component costs associated with new technologies; the impact of the COVID-19 pandemic, our ability to implement efficiencies and maintain product margin levels; the expansion of sales and marketing activities; the success of revenue share programs; the timing of introductions and timing and rate of customer adoption of new products and enhancements to existing products; the slowdowns or declines in customer purchases of traditional systems; acquisition of new capabilities or technologies; and the continued market acceptance of our products. If we are unable to execute on our current operating plan or generate positive operating income and positive cash flows, our liquidity, results of operations and financial condition will be adversely affected and we may fail to meet the borrowing base requirements or comply with the covenants in the BofA Loan Agreement, in which case we may not be able to borrow under the BofA line of credit. We may need to seek other sources of liquidity, including the sale of 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 March 28, 2020 consisted of our contractual obligations under the BofA Loan Agreement, financing arrangements, operating leases for office space and non-cancelable outstanding purchase obligations. The following table summarizes our contractual obligations at March 28, 2020 (in thousands):
Payments Due by Period | ||||||||||||||||||||
Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | ||||||||||||||||
Line of credit, including interest (1) | $ | 33,828 | $ | 1,350 | $ | 32,478 | $ | — | $ | — | ||||||||||
Financing arrangements (2) | 20,350 | 4,757 | 15,593 | — | — | |||||||||||||||
Operating lease obligations (3) | 19,758 | 3,779 | 7,025 | 6,867 | 2,087 | |||||||||||||||
Non-cancelable purchase commitments (4) | 74,911 | 74,911 | — | — | — | |||||||||||||||
$ | 148,847 | $ | 84,797 | $ | 55,096 | $ | 6,867 | $ | 2,087 | |||||||||||
(1) Line of credit contractual obligations include projected interest payments over the term of the BofA Loan Agreement, assuming the interest rate in effect for the outstanding borrowings as of March 28, 2020 of 4.5% and payment of the borrowings on January 27, 2023, the contractual maturity date of the credit facility. See Note 5, “Credit Agreements” of the
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Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion regarding our contractual obligations relating to our line of credit.
(2) Represents installment payments, including interest, related to financing arrangements and estimated total minimum revenue-share obligations under the program, including imputed interest, of $15.8 million associated with developed software product and related enhancements by an engineering service provider of which approximately $12.8 million has been incurred. The schedule reflects our expected revenue-share payments based on our revenue projections for the developed products over a three-year sales period. If the minimum revenue-share payments are not achieved by the end of the three-year sales period, a true-up payment will be due.
(3) Future minimum operating lease obligations in the table above include primarily payments for our office locations, which expire at various dates through 2025. See Note 6 “Commitments and Contingencies” of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion regarding our operating leases.
(4) Represents outstanding purchase commitments for inventory to be delivered by our third-party manufacturers. See Note 6, “Commitments and Contingencies” of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion regarding our outstanding purchase commitments.
Off-Balance Sheet Arrangements
As of March 28, 2020 and December 31, 2019, we did not have any off-balance sheet arrangements.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The primary objectives of our investment activity are to preserve principal, provide liquidity and maximize income without significantly increasing risk. By policy, we do not enter into investments for trading or speculative purposes. At March 28, 2020, we had cash and cash equivalents of $46.2 million, which were held entirely in cash. We don't believe that we have any material exposure to changes in the fair value of our cash equivalents 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 1.25% for prime rate advances and between 1.5% and 2.25% for LIBOR advances based on our FCCR. As of March 28, 2020, we had $30.0 million outstanding in 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 active 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
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located. The percentages of our operating expenses denominated in the following currencies for the indicated periods were as follows:
Three Months Ended | ||||||
March 28, 2020 | March 30, 2019 | |||||
USD | 91 | % | 90 | % | ||
RMB | 6 | % | 7 | % | ||
GBP | 3 | % | 3 | % | ||
100 | % | 100 | % | |||
If USD had appreciated or depreciated by 10%, relative to RMB and GBP, our operating expenses for the first three months of 2020 would have decreased or increased by approximately $0.5 million, or approximately 1%. We do not currently enter into forward exchange contracts to hedge exposure denominated in foreign currencies or any derivative financial instruments. In the future, we may consider entering into hedging transactions to help mitigate our foreign currency exchange risk.
Foreign exchange rate fluctuations may also adversely impact our financial position as the assets and liabilities of our foreign operations are translated into USD in preparing our Condensed Consolidated Balance Sheets. The effect of foreign exchange rate fluctuations on our consolidated financial position for the three months ended March 28, 2020 was a net translation loss of $0.3 million. This loss is recognized as an adjustment to stockholders’ equity through accumulated other comprehensive loss.
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 expense, net” in our Condensed Consolidated Statements of Comprehensive Loss. During the three months ended March 28, 2020, the net gain we recognized related to these foreign exchange assets and liabilities was approximately $0.1 million.
ITEM 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Based on their evaluation as of March 28, 2020, our Chief Executive Officer and Chief Financial Officer, with the participation of our management, have concluded that our disclosure controls and procedures (as defined in Rules 13a–15(e) and 15d–15(e) under the Exchange Act) were effective at the reasonable assurance level.
Limitations on the Effectiveness of Controls
Our disclosure controls and procedures provide our Chief Executive Officer and Chief Financial Officer reasonable assurance that our disclosure controls and procedures will achieve their objectives. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting can or will prevent all human error. Our management recognizes that a control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Furthermore, the design of a control system must reflect the fact that there are internal resource constraints, and the benefit of controls must be weighed relative to their corresponding costs. Because of the limitations in all control systems, no evaluation of controls can provide complete assurance that all control issues and instances of error, if any, within our company are detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur due to human error or mistake. Additionally, controls, no matter how well designed, could be circumvented by the individual acts of specific persons within the organization. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all potential future conditions.
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Changes in Internal Control over Financial Reporting
During the first quarter of 2020, we implemented a new cloud-based enterprise resource planning system. In connection with this implementation and related business processes, we replaced or revised some internal controls that were previously considered effective with new or modified controls that are also expected to be effective. Other than these changes, there was no other change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
For a description of our material pending legal proceedings, please refer to Note 6 “Commitments and Contingencies – Litigation” of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated by reference.
ITEM 1A. Risk Factors
We have identified the following additional risks and uncertainties that may affect our business, financial condition and/or results of operations. The risks described below include any material changes to and supersede the description of the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission on February 21, 2020. Investors should carefully consider the risks described below, together with the other information set forth in this Quarterly Report on Form 10-Q, before making any investment decision. The risks described below are not the only ones we face. Additional risks not currently known to us or that we currently believe are immaterial may also significantly impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and investors may lose all or part of their investment.
Risks Related to Our Business and Industry
Our business and results of operations may be negatively affected by the COVID-19 pandemic that has severely impacted the global economy.
In late 2019 a novel strain of coronavirus, or COVID-19, was reported in Wuhan, China. COVID-19 has since been declared a global pandemic by the World Health Organization and has severely impacted the global economy, disrupting financial markets, supply chains, customer spending and purchasing patterns and general business operations. In response, governments have implemented measures to attempt to contain and mitigate the transmission of COVID-19, including shelter in place orders, travel restrictions, mandatory quarantines and shutdown of certain non-essential business activities, all of which have resulted in global business disruptions. We cannot predict the continued impact of the pandemic and the degree to which our business and results of operations may be affected. There are no assurances that the global economy will recover quickly or at all, or that impacted areas will be able to fully contain COVID-19 to avoid a new wave of infections. The COVID-19 pandemic has also presented financial challenges to numerous businesses, which may result in liquidity issues leading to heightened difficulties with collections.
In consideration of the health and safety of our employees, we instituted office closures, implemented shelter-in-place orders and restrictions, and instituted a mandatory work from home policy for substantially all of our employees. While these measures help to contain and mitigate the transmission of COVID-19, such measures are disruptive, require transition to new business processes and detract our employees from normal business activities.
The spread of COVID-19 has impacted our supply chain operations through restrictions and shutdown of business activities, suppliers from whom we rely on for sourcing components and materials and third-party partners from whom we rely on for manufacturing, warehousing and logistics services. Specifically, the manufacture of our products requires optical-electronic components and materials sourced from suppliers in China. Although we have limited dependencies on suppliers in Wuhan, the containment measures that began in Wuhan have been expanded to other parts of China and have included factory shutdowns at some of our suppliers. Shortages of fiber optics and other materials due to the decreased productivity in Wuhan may delay planned fiber network buildouts by CSPs, which in turn could delay or lower demand for our products. If these containment measures continue for a prolonged period, we may experience a global shortage of components and materials, which may negatively impact our ability to supply products to meet customer requirements and could materially adversely affect our business and results of operations.
Similarly, our customers’ purchasing decisions may be impacted by the pandemic, which could in turn impact our sales and results of operations. For example, CSPs may choose not to invest at this time in our new platforms, or delay infrastructure improvements due to the uncertainty in the global economy. The COVID-19 pandemic has depressed global markets, leading to significant unemployment rates and increasing uncertainty over fears of a global recession.
Adverse global economic conditions, geopolitical issues and other conditions that impact our increasingly global operations, including uncertainty around global trade policies and outbreaks of pandemic diseases, could have a negative effect on our business, results of operations and financial condition and liquidity.
As a global company, our performance is affected by global economic conditions as well as geopolitical issues and other conditions with global reach. In recent years concerns about the global economic outlook have adversely affected market and
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business conditions in general. Macroeconomic weakness and uncertainty also make it more difficult for us to accurately forecast revenue, gross margin and expenses. Geopolitical issues, such as tariffs and trade policy changes imposed by both the United States and China beginning in late 2018, other international trade policy changes and the withdrawal of the United Kingdom from the European Union have resulted in increasing global tensions and create uncertainty for global commerce. In particular, the United States has referenced the potential imposition of tariffs on imports from other countries where we produce some of our products, such as the recent imposition of tariffs on steel imported from Vietnam. We have incurred substantial costs and diversion of resources as a result of these tariff and trade policy changes. More recently, the uncertainty over COVID-19 in China, which has resulted in government-imposed travel restrictions across a number of countries and closures of numerous business operations in China, has disrupted and delayed our and our suppliers’ operations in China. Sustained uncertainty about, or worsening of, global economic conditions, geopolitical issues and other conditions with global impact may increase our cost of doing business or disrupt our supply chain operations and may cause our customers to reduce or delay spending and could intensify pricing pressures. Any or all of these factors could negatively affect demand for our products and our business, financial condition and result of operations.
We have a history of losses, and we may not be able to generate positive operating income and positive cash flows in the future.
We have experienced net losses in each year of our existence. We incurred net losses of $17.7 million in 2019, $19.3 million in 2018 and $83.0 million in 2017. For the first three months of 2020, we incurred a net loss of $6.9 million. As of March 28, 2020, we had an accumulated deficit of $709.5 million.
We expect to continue to incur significant expenses and cash outlays for research and development associated with our platforms and systems, including our cloud and services operations, investments in innovative technologies, expansion of our product portfolio, sales and marketing, customer support and general and administrative functions as we expand our business and operations and target new customer opportunities, including larger CSPs and cable MSOs as well as additional types of regional and local providers. Given our anticipated growth and the intense competitive pressures we face, we may be unable to adequately control our operating costs or generate positive operating income.
We cannot guarantee that we will achieve profitability in the future. We will have to generate and sustain significant and consistent increased revenue, while continuing to control our expenses, in order to achieve and then maintain profitability. We may also incur significant losses in the future for a number of reasons, including the risks discussed in this “Risk Factors” section and other factors that we cannot anticipate. If we are unable to generate positive operating income and positive cash flows from operations, our liquidity, results of operations and financial condition will be adversely affected. If we are unable to generate cash flows to support our operational needs, we may need to seek other sources of liquidity, including additional borrowings, to support our working capital needs. In addition, we may choose to seek other sources of liquidity even if we believe we have generated sufficient cash flows to support our operational needs. There is no assurance that any other sources of liquidity may be available to us on acceptable terms or at all. If we are unable to generate sufficient cash flows or obtain other sources of liquidity, we will be forced to limit our development activities, reduce our investment in growth initiatives and institute cost-cutting measures, all of which would adversely impact our business and growth.
Our quarterly and annual operating results may fluctuate significantly, which may make it difficult to predict our future performance and could cause the market price of our stock to decline.
A number of factors, many of which are outside of our control, may cause or contribute to significant fluctuations in our quarterly and annual operating results. These fluctuations may make financial planning and forecasting difficult. Comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. If our revenue or operating results fall below the expectations of investors or securities analysts, or below any guidance we may provide to the market, the market price of our stock would likely decline.
In addition to the other risk factors listed in this “Risk Factors” section, factors that have in the past and may continue to contribute to the variability of our operating results include:
• | our ability to predict our revenue and reduce and control our costs; |
• | our ability to predict product functions and features desired by our customers; |
• | the impact of global economic conditions, including the impact of the COVID-19 pandemic; |
• | our ability to effectively manage our global supply chain operations to mitigate the impact of the COVID-19 pandemic or of the U.S. tariffs and other trade policies; |
• | our ability to manage our relationships with our third-party vendors, including CMs, ODMs, logistics providers, component suppliers and development partners; |
• | our ability to forecast our manufacturing and product supply requirements and manage our inventory; |
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• | our dependence on sole-, single- and limited-source suppliers and supply chain partners, including suppliers located primarily or solely in China where there are a number of factors that could negatively impact our supply chain; |
• | the capital spending patterns of CSPs and any decrease or delay in capital spending by CSPs due to macro-economic conditions, regulatory uncertainties or other reasons; |
• | the impact of government-sponsored programs on our customers and the impact to our customers of U.S. federal government disruptions, such as government shutdowns, on such programs; |
• | intense competition, including market entrants whose products may be substitutes to ours; |
• | our ability to develop new products or enhancements that support technological advances and meet changing CSP requirements; |
• | our ability to ramp sales and achieve market acceptance of our new products and CSPs’ willingness to adopt and deploy our new products; |
• | the concentration of our customer base as well as our dependence on a limited number of key customers; |
• | the length and unpredictability of our sales cycles and timing of orders; |
• | our lack of long-term, committed-volume purchase contracts with our customers; |
• | our ability to increase our sales globally and to increase our customer base; |
• | our exposure to the credit risks of our customers; |
• | fluctuations in our gross margin; |
• | the interoperability of our products with CSP networks; |
• | our products’ compliance with industry standards and regulatory requirements that apply to our products and services; |
• | our ability to expand our international operations; |
• | our ability to protect our intellectual property and the cost of doing so; |
• | the quality of our products, including any undetected hardware defects or bugs in our software; |
• | our ability to manage data security risks as we grow our cloud and software portfolio; |
• | our ability to estimate future warranty and service obligations; |
• | our ability to obtain necessary third-party technology licenses at reasonable costs; |
• | the regulatory and physical impacts of climate change and other natural events; |
• | the attraction and retention of qualified employees and key management personnel; and |
• | our ability to maintain proper and effective internal controls. |
Our gross margin may fluctuate over time, and our current level of gross margin may not be sustainable.
Our current level of gross margin may not be sustainable and may be adversely affected by numerous factors, including:
• | changes in customer, geographic or product mix, including the mix of configurations within each product group; |
• | the pursuit or addition of new large customers; |
• | increased price competition, including the impact of customer discounts and rebates; |
• | our ability to effectively manage the transition of our global supply chain operations to mitigate the impact of U.S. tariffs; |
• | our ability to reduce and control product costs; |
• | an increase in revenue mix toward services, which typically have lower margins; |
• | changes in component pricing; |
• | changes in pricing with our third-party manufacturing partners; |
• | charges incurred due to inventory holding periods if parts ordering does not correctly anticipate product demand; |
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• | introduction of new products and new technologies, which may involve higher component costs; |
• | our ability to scale our services business in order to gain desired efficiencies; |
• | changes in shipment volume; |
• | changes in or increased reliance on distribution channels; |
• | potential liabilities associated with increased reliance on third-party vendors; |
• | increased expansion efforts into new or emerging markets; |
• | increased warranty costs; |
• | excess and obsolete inventory and inventory holding charges; |
• | expediting costs incurred to meet customer delivery requirements; and |
• | potential costs associated with contractual obligations. |
Our customer base is concentrated, and there are a limited number of potential customers for our products. The loss of any of our key customers, a decrease in purchases by our key customers, pricing pressures or our inability to grow our customer base would adversely impact our revenue and results of operations and any delays in payment by a key customer could negatively impact our cash flows and working capital.
Historically, a large portion of our sales has been to a limited number of customers. For example, one customer accounted for 15% of total revenue in 2019, 18% of total revenue in 2018 and 31% of total revenue in 2017. However, we cannot anticipate the same level of purchases in the future by these or other customers who have historically comprised a larger percentage of our revenue. Although these customers now comprise a smaller percentage of our revenue, we expect that changes in the CSP market, such as financial difficulties, spending cuts or corporate consolidations that impact purchasing decisions by these customers may continue to adversely impact our revenue, and as a result, revenue from such customers may remain flat or continue to decline. For example, CenturyLink completed a large acquisition at the end of 2017, which disrupted its historical levels of purchases with us and we have continued to experience significantly reduced levels of purchases by CenturyLink compared to historical levels. There is no assurance that purchasing levels by CenturyLink will increase from current levels or return to historical levels, and we expect continued uncertainty as it continues to complete its transition activities and corporate strategies. We have experienced and expect to continue to experience delays or declines in purchases by certain CSPs due to deterioration and weakness in their financial condition. For example, Windstream, another one of our larger customers, filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in February 2019 after it was found in default of certain debt instruments. In April 2020, another customer, Frontier, filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in order to facilitate a financial restructuring plan. Any decrease or delay in purchases and/or capital expenditure plans of any of our key customers, particularly if prolonged or sustained, or our inability to grow our sales with existing customers, may have a material negative impact on our revenue and results of operations.
We anticipate that a large portion of our revenue will continue to depend on sales to a limited number of customers. In addition, some larger customers may demand discounts and rebates or desire to purchase their access systems and software from multiple providers. As a result of these factors, our future revenue opportunities may be limited, and we may face pricing pressures, which in turn could adversely impact our margins and our profitability. The loss of, reduction in or pricing discounts associated with, orders from any key customer would significantly reduce our revenue and harm our business. Furthermore, delays in payment and/or extended payment terms from any of our key or larger customers could have a material negative impact on our cash flows and working capital to support our business operations.
Furthermore, over the years the CSP market has undergone substantial consolidation. Industry consolidation generally has negative implications for equipment suppliers, including a reduction in the number of potential customers, a decrease in aggregate capital spending and greater pricing leverage on the part of CSPs over equipment suppliers. Continued consolidation of the CSP industry and among independent local exchange carriers and IOC customers, who represent a large part of our business, could make it more difficult for us to grow our customer base, increase sales of our products and maintain adequate gross margin.
Our new products are early in their life cycles and subject to uncertain market demand. If our customers are unwilling to adopt our platforms, install our new products or deploy our new services, or we are unable to achieve market acceptance of our new products, our business and financial results will be harmed.
Our new products are early in their life cycles and subject to uncertain market demand. They also may face obstacles in manufacturing, deployment and competitive response. Adoption of our new products, such as our smart home and business systems, is dependent on the success of our customers in investing, deploying and selling advanced services to their subscribers. Our products support a variety of advanced broadband services, such as high-speed Internet, managed Wi-Fi, connected home,
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IPTV, mobile broadband, high-definition video and online gaming. If we are unable to ramp sales of our new products, or if subscriber demand for our services does not grow as expected or declines, or our customers are unable or unwilling to invest in our platforms to deploy and market these services, demand for our products may decrease or fail to grow at rates we anticipate.
If we fail to manage our supply chain effectively, or if the federal government increases the imposition of tariffs to goods imported from countries where we do business, our ability to conduct our business will be materially impaired, which would adversely impact our gross margins and results of operations.
Until recently, substantially all of our products were manufactured in China. We recently completed activities to realign our supply chain operations to move substantially all of our product manufacturing to locations outside of China. The transition of global supply chain operations is complex, requires significant resources and unanticipated costs, involves significant third-party dependencies and carries numerous risks of disruptions to the manufacture and supply of our products, including exacerbation of the risks associated with our reliance upon third-party manufacturing and supply partners. In particular, in the first quarter of 2019, we experienced product shortages due to production delays associated with the transition of our global supply chain operations that impaired our ability to fulfill customer orders and resulted in revenue below our plan. The manufacture of our products requires components and materials sourced from suppliers in China, including optical-electronic components and materials manufactured in China. We continue to face increasing competition for components and resources from third-party manufacturing and supply partners as more companies seek to transition manufacturing operations out of China due to the ongoing uncertainty of the escalating tariff wars. We may experience further disruptions, product unavailability, delays or unanticipated costs associated with the supply of our products, particularly in light of the current COVID-19 pandemic, which would adversely affect the demand for our products and have a material adverse effect on our business, gross margins and results of operations if we are unable to manage our supply chain effectively, secure our desired rates for the manufacture and supply of our products with new supply chain partners or if the federal government increases the imposition of tariffs to goods imported from additional countries where we produce some of our products.
We depend on sole-source, single-source and limited-source suppliers for some key components. If we and our business partners are unable to source these components on a timely or cost-effective basis, we will not be able to deliver our products to our customers.
We depend on sole-source, single-source and limited-source suppliers for some key components of our products. For example, certain of our application-specific integrated circuit processors and resistor networks are purchased from sole-source suppliers, including certain components sourced solely through suppliers located in China.
Any of the sole-source, single-source and limited-source suppliers upon whom we or our business partners rely could stop producing our components, be subject to tariffs, epidemics or other conditions that disrupt their operations, cease operations or enter into exclusive arrangements with our competitors. For example, we have encountered disruptions in our supply of certain components sourced from China as a result of the COVID-19 pandemic and the continued uncertainty around trade and tariff policies between the U.S. and China. Disruptions of manufacturing activities in China business activities, particularly if prolonged, may adversely affect our ability to obtain components and materials needed to manufacture our products at acceptable prices or at all, which would in turn harm our business and results of operations. We may also experience shortages or delay of critical components as a result of growing demand in the industry or other sectors. For example, growth in electronic and IoT devices, wireless products, automotive electronics and artificial intelligence all drive increased demand for certain components, such as chipsets and memory products, which may result in lower availability and increased prices for such components. The cost of components may also be impacted by regulatory requirements.
In addition, purchase volumes of such components may be too low for Calix to be considered a priority customer by these suppliers, and we may not be able to negotiate commercially reasonable terms for our business needs. As a result, these suppliers could stop selling to us and our business partners at commercially reasonable prices, or at all. Any such interruption or delay may force us and our business partners to seek similar components from alternative sources, which may not be available, or result in higher than anticipated prices for such components. Switching suppliers could also require that we redesign our products to accommodate new components and could require us to re-qualify our products with our customers, which would be costly and time consuming. Any interruption in the supply of sole-source, single-source or limited-source components for our products would adversely affect our ability to meet scheduled product deliveries to our customers, could result in lost revenue or higher expenses and would harm our business.
We do not have manufacturing capabilities, and therefore we depend solely upon a small number of third-party manufacturing partners to manufacture and supply our products. Consequently, our operations are highly dependent upon our third-party manufacturing partners and our business could be disrupted if we encounter problems with any of these partners.
We do not have internal manufacturing capabilities and rely upon a small number of third-party manufacturing partners such as CMs and ODMs to supply our products to meet customer needs. Our reliance on a small number of manufacturing partners
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makes us vulnerable to possible supply and capacity constraints and reduced control over component availability, delivery schedules, quality, manufacturing yields and costs. Our business operations and ability to supply our products are highly dependent upon our manufacturing partners. Accordingly, if we encounter problems or other disruptions in our business with any of these manufacturing partners, particularly in light of the current COVID-19 pandemic, our business could be disrupted.
In some cases, we do not have supply contracts with our manufacturing partners and these manufacturers are not contractually obligated to supply products to us for any specific period, in any specific quantity or at any certain price. In addition, we are dependent upon our manufacturing partners’ quality systems and controls and the adherence of such systems and controls to applicable standards. If our manufacturing partners fail to maintain levels of quality manufacture suitable for us or our customers, we may incur higher costs and our relationships with our customers may be harmed.
The revenue that our manufacturing partners generate from our orders represent a relatively small percentage of their overall revenue. As a result, fulfilling our orders may not be considered a priority if such manufacturers are constrained in their ability to fulfill all of their customer obligations in a timely manner. In addition, a substantial part of our manufacturing is done in our manufacturers’ facilities that are located outside of the United States. We believe that the location of these facilities outside of the United States increases supply risk, including the risk of supply interruptions or reductions in manufacturing quality or controls. Moreover, regulatory changes or government actions relating to export or import regulations, economic sanctions or related legislation, or the possibility of such changes or actions, may create uncertainty or result in changes to or disruption in our operations with our manufacturers.
If any of our manufacturing partners were unable or unwilling to continue manufacturing our products in required volumes and at high quality levels, we would have to identify, qualify and select acceptable alternative manufacturers which could disrupt our ability to maintain continuous supply of product to meet customer requirements. An alternative manufacturer may not be available to us when needed or may not be in a position to satisfy our production requirements at commercially reasonable prices and quality. Any significant interruption in manufacturing, including labor shortages or competition for components, would require us to reduce our supply of products to our customers, which in turn would reduce our revenue and harm our relationships with our customers.
We utilize domestic and international third-party vendors to assist in the design, development and manufacture of certain of our products, and to provide logistics services in the distribution of our products. If these vendors fail to provide these services, we could incur additional costs and delays or lose revenue.
From time to time we enter into agreements for the design, development and/or manufacture of certain of our products in order to enable us to offer products on an accelerated basis. We also rely upon limited third-party vendors for logistics services to distribute our products. If any of these third-party vendors stop providing their services, for any reason, we would have to obtain similar services from alternative sources, which may not be available on commercially reasonable terms, if at all. We also have limited control over disruptions that may occur at the facilities of these third-party partners, such as supply interruptions, labor shortages, strikes, design and manufacturing failures, quality control issues, systems failures or even facility closures arising from the COVID-19 pandemic that may interrupt transportation and logistics services. In addition, switching development firms or manufacturers could require us to extend our development timeline and/or re-qualify our products with our customers, which would also be costly and time-consuming.
Any interruption in the development, supply or distribution of our products would adversely affect our ability to meet scheduled product deliveries to our customers, or exacerbate delays in customer order fulfillment that have already resulted from recent product unavailability related to the supply chain transition efforts described above, and could result in lost revenue or higher costs, which would negatively impact our margins and operating results and harm our business.
If we fail to forecast our manufacturing requirements accurately or fail to properly manage our inventory with our third-party manufacturers, we could incur additional costs, experience manufacturing delays and lose revenue.
We bear inventory risk under our third-party manufacturing arrangements. Lead times for the materials and components that we order through our manufacturers vary significantly and depend on numerous factors, including the specific supplier and market demand for a component at a given time. Lead times for certain key materials and components incorporated into our products are currently lengthy, requiring our manufacturers to order materials and components several months in advance of manufacture, which impacts the lead time for our products.
If we overestimate our production requirements, our manufacturers may purchase excess components and build excess inventory, and we could be required to pay for these excess parts or products and their storage costs. We have in the past had to reimburse our primary CM for certain inventory purchases that have been rendered excess or obsolete. Examples of when inventory may be rendered excess or obsolete include manufacturing and engineering change orders resulting from design changes or in cases where inventory levels greatly exceed projected demand. If we incur payments to our manufacturers associated with excess or obsolete inventory, this may have an adverse effect on our gross margins, financial condition and results of operations.
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We have experienced unanticipated increases in demand from customers, which resulted in delayed shipments and variable shipping patterns. If we underestimate our product requirements, our manufacturers may have inadequate component inventory, which could interrupt manufacturing of our products, increase our cost of product revenue associated with expedite fees and air freight and/or result in delays or cancellation of sales.
Furthermore, while we have largely transitioned our global supply chain operations to mitigate the impact of U.S. tariffs imposed on goods imported from China, we have experienced and may continue to experience production interruptions from our manufacturers, particularly in light of the current COVID-19 pandemic.
Our business is dependent on the capital spending patterns of CSPs, and any decrease or delay in capital spending by CSPs in response to economic conditions, seasonality, uncertainties associated with the implementation of regulatory reform or otherwise would reduce our revenue and harm our business.
Demand for our products depends on the magnitude and timing of capital spending by CSPs as they construct, expand, upgrade and maintain their access networks. Current disruptions to the global economy due to the COVID-19 pandemic and any future economic downturns may cause a slowdown in telecommunications industry spending, including in the specific geographies and markets in which we operate. In response to reduced consumer spending, challenging capital markets or declining liquidity trends, capital spending for network infrastructure projects of CSPs could be delayed or canceled. In addition, capital spending is cyclical in our industry, sporadic among individual CSPs and can change on short notice. As a result, we may not have visibility into changes in spending behavior until nearly the end of a given quarter.
CSP spending on network construction, maintenance, expansion and upgrades is also affected by reductions in their budgets, delays in their purchasing cycles, access to external capital (such as government grants and loan programs or the capital markets) and seasonality and delays in capital allocation decisions. For example, our CSP customers tend to spend less in the first quarter as they are still finalizing their annual budgets and in certain regions customers are also challenged by winter weather conditions that inhibit outside fiber deployment, resulting in weaker demand for our products in the first quarter of our fiscal year. Also, softness in demand across any of our customer markets, including due to macro-economic conditions beyond our control or uncertainties associated with the implementation of regulatory reform, has in the past and could in the future lead to unexpected slowdown in capital expenditures by service providers.
Many factors affecting our results of operations are beyond our control, particularly in the case of large CSP orders and network infrastructure deployments involving multiple vendors and technologies where the achievement of certain thresholds for acceptance is subject to the readiness and performance of the CSP or other providers and changes in CSP requirements or installation plans. Further, CSPs may not pursue investment for our new platforms or infrastructure upgrades that require our access systems and software. Infrastructure improvements may be delayed or prevented by a variety of factors including cost, regulatory obstacles (including uncertainties associated with the implementation of regulatory reforms), mergers, lack of consumer demand for advanced communications services and alternative approaches to service delivery. Reductions in capital expenditures by CSPs, particularly CSPs that are significant customers, may have a material negative impact on our revenue and results of operations and slow our rate of revenue growth. As a consequence, our results for a particular period may be difficult to predict, and our prior results are not necessarily indicative of results in future periods.
Our markets are rapidly changing, which makes it difficult to predict our future revenue and plan our expenses appropriately.
We compete in markets characterized by rapid technological change, changing needs of CSPs, evolving industry standards and frequent introductions of new products and services. We invest significant amounts to pursue innovative technologies that we believe will be adopted by CSPs. For example, we have invested and continue to invest resources and funds in our cloud and software platforms. In addition, on an ongoing basis we expect to reposition our product and service offerings and introduce new products and services as we encounter rapidly changing CSP requirements and increasing competitive pressures. If we cannot increase sales of our new products and services, keep pace with rapid technological developments to meet our customers’ needs and compete with evolving industry standards or if the technologies we choose to invest in fail to meet customer needs or are not adopted by customers in the timeframes that we expect, it would be difficult to forecast our future revenue and plan our operating expenses.
Government-sponsored programs and U.S. federal government shutdowns could impact the timing and buying patterns of CSPs, which may cause fluctuations in our operating results.
We sell to CSPs, which include U.S.-based IOCs, which have revenue that is particularly dependent upon interstate and intrastate access charges and federal and state subsidies. The FCC and some states may consider changes to such payments and subsidies, and these changes could reduce IOC revenue. Furthermore, many IOCs use or expect to use government-supported loan programs or grants, such as Rural Utility Service loans and grants, to finance capital spending. These government-supported loan programs and grants generally include conditions such as deployment criteria, domestic preference provisions and other requirements that apply to the project and selected equipment as conditions for funding. Changes to the terms or
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administration of these programs, including uncertainty from government and administrative change, potential funding limitations that impact our ability to meet program requirements or funding delays due to U.S. federal government shutdowns could reduce the ability of IOCs to access capital or secure funding under government-funded programs to purchase our products and services and thus reduce our revenue opportunities.
Many of our customers were awarded grants or loans under government stimulus programs or funds distributed under the FCC’s CAF program, and have purchased and will continue to purchase products from us or other suppliers while such programs and funding are available. However, customers may substantially curtail purchases as funding winds down or as planned purchases are completed.
In addition to the impact of U.S. federal government shutdowns, any changes in government regulations and subsidies could also cause our customers to change their purchasing decisions, which could have an adverse effect on our operating results and financial condition. For example, the federal government has announced the Rural Digital Opportunity Fund, or RDOF, as an extension to the CAF program with a funding process that differs from some earlier CAF programs.
We face intense competition that could reduce our revenue and adversely affect our financial results.
The market for our products is highly competitive, and we expect competition from both established and new companies to increase. Our competitors include companies such as ADTRAN, Inc.; Amazon; Casa Systems; Ciena Corporation; Cisco Systems Inc.; CommScope Inc.; DASAN Zhone Solutions, Inc.; Huawei Technologies Co. Ltd.; Juniper Networks Inc.; Nokia Corporation; Plume Design, Inc. and ZTE Corporation, among others.
Our ability to compete successfully depends on a number of factors, including:
• | the successful development of new products; |
• | our ability to anticipate CSP and market requirements and changes in technology and industry standards; |
• | our ability to differentiate our products from our competitors’ offerings based on performance, cost-effectiveness or other factors; |
• | our ability to meet increased customer demand for services and support for their network requirements; |
• | our ability to gain customer acceptance of our products; and |
• | our ability to market and sell our products. |
The broadband access equipment market has undergone and continues to undergo consolidation, as participants have merged, made acquisitions or entered into partnerships or other strategic relationships with one another to offer more comprehensive solutions than they individually had offered. Examples include Arris Group’s acquisition of Pace plc in January 2016; Nokia’s acquisition of Alcatel-Lucent in January 2016; the merger of DASAN Zhone Solutions with DASAN Network Solutions in September 2016; and CommScope’s acquisition of Arris in April 2019. We expect this trend to continue as companies attempt to strengthen or maintain their market positions in an evolving industry.
Many of our current or potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than we do and are better positioned to acquire and offer complementary products and services. Many of our competitors have broader product lines and can offer bundled solutions, which may appeal to certain customers. Our competitors may also invest additional resources in developing more compelling product offerings. Potential customers may also prefer to purchase from their existing suppliers rather than a new supplier, regardless of product performance or features, because the products that we and our competitors offer require a substantial investment of time and funds to qualify and install.
Some of our competitors may offer substantial discounts or rebates to win new customers or to retain existing customers. If we are forced to reduce prices in order to secure customers, we may be unable to sustain gross margin at desired levels or achieve profitability. Competitive pressures could result in increased pricing pressure, reduced profit margin, increased sales and marketing expenses and failure to increase, or the loss of, market share, any of which could reduce our revenue and adversely affect our financial results.
Product development is costly, and if we fail to develop new products or enhancements that meet changing CSP requirements, we could experience lower sales.
Our industry is characterized by rapid technological advances, frequent new product introductions, evolving industry standards and unanticipated changes in subscriber requirements. Our future success will depend significantly on our ability to anticipate and adapt to such changes, and to offer, on a timely and cost-effective basis, products and features that meet changing CSP demands and industry standards. We intend to continue to invest in developing new products and enhancing the functionality of our platforms, including to reach a broader set of customers. Developing our products is expensive and complex and involves
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uncertainties, including pricing risks from sourcing sufficient quantities of custom components from limited suppliers on terms which may not be commercially acceptable for us. We may not have sufficient resources to successfully manage lengthy product development cycles. Our research and development expenses were $20.7 million, or 20% of our revenue, for the first three months of 2020, $81.2 million, or 19% of total revenue, in 2019, $90.0 million, or 20% of total revenue, in 2018 and $127.5 million, or 25% of total revenue, in 2017. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts, including increased reliance on third-party partners to maintain our competitive position. As we continue to invest in third-party partners to develop additional features to our product and service platforms, we may experience increased challenges in design, integration and support of such third-party features in our product and service offerings. These investments may take several years to generate positive returns, if ever. Furthermore, certain of our engineering services arrangements impose future payment obligations, in the form of minimum revenue-share payments on the sale of the developed products, that are set based on our expectations of future customer demand associated with the developed products, and require us to make minimum payments whether or not we achieve the desired customer demand. If our forecasts for the developed products fall short of expectations, we may have an asset impairment related to said products, which could adversely affect our financial results. In addition, we may experience design, manufacturing, software development quality, support, marketing and other difficulties that could delay or prevent the development, introduction or marketing of new products and enhancements. If we fail to meet our development targets, demand for our products will decline.
In addition, the introduction of new or enhanced products also requires that we manage the transition from older products to these new or enhanced products in order to minimize disruption in customer ordering patterns, fulfill ongoing customer commitments and ensure that adequate supplies of new products are available for delivery to meet anticipated customer demand. If we fail to maintain compatibility with other software or equipment found in our customers’ existing and planned networks, or if our products cannot be effectively deployed in our customer networks to provide desired services, we may face substantially reduced demand for our products, which would reduce our revenue opportunities and market share. Moreover, as customers complete infrastructure deployments, they may require greater levels of service and support than we have provided in the past. We may not be able to provide products, services and support to compete effectively for these market opportunities. If we are unable to anticipate and develop new products or enhancements to our existing products on a timely and cost-effective basis, our products may become technologically obsolete more rapidly than anticipated over time, resulting in lower sales which would harm our business.
Our sales cycles can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, our sales are difficult to predict and may vary substantially from quarter to quarter, which may cause our operating results to fluctuate significantly.
The timing of our revenue is difficult to predict. Our sales efforts often involve educating CSPs about the use and benefits of our products. CSPs typically undertake a significant evaluation process, which frequently involves not only our products but also those of our competitors and results in a lengthy sales cycle. Sales cycles for larger customers are relatively longer and require considerably more time and expense. We spend substantial time, effort and money in our sales efforts without any assurance that our efforts will produce sales. In addition, product purchases are frequently subject to budget constraints, multiple approvals and unplanned administrative, processing and other delays. The timing of revenue related to sales of products and services that have installation requirements may be difficult to predict due to interdependencies that may be beyond our control, such as CSP testing and turn-up protocols or other vendors’ products, services or installations of equipment upon which our products and services rely. Such delays may result in fluctuations in our quarterly revenue. If sales expected from a specific customer for a particular quarter are not realized in that quarter or at all, we may not achieve our revenue forecasts and our financial results would be adversely affected.
Our focus on CSPs with relatively small networks limits our revenue from sales to any one customer and makes our future operating results difficult to predict.
A large portion of our sales efforts continue to be focused on CSPs with relatively small networks, cable MSOs and selected international CSPs. Our current and potential customers generally operate small networks with limited capital expenditure budgets. Accordingly, we believe the potential revenue from the sale of our products to any one of these customers is limited. As a result, we must identify and sell products to new customers each quarter to continue to increase our sales. In addition, the spending patterns of many of our customers are characterized by small and sporadic purchases. As a consequence, we have limited backlog and will likely continue to have limited visibility into future operating results.
We do not have long-term, committed-volume purchase contracts with our customers, and therefore have no guarantee of future revenue from any customer.
We typically have not entered into long-term, committed-volume purchase contracts with our customers, including our key customers which account for a material portion of our revenue. As a result, any of our customers may cease to purchase our products at any time. In addition, our customers may attempt to renegotiate terms of sale, including price and quantity. If any of
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our key customers stop purchasing our access platforms, systems and software for any reason, our business and results of operations would be harmed.
Our efforts to increase our sales to CSPs globally, including cable MSOs, may be unsuccessful.
Our sales and marketing efforts have been focused on CSPs in North America. Part of our long-term strategy is to increase sales to CSPs globally, including cable MSOs. We have devoted and continue to devote substantial technical, marketing and sales resources to these larger CSPs, who have lengthy equipment qualification and sales cycles, without any assurance of generating sales. In particular, sales to these larger CSPs may require us to upgrade our products to meet more stringent performance criteria and interoperability requirements, develop new customer-specific features or adapt our products to meet international standards. Implementing these requirements and features is costly and could negatively impact our operating results, financial condition and cash flows. Moreover, if we are unable to obtain materials at favorable costs, our margins and profitability could be adversely impacted. For example, we work with large CSPs in testing and laboratory trials for our NG-PON2 technology and cable MSO applications. We have invested and expect to continue to invest considerable time, effort and expenditures, including investment in product research and development, related to these opportunities without any assurance that our efforts will produce orders or revenue. If we are unable to successfully increase our sales to larger CSPs, our operating results, financial condition, cash flows and long-term growth may be negatively impacted.
Increasing data privacy regulations could impact our business and expose us to increased liability.
Government and regulatory authorities in the United States and around the world have implemented and are continuing to implement broader and more stringent laws and regulations concerning data protection. For example, in July 2016, the European Commission adopted the EU-U.S. Privacy Shield to replace Safe Harbor as a compliance mechanism for the transfer of personal data from the European Union to the United States. In addition, the General Data Protection Regulation, or GDPR, adopted by the European Parliament became effective in May 2018 to harmonize data privacy laws across Europe. Among other requirements, the GDPR imposes specific duties and requirements upon companies that collect, process or control personal data of European Union residents. Although we currently do not have material operations or business in the European Union, the GDPR regulations could cause us to incur substantial costs in order to expand our business or deliver certain services in the European Union. Furthermore, the GDPR imposes penalties for noncompliance of up to the greater of €20 million or 4% of a company’s worldwide revenue; accordingly, any non-compliance with the GDPR could result in a material adverse effect on our business, financial condition and results of operations. In addition, the United Kingdom’s exit from the European Union creates uncertainty with respect to whether the United Kingdom will enact data protection laws or regulations designed to be consistent with the GDPR. Moreover, the California Consumer Privacy Act became effective in California in January 2020 and provides new data privacy rights for consumers and new operational requirements for companies. The interpretation and application of these data protection laws and regulations are often uncertain and in flux, and it is possible that they may be interpreted and applied in a manner that is inconsistent with our data practices. Complying with emerging and changing laws could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.
Concerns about or regulatory actions involving our practices with regard to the collection, storage, processing, use or disclosure of customer information or other privacy related matters, even if unfounded, could damage our reputation and adversely affect operating results. While we strive to provide transparency about our collection, use, disclosure and security over any personal data and to comply with all applicable data protection laws and regulations, the failure or perceived failure to comply may result in inquiries and other proceedings or actions against us by government entities or others, or could cause us to lose customers, which could potentially have an adverse effect on our business.
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Security breaches and data loss may expose us to liability, harm our reputation and adversely affect our business.
As part of our business operations, we collect, store, process, use and/or disclose sensitive data relating to our business, including in connection with the provision of our cloud services and in our information systems and data centers (including third-party data centers). In some cases, we use third-party service providers for services that may include the collection, handling, processing and/or storage of personal data on our behalf. In addition, we host our customers’ subscriber data in third-party data centers in the course of providing services and solutions to our customers through our cloud and smart home and business subscriptions. While we and our service providers apply multiple layers of security to control access to data and use encryption and authentication technologies to secure data from unauthorized access, use, alteration and disclosure, these security measures may be compromised. Malicious hackers may attempt to gain access to our network or data centers; steal proprietary information related to our business, products, employees, and customers; or interrupt our systems and services or those of our customers or others. In particular, there has been a spike in cybersecurity attacks as shelter in place orders and work from home requirements have led businesses to increase reliance on virtual environments and communications systems, which have been subjected to increasing third-party vulnerabilities and security risks. Although we monitor our networks and continue to enhance our security protections, hackers are increasingly more sophisticated and aggressive, and our efforts may be inadequate to prevent all incidents of data breach or theft. The theft, loss, or misuse of personal data collected, stored or processed by us or our service providers to run our business could result in significantly increased security and remediation costs or costs related to defending legal claims. If we or our service providers do not allocate and effectively implement and manage the resources necessary to maintain adequate security measures, we could be subjected to data loss, unauthorized data disclosure or a compromise or breach of our systems or those of our third-party data centers. As we continue to grow our cloud and software portfolio, risks arising from or related to security breaches or data loss are likely to increase. Any loss of data or compromise of our systems or data centers could result in a loss of confidence in the security of our offerings, damage our reputation, cause the loss of current or potential customers or partners, lead to legal and regulatory liability and adversely affect our business, financial condition, operating results and cash flows.
If we experience protracted disruption in functionality or processing capabilities of our newly migrated enterprise resource planning system, or ERP system, we may not be able to effectively transact our business or produce our financial statements on a timely basis and without incurrence of additional costs, which would adversely affect our business, results of operations and cash flows.
We recently migrated our Oracle ERP system to Oracle’s cloud platform. This migration involved significant complexity, requiring us to move and reconfigure all of our current system processes, transactions, data and controls to a new Oracle platform. We may experience difficulties and delays in transacting our business due to system challenges, limitations in functionality, inadequate change management or process deficiencies in the production use of the ERP system. With the migration to Oracle’s cloud platform, we are highly dependent upon Oracle to host, manage and maintain our ERP system and any disruptions to their business or processes, or delays in their ability to provide services to us, may in turn disrupt our business operations or increase costs. Furthermore, we will receive quarterly system updates and enhancements on the cloud platform according to Oracle’s release timeline and change management processes, which if not managed properly may disrupt our business operations and delay our ability to process transactions and produce reports necessary to conduct our business. We are highly dependent upon our ERP system for critical business functions, including order processing and management, supply chain and procurement operations, financial planning, accounting and reporting; accordingly, protracted disruption in functionality or processing capabilities of the ERP system could materially impair our ability to conduct our business, process transactions timely or to produce accurate financial statements on a timely basis. If our ability to conduct our business, process transactions or to produce accurate financial statements on a timely basis remains impaired, our business, results of operations and cash flows would be adversely affected.
We are exposed to the credit risks of our customers; if we have inadequately assessed their creditworthiness, we may have more exposure to accounts receivable risk than we anticipate. Failure to collect our accounts receivable in amounts that we anticipate could adversely affect our operating results and financial condition.
In the course of our sales to customers, we may encounter difficulty collecting accounts receivable and could be exposed to risks associated with uncollectible accounts receivable. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability or unwillingness of our customers to make required payments. However, these allowances are based on our judgment and a variety of factors and assumptions.
We perform credit evaluations of our customers’ financial condition. However, our evaluation of the creditworthiness of customers may not be accurate if they do not provide us with timely and accurate financial information, or if their situations change after we evaluate their credit. Furthermore, some of our international customers operate in countries with developing economies, which from time to time, experience financial crises and become unable to make payments in U.S. dollars. The COVID-19 pandemic has also presented financial challenges to numerous businesses, which may result in liquidity issues leading to heightened difficulties with collections. While we attempt to monitor these situations carefully, adjust our allowances
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for doubtful accounts as appropriate and take measures to collect accounts receivable balances, we have written down accounts receivable and written off doubtful accounts in prior periods and may be unable to avoid additional write-downs or write-offs of doubtful accounts in the future. Such write-downs or write-offs could negatively affect our operating results for the period in which they occur and could harm our cash flow or our financial condition.
Our products must interoperate with many software applications and hardware products found in our customers’ networks. If we are unable to ensure that our products interoperate properly, our business will be harmed.
Our products must interoperate with our customers’ existing and planned networks, which often have varied and complex specifications, utilize multiple protocol standards, include software applications and customizations and products from multiple vendors and contain multiple generations of products that have been added over time. As a result, we must continually ensure that our products interoperate properly with these existing and planned networks. To meet these requirements, we must undertake development efforts, including test protocols, that require substantial capital investment and employee resources. We may not accomplish these development goals quickly or cost-effectively, if at all. If we fail to maintain compatibility with other software or equipment found in our customers’ existing and planned networks, we may face substantially reduced demand for our products, which would reduce our revenue opportunities and market share.
We have entered into interoperability arrangements with a number of equipment and software vendors for the use or integration of their technology with our products. These arrangements give us access to and enable interoperability with various products that we do not otherwise offer. If these relationships fail, we may have to devote substantially more resources to the development of alternative products and processes and our efforts may not be as effective as the combined solutions under our current arrangements. In some cases, these other vendors are either companies that we compete with directly or companies that have extensive relationships with our existing and potential customers and may have influence over the purchasing decisions of those customers. Some of our competitors have stronger relationships with some of our existing and other potential interoperability partners, and as a result, our ability to have successful interoperability arrangements with these companies may be harmed. Our failure to establish or maintain key relationships with third-party equipment and software vendors may harm our ability to successfully sell and market our products.
The quality of our support and services offerings is important to our customers, and if we fail to continue to offer high quality support and services, we could lose customers, which would harm our business.
Once our products are deployed within our customers’ networks, they depend on our support organization to resolve any issues relating to those products. A high level of support is critical for the successful marketing and sale of our products. Furthermore, our services to customers have increasingly broadened to include network optimization, integration and development services and remote monitoring to help our customers deploy our products within their networks. If we do not effectively assist our customers in deploying our products, succeed in helping them quickly resolve post-deployment issues or provide effective ongoing support, it could adversely affect our ability to sell our products to existing customers and harm our reputation with potential new customers. As a result, our failure to maintain high quality support and services could result in the loss of customers, which would harm our business.
An increase in revenue mix towards deployment services may adversely affect our gross margin.
In response to greater customer demand for certain professional and support services for our products, we continue to invest and grow our services business while de-prioritizing lower gross margin deployment services. Our services include deployment services, product warranty and support services, customer success services, customer enablement services, managed services to help our customers manage and optimize their networks and education and certification services. Deployment services typically have a lower gross margin than product purchases or other service offerings. We also rely upon third-party subcontractors to assist with some of our professional and support services projects, which generally result in higher costs and increased risk of cost overruns, which can negatively impact our gross margin. Moreover, if we are unable to achieve desired efficiencies and scale as we ramp and develop our services business, we may incur higher than expected costs, which can further adversely impact our gross margin.
Our products are highly technical and may contain undetected hardware defects or software bugs, which could harm our reputation and adversely affect our business.
Our products, including our smart home and business systems and our cloud and software platforms, are highly technical and, when deployed, are critical to the operation of many networks. Our products have contained and may contain undetected defects, bugs or security vulnerabilities, which risks may be exacerbated as we continue to expand our cloud and software portfolio. Some defects in our products may only be discovered after a product has been installed and used by customers and may in some cases only be detected under certain circumstances or after extended use. Any errors, bugs, defects or security vulnerabilities discovered in our products after commercial release could result in loss of revenue or delay in revenue recognition, loss of customers and increased service and warranty and retrofit costs, any of which could adversely affect our business, operating results and financial condition. In addition, we could face claims for security and data breach, product
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liability, tort or breach of warranty. Our contracts with customers contain provisions relating to warranty disclaimers and liability limitations, which may not be upheld. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention and adversely affect the market’s perception of us and our products. In addition, if our business liability insurance coverage proves inadequate or future coverage is unavailable on acceptable terms or at all, our business, operating results and financial condition could be adversely impacted.
Our estimates regarding future warranty or product obligations may change due to product failure rates, shipment volumes, field service obligations and rework costs incurred in correcting product failures. If our estimates change, the liability for warranty or product obligations may be increased, impacting future cost of revenue.
Our products are highly complex, and our product development, manufacturing and integration testing may not be adequate to detect all defects, errors, failures and quality issues. Quality or performance problems for products covered under warranty could adversely impact our reputation and negatively affect our operating results and financial position. The development and production of new products with high complexity often involves problems with software, components and manufacturing methods. If significant warranty or other product obligations arise due to reliability or quality issues arising from defects in software, faulty components or improper manufacturing methods, our operating results and financial position could be negatively impacted by:
• | cost associated with fixing software or hardware defects; |
• | high service and warranty expenses; |
• | high inventory obsolescence expense; |
• | delays in collecting accounts receivable; |
• | payment of liquidated damages for performance failures; and |
• | declining sales to existing customers. |
As the market for our products evolves, changing customer requirements may adversely affect the valuation of our inventory.
Customer demand for our products can change rapidly in response to market and technology developments. Demand can be affected not only by customer- or market-specific issues, but also by broader economic and/or geopolitical factors. We may, from time to time, adjust inventory valuations downward in response to our assessment of demand from our customers for specific products or product lines. The related excess inventory charges may have an adverse effect on our gross margin, financial condition and results of operations.
If we fail to comply with evolving industry standards, sales of our existing and future products would be adversely affected.
The markets for our products are characterized by a significant number of standards, both domestic and international, which are evolving as new technologies are developed and deployed. As we expand into adjacent markets and increase our international footprint, we are likely to encounter additional standards. Our products must comply with these standards in order to be widely marketable. In some cases, we are compelled to obtain certifications or authorizations before our products can be introduced, marketed or sold in new markets or to customers that we have not historically served. For example, our ability to maintain Operations System Modification for Intelligent Network Elements certification for our products will affect our ongoing ability to continue to sell our products to Tier 1 CSPs.
In addition, our ability to expand our international operations and create international market demand for our products may be limited by regulations or standards adopted by other countries that may require us to redesign our existing products or develop new products suitable for sale in those countries. Although we believe our products are currently in compliance with domestic and international standards and regulations in countries in which we currently sell, we may not be able to design our products to comply with evolving standards and regulations in the future. This ongoing evolution of standards and differing foreign regulations may directly affect our ability to market or sell our products, particularly with regards to our cloud and software platforms in international markets. Further, the cost of complying with the evolving standards and regulations or the failure to obtain timely domestic or foreign regulatory approvals or certification could prevent us from selling our products where these standards or regulations apply, which would result in lower revenue and lost market share.
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We may be unable to successfully expand our international operations. In addition, we may be subject to a variety of international risks that could harm our business.
We currently generate most of our sales from customers in North America and have more limited experience marketing, selling and supporting our products and services outside North America or managing the administrative aspects of a worldwide operation. Our ability to expand our international operations is dependent on our ability to create or maintain international market demand for our products. In addition, as we expand our operations internationally, our support organization will face additional challenges including those associated with delivering support, training and documentation in languages other than English. If we invest substantial time and resources to expand our international operations and are unable to do so successfully and in a timely manner, our business, financial condition and results of operations may suffer.
In the course of expanding our international operations and operating overseas, we will be subject to a variety of risks, including:
• | differing regulatory requirements, including tax laws, trade laws, data privacy laws, labor regulations, tariffs, export quotas, custom duties or other trade restrictions; |
• | liability or damage to our reputation resulting from corruption or unethical business practices in some countries; |
• | exposure to effects of fluctuations in currency exchange rates if, over time, international customer contracts are increasingly denominated in local currencies; |
• | longer collection periods and difficulties in collecting accounts receivable; |
• | greater difficulty supporting and localizing our products; |
• | added costs of supporting cloud infrastructure outside of the United States; |
• | different or unique competitive pressures as a result of, among other things, the presence of local equipment suppliers; |
• | challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies and compensation, benefits and compliance programs; |
• | limited or unfavorable intellectual property protection; |
• | risk of change in international political or economic conditions, terrorist attacks or acts of war; and |
• | restrictions on the repatriation of earnings. |
We engage resellers to promote, sell, install and support our products to some customers in North America and internationally. Their failure to do so or our inability to recruit or retain appropriate resellers may reduce our sales and thus harm our business.
We engage some value-added resellers, or VARs, who provide sales and support services for our products. We compete with other telecommunications systems providers for our VARs’ business and many of our VARs are free to market competing products. Our use of VARs and other third-party support partners and the associated risks of doing so are likely to increase as we expand sales outside of North America. If a VAR promotes a competitor’s products to the detriment of our products or otherwise fails to market our products and services effectively, we could lose market share. In addition, the loss of a key VAR or the failure of VARs to provide adequate customer service could have a negative effect on customer satisfaction and could cause harm to our business. If we do not properly recruit and train VARs to sell, install and service our products, our business, financial condition and results of operations may suffer.
We may have difficulty evolving and scaling our business and operations to meet customer and market demand, which could result in lower profitability or cause us to fail to execute on our business strategies.
In order to grow our business, we will need to continually evolve and scale our business and operations to meet customer and market demand. Evolving and scaling our business and operations places increased demands on our management as well as our financial and operational resources to effectively:
• | manage organizational change; |
• | manage a larger organization; |
• | accelerate and/or refocus research and development activities; |
• | expand our manufacturing, supply chain and distribution capacity; |
• | increase our sales and marketing efforts; |
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• | broaden our customer-support and services capabilities; |
• | maintain or increase operational efficiencies; |
• | scale support operations in a cost-effective manner; |
• | implement appropriate operational and financial systems; and |
• | maintain effective financial disclosure controls and procedures. |
If we cannot evolve and scale our business and operations effectively, we may not be able to execute our business strategies in a cost-effective manner and our business, financial condition, profitability and results of operations could be adversely affected.
We may not be able to protect our intellectual property, which could impair our ability to compete effectively.
We depend on certain proprietary technology for our success and ability to compete. We rely on intellectual property laws as well as nondisclosure agreements, licensing arrangements and confidentiality provisions to establish and protect our proprietary rights. U.S. patent, copyright and trade secret laws afford us only limited protection, and the laws of some foreign countries do not protect proprietary rights to the same extent. Our pending patent applications may not result in issued patents, and our issued patents may not be enforceable. Any infringement of our proprietary rights could result in significant litigation costs. Further, any failure by us to adequately protect our proprietary rights could result in our competitors offering similar products, resulting in the loss of our competitive advantage and decreased sales.
It may become more difficult to adequately protect our intellectual property as we expand our reliance on third parties for the design, development and/or manufacture of our products. While our contracts with such third parties contain provisions relating to intellectual property rights, indemnification and liability, they may not be adequately enforced. Our third-party providers may also be subject to unauthorized third-party copying or use of our proprietary rights.
Despite our efforts to protect our proprietary rights, attempts may be made to copy or reverse engineer aspects of our products or to obtain and use information that we regard as proprietary. Accordingly, we may be unable to protect our proprietary rights against unauthorized third-party copying or use. Furthermore, policing the unauthorized use of our intellectual property is difficult and costly. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Litigation could result in substantial costs, diversion of resources and harm to our business.
We could become subject to litigation regarding intellectual property rights that could harm our business.
We may be subject to intellectual property infringement claims that are costly to defend and could limit our ability to use some technologies in the future. The risk of such claims could increase as we expand our product portfolio and increasingly rely on more technologies. Third parties may assert patent, copyright, trademark or other intellectual property rights to technologies or rights that are important to our business. Such claims may originate from non-practicing entities, patent holding companies or other adverse patent owners who have no relevant product revenue, and therefore, our own issued and pending patents may provide little or no deterrence to suit from these entities.
We have received in the past and expect that in the future we may receive communications from competitors and other companies alleging that we may be infringing their patents, trade secrets or other intellectual property rights; offering licenses to such intellectual property; threatening litigation or requiring us to act as a third-party witness in litigation. In addition, we have agreed, and may in the future agree, to indemnify our customers for expenses or liabilities resulting from certain claimed infringements of patents, trademarks or copyrights of third parties. Such indemnification may require us to be financially responsible for claims made against our customers, including costs of litigation and damages awarded, which could negatively impact our results of operations. Any claims asserting that our products infringe the proprietary rights of third parties, with or without merit, could be time-consuming, result in costly litigation and divert the efforts of our engineering teams and management. These claims could also result in product shipment delays or require us to modify our products or enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available to us on acceptable terms, if at all.
Our use of open source software could impose limitations on our ability to commercialize our products.
We incorporate open source software into our products. Although we closely monitor our use of open source software, the terms of many open source software licenses have not been interpreted by the courts, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to sell our products. In such event, we could be required to make our proprietary software generally available to third parties, including competitors, at no cost, to seek licenses from third parties in order to continue offering our products, to re-engineer our products or to discontinue the sale of our products in the event re-engineering cannot be accomplished on a timely basis or at all, any of which could adversely affect our revenue and operating expenses.
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If we are unable to obtain necessary third-party technology licenses, our ability to develop new products or product enhancements may be impaired.
While our current licenses of third-party technology generally relate to commercially available off-the-shelf technology, we may from time to time be required to license additional technology from third parties to develop new products or product enhancements either directly or through an ODM partner. These third-party licenses may be unavailable to us or our ODMs on commercially reasonable terms, if at all. The inability to obtain necessary third-party licenses may force us to accept substitute technology of lower quality or performance standards or at greater cost or may increase the time-to-market of our products or product enhancements, any of which could harm the competitiveness of our products and result in lost revenue.
Our ability to incur debt and the use of our funds could be limited by borrowing base restrictions and restrictive covenants in our loan and security agreement for our revolving credit facility.
In January 2020 we entered into a Loan and Security Agreement with Bank of America, N.A., or the BofA Loan Agreement, which provides for a revolving credit facility up to a principal amount of $35.0 million, with the availability of borrowings subject to certain conditions and requirements, including the maintenance of Availability (as defined in the BofA Loan Agreement) of at least $5.0 million. We are dependent on our existing cash, cash equivalents and borrowings available under our BofA Loan Agreement to provide adequate funds for ongoing operations, planned capital expenditures and working capital requirements for at least the next twelve months. If our financial position deteriorates, our borrowing capacity under the credit facility may be reduced, which would adversely impact our business and growth. In addition, the BofA Loan Agreement includes covenants that place certain restrictions on our ability to, among other things, borrow secured debt or unsecured debt beyond a certain amount, create or suffer to exist any liens, sell or transfer any assets, make distributions, liquidate, dissolve, merge, amalgamate, combine or consolidate, or become a party to certain agreements restricting our ability to incur or repay debt, grant liens, make distributions or modify loan agreements, in each case subject to certain exceptions. Failure to maintain these covenants can limit the amount of borrowings that are available to us, increase the cost of borrowings under the facility, and/or require us to make immediate payments to reduce borrowings.
Given our current financial position and history of operating losses, it is possible that we may fail to meet the minimum levels required by the financial covenants, which would constitute an event of default under the BofA Loan Agreement. Events beyond our control could have a material adverse impact on our results of operations, financial condition or liquidity, in which case we may not be able to meet our financial covenants. For example, prior to the BofA Loan Agreement, we were party to a loan agreement with Silicon Valley Bank, or the SVB Loan Agreement, that provided us a revolving credit facility based on a customary accounts receivable borrowing base, subject to certain exceptions and conclusions. During the term of the SVB Loan Agreement, we were not able to meet the financial covenants in several of the quarters due to variability in our results of operations and financial position and had to request waivers and amendments to the SVB Loan Agreement to avoid an event of default. The BofA Loan Agreement covenants may also affect our ability to obtain future financing and to pursue attractive business opportunities and our flexibility in planning for, and reacting to, changes in business conditions. These covenants could place us at a disadvantage compared to some of our competitors, who may have fewer restrictive covenants and may not be required to operate under these restrictions.
Our failure or the failure of our manufacturers to comply with environmental and other legal regulations could adversely impact our results of operations.
The manufacture, assembly and testing of our products may require the use of hazardous materials that are subject to environmental, health and safety regulations, or materials subject to laws restricting the use of conflict minerals. Our failure or the failure of our third-party manufacturers to comply with any of these requirements could result in regulatory penalties, legal claims or disruption of production. In addition, our failure or the failure of our manufacturers to properly manage the use, transportation, emission, discharge, storage, recycling or disposal of hazardous materials could subject us to increased costs or liabilities. Existing and future environmental regulations and other legal requirements may restrict our use of certain materials to manufacture, assemble and test products. Any of these consequences could adversely impact our results of operations by increasing our expenses and/or requiring us to alter our manufacturing processes.
Regulatory and physical impacts of climate change and other natural events may affect our customers and our manufacturers, resulting in adverse effects on our operating results.
As emissions of greenhouse gases continue to alter the composition of the atmosphere, affecting large-scale weather patterns and the global climate, any new regulation of greenhouse gas emissions may result in additional costs to our customers and our manufacturers. In addition, the physical impacts of climate change and other natural events, including changes in weather patterns, drought, rising ocean and temperature levels, earthquakes and tsunamis may impact our customers, suppliers and manufacturers, and our operations. These potential physical effects may adversely affect our revenue, costs, production and delivery schedules, and cause harm to our results of operations and financial condition.
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We have in the past pursued, and may in the future continue to pursue, acquisitions which involve a number of risks and uncertainties. If we are unable to address and resolve these risks and uncertainties successfully, such acquisitions could disrupt our business and result in higher costs than we anticipate.
We may in the future acquire businesses, products or technologies to expand our product offerings and capabilities, customer base and business. We have evaluated and expect to continue to evaluate a wide array of potential strategic transactions. We have limited experience making such acquisitions or integrating these businesses after such acquisitions. Any anticipated and unanticipated costs to us related to future transactions could exceed amounts that are covered by insurance and could have a material adverse impact on our financial condition and results of operations. In addition, the anticipated benefit of any acquisitions may never materialize or the process of integrating acquired businesses, products or technologies may create unforeseen operating difficulties and expenditures.
Some of the areas where we have experienced and may in the future experience acquisition-related risks include:
• | expenses and distractions, including diversion of management time related to litigation; |
• | expenses and distractions related to potential claims resulting from any possible future acquisitions, whether or not they are completed; |
• | retaining and integrating employees from acquired businesses; |
• | issuance of dilutive equity securities or incurrence of debt; |
• | integrating various accounting, management, information, human resource and other systems to permit effective management; |
• | incurring possible write-offs, impairment charges, contingent liabilities, amortization expense of intangible assets or impairment of goodwill and intangible assets with finite useful lives; |
• | difficulties integrating and supporting acquired products or technologies; |
• | unexpected capital expenditure requirements; |
• | insufficient revenue to offset increased expenses associated with acquisitions; and |
• | opportunity costs associated with committing capital to such acquisitions. |
If our goodwill becomes impaired, we may be required to record a significant charge to our results of operations. We review our goodwill for impairment annually or when events or changes in circumstances indicate the carrying value may not be recoverable, such as a sustained or significant decline in stock price and market capitalization. If the carrying value of goodwill was deemed to be impaired, an impairment loss equal to the amount by which the carrying amount exceeds the estimated fair value would be recognized. Any such impairment could materially and adversely affect our financial condition and results of operations.
Foreign acquisitions would involve risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries. We may not be able to address these risks and uncertainties successfully, or at all, without incurring significant costs, delays or other operating problems.
Our inability to address or anticipate any of these risks and uncertainties could disrupt our business and could have a material impact on our financial condition and results of operations.
Our use of and reliance upon development resources in China may expose us to unanticipated costs or liabilities.
We operate a wholly foreign owned enterprise in Nanjing, China, where a dedicated team of engineers performs product development, quality assurance, cost reduction and other engineering work. Our reliance upon development resources in China may not enable us to achieve meaningful product cost reductions or greater resource efficiency. Further, our development efforts and other operations in China involve significant risks, including:
• | difficulty hiring and retaining appropriate engineering resources due to intense competition for such resources and resulting wage inflation; |
• | the knowledge transfer related to our technology and exposure to misappropriation of intellectual property or confidential information, including information that is proprietary to us, our customers and third parties; |
• | heightened exposure to changes in the economic, security, political and pandemic conditions that may arise in China; |
• | fluctuation in currency exchange rates and tax risks associated with international operations; |
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• | development efforts that do not meet our requirements because of language, cultural or other differences associated with international operations, resulting in errors or delays; and |
• | uncertainty with respect to tariffs imposed by the federal government on products imported from China and future actions the federal government may take with respect to international trade agreements and U.S. tax provisions related to international commerce that could adversely affect our international operations. |
Difficulties resulting from the factors above and other risks related to our operations in China could expose us to increased expense, impair our development efforts, harm our competitive position and damage our reputation. For example, the COVID-19 outbreak first reported in Wuhan, China in December 2019 impacted our research and development operations in Nanjing, and may continue to impact our operations, including our ability to meet our desired development timelines. Government-imposed travel restrictions and closures of certain business operations in China in response to COVID-19 have disrupted and delayed the supply of component parts sourced from China and our supply chain and our suppliers’ operations in and outside of China, which may continue for the foreseeable future if the pandemic is not contained.
Our customers are subject to government regulation, and changes in current or future laws or regulations that negatively impact our customers could harm our business.
The FCC has jurisdiction over all of our U.S. customers. FCC regulatory policies that create disincentives for investment in access network infrastructure or impact the competitive environment in which our customers operate may harm our business. For example, future FCC regulation affecting providers of broadband Internet access services could impede the penetration of our customers into certain markets or affect the prices they may charge in such markets. Similarly, changes to regulatory tariff requirements or other regulations relating to pricing or terms of carriage on communication networks could slow the development or expansion of network infrastructures. Consequently, such changes could adversely affect the sale of our products and services. Furthermore, many of our customers are subject to FCC rate regulation of interstate telecommunications services and are recipients of CAF capital incentive payments, which are intended to subsidize broadband and telecommunications services in areas that are expensive to serve. Changes to these programs, rules and regulations that could affect the ability of IOCs to access capital, and which could in turn reduce our revenue opportunities, remain possible.
In addition, many of our customers are subject to state regulation of intrastate telecommunications services, including rates for such services, and may also receive funding from state universal service funds. Changes in rate regulations or universal service funding rules, either at the U.S. federal or state level, could adversely affect our customers’ revenue and capital spending plans. Moreover, various international regulatory bodies have jurisdiction over certain of our non-U.S. customers. Changes in these domestic and international standards, laws and regulations, or judgments in favor of plaintiffs in lawsuits against CSPs based on changed standards, laws and regulations could adversely affect the development of broadband networks and services. This, in turn, could directly or indirectly adversely impact the communications industry in which our customers operate.
Many jurisdictions, including international governments and regulators, are also evaluating, implementing and enforcing regulations relating to cyber security, privacy and data protection, which can affect the market and requirements for networking and communications equipment. To the extent our customers are adversely affected by laws or regulations regarding their business, products or service offerings, our business, financial condition and results of operations would suffer.
We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in additional international markets.
Our products are subject to U.S. export and trade controls and restrictions. International shipments of certain of our products may require export licenses or are subject to additional requirements for export. In addition, the import laws of other countries may limit our ability to distribute our products, or our customers’ ability to buy and use our products, in those countries. Changes in our products or changes in export and import regulations or duties may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products or, in some cases, prevent the export or import of our products to certain countries altogether. Any change in export or import regulations, duties or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the countries, persons or technologies targeted by such regulations, could negatively impact our ability to sell, profitably or at all, our products to existing or potential international customers.
If we lose any of our key personnel, or are unable to attract, train and retain qualified personnel, our ability to manage our business and continue our growth would be negatively impacted.
Our success depends, in large part, on the continued contributions of our key personnel, many of whom are highly skilled and would be difficult to replace. None of our key personnel are bound by a written employment contract to remain with us for a specified period. In addition, we do not currently maintain key person life insurance covering our key personnel. If we lose the services of any key personnel, our business, financial condition and results of operations may suffer.
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Competition for skilled personnel is intense. We cannot be certain that we will be successful in attracting and retaining qualified personnel, or that newly hired personnel will function effectively, both individually and as a group. If we are unable to effectively recruit, hire and utilize new employees to align with our company objectives, execution of our business strategy and our ability to react to changing market conditions may be impeded, and our business, financial condition and results of operations may suffer.
Volatility or lack of performance in our stock price may also affect our ability to attract and retain our key personnel. Our executive officers and employees hold a substantial number of shares of our common stock and vested stock options. Employees may be more likely to leave us if the shares they own or the shares underlying their equity awards decline in value, or if the exercise prices of stock options that they hold are significantly above the market price of our common stock. If we are unable to retain our employees, our business, operating results and financial condition will be harmed.
If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired, which would adversely affect our operating results, our ability to operate our business and our stock price.
Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Our recent migration of our ERP system to Oracle’s cloud platform required us to expend substantial time to re-evaluate and update our internal controls. We have in the past discovered, and may in the future discover, areas of our internal financial and accounting controls and procedures that need improvement, particularly as we adjust to our new ERP platform.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our management does not expect that our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company will have been detected.
We are required to comply with Section 404 of the Sarbanes-Oxley Act, or SOX, which requires us to expend significant resources in developing the required documentation and testing procedures. We cannot be certain that the actions we have taken and are taking to improve our internal controls over financial reporting will be sufficient to maintain effective internal controls over financial reporting in subsequent reporting periods or that we will be able to implement our planned processes and procedures in a timely manner. In addition, new and revised accounting standards and financial reporting requirements may occur in the future and implementing changes required by new standards, requirements or laws may require a significant expenditure of our management’s time, attention and resources which may adversely affect our reported financial results. If we are unable to produce accurate financial statements on a timely basis, investors could lose confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline and make it more difficult for us to finance our operations and growth.
We incur significant costs as a result of operating as a public company, which may adversely affect our operating results and financial condition.
As a public company, we incur significant accounting, legal and other expenses, including costs associated with our public company reporting requirements. We also anticipate that we will continue to incur costs associated with corporate governance requirements, including requirements and rules under SOX and the Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank, among other rules and regulations implemented by the SEC, as well as listing requirements of the New York Stock Exchange, or NYSE. Furthermore, these laws and regulations could make it difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these requirements could also make it difficult for us to attract and retain qualified persons to serve on our Board of Directors, our board committees or as executive officers.
New laws and regulations as well as changes to existing laws and regulations affecting public companies, including the provisions of SOX and the Dodd-Frank Act and rules adopted by the SEC and the NYSE, would likely result in increased costs to us as we respond to their requirements. We continue to invest resources to comply with evolving laws and regulations, and this investment may result in increased general and administrative expense.
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Risks Related to Ownership of Our Common Stock
Our stock price may continue to be volatile, and the value of an investment in our common stock may decline.
The trading price of our common stock has been, and is likely to continue to be, volatile, which means that it could decline substantially within a short period of time and could fluctuate widely in response to various factors, some of which are beyond our control. These factors include those discussed above under “Risks Related to Our Business and Industry” and others such as:
• | quarterly variations in our results of operations or those of our competitors; |
• | failure to meet any guidance that we have previously provided regarding our anticipated results; |
• | changes in earnings estimates or recommendations by securities analysts; |
• | failure to meet securities analysts’ estimates; |
• | announcements by us or our competitors of new products, significant contracts, commercial relationships, acquisitions or capital commitments; |
• | developments with respect to intellectual property rights; |
• | our ability to develop and market new and enhanced products on a timely basis; |
• | our commencement of, or involvement in, litigation and developments relating to such litigation; |
• | changes in governmental regulations; and |
• | a slowdown in the communications industry or the general economy. |
In recent years, the stock market in general, and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our actual operating performance. Recently, the COVID-19 pandemic has severely impacted U.S. markets, causing dramatic swings in the U.S. stock exchanges that resulted in increased volatility in the trading price of our common stock. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
If securities or industry analysts do not publish research or reports about our business or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If any of the analysts who cover us issue an adverse or misleading opinion regarding our stock, our stock price would likely decline. If several of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable and may lead to entrenchment of our management and Board of Directors.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could have the effect of delaying or preventing changes in control or changes in our management or our Board of Directors. These provisions include:
• | a classified Board of Directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority of our Board of Directors; |
• | no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates; |
• | the exclusive right of our Board of Directors to elect a director to fill a vacancy created by the expansion of the Board of Directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our Board of Directors; |
• | the ability of our Board of Directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer; |
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• | a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders; |
• | the requirement that a special meeting of stockholders may be called only by the chairman of the Board of Directors, the chief executive officer or the Board of Directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and |
• | advance notice procedures that stockholders must comply with in order to nominate candidates to our Board of Directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us. |
We are also subject to certain anti-takeover provisions under Delaware law. Under Delaware law, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the Board of Directors has approved the transaction.
We may need additional capital in the future to finance our business.
We may need to raise additional capital to fund operations in the future. Our working capital needs and cash use have continued to increase to support our growth initiatives, and we may need additional capital if our current plans and assumptions change. While we have transitioned our supply chain operations to mitigate the impact of U.S. tariffs on goods imported from China, failure to effectively manage the transition or unanticipated further expenditures associated with mitigation efforts could negatively impact our cash flows and result of operations. Failure to maintain certain restrictive covenants and requirements under the BofA Loan Agreement could result in limiting the amount of borrowings that are available to us, increase the cost of borrowings under the credit facility, and/or cause us to make immediate payments to reduce borrowings or result in an event of default. If future financings involve the issuance of equity securities, our then-existing stockholders would suffer dilution. If we raise additional debt financing, we may be subject to restrictive covenants that limit our ability to conduct our business. If we are unable to generate positive operating income and positive cash flows from operations, our liquidity, results of operations and financial condition will be adversely affected. Furthermore, if we are unable to generate sufficient cash flows to support our operational needs, we may need to seek additional sources of liquidity, including borrowings, to support our working capital needs. In addition, we may choose to seek other sources of liquidity even if we believe we have generated sufficient cash flows to support our operational needs. There is no assurance that any other sources of liquidity may be available to us on acceptable terms or at all. If we are unable to generate sufficient cash flows or obtain other sources of liquidity, we will be forced to limit our development activities, reduce our investment in growth initiatives and institute cost-cutting measures, all of which would adversely impact our business and growth.
We do not currently intend to pay dividends on our common stock and, consequently, our stockholders’ ability to achieve a return on their investment will depend on appreciation in the price of our common stock.
We do not currently intend to pay any cash dividends on our common stock for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Additionally, the terms of our credit facility restrict our ability to pay dividends under certain circumstances. Therefore, our stockholders are not likely to receive any dividends on our common stock for the foreseeable future.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 5. Other Information
None.
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ITEM 6. Exhibits
Exhibit Number | Description | |
31.1 | ||
31.2 | ||
32.1 | ||
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
* Indicates management contract or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CALIX, INC. (Registrant) | |||
Date: April 30, 2020 | By: | /s/ Carl Russo | |
Carl Russo | |||
Chief Executive Officer (Principal Executive Officer) | |||
Date: April 30, 2020 | By: | /s/ Cory Sindelar | |
Cory Sindelar | |||
Chief Financial Officer (Principal Financial Officer) | |||
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