CALIX, INC. This report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities and Exchange Act of 1934, as amended. All statements other than statements of historical facts are "forward-looking statements" for purposes of these provisions, including any projections of earnings, revenue or other financial items, any statement of or concerning the following: the plans and objectives of management for future operations, proposed new products or licensing, product development, anticipated customer demand or capital expenditures, anticipated growth and trends in our business and industry, future economic and/or market conditions or performance and assumptions underlying any of the above. In some cases, forward-looking statements can be identified by the use of terminology such as "could," "may," "will," "would," "expects," "believes," "intends," "plans," "anticipates," "estimates," "projects," "predicts," "potential," or "continue" or the negative thereof or other comparable terminology. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including those identified in the Risk Factors discussed in Part II, Item 1A, of this report on Form 10-Q, as well as in other sections of this report and in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . All forward-looking statements and reasons why results may differ included in this Quarterly Report on Form 10-Q are made as of the date hereof, and we assume no obligation to update these forward-looking statements or reasons why actual results might differ. Overview We are a leading global provider of cloud and software platforms, systems and services for fiber- and copper-based network architectures and a pioneer in software defined access and cloud products focused on access networks and the subscriber. Our portfolio allows for a broad range of subscriber services to be provisioned and delivered over a single unified network. Our access systems can deliver voice and data services, advanced broadband services, mobile broadband, as well as high-definition video and online gaming. Our most recent generation of premises systems enable CSPs to address the complexity of the smart home and business and offer new services to their device enabled subscribers. We have designed all of our current platforms and related systems so that they can be monitored, analyzed, managed and supported by Calix Cloud. We market our cloud and software platforms, systems and services to CSPs globally through our direct sales force as well as select resellers. Our customers range from smaller, regional CSPs to some of the world's largest CSPs. We have enabled approximately 1,600 customers to deploy passive optical, Active Ethernet and point-to-point Ethernet fiber access networks. Beginning in 2018,the United States enacted a series of tariffs on certain goods manufactured inChina . As a result of these tariffs, we incurredU.S. tariff and tariff-related costs of$6.2 million in 2019 and$1.7 million the first six months of 2020. In order to mitigate the impact of the tariffs enacted bythe United States , we undertook a broad plan to realign our global supply chain by moving substantially all of our production outside ofChina in addition to other supply chain improvements in the first half of 2019. As a result of the tariffs imposed on a broader list of products inSeptember 2019 , we expanded the scope of our global supply chain realignment plan, which is expected to take until the end of 2020 to complete. Our revenue and potential revenue growth will depend on our ability to sell and license our cloud and software platforms, systems and services to strategically aligned customers, including from market segments such as cable MSOs, WISPs, fiber overbuilders, municipalities and electric cooperatives, inthe United States and internationally. Revenue fluctuations result from many factors, including, but not limited to: increases or decreases in customer orders for our products and services, market, financial or other factors that may delay or materially impact customer purchasing decisions including as a result of uncertainty related to the COVID-19 pandemic, non-availability of products due to supply chain challenges including business closures, manufacturing disruptions and component shortages due to the COVID-19 pandemic, contractual terms with customers that result in delayed revenue recognition and varying budget cycles and seasonal buying patterns of our customers. More specifically, our customers tend to spend less in the first quarter as they are finalizing their annual budgets, and in certain regions, customers are challenged by winter weather conditions that inhibit fiber deployment in outside infrastructure. Our revenue is also dependent upon our customers' timing of purchases, capital expenditure plans and decisions to upgrade their network or adopt new technologies, including adoption of our software and cloud platform solutions, as well as our ability to grow our customer base. Cost of revenue is strongly correlated to revenue and tends to fluctuate due to all of the above factors that may cause revenue fluctuations. Factors that impacted our cost of revenue for the three and six months endedJune 27, 2020 , and that we expect will impact cost of revenue in future periods, also include: changes in the mix of products delivered, customer location and regional mix, changes in product warranty and incurrence of retrofit costs, changes in the cost of our inventory, including higher costs due to materials shortages including components, supply constraints or unfavorable changes in trade policies, 18 -------------------------------------------------------------------------------- Table of Contents investments to support expansion of cloud and customer support offerings, tariffs and associated costs to mitigate the impact of tariffs, amortization of intangibles, asset write-offs, silicon support fees and inventory write-downs. In particular, recently we have seen increases in global freight charges followingChina's reopening of manufacturing. Cost of revenue also includes fixed expenses related to our internal operations, which could increase our cost of revenue as a percentage of revenue if there are declines in revenue. Our gross profit and gross margin fluctuate based on timing of factors such as new product introductions or upgrades to existing products, changes in customer mix and changes in the mix of products demanded and sold (and any related write-downs of existing inventory) and have in the past been negatively impacted by increases in mix of revenue towards professional services, increases in mix of revenue from channel sales rather than direct sales or other unfavorable customer or product mix, shipment volumes and any related volume discounts, changes in our product and services costs, pricing decreases or discounts, customer rebates and incentive programs due to competitive pressure or materials shortages, supply constraints, investments to support expansion of cloud and customer support offerings, tariffs or unfavorable changes in trade policies. Our operating expenses fluctuate based on the following factors among others: changes in headcount and personnel costs, which comprise a significant portion of our operating expenses; variable compensation due to fluctuations in shipment volumes or level of achievement against performance targets; timing of research and development expenses, including investments in innovative solutions and new customer segments, prototype builds and outsourced development resources; asset write-offs; investments in our business and information technology infrastructure; and fluctuations in stock-based compensation expenses due to timing of equity grants or other factors affecting vesting. Our net loss was$11.2 million for the six months endedJune 27, 2020 and$17.7 million for 2019. Since our inception we have incurred significant losses, and as ofJune 27, 2020 , we had an accumulated deficit of$713.7 million . Further, as a result of factors contributing to the fluctuations described above among other factors, many of which are outside our control, our quarterly operating results fluctuate from period to period. Comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. COVID-19 Pandemic We are subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict as coronavirus continues to spread around the world. There is still no vaccine, and treatments are limited. We have instituted office closures, travel restrictions and continue with a mandatory work-from-home policy for substantially all of our employees. The spread of COVID-19 has impacted our supply chain operations through restrictions, reduced capacity and shutdown of business activities by suppliers whom we rely on for sourcing components and materials and third-party partners whom we rely on for manufacturing, warehousing and logistics services. Although demand for our products has been strong in the short-term as subscribers seek more bandwidth and better WiFi, customers' purchasing decisions over the long-term may be impacted by the pandemic and its impact on the economy, which could in turn impact our revenue and results of operations. Furthermore, our supply chain continues to face constraints primarily due to challenges in sourcing components and materials to manufacture our products, and future outbreaks could exacerbate these constraints or cause further supply chain disruptions. The extent to which the COVID-19 pandemic may materially impact our financial condition, liquidity or results of operations is uncertain. In the second quarter of 2020, we made the decision to embrace a work-from-anywhere model, with many of our employees electing to work remotely on a permanent basis. This operating mode reduces our physical facilities requirements, and consequently, we established a restructuring plan to align our business to a work-from-anywhere model and incurred facilities-related restructuring charges of$5.1 million . Furthermore, in the second quarter of 2020 we realigned our product portfolio to reduce and consolidate certain legacy product lines as customers accelerated their interest in our all-platform offerings. These actions resulted in a component inventory accrual of$1.8 million and severance-related charges of$1.2 million . Critical Accounting Policies and Estimates Our financial statements are prepared in accordance withU.S. GAAP. These accounting principles require us to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Management bases its estimates, assumptions and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. To the extent there are material differences between these estimates and actual results, our financial statements may be affected. Our management evaluates its estimates, assumptions and judgments on an ongoing basis. Our critical accounting policies and estimates, which are revenue recognition and inventory valuation, are described under "Critical Accounting Policies and Estimates" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . For the six months endedJune 27, 2020 , there have been no significant changes in our critical accounting policies and estimates. 19 -------------------------------------------------------------------------------- Table of Contents Recent Accounting Pronouncements There have been no additional accounting pronouncements or changes in accounting pronouncements during the six months endedJune 27, 2020 , as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , that are significant or potentially significant to us. Results of Operations Comparison of the Three and Six Months EndedJune 27, 2020 andJune 29, 2019 Revenue Our revenue is comprised of the following: •Systems include revenue from the sale of access and premises systems, software platform licenses and cloud-based software subscriptions; and •Services include revenue from professional services, customer support, software- and cloud-based maintenance, extended warranty subscriptions, training and managed services. The following table sets forth our revenue (dollars in thousands): Three Months Ended Six Months Ended Variance Variance Variance Variance June 27, June 29, in in June 27, June 29, in in 2020 2019 Dollars Percent 2020 2019 Dollars Percent Revenue: Systems$ 110,841 $ 92,833 $ 18,008 19 %$ 205,350 $ 175,193 $ 30,157 17 % Services 8,182 7,471 711 10 % 15,355 14,461 894 6 %$ 119,023 $ 100,304 $ 18,719 19 %$ 220,705 $ 189,654 $ 31,051 16 % Percent of total revenue: Systems 93 % 93 % 93 % 92 % Services 7 % 7 % 7 % 8 % 100 % 100 % 100 % 100 % Our revenue increased by$18.7 million and$31.1 million for the three and six months endedJune 27, 2020 , respectively, as compared to the corresponding periods in 2019 due to higher systems revenue of$18.0 million and$30.2 million , respectively, and higher services revenue of$0.7 million and$0.9 million , respectively. The increase in systems revenue was primarily due to higher revenue from our small, regional customers and, to a lesser extent, our large-sized customers, as service providers accelerated some deployments to respond to demand for network capacity and relieve network capacity constraints. The increase in services revenue was due to continued ramp in our next generation service offerings was only partially offset by lower professional services related to CAF deployments. For the three and six months endedJune 27, 2020 , revenue generated inthe United States was$108.2 million and$196.2 million , or 91% and 89% of our total revenue, respectively, compared to$85.8 million and$161.6 million , or 86% and 85% of our total revenue, respectively, for the same period in 2019. International revenue was$10.8 million and$24.5 million , or 9% and 11% of our total revenue, respectively, for the three and six months endedJune 27, 2020 , as compared to$14.5 million and$28.0 million , or 14% and 15% of our total revenue, respectively, for the same period in 2019. Only CenturyLink, Inc. accounted for more than 10% of the Company's total revenue, representing 15% for both the three and six months endedJune 27, 2020 , and 17% and 15% for the three and six months endedJune 29, 2019 , respectively. 20 -------------------------------------------------------------------------------- Table of Contents Cost of Revenue, Gross Profit and Gross Margin The following table sets forth our cost of revenue (dollars in thousands): Three Months Ended Six Months Ended Variance Variance Variance Variance June 27, June 29, in in June 27, June 29, in in 2020 2019 Dollars Percent 2020 2019 Dollars Percent Cost of revenue: Systems$ 56,721 $ 49,561 $ 7,160 14 %$ 107,429 $ 94,162 $ 13,267 14 % Services 5,897 6,075 (178) (3) % 11,247 12,481 (1,234) (10) %$ 62,618 $ 55,636 $ 6,982 13 %$ 118,676 $ 106,643 $ 12,033 11 % Our cost of revenue increased by$7.0 million and$12.0 million for the three and six months endedJune 27, 2020 , respectively, as compared with the corresponding periods in 2019. The$7.2 million and$13.3 million increases in our systems cost of revenue were less than the increases in revenue compared with the corresponding periods in 2019, despite a charge of$1.8 million related to our reduction and consolidation of legacy product lines taken in the second quarter of 2020, and were partly due to favorable customer and product mix. The decrease in services cost of revenue was mainly due to reduced personnel costs for the three and six months endedJune 27, 2020 compared with the corresponding period in 2019. The following table sets forth our gross profit and gross margin (dollars in thousands): Three Months Ended Six Months Ended Variance Variance Variance Variance June 27, June 29, in in June 27, June 29, in in 2020 2019 Dollars Percent 2020 2019 Dollars Percent Gross profit: Systems$ 54,120 $ 43,272 $ 10,848 25 %$ 97,921 $ 81,031 $ 16,890 21 % Services 2,285 1,396 889 64 % 4,108 1,980 2,128 107 %$ 56,405 $ 44,668 $ 11,737 26 %$ 102,029 $ 83,011 $ 19,018 23 % Gross margin: Systems 48.8 % 46.6 % 47.7 % 46.3 % Services 27.9 % 18.7 % 26.8 % 13.7 % Overall 47.4 % 44.5 % 46.2 % 43.8 % Gross profit increased to$56.4 million and$102.0 million for the three and six months endedJune 27, 2020 , respectively, from$44.7 million and$83.0 million during the corresponding periods in 2019 primarily due to higher systems and services gross margin. During the three and six months endedJune 27, 2020 , systems gross margin was negatively impacted byU.S. tariff and tariff-related costs of$0.7 million and$1.7 million , or 65 and 80 basis points, respectively, and intangible asset amortization of$0.7 million and$1.3 million , or 60 basis points for both periods, respectively. Excluding the impact ofU.S. tariff and tariff-related costs and intangible assets amortization, systems gross margin was 50.1% and 49.1% for the three and six months endedJune 27, 2020 , respectively. During the three and six months endedJune 29, 2019 , systems gross margin was negatively impacted byU.S. tariff and tariff-related costs of$1.9 million and$4.0 million , or 200 and 230 basis points, respectively. There was no intangible asset amortization in the three and six months endedJune 29, 2019 . Excluding the impact ofU.S. tariff and tariff-related costs, systems gross margin was 48.6% and 48.5% for the three and six months endedJune 29, 2019 , respectively. The increase in systems gross margin excludingU.S. tariff and tariff-related costs and intangible assets amortization for the three months endedJune 27, 2020 compared the corresponding period in 2019, was mainly due to continued growth in our all-platform offerings along with favorable product and customer mix. Services gross margin increased for the three months endedJune 27, 2020 compared to the corresponding period in 2019 due to lower personnel costs as our service revenue mix shifts away from low gross margin deployment services to higher gross margin software maintenance and services aligned with our platform offerings. 21 -------------------------------------------------------------------------------- Table of Contents Operating Expenses Research and Development Expenses The following table sets forth our research and development expenses (dollars in thousands): Three Months Ended Six Months Ended Variance Variance Variance Variance June 27, June 29, in in June 27, June 29, in in 2020 2019 Dollars Percent 2020 2019 Dollars Percent Research and development$ 20,921 $ 20,700 $ 221 1 %$ 41,592 $ 40,030 $ 1,562 4 % Percent of total revenue 18 % 21 % 19 % 21 % Research and development expenses for the three months endedJune 27, 2020 increased by$0.2 million as compared with the corresponding period in 2019 mainly due to higher personnel expenses of$0.7 million , primarily related to incentive compensation expense, and higher stock-based compensation of$0.2 million . These increases were partially offset by decreases in depreciation and amortization expense of$0.3 million and lower travel expenses of$0.2 million . Research and development expenses for the six months endedJune 27, 2020 increased by$1.6 million as compared with the corresponding period in 2019 mainly due to higher personnel expenses of$1.8 million , primarily related to incentive compensation expense, higher outside services expenses of$0.8 million and higher stock-based compensation of$0.2 million . These increases were partially offset by decreases in depreciation and amortization expense of$0.4 million , lower equipment expenses of$0.3 million and lower travel expenses of$0.3 million . Sales and Marketing Expenses The following table sets forth our sales and marketing expenses (dollars in thousands): Three Months Ended Six Months Ended Variance Variance Variance Variance June 27, June 29, in in June 27, June 29, in in 2020 2019 Dollars Percent 2020 2019 Dollars Percent Sales and marketing$ 21,343 $ 19,734 $ 1,609 8 %$ 41,967 $ 39,073 $ 2,894 7 % Percent of total revenue 18 % 20 % 19 % 21 % Sales and marketing expenses for the three months endedJune 27, 2020 increased by$1.6 million as compared with the corresponding period in 2019 primarily due to higher personnel expenses of$1.7 million , mainly related to higher sales incentive compensation expense and investments in sales headcount, higher marketing expenses of$0.8 million and higher stock-based compensation of$0.2 million . These increases were partially offset by a decrease in travel expenses of$1.4 million . Sales and marketing expenses for the six months endedJune 27, 2020 increased by$2.9 million as compared with the corresponding period in 2019 primarily due to higher personnel expenses of$2.7 million , mainly related to investments in sales headcount and higher sales incentive compensation expense, and higher marketing expenses of$1.4 million . These increases were partially offset by a decrease in travel expenses of$1.6 million . General and Administrative Expenses The following table sets forth our general and administrative expenses (dollars in thousands): Three Months Ended Six Months Ended Variance Variance Variance Variance June 27, June 29, in in June 27, June 29, in in 2020 2019 Dollars Percent 2020 2019 Dollars Percent General and administrative$ 11,193 $ 9,165 $ 2,028 22 %$ 21,862 $ 17,952 $ 3,910 22 % Percent of total revenue 9 % 9 % 10 % 9 % General and administrative expenses for the three months endedJune 27, 2020 increased by$2.0 million as compared with the corresponding period in 2019 mainly due to capitalized cloud-computing amortization and subscription expenses of$1.1 million as our cloud-based ERP system went live in January of 2020, an increase in our bad debt allowance of$0.9 million , and an increase in personnel expenses of$0.4 million , primarily related to incentive compensation expense. These increases were partially offset by decreases in professional services fees of$0.4 million and facilities expenses of$0.2 million . 22 -------------------------------------------------------------------------------- Table of Contents General and administrative expenses for the six months endedJune 27, 2020 increased by$3.9 million as compared with the corresponding period in 2019 mainly due to capitalized cloud-computing amortization and subscription expenses of$2.2 million as our cloud-based ERP system went live in January of 2020, an increase in personnel expenses of$1.7 million , primarily related to the capitalization of internal resources related to our cloud-based ERP implementation that lowered personnel expenses in 2019 as well as an increase in incentive compensation expense in 2020, and an increase in our bad debt allowance of$1.0 million . These increases were partially offset by lower facilities expenses of$0.4 million and lower professional services fees of$0.3 million . Restructuring Charges The following table sets forth our restructuring charges (dollars in thousands): Three Months Ended Six Months Ended Variance Variance Variance Variance June 27, June 29, in in June 27, June 29, in in 2020 2019 Dollars Percent 2020 2019 Dollars Percent Restructuring charges$ 6,286 $ -$ 6,286 100 %$ 6,286 $ -$ 6,286 100 % Percent of total revenue 5 % - % 3 % - % Responding to changes and trends caused by the COVID-19 pandemic, we initiated a restructuring plan inJune 2020 to accelerate our all-platform future and to align with a work-from-anywhere culture. We incurred restructuring charges of$6.3 million , consisting of facilities-related charges and severance and other termination related benefits. See Note 5, "Balance Sheet Details" of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details. Provision for Income Taxes The following table sets forth our provision for income taxes (dollars in thousands): Three Months Ended Six Months Ended Variance Variance Variance Variance June 27, June 29, in in June 27, June 29, in in 2020 2019 Dollars Percent 2020 2019 Dollars Percent Provision for income taxes$ 148 $ 95 $ 53 56 %$ 477 $ 250 $ 227 91 % Effective tax rate (3.6) % (1.9) % (4.5) % (1.7) % The effective tax rate for the three and six months endedJune 27, 2020 was determined using an estimated annual effective tax rate adjusted for discrete items, if any, that occurred during the respective periods. Deferred tax assets are recognized if realization of such assets is more likely than not. We have established and continue to maintain a full valuation allowance against our net deferred tax assets, with the exception of certain foreign deferred tax assets, as we do not believe that realization of those assets is more likely than not. Our effective tax rate may be subject to fluctuation during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as the mix of forecasted pre-tax earnings in the various jurisdictions in which we operate, valuation allowances against deferred tax assets, the recognition or de-recognition of tax benefits related to uncertain tax positions and changes in or the interpretation of tax laws in jurisdictions where we conduct business. 23 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources We have funded our operations and investing activities primarily through cash generated from operations, borrowings on our line of credit, financing arrangements for certain lab equipment and consulting services and sales of our common stock. As ofJune 27, 2020 , we had cash and cash equivalents of$50.6 million , which consisted of deposits held at banks held at major financial institutions. Operating Activities Net cash provided by operating activities was$3.9 million for the six months endedJune 27, 2020 and consisted of$17.0 million of non-cash charges and$1.9 million of cash flow decreases reflected in the net change in assets and liabilities, partially offset by a net loss of$11.2 million . Cash flow decreases resulting from the net change in assets and liabilities primarily consisted of an increase in accounts receivable of$12.1 million , due to product shipment timing. In addition, there was a decrease in deferred revenue of$0.9 million due to the invoice timing of our customer support and subscription offerings and a decrease in accounts payable of$0.7 million , primarily due to timing of payments to our suppliers. These changes were partially offset by an increase in accrued liabilities of$7.9 million , due to an increase in accruals related to our restructuring activities and an increase our liability for components at certain suppliers. In addition, there was a decrease in inventory of$3.5 million due to lower deliveries as a result of the supply disruption during 2020 and an increase in prepaid expenses and other assets of$1.2 million , due to an increase in our VAT receivable and employee receivables related to income tax obligations associated with our NQ ESPP. Non-cash charges primarily consisted of depreciation and amortization of$7.0 million , stock-based compensation of$6.2 million and lease restructuring charges of$3.7 million . During the six months endedJune 29, 2019 , net cash used in operating activities was$3.3 million and consisted of a net loss of$14.8 million partially offset by$1.0 million of cash flow increases reflected in the net change in assets and liabilities and by$10.4 million of non-cash charges. Cash flow increases resulting from the net change in assets and liabilities primarily consisted of a decrease in accounts receivable of$6.8 million , mainly due to lower sales, a decrease in inventory of$4.8 million , primarily due to the transfer of raw material inventory to our new CM and higher excess and obsolete reserves, an increase in deferred revenue of$3.2 million due to increased support contracts, software maintenance and Calix Cloud subscriptions and a decrease in prepaid expenses and other assets of$1.7 million , mainly due to operating lease asset amortization. This was partially offset by a decrease in accrued liabilities of$10.3 million , mainly related to incentive compensation payments to employees and ESPP purchases, a decrease in accounts payable of$2.7 million , primarily due to less inventory purchases, a decrease in other long-term liabilities of$2.5 million , mainly due to operating lease liability amortization. Non-cash charges primarily consisted of stock-based compensation of$5.7 million and depreciation and amortization of$4.6 million . Investing Activity For the six months endedJune 27, 2020 we invested$4.5 million in capital expenditures consisting primarily of purchases of test equipment and computer equipment. Similarly, for the six months endedJune 29, 2019 , we invested$9.5 million in capital expenditures consisting primarily of purchases of test equipment, computer equipment and software. Financing Activities Net cash provided by financing activities of$4.5 million for the six months endedJune 27, 2020 mainly consisted of proceeds from the issuance of common stock from stock option exercises of$5.6 million and from our employee stock purchase plans of$4.7 million . These inflows were partially offset by the partial re-payment of our line of credit of$4.0 million , payments related to financing arrangements of$1.5 million and payments to originate the credit line of$0.3 million . Net cash used in financing activities of$1.9 million for the six months endedJune 29, 2019 mainly related to reduced borrowing from the line of credit of$5.0 million and payments for financing arrangements of$1.3 million , partially offset by proceeds from the issuance of common stock under our employee stock purchase plans of$4.2 million and from stock option exercises of$0.3 million . Working Capital and Capital Expenditure Needs Our material cash commitments include non-cancelable firm purchase commitments, contractual obligations under our loan and security agreement withBank of America , or BofA Loan Agreement, normal recurring trade payables, compensation-related and expense accruals, operating leases, minimum revenue-share obligations and obligations from financing arrangements. We believe that our outsourced approach to manufacturing provides us significant flexibility in both managing inventory levels and financing our inventory. In the event that our revenue plan does not meet our expectations, we may be required to curtail or eliminate expenditures to mitigate the impact on our working capital. 24 -------------------------------------------------------------------------------- Table of Contents InJanuary 2020 , we terminated ourSilicon Valley Bank loan and security agreement and entered into a new loan and security agreement withBank of America, N.A . The BofA Loan Agreement provides for a revolving facility up to a principal amount of up to$35.0 million , including a$10.0 million sublimit for letters of credit. The BofA Loan Agreement matures, and all outstanding amounts become due and payable, inJanuary 2023 . The BofA Loan Agreement is secured by substantially all of our assets, including our intellectual property. EffectiveJuly 1, 2020 , loans under the credit facility will bear interest at a rate per annum equal to either LIBOR (customarily defined) plus an applicable margin between 1.5% to 2.0% or Prime Rate (customarily defined) plus an applicable margin between 0.5% to 1.0%, in each case largely based on a fixed charge coverage ratio measured at the end of each fiscal quarter. The availability of borrowings under the BofA Loan Agreement is subject to certain conditions and requirements, including among others, if at any time our availability is less than$5.0 million , we must maintain a minimum fixed charge coverage ratio, or FCCR, of 1.0 to 1.0. As ofJune 27, 2020 , we were in compliance with these requirements, had borrowings outstanding of$26.0 million , availability of$9.0 million and an FCCR of 4.1 to 1.0. Our interest rate on the line of credit was 4.5% as of the quarter endedJune 27, 2020 and decreased to 3.75% onJuly 1, 2020 . InMarch 2018 , we entered into an agreement with a vendor to develop software products pursuant to which we would become obligated, if the vendor delivered software that meets our technical requirements for commercial sale, to make minimum revenue-share payments of$15.8 million over the subsequent three years. The payments are based on a revenue-share rate applied to revenue from developed product sales subject to a minimum and a maximum aggregate amount over the three-year sales period. We had our first sale inAugust 2019 . Revenue-share payments are paid quarterly in arrears, and we began making payments in the first quarter of 2020. During 2018, we entered into financing arrangements to purchase lab equipment for approximately$5.1 million . Each agreement is to be paid over 36 months with a weighted average interest rate of 6.2%. As ofJune 27, 2020 , we had$2.1 million outstanding under these financing arrangements. From 2017 to 2020, in connection with our ERP implementation, we entered into financing arrangements for consulting services of$5.5 million . The current amounts due under this agreement are to be paid over a weighted average term of 2.4 years with a weighted average interest rate of 6.2%. As ofJune 27, 2020 , there was$1.9 million outstanding under this arrangement. We believe, based on our current operating plan and expected operating cash flows, that our existing cash and cash equivalents, along with available borrowings under our BofA Loan Agreement, will be sufficient to meet our anticipated cash needs for at least the next twelve months. Our future capital requirements will depend on many factors including our rate of revenue growth; timing of customer payments and payment terms, particularly of larger customers; the timing and extent of spending to support development efforts; our ability to manage product cost, including the cost impact of theU.S. tariffs as well as the possibility of additional tariffs or costs associated with disruptions in global trade and relations that may impact our product costs and higher component costs associated with new technologies; the global impact of the COVID-19 pandemic, particularly if restrictions are prolonged; our ability to implement efficiencies and maintain product margin levels; the expansion of sales and marketing activities; the success of revenue share programs; the timing of introductions and timing and rate of customer adoption of new products and enhancements to existing products; the slowdowns or declines in customer purchases of traditional systems; acquisition of new capabilities or technologies; and the continued market acceptance of our products. If we are unable to execute on our current operating plan or generate positive operating income and positive cash flows, our liquidity, results of operations and financial condition will be adversely affected, and we may fail to meet the borrowing base requirements or comply with the covenants in the BofA Loan Agreement, in which case we may not be able to borrow under the BofA Loan Agreement. We may need to seek other sources of liquidity, including the sale of equity or incremental borrowings, to support our working capital needs. In addition, we may choose to seek other sources of liquidity even if we believe we have generated sufficient cash flows to support our operational needs. There is no assurance that any other sources of liquidity may be available to us on acceptable terms or at all. If we are unable to generate sufficient cash flows or obtain other sources of liquidity, we will be forced to limit our development activities, reduce our investment in growth initiatives and institute cost-cutting measures, all of which may adversely impact our business and potential growth. 25 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations and Commitments Our principal commitments as ofJune 27, 2020 consisted of our contractual obligations under the BofA Loan Agreement, financing arrangements, operating leases for office space and non-cancelable outstanding purchase obligations. The following table summarizes our contractual obligations atJune 27, 2020 (in thousands): Payments Due by Period More Than 5 Total Less Than 1 Year 1-3 Years 3-5 Years Years Non-cancelable purchase commitments (1)$ 104,763 $
104,763 $ - $ - $ - Line of credit, including interest (2)
29,026 1,170 27,856 - -
Financing arrangements (3) 19,977 5,450 14,527 - -
Operating lease obligations (4) 18,802 3,720 6,971 6,774 1,337
$ 172,568 $ 115,103 $ 49,354 $ 6,774 $ 1,337
(1) Represents outstanding purchase commitments for inventory to be delivered by
our third-party manufacturers. See Note 6, "Commitments and Contingencies" of
the Notes to Condensed Consolidated Financial Statements included in Part I,
Item 1 of this Quarterly Report on Form 10-Q for further discussion regarding
our outstanding purchase commitments.
(2) Line of credit contractual obligations include projected interest payments
over the term of the BofA Loan Agreement, assuming the interest rate in effect
for the outstanding borrowings as of June 27, 2020 of 4.5% and payment of the
borrowings on January 27, 2023 , the contractual maturity date of the credit
facility. See Note 5, "Credit Agreements" of the Notes to Condensed Consolidated
Financial Statements included in Part I, Item 1 of this Quarterly Report on Form
10-Q for further discussion regarding our contractual obligations relating to
our line of credit.
(3) Represents installment payments, including interest, related to financing
arrangements and estimated total minimum revenue-share obligations under the
program, including imputed interest, of $15.8 million associated with developed
software product and related enhancements by an engineering service provider of
which approximately $12.8 million has been incurred. The schedule reflects our
expected revenue-share payments based on our revenue projections for the
developed products over a three-year sales period. If the minimum revenue-share
payments are not achieved by the end of the three-year sales period, a true-up
payment will be due.
(4) Future minimum operating lease obligations in the table above include
primarily payments for our office locations, which expire at various dates
through 2025. See Note 6 "Commitments and Contingencies" of the Notes to
Condensed Consolidated Financial Statements included in Part I, Item 1 of this
Quarterly Report on Form 10-Q for further discussion regarding our operating
leases.
Off-Balance Sheet Arrangements
As of June 27, 2020 and December 31, 2019 , we did not have any off-balance sheet
arrangements.
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