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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 July 1, 2017
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.)
1035 N. McDowell Blvd., Petaluma, CA 94954
(Address of Principal Executive Offices) (Zip Code)
(707) 766-3000
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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
(Do not check if a smaller reporting company)
 
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 August 3, 2017, there were 50,307,864 shares of the Registrant’s common stock, par value $0.025 outstanding.


Table of Contents

Calix, Inc.
Form 10-Q
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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PART I. FINANCIAL INFORMATION
 
ITEM 1.
Financial Statements
CALIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
 
 
 
July 1,
2017
 
December 31,
2016
 
 
(Unaudited)
 
 (See Note 1)
ASSETS
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
37,294

 
$
50,359

Marketable securities
 
12,915

 
27,748

Accounts receivable, net
 
53,392

 
51,336

Inventory
 
39,572

 
44,545

Deferred cost of revenue
 
40,094

 
34,763

Prepaid expenses and other current assets
 
11,112

 
10,571

Total current assets
 
194,379

 
219,322

Property and equipment, net
 
17,959

 
17,984

Goodwill
 
116,175

 
116,175

Intangible assets, net
 

 
813

Other assets
 
811

 
1,181

 
 
$
329,324

 
$
355,475

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
 
Accounts payable
 
$
27,840

 
$
23,827

Accrued liabilities
 
72,662

 
69,715

Deferred revenue
 
41,847

 
27,854

Total current liabilities
 
142,349

 
121,396

Long-term portion of deferred revenue
 
21,104

 
20,237

Other long-term liabilities
 
638

 
878

Total liabilities
 
164,091

 
142,511

Commitments and contingencies (See Note 7)
 

 

Stockholders’ equity:
 
 
 
 
Preferred stock, $0.025 par value; 5,000 shares authorized; no shares issued and outstanding as of July 1, 2017 and December 31, 2016
 

 

Common stock, $0.025 par value; 100,000 shares authorized; 55,605 shares issued and 50,275 shares outstanding as of July 1, 2017, and 54,722 shares issued and 49,392 shares outstanding as of December 31, 2016
 
1,390

 
1,368

Additional paid-in capital
 
840,931

 
836,563

Accumulated other comprehensive loss
 
(464
)
 
(656
)
Accumulated deficit
 
(636,638
)
 
(584,325
)
Treasury stock, 5,330 shares as of July 1, 2017 and December 31, 2016
 
(39,986
)
 
(39,986
)
Total stockholders’ equity
 
165,233

 
212,964

 
 
$
329,324

 
$
355,475


See accompanying notes to condensed consolidated financial statements.


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CALIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands, except per share data)
(Unaudited)
 
 
 
Three Months Ended
 
Six Months Ended
 
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
Revenue:
 
 
 
 
 
 
 
 
Products
 
$
107,348

 
$
100,144

 
$
198,953

 
$
191,824

Services
 
18,775

 
7,281

 
44,688

 
13,976

Total revenue
 
126,123

 
107,425

 
243,641

 
205,800

Cost of revenue:
 
 
 
 
 
 
 
 
Products (1)
 
58,299

 
51,501

 
115,672

 
99,194

Services (1)
 
24,501

 
5,918

 
50,269

 
11,118

Total cost of revenue
 
82,800

 
57,419

 
165,941

 
110,312

Gross profit
 
43,323

 
50,006

 
77,700

 
95,488

Operating expenses:
 
 
 
 
 
 
 
 
Research and development (1)
 
32,950

 
25,033

 
66,758

 
47,806

Sales and marketing (1)
 
18,429

 
19,213

 
40,858

 
38,275

General and administrative (1)
 
9,701

 
11,641

 
19,958

 
24,325

Amortization of intangible assets
 

 

 

 
1,701

Restructuring charges
 
957

 

 
1,656

 

Total operating expenses
 
62,037

 
55,887

 
129,230

 
112,107

Loss from operations
 
(18,714
)
 
(5,881
)
 
(51,530
)
 
(16,619
)
Interest and other income (expense), net:
 
 
 
 
 
 
 
 
Interest income, net
 
54

 
97

 
148

 
194

Other income (expense), net
 
(151
)
 
82

 
(81
)
 
115

Loss before provision for income taxes
 
(18,811
)
 
(5,702
)
 
(51,463
)
 
(16,310
)
Provision for income taxes
 
177

 
124

 
850

 
245

Net loss
 
$
(18,988
)

$
(5,826
)
 
$
(52,313
)
 
$
(16,555
)
Net loss per common share, basic and diluted
 
$
(0.38
)
 
$
(0.12
)
 
$
(1.05
)
 
$
(0.34
)
Weighted-average number of shares used to compute
 


 


 
 
 
 
net loss per common share, basic and diluted
 
50,019

 
48,371

 
49,772

 
48,478

 
 
 
 
 
 
 
 
 
Net loss
 
$
(18,988
)
 
$
(5,826
)
 
$
(52,313
)
 
$
(16,555
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale marketable securities, net
 
3

 
41

 
(1
)
 
106

Foreign currency translation adjustments, net
 
132

 
(23
)
 
193

 
(41
)
Total other comprehensive income, net of tax
 
135

 
18

 
192

 
65

Comprehensive loss
 
$
(18,853
)
 
$
(5,808
)
 
$
(52,121
)
 
$
(16,490
)
                                                                                     
 
 
 
 
 
 
 
 
 (1)  Includes stock-based compensation as follows:
 
 
 
 
 
 
 
 
Cost of revenue:
 
 
 
 
 
 
 
 
Products
 
$
96

 
$
128

 
$
212

 
$
218

Services
 
75

 
55

 
131

 
92

Research and development
 
1,122

 
1,099

 
2,448

 
2,146

Sales and marketing
 
654

 
840

 
1,765

 
1,662

General and administrative
 
831

 
846

 
1,762

 
1,571


See accompanying notes to condensed consolidated financial statements.

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CALIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
 
Six Months Ended
 
 
July 1,
2017
 
June 25,
2016
Operating activities:
 
 
 
 
Net loss
 
$
(52,313
)
 
$
(16,555
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
Depreciation and amortization
 
4,929

 
4,131

Loss on retirement of property and equipment
 
80

 

Amortization of intangible assets
 
813

 
4,178

Amortization of premium (discount) related to available-for-sale securities
 
(3
)
 
233

Stock-based compensation
 
6,318

 
5,689

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable, net
 
(2,056
)
 
(1,963
)
Inventory
 
4,973

 
6,906

Deferred cost of revenue
 
(5,331
)
 
(1,894
)
Prepaid expenses and other assets
 
(156
)
 
1,394

Accounts payable
 
3,731

 
(5,859
)
Accrued liabilities
 
2,962

 
9,012

Deferred revenue
 
14,860

 
323

Other long-term liabilities
 
(241
)
 
(207
)
Net cash provided by (used in) operating activities
 
(21,434
)
 
5,388

Investing activities:
 
 
 
 
Purchases of property and equipment
 
(4,715
)
 
(3,078
)
Purchases of marketable securities
 
(8,732
)
 

Sales of marketable securities
 
5,051

 

Maturities of marketable securities
 
18,516

 
11,670

Net cash provided by investing activities
 
10,120

 
8,592

Financing activities:
 
 
 
 
Proceeds from exercise of stock options
 
29

 
14

Proceeds from employee stock purchase plan
 
673

 
2,905

Payments for repurchases of common stock
 

 
(12,809
)
Taxes paid for awards vested under equity incentive plan
 
(2,630
)
 
(1,547
)
Net cash used in financing activities
 
(1,928
)
 
(11,437
)
Effect of exchange rate changes on cash and cash equivalents
 
177

 
(124
)
Net increase (decrease) in cash and cash equivalents
 
(13,065
)
 
2,419

Cash and cash equivalents at beginning of period
 
50,359

 
23,626

Cash and cash equivalents at end of period
 
$
37,294

 
$
26,045


See accompanying notes to condensed consolidated financial statements.

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CALIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Company and Basis of Presentation
Company
Calix, Inc. (together with its subsidiaries, “Calix,” the “Company,” “our,” “we,” or “us”) was incorporated in August 1999, and is a Delaware corporation. The Company is a leading global provider of broadband communications access platforms, systems and software for fiber- and copper-based network architectures and a pioneer in software defined access and cloud products focused on access networks and the subscriber. Calix’s portfolio combines Access eXtensible Operating System (“AXOS”), a software platform for access, with Calix Cloud, innovative cloud products for network data analytics and subscriber experience assurance. Together they enable communications service providers (“CSPs”) to transform their networks and enhance how they connect to their residential and business subscribers. The Company enables 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 solely 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 significant intercompany balances and transactions have been eliminated in consolidation. The Condensed Consolidated Balance Sheet at December 31, 2016 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 fiscal 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, 2016.
The Company’s fiscal year begins on January 1st and ends on December 31st. Quarterly periods are based on a 4-4-5 fiscal calendar with the first, second and third fiscal quarters ending on the 13th Saturday of each fiscal period. As a result, the Company had five more days in the six months ended July 1, 2017 than in the six months ended June 25, 2016. 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.
Prior Period Recast
The Company’s revenue from services for the three and six months ended July 1, 2017 represents more than 10% of its total revenue; hence, the revenue derived from services along with its associated cost of revenue are presented separately in the accompanying Condensed Consolidated Statements of Comprehensive Loss. Services include professional services, software support services for access systems, extended warranty and training services. Accordingly, revenue and cost of revenue for the three and six months ended June 25, 2016 are recast solely to conform with the current period presentation. The recast does not affect total revenue, total cost of revenue, gross profit, operating expenses, or net loss.
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, 2016. The Company’s significant accounting policies did not change during the six months ended July 1, 2017, except for those impacted by the newly adopted accounting standards below.
Newly Adopted Accounting Standards
Stock-Based Compensation
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company adopted ASU 2016-09 in the first quarter of fiscal 2017 and had the following impact:
a.
Accounting for Income Taxes - The primary impact of the adoption was the recognition of excess tax benefits and tax deficiencies through the statement of operations when the awards vest or are settled rather than through paid-in capital. The new guidance eliminates the requirement to delay the recognition of excess tax benefits until it reduces current taxes payable and requires the

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recognition of excess tax benefits and tax deficiencies in the period they arise. The Company adopted this guidance on a modified retrospective basis beginning on January 1, 2017, and the adoption had a cumulative-effect adjustment to the beginning balance of deferred tax asset and was fully offset by the corresponding valuation allowance as of January 1, 2017. The adoption had no cumulative-effect adjustment on January 1, 2017 accumulated deficit as the Company’s net operating loss carryforwards are offset by a full valuation allowance.
b.
Classification of Excess Tax Benefits on the Statement of Cash Flows - ASU 2016-09 requires all tax-related cash flows resulting from share-based payments to be reported as operating activities on the statement of cash flows, a change from the current requirement to present windfall tax benefits as an inflow from financing activities and an outflow from operating activities. The Company adopted this guidance prospectively beginning on January 1, 2017. The adoption of ASU 2016-09 as it relates to this matter had no impact to the Company’s consolidated financial statements.
c.
Forfeitures - The Company has historically recognized stock-based compensation expense net of estimated forfeitures on all unvested awards and elected to continuously do so with the adoption of this new guidance. Hence, the adoption of ASU 2016-09 as it relates to this matter had no impact to the Company’s consolidated financial statements.
d.
Minimum Statutory Tax Withholding Requirements - ASU 2016-09 allows companies to withhold an amount up to the employee’s maximum individual tax rate in the relevant jurisdiction without resulting in liability classification of the award. The Company adopted this guidance using a modified retrospective approach. The adoption had no impact on the January 1, 2017 accumulated deficit as the Company had no outstanding liability awards that would otherwise qualify for equity classification under this new guidance.
e.
Classification of Employee Taxes Paid on the Statement of Cash Flows When an Employer Withholds Shares for Tax-Withholding Purposes - ASU 2016-09 clarifies that all cash payments made to taxing authorities on the employees’ behalf for withheld shares should be presented as financing activities on the statement of cash flows. The Company has historically presented the taxes paid related to net share settlement of equity awards as a financing activity on the statements of cash flows. Hence, the adoption of ASU 2016-09 as it relates to this matter had no impact to the Company’s consolidated financial statements.
Inventory
In July 2015, the FASB issued Accounting Standards Update No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”), which requires measurement of inventory at lower of cost and net realizable value, versus lower of cost or market. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company adopted ASU 2015-11 prospectively beginning on January 1, 2017. The adoption of this standard had no material impact on the Company’s consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
Leases
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires recognition of an asset and liability for lease arrangements longer than twelve months. ASU 2016-02 will be effective for the Company beginning in the first quarter of fiscal 2019. Early application is permitted, and it is required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company is not planning to early adopt, and accordingly, it will adopt the new standard effective January 1, 2019. The Company intends to elect the available practical expedients on adoption. The Company is currently assessing the potential impact of adopting this new guidance on its consolidated financial statements. The Company expects its assets and liabilities to increase as the new standard requires recognition of right-of-use assets and lease liabilities for operating leases, but does not expect any material impact on its loss from operations or net loss as a result of the adoption of this standard.
Revenue from Contracts with Customers
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which provides guidance for revenue recognition. ASU 2014-09 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. Additionally, it supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts, and creates new Subtopic 340-40, Other Assets and Deferred Costs-Contracts with Customers. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under the previous guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. On August 12, 2015, the FASB issued Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date (“ASU 2015-14”) to defer the effective date of ASU 2014-09 by one year. ASU 2015-14 permits early adoption of the new revenue standard, but not before its original effective date. In April 2016, the FASB issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”) which further clarifies guidance related to identifying performance obligations and licensing implementation guidance contained in ASU 2014-09. In May 2016, the FASB issued Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”) which addresses narrow-scope improvements to the guidance on collectibility, non-cash consideration, and completed contracts at transition and provides a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers.

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The new standard permits adoption either by using (i) a full retrospective approach for all periods presented in the period of adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing certain additional disclosures. The Company will adopt the new standard effective January 1, 2018 using the modified retrospective transition method applied to those contracts which are not completed as of that date.
The Company has reached preliminary conclusions on key accounting assessments related to the standard and is in the process of evaluating the impact of the new standard on its accounting policies, processes, and system requirements. The Company has assigned internal resources in addition to the engagement of third party service providers to assist in its evaluation. Additionally, the Company expects to make investments in new systems or enhancement of existing systems to enable timely and accurate reporting under the new standard. While the Company continues to perform further assessment of all potential impacts under the new standard, the Company expects the timing of revenue recognition to be accelerated for certain performance obligations related to certain revenue arrangements which are currently deferred until customer acceptance. Depending on the outcome of the Company’s final evaluation, the timing of when revenue is recognized could change significantly for those revenue arrangements under the new standard.
In connection with the adoption of the new revenue standard, the Company will also adopt ASC 340-40, Other Assets and Deferred Costs - Contracts with Customers, with respect to capitalization and amortization of incremental costs of obtaining a contract effective January 1, 2018. As a result, the Company may need to capitalize additional costs of obtaining a contract, including sales commissions, as the guidance requires the capitalization of all incremental costs incurred to obtain a contract with a customer that it would not have incurred if the contract had not been obtained, provided it expects to recover the costs. The Company expects that sales commissions as a result of obtaining customer contracts are recoverable, and as a result, the Company will defer certain sales commissions and amortize them over the period that the related revenue is recognized.
While the Company continues to assess all the potential impacts of the new standard, including the areas described above, and anticipates this standard could have a material impact on its consolidated financial statements, the Company is not able to quantify or cannot reasonably estimate quantitative information related to the impact of the new standard on its consolidated financial statements at this time.
Concentration of Customer Risk
The Company had one customer that accounted for more than 10% of its total revenue for the three months ended July 1, 2017 and two customers that each accounted for more than 10% of its total revenue for the six months ended July 1, 2017. These two customers each accounted for more than 10% of the Company’s total revenue for the three and six months ended June 25, 2016. These two customers together represented 34% and 44% of the Company’s total revenue for the three and six months ended July 1, 2017, respectively, and 35% and 32% for the three and six months ended June 25, 2016, respectively. Each of these two customers represented more than 10% of the Company’s accounts receivable as of July 1, 2017 and December 31, 2016.
3. Cash, Cash Equivalents and Marketable Securities
The Company has invested its excess cash primarily in money market funds and highly liquid marketable securities such as corporate debt instruments, commercial paper and U.S. government agency securities. The Company considers all investments with maturities of three months or less when purchased to be cash equivalents. Marketable securities represent highly liquid corporate debt instruments, commercial paper and U.S. government agency securities with maturities greater than 90 days at date of purchase. Marketable securities with maturities greater than one year are classified as current because management considers all marketable securities to be available for current operations.
Cash equivalents are stated at amounts that approximate fair value based on quoted market prices. Marketable securities are recorded at their fair values.
The Company’s investments have been classified and accounted for as available-for-sale. Such investments are recorded at fair value and unrealized holding gains and losses are reported as a separate component of accumulated other comprehensive income (loss) in the stockholders’ equity until realized. Realized gains and losses on sales of marketable securities, if any, are determined on the specific identification method and are reclassified from accumulated other comprehensive income (loss) to results of operations as other income (expense).
The Company, to date, has not determined that any of the unrealized losses on its investments are considered to be other-than-temporary. The Company reviews its investment portfolio to determine if any security is other-than-temporarily impaired, which would require the Company to record an impairment charge in the period any such determination is made. In making this judgment, the Company evaluates, among other things: the duration and extent to which the fair value of a security is less than its cost; the financial condition of the issuer and any changes thereto; and the Company’s intent and ability to hold its investment for a period of time sufficient to allow for any anticipated recovery in market value, or whether the Company will more likely than not be required to sell the security before recovery of its amortized cost basis. The Company has evaluated its investments as of July 1, 2017 and has determined that no investments with unrealized losses are other-than-temporarily impaired. No investments have been in a continuous loss position for greater than one year.

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Cash, cash equivalents and marketable securities consisted of the following (in thousands):
 
 
July 1,
2017
 
December 31,
2016
Cash and cash equivalents:
 
 
 
 
Cash
 
$
34,534

 
$
34,340

Money market funds
 
2,760

 
15,020

Commercial paper
 

 
999

Total cash and cash equivalents
 
37,294

 
50,359

Marketable securities:
 


 


Corporate debt securities
 
6,125

 
17,272

Commercial paper
 
2,594

 
6,275

U.S. government agency securities
 
4,196

 
4,201

Total marketable securities
 
12,915

 
27,748

 
 
$
50,209

 
$
78,107

The carrying amounts of the Company’s money market funds approximate their fair values due to their nature, duration and short maturities.
As of July 1, 2017, all marketable securities were due in one year or less; and the amortized cost and fair value of marketable securities were as follows (in thousands):
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Corporate debt securities
 
$
6,128

 
$

 
$
(3
)
 
$
6,125

Commercial paper
 
2,594

 

 

 
2,594

U.S. government agency securities
 
4,200

 

 
(4
)
 
4,196

 
 
$
12,922

 
$

 
$
(7
)
 
$
12,915

As of December 31, 2016, the amortized cost and fair value of marketable securities were as follows (in thousands):
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Corporate debt securities
 
$
17,279

 
$
1

 
$
(8
)
 
$
17,272

Commercial paper
 
6,275

 

 

 
6,275

U.S. government agency securities
 
4,200

 
1

 

 
4,201

 
 
$
27,754

 
$
2

 
$
(8
)
 
$
27,748

4. Fair Value Measurements
The Company measures its cash equivalents and marketable securities at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The Company utilizes the following three-tier value hierarchy which prioritizes the inputs used in measuring fair value:
Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – Observable inputs other than quoted prices included in Level 1 for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-driven valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 – Unobservable inputs to the valuation derived from fair valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

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The following table sets forth the Company’s financial assets measured at fair value on a recurring basis as of July 1, 2017 and December 31, 2016, based on the three-tier fair value hierarchy (in thousands):
As of July 1, 2017
 
Level 1

Level 2

Total
Money market funds
 
$
2,760

 
$

 
$
2,760

Corporate debt securities
 

 
6,125

 
6,125

Commercial paper
 

 
2,594

 
2,594

U.S. government agency securities
 

 
4,196

 
4,196

 
 
$
2,760

 
$
12,915


$
15,675

 

As of December 31, 2016
 
Level 1
 
Level 2
 
Total
Money market funds
 
$
15,020

 
$

 
$
15,020

Corporate debt securities
 

 
17,272

 
17,272

Commercial paper
 

 
7,274

 
7,274

U.S. government agency securities
 

 
4,201

 
4,201

 
 
$
15,020

 
$
28,747

 
$
43,767

The fair values of money market funds classified as Level 1 were derived from quoted market prices as active markets for these instruments exist. The fair values of corporate debt securities, commercial paper and U.S. government agency securities classified as Level 2 were derived from quoted market prices for similar instruments indexed to prevailing market yield rates. The Company has no level 3 financial assets. The Company did not have any transfers between Level 1 and Level 2 of the fair value hierarchy during the six months ended July 1, 2017 and June 25, 2016.
5. Goodwill and Intangible Assets
Goodwill
Goodwill was recorded as a result of the Company’s acquisitions of Occam Networks, Inc. (“Occam”) in February 2011 and Optical Solutions, Inc. in February 2006. This goodwill is not deductible for tax purposes, and there have been no adjustments to goodwill since the acquisition dates.
Goodwill is not amortized but instead is subject to an annual impairment test or more frequently if events or changes in circumstances indicate that it may be impaired. The Company evaluates goodwill on an annual basis at the end of the second quarter of each year. Management has determined that the Company operates as a single reporting unit and, therefore, evaluates goodwill impairment at the enterprise level. Management assessed qualitative factors to determine whether it was more likely than not (that is, a likelihood of more than 50 percent) that the fair value of the Company was less than its carrying amount, including goodwill, as of July 1, 2017. In assessing the qualitative factors, management considered the impact of these key factors: macro-economic conditions, industry and market environment, overall financial performance of the Company, cash flow from operating activities, market capitalization and stock price. Management concluded that the fair value of the Company was more likely than not greater than its carrying amount as of July 1, 2017. As such, it was not necessary to perform the two-step goodwill impairment test at the time.
Intangible Assets
Intangible assets are carried at cost, less accumulated amortization. The details of intangible assets as of July 1, 2017 and December 31, 2016 are disclosed in the following table (in thousands):
 
 
July 1, 2017
 
December 31, 2016
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Core developed technology
 
$
68,964

 
$
(68,964
)
 
$

 
$
68,964

 
$
(68,151
)
 
$
813

Customer relationships
 
54,740

 
(54,740
)
 

 
54,740

 
(54,740
)
 

 
 
$
123,704

 
$
(123,704
)
 
$

 
$
123,704

 
$
(122,891
)
 
$
813

All intangible assets were fully amortized at April 1, 2017.

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Amortization expense in the periods as indicated were recognized as follows (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
Cost of products revenue
 
$

 
$
814

 
$
813

 
$
2,477

Operating expenses
 

 

 

 
1,701

 
 
$

 
$
814

 
$
813

 
$
4,178

6. Balance Sheet Details
Accounts receivable, net consisted of the following (in thousands):
 
 
July 1,
2017
 
December 31,
2016
Accounts receivable
 
$
55,390

 
$
52,792

Allowance for doubtful accounts
 
(450
)
 
(518
)
Product return reserve
 
(1,548
)
 
(938
)
 
 
$
53,392

 
$
51,336

Inventory consisted of the following (in thousands):
 
 
July 1,
2017
 
December 31,
2016
Raw materials
 
$
1,028

 
$
1,827

Finished goods
 
38,544

 
42,718

 
 
$
39,572

 
$
44,545

Property and equipment, net consisted of the following (in thousands):
 
 
July 1,
2017
 
December 31,
2016
Test equipment
 
$
45,559

 
$
43,580

Computer equipment and software
 
32,833

 
30,306

Furniture and fixtures
 
2,881

 
2,831

Leasehold improvements
 
6,893

 
6,898

Total
 
88,166

 
83,615

Accumulated depreciation and amortization
 
(70,207
)
 
(65,631
)
 
 
$
17,959

 
$
17,984

Accrued liabilities consisted of the following (in thousands):
 
 
July 1,
2017
 
December 31,
2016
Advance customer payments
 
$
20,199

 
$
20,726

Accrued compensation and related benefits
 
19,007

 
19,541

Accrued professional and consulting fees
 
14,215

 
8,205

Accrued warranty and retrofit
 
9,265

 
12,214

Accrued excess and obsolete inventory at contract manufacturers
 
1,979

 
1,327

Accrued customer rebates
 
717

 
1,931

Accrued restructuring charges
 
600

 

Accrued other
 
6,680

 
5,771

 
 
$
72,662

 
$
69,715

Advance customer payments as of July 1, 2017 and December 31, 2016 primarily included $19.4 million and $20.3 million, respectively, which the Company received as payments in advance of completion of final customer acceptance of the products and services provided in connection with network improvement projects for a customer.

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Deferred revenue consisted of the following (in thousands):
 
 
July 1,
2017
 
December 31,
2016
Current:
 
 
 
 
Products and services
 
$
38,454

 
$
24,472

Extended warranty
 
3,393

 
3,382

 
 
41,847

 
27,854

Long-term:
 
 
 
 
Products and services
 
26

 
22

Extended warranty
 
21,078

 
20,215

 
 
21,104

 
20,237

 
 
$
62,951

 
$
48,091

Deferred cost of revenue consisted of costs incurred for products and services for which revenues have been deferred or not yet earned.
7. Commitments and Contingencies
Commitments
The Company’s principal commitments consist of obligations under operating leases for office space and non-cancelable outstanding purchase obligations. These commitments as of December 31, 2016 are disclosed in the Company’s Annual Report on Form 10-K, and have not changed materially during the six months ended July 1, 2017.
Contingencies
The Company evaluates the circumstances regarding outstanding and potential litigation and other contingencies on a quarterly basis to determine whether there is at least a reasonable possibility that a loss exists requiring accrual or disclosure, and if so, whether an estimate of the possible loss or range of loss can be made, or whether such an estimate cannot be made. When a loss is probable and reasonably estimable, the Company accrues for such amount based on its estimate of the probable loss considering information available at the time. When a loss is reasonably possible, the Company discloses the estimated possible loss or range of loss in excess of amounts accrued if material. Except as otherwise disclosed below, the Company does not believe that there was a reasonable possibility that a material loss may have been incurred during the period presented with respect to the matters disclosed.
Accrued Warranty and Retrofit
The Company provides a standard warranty for its hardware products. Hardware generally has a one-, three- 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 reserves in the periods as indicated were as follows (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
Balance at beginning of period
 
$
10,778

 
$
9,152

 
$
12,214

 
$
9,564

Provision for warranty and retrofit charged to cost of revenue
 
1,743

 
2,532

 
3,605

 
3,112

Utilization of reserve
 
(3,256
)
 
(1,485
)
 
(6,554
)
 
(2,104
)
Adjustments to pre-existing reserve
 

 
(25
)
 

 
(398
)
Balance at end of period
 
$
9,265

 
$
10,174

 
$
9,265

 
$
10,174

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.

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Indemnifications
The Company from time to time enters into contracts that require it to indemnify various parties against claims from third parties. These contracts primarily relate to (i) certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises, (ii) agreements with the Company’s officers, directors, and certain employees, under which the Company may be required to indemnify such persons for liabilities arising out of their relationship with the Company, (iii) contracts under which the Company may be required to indemnify customers against third-party claims that a Company product infringes a patent, copyright, or other intellectual property right and (iv) procurement or license agreements, under which the Company may be required to indemnify licensors or vendors for certain claims that may be brought against them arising from the Company’s acts or omissions with respect to the supplied products or technology.
Because any potential obligation associated with these types of contractual provisions are not quantified or stated, the overall maximum amount of the obligation cannot be reasonably estimated. Historically, the Company has not been required to make payments under these obligations, and no liabilities have been recorded for these obligations in the accompanying Condensed Consolidated Balance Sheets.
8. 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
 
Six Months Ended
 
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
Numerator:
 
 
 
 
 
 
 
 
Net loss
 
$
(18,988
)
 
$
(5,826
)
 
$
(52,313
)
 
$
(16,555
)
Denominator:
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
 
50,019

 
48,371

 
49,772

 
48,478

Basic and diluted net loss per common share
 
$
(0.38
)
 
$
(0.12
)
 
$
(1.05
)
 
$
(0.34
)
Potentially dilutive shares, weighted average

5,225

 
5,733

 
5,685

 
5,620

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.
9. Stockholders’ Equity
Equity Incentive Plans
The Company currently maintains two equity incentive plans, the 2002 Stock Plan and the 2010 Equity Incentive Award Plan (together, the “Plans”). These plans were approved by the stockholders and are described in the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2017. The Company also maintains a Long Term Incentive Program under the 2010 Equity Incentive Award Plan. Under the Long Term Incentive Program, certain key employees of the Company are eligible for equity awards based on the Company’s stock price performance. To date, awards granted under the Plans consist of stock options, restricted stock units (“RSUs”) and performance restricted stock units (“PRSUs”).
Stock Options
During the three and six months ended July 1, 2017, no stock options were granted. During the three months ended July 1, 2017, 3,000 shares of stock options were exercised at a weighted-average exercise price of $5.62 per share. During the six months ended July 1, 2017, 5,000 shares of stock options were exercised at a weighted-average exercise price of $5.99 per share. As of July 1, 2017, unrecognized stock-based compensation expense of $2.5 million related to stock options, net of estimated forfeitures, is expected to be recognized over a weighted-average period of 2.8 years.
Restricted Stock Units
During the three months ended July 1, 2017, 209,870 shares of RSUs were granted with a weighted-average grant date fair value of $6.70 per share. During the six months ended July 1, 2017, 412,970 shares of RSUs were granted with a weighted-average grant date fair value of $6.85 per share. During the three months ended July 1, 2017, 510,827 shares of RSUs vested, net of shares withheld for statutory income tax purposes, and were converted to an equivalent number of shares of common stock. During the six months ended July 1, 2017, 562,988 shares of RSUs vested, net of shares withheld for statutory income tax purposes, and were converted to an equivalent number of shares of common stock. Taxes withheld from employees of $1.5 million were remitted to the relevant taxing authorities during the three months ended July 1, 2017. Taxes withheld from employees of $1.7 million were remitted to the relevant taxing authorities during the six months ended July 1, 2017. As of July 1, 2017, unrecognized stock-based compensation expense of $11.6 million related to RSUs, net of estimated forfeitures, was expected to be recognized over a weighted-average period of 2.4 years.

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Performance Restricted Stock Units
In 2016, the Company granted PRSUs to its executives with a one-year performance period and a subsequent two-year service period. The performance target for these particular performance-based awards is based on the Company’s revenue during the performance period and accounted for as a performance condition. After the one-year performance period, if the performance target is met and subject to certification by the Compensation Committee of the Company’s board of directors, each PRSU award shall vest with respect to 50% of the PRSUs subject to the award in February 2017, 25% in February 2018 and 25% in February 2019, subject to the executive’s continuous service with the Company from the grant date through the respective vesting dates. If the performance target is not met, all PRSUs granted under this award shall be immediately forfeited and canceled without vesting of any shares.
During the three months ended July 1, 201725,000 shares of PRSUs vested and were converted into 15,604 shares of common stock, net of shares withheld for statutory income tax purposes. During the six months ended July 1, 2017, 325,000 shares of PRSUs vested and were converted into 195,656 shares of common stock, net of shares withheld for statutory income tax purposes. Taxes withheld from employees of $0.1 million were remitted to the relevant taxing authorities during the three months ended July 1, 2017. Taxes withheld from employees of $0.9 million were remitted to the relevant taxing authorities during the six months ended July 1, 2017. As of July 1, 2017, unrecognized stock-based compensation expense of $0.4 million related to PRSUs, net of estimated forfeitures, is expected to be recognized over a weighted-average period of 1.1 years.
Employee Stock Purchase Plans
The Company’s Amended and Restated Employee Stock Purchase Plan (“Restated ESPP”) allows employees to purchase shares of the Company’s common stock through payroll deductions of up to 15 percent 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 Restated ESPP were six-month periods commencing on November 2nd and May 2nd of each year, effective November 2, 2015. In July 2016, the Compensation Committee of the Company’s board of directors approved a change in those six-month period commencement dates to May 15th and November 15th of each year, effective May 15, 2017. The ending date of the Restated ESPP offering period which commenced on November 2, 2016 was extended until May 14, 2017 as a result of this change. The price of common stock purchased under the Restated ESPP is 85 percent 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. As of July 1, 2017, there were 3,000,217 shares available for issuance under the Restated ESPP.
During the three and six months ended July 1, 2017, 119,011 shares were purchased under the Restated ESPP. As of July 1, 2017, unrecognized stock-based compensation expense of $0.7 million related to the Restated ESPP is expected to be recognized over a remaining service period of 4.5 months.
On March 30, 2017, the Company’s board of directors, upon recommendation of the Compensation Committee, approved the adoption of the Calix, Inc. 2017 Nonqualified Employee Stock Purchase Plan (“Nonqualified ESPP”). The Nonqualified ESPP was approved by our stockholders on May 17, 2017, with the initial offering period commencing July 1, 2017. Under the Nonqualified ESPP, eligible employees can purchase shares of the Company’s common stock through payroll deductions of up to 25 percent 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 Nonqualified ESPP provides two six-month offering periods, from January 1 through June 30 and July 1 through December 31 of each year. The maximum number of shares of common stock currently authorized for issuance under the Nonqualified ESPP is 1,000,000 shares, with a maximum of 500,000 shares allocated per purchase period.
Stock-Based Compensation Expense
Stock-based compensation expense associated with stock options, RSUs, PRSUs and purchase rights under the ESPP is measured at the grant date based on the fair value of the award, and is recognized, net of forfeitures, as expense over the remaining requisite service period on a straight-line basis.
The Company values RSUs at the closing market price of the Company’s common stock on the date of grant.
Stock-based compensation expense associated with PRSUs with graded vesting features and which contain both a performance and a service condition is measured based on the closing market price of the Company’s common stock on the date of grant, and is recognized, net of forfeitures, as expense over the requisite service period using the graded vesting attribution method. Compensation expense is only recognized if the Company has determined that it is probable that the performance condition will be met. The Company reassesses the probability of vesting at each reporting period and adjusts compensation expense based on its probability assessment. In February 2017, the Compensation Committee of the Company’s board of directors determined that the performance condition related to PRSUs granted to executives in 2016 was met based on the Company’s actual revenue recognized during 2016.
The fair value of PRSUs with a market condition is estimated on the date of award, using a Monte Carlo simulation model to estimate the TSR of the Company’s stock in relation to the peer group over each performance period. Compensation cost on PRSUs with a market condition is not adjusted for subsequent changes in the Company’s stock performance or the level of ultimate vesting.

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Table of Contents

10. Accumulated Other Comprehensive Loss
The table below summarizes the changes in accumulated other comprehensive loss by component for the periods indicated (in thousands):
 
Three Months Ended
 
July 1, 2017
 
June 25, 2016
 
Unrealized Gains and Losses on Available-for-Sale Marketable Securities
 
Foreign Currency Translation Adjustments
 
Total
 
Unrealized Gains and Losses on Available-for-Sale Marketable Securities
 
Foreign Currency Translation Adjustments
 
Total
Balance at beginning of period
$
(10
)
 
$
(589
)
 
$
(599
)
 
$
(29
)
 
$
(119
)
 
$
(148
)
Other comprehensive income (loss)
3

 
132

 
135

 
41

 
(23
)
 
18

Balance at end of period
$
(7
)
 
$
(457
)
 
$
(464
)
 
$
12

 
$
(142
)
 
$
(130
)
 
Six Months Ended
 
July 1, 2017
 
June 25, 2016
 
Unrealized Gains and Losses on Available-for-Sale Marketable Securities
 
Foreign Currency Translation Adjustments
 
Total
 
Unrealized Gains and Losses on Available-for-Sale Marketable Securities
 
Foreign Currency Translation Adjustments
 
Total
Balance at beginning of period
$
(6
)
 
$
(650
)
 
$
(656
)
 
$
(94
)
 
$
(101
)
 
$
(195
)
Other comprehensive income (loss)
(1
)
 
193

 
192

 
106

 
(41
)
 
65

Balance at end of period
$
(7
)
 
$
(457
)
 
$
(464
)
 
$
12

 
$
(142
)
 
$
(130
)
Realized gains and losses on sales of available-for-sale marketable securities, if any, are reclassified from accumulated other comprehensive loss to “Other income (expense)” in the accompanying Condensed Consolidated Statements of Comprehensive Loss.
11. Credit Facility
The Company entered into a credit agreement with Bank of America, N.A. on July 29, 2013 (as amended on December 23, 2015, the “Credit Agreement”). The Credit Agreement provided for a revolving facility in the aggregate principal amount of up to $50.0 million, with any borrowings limited to a maximum consolidated leverage ratio of consolidated funded indebtedness to consolidated EBITDA (as defined in the Credit Agreement). The Company had determined that as of July 1, 2017, no funds were available for borrowing under the Credit Agreement based on the Company’s consolidated leverage ratios. In August 2017, the Company entered into a loan and security agreement (the “Loan Agreement”) with Silicon Valley Bank (“SVB”). In connection with the Loan Agreement, the Company terminated the Credit Agreement. (See Note 14, Subsequent Event.)
12. Income Taxes
The following table presents the provision for income taxes from continuing operations and the effective tax rates for the periods indicated (in thousands, except percentages):
 
 
Three Months Ended
 
Six Months Ended

 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
Provision for income taxes
 
$
177

 
$
124

 
$
850

 
$
245

Effective tax rate
 
(0.9
)%
 
(2.2
)%
 
(1.7
)%
 
(1.5
)%
The income tax provision for the three and six months ended July 1, 2017 and June 25, 2016 consisted primarily of foreign income taxes. The effective tax rate for the three and six months ended July 1, 2017 and June 25, 2016 was determined using an estimated annual effective tax rate adjusted for discrete items, if any, that occurred during the respective periods. The Company’s effective tax rate for the three and six months ended July 1, 2017 and June 25, 2016 is impacted by the change in foreign income tax expense.
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

15

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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.
13. Restructuring Charges
The Company adopted a restructuring plan in March 2017. This restructuring plan realigns the Company’s business, increasing its focus towards its investments in innovative software defined access systems and software, while reducing its cost structure in its traditional systems business. The Company began to take action under this plan beginning in March 2017 and recognized approximately $1.0 million and $1.7 million of restructuring charges for the three and six months ended July 1, 2017, respectively, consisting primarily of severance and other one-time termination benefits. Restructuring charges are presented separately under operating expenses in the accompanying Condensed Consolidated Statements of Comprehensive Loss.
The following table summarizes the activities related to the restructuring charges pursuant to the above restructuring plan (in thousands):
 
 
Three Months Ended July 1, 2017
 
Six Months Ended July 1, 2017
Liability at beginning of period
 
$
699

 
$

Restructuring charges for the period
 
957

 
1,656

Cash payments
 
(1,056
)
 
(1,056
)
Liability at end of period
 
$
600

 
$
600

The Company currently estimates that this plan will result in pre-tax restructuring charges totaling up to $6.8 million with approximately up to $5.1 million of additional charges expected to be recognized during the rest of fiscal 2017. These charges are primarily cash-based.
14. Subsequent Event
In August 2017, the Company entered into the Loan Agreement for a senior secured revolving credit facility with SVB, pursuant to which SVB agreed to make revolving advances available to the Company in a principal amount of up to $30.0 million based on a customary accounts receivable borrowing base, subject to certain exceptions for accounts originating outside the United States and certain specific accounts. The credit facility includes a $10.0 million sublimit for the issuance of letters of credit. The letters of credit issued under the Loan Agreement will reduce, on a dollar-for-dollar basis, the amount available under the credit facility. Additionally, the Company can borrow up to $5.0 million on a non-formula revolver until January 15, 2018, which will reduce, on a dollar-for-dollar basis, the amount available under the credit facility so that at no time will more than $30.0 million in principal amount be outstanding under the Loan Agreement. The credit facility matures and all outstanding amounts become due and payable on August 7, 2019. Subject to certain exceptions, the Company will also be required to pay to SVB a fee of $0.3 million if it terminates the credit facility prior to August 7, 2018. The credit facility is secured by substantially all of the Company’s assets, including the Company’s intellectual property. Loans under the credit facility 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 0.50% to 1.50% for prime rate advances and between 2.00% and 3.00% for LIBOR advances based on the Company’s maintenance of an applicable liquidity ratio. The credit facility includes affirmative and negative covenants applicable to the Company and its subsidiaries. Furthermore, the Loan Agreement requires the Company to maintain a liquidity ratio at minimum levels set forth in more detail in the Loan Agreement. The credit facility also includes events of default, the occurrence and continuation of which would provide SVB with the right to demand immediate repayment of any principal and unpaid interest under the credit facility, and to exercise remedies against the Company and the collateral securing the loans under the credit facility.
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, revenues 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, 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 “may,” “will,” “expects,” “believes,” “intends,” “plans,” “anticipates,” “estimates,” “projects,” “potential,” or “continue” or the negative thereof or other comparable terminology. 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, in the discussion below, as well as in other sections of this report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. 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.

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Overview
We are a leading global provider of broadband communications access platforms, systems and software for fiber- and copper-based network architectures and a pioneer in software defined access and cloud products focused on access networks and the subscriber. Calix’s portfolio combines AXOS, a software platform for access, with Calix Cloud, innovative cloud products for network data analytics and subscriber experience assurance. Together, they enable CSPs to transform their networks and enhance how they connect to their residential and business subscribers. We enable 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. We focus solely 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. We believe that continued innovation and investment in advanced platforms and systems are important elements of our growth strategy. Our most advanced systems operate on AXOS, a network operating system and software platform built for the specific needs of the access network that allows for all software functions in the access network to be developed and run without dependence on underlying hardware and associated silicon chipsets.
We market our access systems and related software to CSPs globally through our direct sales force as well as a growing number of resellers. At the end of the second quarter of 2017, over 23 million ports of the Calix portfolio have been deployed at a growing number of CSPs worldwide. Our customers range from smaller, regional CSPs to some of the world’s largest CSPs. We have enabled over 1,300 customers to deploy gigabit passive optical network, Active Ethernet and point-to-point Ethernet fiber access networks.
Our revenue was $126.1 million and $243.6 million for the three and six months ended July 1, 2017, respectively, compared to $107.4 million and $205.8 million for the three and six months ended June 25, 2016, respectively. Our revenue levels and continued revenue growth will depend on our ability to continue to sell our access systems and software to existing customers and to attract new customers, particularly larger CSPs, globally. We continue to grow our services business to meet ongoing demand for turnkey solutions that include professional services together with the supply of equipment and materials, including projects that are funded by the CAF 2 program. During the second quarter of 2017 we completed a significant network improvement project that we commenced in 2015, and continued work underway on previously-awarded projects. We believe that these services enable us to offer broader solutions to meet customer needs as well as support our long-term growth initiatives. Revenue for such projects is generally recognized only when project requirements are completed, which typically requires longer periods depending on the nature and scope of the project. Similarly, some of the costs incurred by us for such projects, including labor and related costs, are deferred and recognized to cost of revenue when the associated revenue is recognized.
Revenue fluctuations result from many factors, including: increases or decreases in customer orders for our products and services, 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 fiscal quarter as they are finalizing their annual budgets, and in certain regions, customers are also challenged by winter weather conditions that inhibit fiber deployment in outside plants. Our revenue levels are also dependent upon our customers’ timing of purchases and capital expenditure plans, including expenditure plans for turnkey solutions projects, which are generally non-recurring in nature. As of July 1, 2017, we had deferred revenue of approximately $28.7 million related to ongoing work in turnkey network improvement projects that will be recognized only upon acceptance by customer or upon agreed milestones. The timing of recognition of deferred revenue may cause significant fluctuations in our revenue and operating results from period to period.
Cost of revenue is strongly correlated to revenue and tends to fluctuate from all of the above factors that could impact revenue. Factors that impacted our cost of revenue for the three and six months ended July 1, 2017, and that may 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 and inventory write-downs. Cost of services revenue has been, and is expected to continue to be impacted in future periods by, increases in the pace of professional services activity due to customer requirements and project deadlines, the timing of completion of project requirements, higher than anticipated costs associated with delivery of professional services for which project pricing is typically set at the outset of the project, charges related to cost overruns on services projects and inefficiencies associated with delays resulting from third party dependencies and incremental costs to rework. Cost of revenue also includes fixed expenses related to our internal operations, which could impact our cost of revenue as a percentage of revenue if there are large fluctuations in revenue.
Cost of revenue has a direct impact on gross profit and gross margins. During the three and six months ended July 1, 2017, our gross profit and gross margin continue to be negatively impacted by an increase in our services revenue, which carries lower gross margin, as a mix of total revenue. We have continued to incur higher costs related to growing our professional services business for turnkey network improvement projects. We also incurred higher than expected costs and cost overruns associated with delivery of services due to project delays, third party dependencies, longer than anticipated time to complete projects and incremental rework needed to complete services projects, as well as continued elevated pace of services activities to complete project requirements during the three and six months ended July 1, 2017. Overall, our gross profit and gross margin fluctuate based on timing of factors such as new product introduction or upgrades to existing products, changes in customer mix, changes in the mix of products demanded and sold (and any related write-downs of existing inventory), increase in mix of revenue towards professional services, increase 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. The timing of our recognition of deferred revenue and related deferred costs related to turnkey professional services projects could also result in lower gross profit and gross margin in the periods that such revenue is recognized, and the relative size of these arrangements could cause large fluctuations in our gross profit from period to period. Moreover, to the extent that deferred cost of revenue relating to the professional services portion of turnkey projects is determined to be unrecoverable, we incur a charge to cost of revenue in the period such cost is determined to be unrecoverable. During the six months ended July 1, 2017, we recorded a charge of $3.6 million due to overruns and re-work associated with a number of turnkey network improvement projects.

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Our operating expenses have fluctuated based on the following factors: changes in headcount and personnel costs which comprise a significant portion of our operating expenses, timing of variable compensation expenses due to fluctuations in order volumes, timing of research and development expenses including investments in innovative solutions, including next generation solutions and new customer segments, prototype builds and outsourced development projects, fluctuations in stock-based compensation expenses due to timing of equity grants or other factors affecting vesting, changes in acquisition-related expenses, and timing of litigation-related costs. During the three and six months ended July 1, 2017 as compared with the corresponding periods in fiscal 2016, our total operating expense increased due to increases in headcount and outside contractors, primarily for research and development and, to a lesser extent, as a result of severance-related expenses incurred in the three and six months ended July 1, 2017. In March 2017, we adopted a restructuring plan to realign our business to increase focus towards investments in software defined access systems and software and to reduce costs in our traditional systems business, which we expect will result in estimated pre-tax restructuring charges totaling up to $6.8 million for fiscal year 2017, of which we incurred $1.7 million during the six months ended July 1, 2017. We anticipate that our operating expenses may increase in absolute dollar amounts but will decline as a percentage of revenue over time.
During the three and six months ended July 1, 2017 as compared with the corresponding periods in fiscal 2016, our costs, operating expenses and working capital needs increased primarily due to the continued growth of our professional services operations to meet customer and market demand for turnkey network improvement projects and higher research and development expenditures related to strategic investments in our platform, products and software. We focus our research and development efforts on innovative technologies that we believe will grow our customer base, including the pursuit of larger customer opportunities. We expect to continue to incur higher capital and operating expenditures, and higher levels of cash use, related to our investments in these initiatives as we seek to grow our market share.
Our net loss was $19.0 million and $52.3 million for the three and six months ended July 1, 2017, respectively, compared to a net loss of $5.8 million and $16.6 million for the three and six months ended June 25, 2016, respectively. Since our inception we have incurred significant losses and, as of July 1, 2017, we had an accumulated deficit of $636.6 million. Further, as a result of the fluctuations described above and a number of 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.
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 will be affected. Our management evaluates its estimates, assumptions and judgments on an ongoing basis.
Our critical accounting policies and estimates 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, 2016. During the six months ended July 1, 2017, there have been no significant changes in our critical accounting policies and estimates.
Recent Accounting Pronouncements
See Note 2 to the unaudited condensed consolidated financial statements set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition, which is incorporated herein by reference.
Results of Operations
Comparison of the Three and Six Months Ended July 1, 2017 and June 25, 2016
Revenue
Our revenue is comprised of the following:
Products — includes revenue derived from the sale of access systems, premises equipment, software licenses and cloud-based software products.
Services — includes revenue from professional services, software support services for access systems, extended warranty and training services.

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The following table sets forth our revenue (dollars in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
 
July 1,
2017
 
June 25,
2016
 
Variance
in
Dollars
 
Variance
in
Percent
 
July 1,
2017
 
June 25,
2016
 
Variance
in
Dollars
 
Variance
in
Percent
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Products
 
$
107,348

 
$
100,144

 
$
7,204

 
7
%
 
$
198,953

 
$
191,824

 
$
7,129

 
4
%
Services
 
18,775

 
7,281

 
11,494

 
158
%
 
44,688

 
13,976

 
30,712

 
220
%
 
 
$
126,123

 
$
107,425

 
$
18,698

 
17
%
 
$
243,641

 
$
205,800

 
$
37,841

 
18
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percent of total revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Products
 
85
%
 
93
%
 
 
 
 
 
82
%
 
93
%
 
 
 
 
Services
 
15
%
 
7
%
 
 
 
 
 
18
%
 
7
%
 
 
 
 
 
 
100
%
 
100
%
 
 
 
 
 
100
%
 
100
%
 
 
 
 
Our revenue increased by $18.7 million, or 17%, for the three months ended July 1, 2017 and $37.8 million, or 18%, for the six months ended July 1, 2017 as compared with the corresponding periods in fiscal 2016. This was mainly due to an increase in services revenue by $11.5 million, or 158%, for the three months ended July 1, 2017 and $30.7 million, or 220%, for the six months ended July 1, 2017, primarily driven by completion of services associated with a significant turnkey network improvement project substantially completed during the first quarter of 2017 and the completion of several sites from previously-awarded projects. Our products revenue also increased by $7.2 million and $7.1 million for the three and six months ended July 1, 2017 as compared with the corresponding periods in fiscal 2016 mainly due to higher shipments. During the three and six months ended July 1, 2017, revenue generated in the United States was $108.1 million and $214.6 million or approximately 86% and 88%, respectively, of our total revenue, compared to $99.2 million and $187.0 million, or approximately 92% and 91% of our total revenue, for the same periods in fiscal 2016. International revenue was $18.0 million and $29.0 million, or approximately 14% and 12% of our total revenue, for the three and six months ended July 1, 2017, respectively, compared to $8.3 million and $18.8 million, or approximately 8% and 9% of our total revenue, for the same periods in fiscal 2016.
We had one customer that accounted for more than 10% of our total revenue during the three months ended July 1, 2017. See Note 2 to the unaudited condensed consolidated financial statements set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q for more details on concentration of revenue for the periods presented.
Cost of Revenue, Gross Profit and Gross Margin
The following table sets forth our cost of revenue (dollars in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
 
July 1,
2017
 
June 25,
2016
 
Variance
in
Dollars
 
Variance
in
Percent
 
July 1,
2017
 
June 25,
2016
 
Variance
in
Dollars
 
Variance
in
Percent
Cost of revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Products
 
$
58,299

 
$
51,501

 
$
6,798

 
13
%
 
$
115,672

 
$
99,194

 
$
16,478

 
17
%
Services
 
24,501

 
5,918

 
18,583

 
314
%
 
50,269

 
11,118

 
39,151

 
352
%
 
 
$
82,800

 
$
57,419

 
$
25,381

 
44
%
 
$
165,941

 
$
110,312

 
$
55,629

 
50
%
Our cost of revenue increased by $25.4 million and $55.6 million during the three and six months ended July 1, 2017, respectively, as compared with the corresponding periods in fiscal 2016. This was primarily attributable to an increase in cost of services revenue by $18.6 million and $39.2 million during those respective periods, as we experienced a higher pace of services activities, including higher costs attributed to rework and overruns (including third party costs) to meet project requirements for our turnkey network improvement projects. Our product cost of revenue also increased by $6.8 million and $16.5 million mainly due to higher volume of shipments.

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The following table sets forth our gross profit and gross margin (dollars in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
 
July 1,
2017
 
June 25,
2016
 
Variance
in
Dollars
 
Variance
in
Percent
 
July 1,
2017
 
June 25,
2016
 
Variance
in
Dollars
 
Variance
in
Percent
Gross profit:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Products
 
$
49,049

 
$
48,643

 
$
406

 
1
 %
 
$
83,281

 
$
92,630

 
$
(9,349
)
 
(10
)%
Services
 
(5,726
)
 
1,363

 
(7,089
)
 
(520
)%
 
(5,581
)
 
2,858

 
(8,439
)
 
(295
)%
Total gross profit
 
$
43,323

 
$
50,006

 
$
(6,683
)
 
(13
)%
 
$
77,700

 
$
95,488

 
$
(17,788
)
 
(19
)%
Gross margin:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Products
 
46
 %
 
49
%
 
 
 
 
 
42
 %
 
48
%
 
 
 
 
Services
 
(30
)%
 
19
%
 
 
 
 
 
(12
)%
 
20
%
 
 
 
 
Total gross margin
 
34
 %
 
47
%
 
 
 
 
 
32
 %
 
46
%
 
 
 
 
Gross profit decreased to $43.3 million and $77.7 million during the three and six months ended July 1, 2017, respectively, from $50.0 million and $95.5 million during the corresponding periods in fiscal 2016. Gross margin decreased to 34% and 32% during the three and six months ended July 1, 2017, respectively, from 47% and 46% during the corresponding periods in fiscal 2016. The decrease in gross profit and gross margin during the three and six months ended July 1, 2017 was primarily due to an increase in revenue mix toward services revenue as we continued to grow our professional services business, an increased pace of activities in our turnkey network improvement projects and higher costs attributed to rework and overruns to meet customer requirements. Services revenue, particularly those relating to our turnkey network improvement projects, typically has higher associated costs and lower margins. The decrease was partly attributed to product and regional mix within products.
Operating Expenses
Research and Development Expenses
The following table sets forth our research and development expenses (dollars in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
 
July 1,
2017
 
June 25,
2016
 
Variance
in
Dollars
 
Variance
in
Percent
 
July 1,
2017
 
June 25,
2016
 
Variance
in
Dollars
 
Variance
in
Percent
Research and development
 
$
32,950

 
$
25,033

 
$
7,917

 
32
%
 
$
66,758

 
$
47,806

 
$
18,952

 
40
%
Percent of total revenue
 
26
%
 
23
%
 
 
 
 
 
27
%
 
23
%
 
 
 
 
The increase in research and development expenses by $7.9 million and $19.0 million during the three and six months ended July 1, 2017, respectively, compared with the corresponding periods in fiscal 2016 was primarily due to an increase in personnel for research and development. This resulted in higher compensation and employee benefits of $2.3 million and $7.1 million during the three and six months ended July 1, 2017, respectively. We increased our research and development efforts to support our growing product portfolio and strategic investments in innovative solutions, including next generation solutions and new customer segments. Expenses for outside contractors increased by $4.4 million and $8.7 million and expenditures relating to prototype and expendable equipment used for research and development activities increased by approximately $0.9 million and $2.4 million during the three and six months ended July 1, 2017, respectively, primarily for development services including investments in next generation technologies to pursue broader growth opportunities.
We intend to moderate our investments in research and development as our next generations systems and software platforms are brought to market.
Sales and Marketing Expenses
The following table sets forth our sales and marketing expenses (dollars in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
 
July 1,
2017
 
June 25,
2016
 
Variance
in
Dollars
 
Variance
in
Percent
 
July 1,
2017
 
June 25,
2016
 
Variance
in
Dollars
 
Variance
in
Percent
Sales and marketing
 
$
18,429

 
$
19,213

 
$
(784
)
 
(4
)%
 
$
40,858

 
$
38,275

 
$
2,583

 
7
%
Percent of total revenue
 
15
%
 
18
%
 
 
 
 
 
17
%
 
19
%
 
 
 
 
Sales and marketing expenses were relatively flat during the three months ended July 1, 2017 compared with the corresponding period in fiscal 2016. The increase in sales and marketing expenses by $2.6 million during the six months ended July 1, 2017 compared with the corresponding period in 2016 was primarily due to an increase in compensation and employee benefits attributed to higher commissions due to increased shipments and higher payroll related expenses arising from changes in personnel.

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We expect to continue our investments in sales and marketing in order to extend our market reach and grow our business in support of our key strategic initiatives.
General and Administrative Expenses
The following table sets forth our general and administrative expenses (dollars in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
 
July 1,
2017
 
June 25,
2016
 
Variance
in
Dollars
 
Variance
in
Percent
 
July 1,
2017
 
June 25,
2016
 
Variance
in
Dollars
 
Variance
in
Percent
General and administrative
 
$
9,701

 
$
11,641

 
$
(1,940
)
 
(17
)%
 
$
19,958

 
$
24,325

 
$
(4,367
)
 
(18
)%
Percent of total revenue
 
8
%
 
11
%
 
 
 
 
 
8
%
 
12
%
 
 
 
 
General and administrative expenses decreased by $1.9 million and $4.4 million during the three and six months ended July 1, 2017, respectively, compared with the corresponding periods in fiscal 2016, which included legal fees and expenses related to the Occam litigation of $2.9 million and $6.5 million that did not recur in 2017 as the litigation was settled in 2016. The decrease was partially offset by an increase in compensation and employee benefits by $0.6 million and $1.4 million during the three and six months ended July 1, 2017, respectively, due to increase in headcount. Severance benefits also increased by $0.5 million during the six months ended July 1, 2017 related to our separation agreement with our former Executive Vice President and Chief Financial Officer. We expect that general and administrative expenses will increase due to implementation costs associated with new SaaS-based infrastructure.
Amortization of Intangible Asset
The following table sets forth our amortization of intangible asset included in operating expenses (dollars in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
 
July 1,
2017
 
June 25,
2016
 
Variance
in
Dollars
 
Variance
in
Percent
 
July 1,
2017
 
June 25,
2016
 
Variance
in
Dollars
 
Variance
in
Percent
Amortization of intangible asset
 
$

 
$

 
$

 
%
 
$

 
$
1,701

 
$
(1,701
)
 
(100
)%
Percent of total revenue
 
%
 
%
 
 
 
 
 
%
 
1
%
 
 
 
 
The intangible asset related to customer relationships had reached completion of its amortization period during the first quarter of fiscal 2016.
Restructuring Charges
The following table sets forth our restructuring charges (dollars in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
 
July 1,
2017
 
June 25,
2016
 
Variance
in
Dollars
 
Variance
in
Percent
 
July 1,
2017
 
June 25,
2016
 
Variance
in
Dollars
 
Variance
in
Percent
Restructuring charges
 
$
957

 
$

 
$
957

 
100
%
 
$
1,656

 
$

 
$
1,656

 
100
%
Percent of total revenue
 
1
%
 
%
 
 
 
 
 
1
%
 
%
 
 
 
 
In connection with a restructuring plan we adopted in March 2017, we recognized approximately $1.0 million and $1.7 million of restructuring charges during the three and six months ended July 1, 2017, respectively, consisting primarily of severance and other one-time termination benefits. See Note 13, “Restructuring Charges” of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further details regarding this restructuring plan.
Provision for Income Taxes
The following table sets forth our provision for income taxes (dollars in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
 
July 1,
2017
 
June 25,
2016
 
Variance
in
Dollars
 
Variance
in
Percent
 
July 1,
2017
 
June 25,
2016
 
Variance
in
Dollars
 
Variance
in
Percent
Provision for income taxes
 
$
177

 
$
124

 
$
53

 
43
%
 
$
850

 
$
245

 
$
605

 
247
%
Effective tax rate
 
(0.9
)%
 
(2.2
)%
 
 
 
 
 
(1.7
)%
 
(1.5
)%
 
 
 
 
The income tax provision for the three and six months ended July 1, 2017 and June 25, 2016 consisted primarily of foreign income taxes. The effective tax rate for the three and six months ended July 1, 2017 and June 25, 2016 was determined using an estimated annual effective tax rate adjusted for discrete items, if any, that occurred during the respective periods. Our effective tax rate for the three and six months ended July 1, 2017 and June 25, 2016 is impacted by the change in foreign income tax expense.

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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. At July 1, 2017, we had cash, cash equivalents and marketable securities of $50.2 million, which consisted of deposits held at banks, money market mutual funds held at major financial institutions and highly liquid marketable securities such as corporate debt instruments, commercial paper and U.S. government agency securities. This includes $6.5 million of cash held by our foreign subsidiaries, primarily in China. Our current intent is to reinvest our earnings from foreign operations outside the United States, and our current plans do not demonstrate a need to repatriate the earnings from foreign operations to fund our U.S. operations.
Operating Activities
During the six months ended July 1, 2017, cash used in operating activities increased as we continued to invest in research and development to pursue broader market and customer opportunities. Furthermore, we have continued to grow our professional services business for turnkey network improvement projects (including projects funded by the Federal Communication Commission’s (FCC) current Connect America Fund program, CAF 2) and have experienced losses due to higher costs, delays, overruns and other inefficiencies. Moreover, as described below, these turnkey network improvement projects may involve greater working capital needs at the outset as services and products are supplied, while revenue and cash collections occur after projects are accepted or agreed-upon milestones are reached. Net cash used in operations of $21.4 million in the six months ended July 1, 2017 consisted of a net loss of $52.3 million, partially offset by $18.7 million of cash flow increases reflected in the net change in assets and liabilities and $12.1 million of non-cash charges. Cash flow increases resulting from the net change in assets and liabilities primarily consisted of a $9.5 million net increase in deferred revenue and deferred cost of revenue as a result of additional deferral of revenue and associated costs related to turnkey network improvement projects, a $5.0 million decrease in inventories primarily due to higher inventory turnover, a $3.7 million increase in accounts payable primarily due to the timing of inventory receipts and payments to our manufacturers and a $2.7 million increase in accrued expenses and other liabilities due to the timing of our payroll, sales commissions and other expenses accruals and payout. This was partially offset by a $2.1 million increase in accounts receivable mainly due to higher revenue and a $0.2 million increase in prepaid expenses and other assets. Non-cash charges primarily consisted of $6.3 million of stock-based compensation, $4.9 million of depreciation and amortization and $0.8 million of amortization of intangible assets.
Net cash provided by operations of $5.4 million in the six months ended June 25, 2016 consisted of a net loss of $16.6 million, more than offset by $14.2 million of non-cash charges and $7.7 million of cash flow increases reflected in the net change in assets and liabilities. Cash flow increases resulting from the net change in assets and liabilities primarily consisted of a $8.8 million increase in accrued expenses and other liabilities primarily due to the timing of our payroll, sales commissions and other expenses accruals and payout, a $6.9 million decrease in inventories primarily due to higher inventory turnover, and a $1.4 million decrease in prepaid expenses and other assets, partially offset by a $5.9 million decrease in accounts payable primarily due to the timing of inventory receipts and payments to our manufacturers, a $2.0 million increase in accounts receivable mainly due to higher revenue in 2016, and a $1.6 million net decrease in deferred revenue and deferred cost of revenue as a result of revenue and cost recognition for previous shipments related to certain turnkey projects and RUS-funded contracts. Non-cash charges primarily consisted of $5.7 million of stock-based compensation, $4.2 million of amortization of intangible assets, $4.1 million of depreciation and amortization and $0.2 million of amortization of premium (discount) related to available-for-sale securities.
Investing Activities
Net cash provided by investing activities of $10.1 million in the six months ended July 1, 2017 consisted of $14.8 million in net sales and maturities of marketable securities, partially offset by $4.7 million in capital expenditures for purchases of test equipment, computer equipment and software.
Our cash provided by investing activities of $8.6 million in the six months ended June 25, 2016 consisted of $11.7 million in maturities of marketable securities, partially offset by $3.1 million in capital expenditures for purchases of test equipment, computer equipment and software.
Financing Activities
Net cash used in financing activities of $1.9 million in the six months ended July 1, 2017 primarily consisted of $2.6 million in payment of payroll taxes for the vesting of awards under equity incentive plan, offset by $0.7 million of proceeds from the issuance of common stock under the employee stock purchase plan (“ESPP”).
Net cash used in financing activities of $11.4 million in the six months ended June 25, 2016 consisted of $12.8 million in repurchases of common stock and $1.5 million in payment of payroll taxes for the vesting of awards under equity incentive plan, offset by $2.9 million of proceeds from the issuance of common stock under the ESPP.

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Stock Repurchase Program
On April 26, 2015, our board of directors approved a program to repurchase up to $40 million of our common stock from time to time. This stock repurchase program commenced in May 2015.
During the six months ended June 25, 2016, we repurchased 1,789,287 shares of common stock for $12.8 million at an average price of $7.16 per share. In March 2016, we completed purchases under the $40 million stock repurchase program and repurchased a total of 5,329,817 shares of common stock from May 2015 to March 2016 at an average price of $7.50 per share.
Working Capital and Capital Expenditure Needs
We currently have no material cash commitments, except for normal recurring trade payables, expense accruals, operating leases and non-cancelable firm purchase commitments. Our working capital needs related to turnkey network improvement arrangements have been substantial, and are expected to remain substantial, as under such arrangements, we generally purchase substantial equipment, components and materials and pay our subcontractors at the outset and through the course of a project, but we may not receive payment from our customers until completion and acceptance of the associated services, which may be one or more quarters later. 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 eliminate or curtail expenditures to mitigate the impact on our working capital.
We had a Credit Agreement with Bank of America that provided for an aggregate principal amount of up to $50.0 million, with any borrowings limited to a maximum consolidated leverage ratio of consolidated funded indebtedness to consolidated EBITDA (as defined in the Credit Agreement). Based on the consolidated leverage ratio requirements that limit available funds under the Credit Agreement, we had no funds available for borrowing under the Credit Agreement as of July 1, 2017. In August 2017, in connection with entering into the Loan Agreement with SVB, we terminated our Credit Agreement with Bank of America. Our Loan Agreement with SVB provides for a revolving credit facility of up to $30.0 million. Please refer to Note 14, “Subsequent Events” of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more details on this credit facility.
We believe based on our current operating plan and operating cash flows, our existing cash, cash equivalents and marketable securities together with borrowings available under the 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 defined access portfolio, our ability to manage product cost efficiencies and maintain product margin levels, the timing, extent and size of turnkey professional services projects and our ability to develop operational efficiencies and successfully scale that business, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, the acquisition of new capabilities or technologies and the continued market acceptance of our products. 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 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.
Contractual Obligations and Commitments
Our principal commitments consist of obligations under operating leases for office space and non-cancelable outstanding purchase obligations. These commitments are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016, and have not changed materially during the six months ended July 1, 2017.
Off-Balance Sheet Arrangements
As of July 1, 2017 and December 31, 2016, 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 July 1, 2017, we had cash, cash equivalents and marketable securities of $50.2 million, which was held primarily in cash, money market funds and highly liquid marketable securities such as corporate debt instruments, commercial paper and U.S. government agency securities. Due to the nature of these money market funds and highly liquid marketable securities, we believe that we do not have any material exposure to changes in the fair value of our cash equivalents and marketable securities as a result of changes in interest rates.
Our exposure to interest rate risk also relates to the amount of interest we must pay on our borrowings under our credit facility. Borrowings under our Credit Agreement with Bank of America will accrue interest at a variable rate based upon the applicable base rate or LIBOR plus a margin depending on our consolidated leverage ratio of consolidated funded indebtedness to consolidated EBITDA (as defined

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in the Credit Agreement). As of July 1, 2017, we had no borrowings under the credit facility. In August 2017, in connection with entering into a Loan Agreement with SVB, we terminated our Credit Agreement with Bank of America. Our new revolving credit facility under our Loan Agreement with SVB will accrue interest at a variable rate based upon an annual rate of either a prime rate or a LIBOR rate, plus an applicable margin which fluctuates based on the Company’s maintenance of an applicable liquidity ratio.
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 (“USD”). However, we are indirectly exposed to changes in foreign currency exchange rates to the extent of our use of foreign contract manufacturers 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 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 subsidiary in Brazil, China and the United Kingdom, whose functional currencies are the Brazilian Real (“BRL”), Chinese Renminbi (“RMB”) and British Pounds Sterling (“GBP”), respectively.
Our operating expenses are incurred primarily in the United States, with a small portion of expenses incurred in Brazil associated with sales and marketing expenses, in China associated with our research and development operations that are maintained there and in the United Kingdom for our sales and services operations there. Our operating expenses are generally denominated in the functional currencies of our subsidiaries in which the operations are located. The percentages of our operating expenses denominated in the following currencies for the indicated periods were as follows:
 
 
Six Months Ended
 
 
July 1,
2017
 
June 25,
2016
USD
 
90
%
 
88
%
RMB
 
6
%
 
7
%
GBP
 
3
%
 
4
%
BRL
 
1
%
 
1
%
 
 
100
%
 
100
%
If USD had appreciated or depreciated by 10%, relative to RMB, GBP and BRL, our operating expenses for the first six months of 2017 would have decreased or increased by approximately $1.3 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 six months ended July 1, 2017 was a net translation gain of approximately $0.2 million. This gain 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 income (expense), net in our Condensed Consolidated Statements of Comprehensive Loss. During the six months ended July 1, 2017, the net loss we recognized related to these foreign exchange assets and liabilities was insignificant.
ITEM 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on their evaluation as of July 1, 2017, our Chief Executive Officer and Interim 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.

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Limitations on the Effectiveness of Controls
Our disclosure controls and procedures provide our Chief Executive Officer and Interim 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 Interim Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting can or will prevent all human error. Our management recognizes that a control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Furthermore, the design of a control system must reflect the fact that there are internal resource constraints, and the benefit of controls must be weighed relative to their corresponding costs. Because of the limitations in all control systems, no evaluation of controls can provide complete assurance that all control issues and instances of error, if any, within our company are detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur due to human error or mistake. Additionally, controls, no matter how well designed, could be circumvented by the individual acts of specific persons within the organization. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all potential future conditions.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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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 7 “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, 2016, as filed with the Securities and Exchange Commission on February 28, 2017. 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 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 communications service providers, or CSPs, evolving industry standards and frequent introductions of new products and services. We invest significant amounts to pursue innovative technologies that we believe would be adopted by CSPs. In addition, on an ongoing basis we expect to be required to reposition our product and service offerings and introduce new products and services as we encounter rapidly changing CSP requirements and increasing competitive pressures. We may not be successful in doing so in a timely and responsive manner, or at all. As a result, it is difficult to forecast our future revenues and plan our operating expenses appropriately, which makes it difficult to predict our future operating results.
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. For the years ended December 31, 2016, 2015 and 2014, we incurred net losses of $27.4 million, $26.3 million, and $20.8 million, respectively. For the first six months of 2017, we incurred a net loss of $52.3 million. As of July 1, 2017 and December 31, 2016, we had an accumulated deficit of $636.6 million and $584.3 million, respectively.
We expect to continue to incur significant expenses and cash outlays for research and development, growth of our 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 segments, primarily larger CSPs including cable multiple system operators, or MSOs. Given our growth rate and the intense competitive pressures we face, we may be unable to control our operating costs.
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. We have incurred higher than expected costs associated with the growth of our professional services business and, if we are unable to scale that business and attain operational efficiencies, we will continue to incur losses. If we are unable to generate positive operating income and positive cash flows from operations, our liquidity, gross margins, 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 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. Moreover, we may experience delays in recognizing revenue under applicable revenue recognition rules. For example, revenues associated with large turnkey network improvement projects, which include projects that are funded by the CAF 2 program, are generally deferred until customer acceptance is received and may be subject to delays, rework requirements and unexpected costs, among other uncertainties. Certain government-funded contracts, such as those funded by U.S.

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Department of Agriculture’s RUS, also include acceptance and administrative requirements that delay revenue recognition. The extent of these delays and their impact on our revenues can fluctuate considerably depending on the number and size of purchase orders under these contracts for a given time period. In addition, unanticipated decreases in our available liquidity due to fluctuating operating results could limit our growth and delay implementation of our expansion plans.
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 product costs;
our ability to increase our sales to larger CSPs globally;
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;
intense competition;