2014 Annual Report
“Our 1,200+ customers continued to invest in
enhanced broadband access networks both here
in the United States and internationally, with
Calix seen as the clear leader in gigabit
broadband services deployments.”
– Carl Russo, President and CEO
Fellow Calix Stockholders,
Industry adoption of gigabit networks began in earnest in 2014. And Calix led the way with 65 customer
announced deployments in 36 US states and five countries by the end of the year. Our 1,200+ customers
continued to invest in enhanced broadband access networks both here in the United States and
internationally, with Calix seen as the clear leader in gigabit broadband services deployments1.
After a slow start, we saw sequential quarterly growth in 2014, ending the year with sales of $401 million, up 5
percent from last year. Strong execution and industry-leading solutions for our customers enabled Calix to
achieve non-GAAP gross margins of 47 percent. Our non-GAAP earnings per share decreased to $0.29 in the
year from $0.39 in 2013 due to write-downs taken against slower moving inventory and to increased
expenditures on headcount and related expenses, notably on international sales and marketing personnel. We
generated positive cash flow from operations for the sixth year in a row – generating $38 million in 2014 and
exiting the year with a solid, debt-free balance sheet.
Our growth-oriented investments in 2014 included:
The 844G and 854G GigaCenters, our industry’s first fiber products to offer carrier-class Wi-Fi in the home,
delivering unprecedented in-home wireless broadband coverage, quality of service, and speed.
Open Link Cable software, an innovative fiber access solution for cable operators which enables them to
deliver gigabit services over fiber while retaining their existing DOCSIS command and control procedures.
The expansion of our international sales team and Value Added Reseller network to address opportunities,
in over 90 countries around the world.
We also strengthened our management team and board of directors in 2014. After making a number of
contributions to Calix over the past decade, Board Member and EVP/CFO Michael Ashby retired and was
succeeded by telecom veteran William Atkins. Also joining Calix to lead our systems product development and
strategy was Michel Langlois as SVP of Systems Products. We also broadened the expertise of the Calix board
of directors by adding Chris Bowick, former CTO of Cox Communications, and Kevin Peters, former EVP, Global
Customer Service at AT&T.
I would like to you thank you – our customers, suppliers, employees, and fellow Calix stockholders – for your
continued support. We will continue to reap the benefits of past investments in people and technology while
making focused investments to position us for further success in the years ahead – thereby setting the stage
for continued growth in 2015 and beyond.
Sincerely,
Carl Russo
President and CEO
Calix, Inc.
1BroadbandTrends, February 2015
Note: The above includes forward-looking statements, including expectations of further growth. Please refer to the Section entitled SPECIAL NOTE
REGARDING FORWARD LOOKING STATEMENTS, on the attached Annual Report on Form 10K for a discussion of forward-looking statements and the risk
factors that may impact our future results. We also make reference to Non-GAAP measures in the above letter. A reconciliation of the Non-GAAP to
GAAP measures is available on our investor relations website.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2014
OR
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
(State or Other Jurisdiction of
Incorporation or Organization)
1035 N. McDowell Blvd.
Petaluma, California
(Address of Principal Executive Offices)
68-0438710
(I.R.S. Employer
Identification No.)
94954
(Zip Code)
Registrant’s telephone number, including area code (707) 766-3000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.025 par value
Name of each exchange on which registered
The New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act:
(Title of class)
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes:
No:
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes:
No:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes:
No:
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:
No:
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large Accelerated Filer
Accelerated Filer
Non-accelerated filer
(Do not check if a smaller reporting Company)
Smaller Reporting Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes:
No:
The aggregate market value of the Common Stock held by non-affiliates of the registrant based upon the closing sale price on the New
York Stock Exchange on June 27, 2014, the last business day of the Registrant’s most recently completed second fiscal quarter, was
approximately $340.6 million. Shares held by each executive officer, director and by each other person (if any) who owns more than 10% of
the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of February 25, 2015, the number of shares of the registrant’s common stock outstanding was 51,805,177.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for its 2015 annual meeting of stockholders are incorporated by reference in Items 10,
11, 12, 13 and 14 of Part III.
Table of Contents
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Calix, Inc.
Form 10-K
TABLE OF CONTENTS
PART I
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
PART III
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
Signatures
PART IV
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36
37
37
37
38
40
50
51
78
78
81
81
81
81
81
81
82
85
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements that involve substantial risks and uncertainties. All statements other than statements of
historical facts contained in this report, including statements regarding Calix’s future financial position, business strategy and plans and
objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements
by terminology such as “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “potential,” or
the negative of these terms or other similar expressions. Forward-looking statements include Calix’s expectations concerning the outlook for
its business, productivity, plans and goals for future operational improvements and capital investments, operational performance, future
market conditions or economic performance and developments in the capital and credit markets and expected future financial performance.
Forward-looking statements involve a number of risks, uncertainties and assumptions, and actual results or events may differ materially
from those projected or implied in those statements. Important factors that could cause such differences include:
• our ability to predict our revenue and plan our expenses appropriately;
•
•
•
the capital spending patterns of communications service providers ("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;
• our ability to develop new products or enhancements that support technological advances and meet changing CSP
requirements;
• our ability to achieve market acceptance of our products and CSPs’ willingness to deploy our new products;
•
•
the concentration of our customer base;
the length and unpredictability of our sales cycles;
• our focus on CSPs with limited revenue potential;
• our lack of long-term, committed-volume purchase contracts with our customers;
• our ability to increase our sales to larger North American as well as international CSPs;
• our exposure to the credit risks of our customers;
•
•
fluctuations in our gross margin;
the interoperability of our products with CSP networks;
• our dependence on sole- and limited-source suppliers;
• our ability to manage our relationships with our contract manufacturers;
• our ability to forecast our manufacturing requirements and manage our inventory;
• our products’ compliance with industry standards;
• our ability to expand our international operations;
• our inability to recruit or retain appropriate international resellers ;
•
the ability to address and resolve risks related to acquisitions;
• our ability to protect our intellectual property and the cost of doing so;
•
the quality of our products, including any undetected hardware defects or bugs in our software;
• our ability to estimate future warranty obligations due to product failure rates;
• our ability to obtain necessary third-party technology licenses at reasonable costs;
•
•
the regulatory and physical impacts of climate change and other natural events;
the attraction and retention of qualified employees and key management personnel;
• our ability to build and sustain the proper information technology infrastructure; and
• our ability to maintain proper and effective internal controls.
Calix cautions you against placing undue reliance on forward-looking statements, which reflect our current beliefs and are based on
information currently available to us as of the date a forward-looking statement is made. Forward-looking statements set forth in this report
on Form 10-K speak only as of the date of its filing. We undertake no obligation to revise forward-looking statements to reflect future events,
changes in circumstances, or changes in beliefs. In the event that we do update any forward-looking statements, no inference should be made
that we will make additional updates with respect to that statement, related matters, or any other forward-looking statements.
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ITEM 1.
Business
Overview
PART I
Calix, Inc. (together with its subsidiaries, “Calix,” the “Company,” “our,” “we,” or “us”) was incorporated in August 1999, and is a
Delaware corporation. We are a leading global provider of broadband communications access systems and software for fiber- and copper-
based network architectures that enable communications service providers ("CSPs"), to transform their networks and 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 develop and
sell carrier-class hardware and software products, which we refer to as the Unified Access portfolio that are designed to enhance and
transform CSP access networks to meet the changing demands of subscribers rapidly and cost-effectively.
Our Unified Access portfolio consists of four core platforms and/or nodes, the E-Series Ethernet service access platforms and nodes
("E-Series platforms and nodes"), the B6 Ethernet service access nodes ("B-Series nodes"), the C7 multiservice, multiprotocol access
platform ("C-Series platform"), and the BLM1500 gigabit passive optical network ("GPON") access terminal. These platforms, nodes, and
terminals are complemented by the P-Series and T-Series optical network terminals ("ONTs"), residential gateways ("RGs") and GigaCenters,
the Calix Management System ("CMS"), EntriView element management software, OpenLink Cable software and Compass suite of value-
added software applications. Our broad and comprehensive portfolio serves the CSP network from the central office or data center to the
subscriber premises and enables CSPs to deliver voice, high-speed data and advanced broadband services over legacy and next-generation
access networks. These packet-based platforms enable CSPs to rapidly introduce new revenue-generating services, while minimizing the
capital and operational costs of CSP networks. The Unified Access portfolio allows CSPs to evolve their networks and service delivery
capabilities at a pace that balances their financial, competitive and technology needs.
We believe that the rapid growth of Internet and data traffic, introduction of bandwidth-intensive advanced broadband services, such as
high-speed Internet, Internet protocol television ("IPTV"), mobile broadband, high-definition video, and online gaming, the rise of “the
cloud” as a mainstream vehicle for content delivery over broadband, the proliferation of broadband-ready consumer devices, and the
increasingly competitive market for residential and business subscribers are driving CSPs to invest in and upgrade their access networks. We
also believe that CSPs will gradually transform their access networks to deliver these advanced broadband services over fiber-based networks
complemented by advanced wireless technologies, thereby preparing networks for continued bandwidth growth, the introduction of new
services and more cost-effective operations. During this time, CSPs will increasingly deploy new fiber-based network infrastructure to enable
this transition while continuing to support basic voice and data services over legacy networks. Our portfolio is designed to enable this
evolution of the access network efficiently and flexibly.
We market our access systems and software to CSPs globally through our direct sales force as well as a limited, but expanding number
of international resellers. As of December 31, 2014, over 19 million ports of our Unified Access portfolio have been deployed at a growing
number of CSPs worldwide, whose networks serve over 100 million subscriber lines in total. Our customers include many of the world's
largest communications providers. In addition, we have enabled over 1,000 customers to deploy gigabit passive optical network, Active
Ethernet and point-to-point Ethernet fiber access networks.
We have a single reporting segment. Additional information about geographic areas required by this item is incorporated herein by
reference to Note 14, “Segment Information” of the Notes to Consolidated Financial Statements of this Form 10-K.
Industry Background
CSPs compete in a rapidly changing market to deliver a range of voice, data and video services to their residential and business
subscribers. CSPs include wireline and wireless service providers, cable multiple system operators ("MSOs"), electrical cooperatives, and
municipalities. The rise in Internet-enabled communications has created an environment in which CSPs are competing to deliver voice, data
and video offerings to their subscribers across fixed and mobile networks. Residential and business subscribers now have the opportunity to
purchase an array of services such as basic voice and data as well as advanced broadband services such as high-speed Internet, IPTV, mobile
broadband, high-definition video and online gaming from a variety of CSPs. The rapid growth in new services is generating increased
network traffic.
For example, Cisco Systems, Inc. estimates that global IP traffic will grow at a compound annual growth rate of 21% per year from
2013 to reach approximately 132 exabytes per month in 2018. We believe that increased network traffic will be largely driven by video
applications, which are expected to account for 83% of global consumer traffic by 2018. CSPs are also broadening their offerings of
bandwidth-intensive advanced broadband services, while maintaining support for their widely utilized basic voice and data services. CSPs are
being driven to evolve their access networks to enable cost-effective delivery of a broad range of services demanded by their subscribers.
With strong subscriber demand for low latency and bandwidth-intensive applications, CSPs are seeking to offer new services, realize
new revenue streams, build out new infrastructure and differentiate themselves from their competitors. CSPs typically compete on their cost
to acquire and retain subscribers, the quality of their service offerings, including such measures as the speed, latency, and reliability of their
broadband services, and the cost to deploy and operate their networks. In the past, CSPs offered different solutions delivered over distinct
networks designed for specific services and were generally not in direct competition. For example, traditional wireline service providers
provided voice services whereas cable MSOs delivered cable television services. Currently, CSPs are increasingly offering services that
leverage Internet protocol ("IP"), thereby enabling CSPs of all types to offer a comprehensive bundle of IP-based voice, data and video
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services to their subscribers. This has increased the level of competition among CSPs as wireline and wireless service providers, cable MSOs
and other CSPs can all compete for the same residential and business subscribers using similar types of IP-based services. Over the last few
years, Google has been selectively overbuilding major U.S. cities with fiber and delivering data and video service packages that include
symmetrical 1 gigabit per second (gigabit) high-speed data services. Google’s actions and success have spurred both traditional wireline
service providers and cable MSOs to invest in gigabit capable network in both the Google targeted cities as well as other communities around
the world.
Access Networks are Critical and Strategic to CSPs and Policymakers
Access networks, also known as the local loop or last mile, directly and physically connect the residential or business subscriber to the
CSP’s data center, central office or similar facilities. The access network is critical for service delivery as it governs the bandwidth capacity,
service quality available to subscribers and ultimately the services CSPs can provide to subscribers. Connecting the cloud to a growing
number of broadband-ready consumer devices and providing differentiated, high-speed, high quality connectivity has become increasingly
critical for CSPs to retain and expand their subscriber base and to launch new services. Typically, subscribers consider service breadth,
bandwidth speed, latency, reliability, price, ease of use and technical support as key factors in the decision to purchase services from a CSP.
As CSPs face increasing pressure to retain their basic voice and data customers in response to competitive CSPs offering voice, data and
video services, it is critical for CSPs to continue to invest in and upgrade their access networks in order to maintain a compelling service
offering, drive new revenue opportunities and maintain and grow their subscriber base. Access networks can meaningfully affect the ongoing
success of CSPs.
Governments around the world recognize the importance of expanding broadband networks and delivering advanced broadband
services to more people and businesses. For example, in February 2009, the U.S. government passed the American Recovery and
Reinvestment Act ("ARRA"), which set aside approximately $7.2 billion as Broadband Stimulus funds for widening the reach of broadband
access across the United States, a portion of which includes broadband access equipment.
In addition to one-time stimulus programs, governments globally also provide other incentives for broadband investment on an on-
going basis. In the U.S., programs like the Connect America Fund ("CAF") and E-Rate provide billions of dollars each year to CSPs in the
form of capital investment incentives, grants, and loans targeted at encouraging broadband network investment in unserved or underserved
communities and schools. In 2015 for example, the CAF program is authorized to distribute $3.8 billion to offset the costs of installing and
operating CSP operated broadband and voice networks, and the E-Rate program is authorized to offer $1.5 billion in grants to build gigabit
capable network connections to schools. The CAF program is funded to distribute this same amount of funds to CSPs through 2020, and the
E-Rate program targeted at networks is funded at its current level indefinitely. The European Commission is pursuing similar goals via its
Connecting Europe Facility and other programs.
Limitations of Traditional Access Networks
CSPs rely on the capabilities and quality of their access networks to sustain their businesses and relationships with their subscribers. In
the past, subscribers had little influence over the types of services provided by CSPs. Today, subscribers can be more selective among CSPs,
and these device-enabled subscribers are increasingly demanding advanced broadband services on both a wireline and wireless basis in
addition to basic voice and data services. In general, access networks are highly capital intensive and CSPs have historically upgraded
capacity as technology and subscriber demands on their networks have changed. We believe CSPs will increasingly integrate fiber-and
Ethernet-based access networks to enable the delivery of more advanced broadband services at a lower cost while at the same time enabling
the continued delivery of basic voice and data services. Thus far, CSPs have taken an incremental approach to capacity upgrades in their
access networks. As a result CSPs face multiple challenges concerning their access networks, business models and service delivery
capabilities, including:
• A Complex Patchwork of Networks and Technologies—In order to upgrade their access networks CSPs have typically added
networks for new residential or business services that they deliver, such as digital subscriber line ("DSL"), data over cable service
interface specification ("DOCSIS"), GPON or Gigabit Ethernet, on top of existing networks. This led to an overbuild of access
technologies and an unnecessarily complex patchwork of physical connections between the central office or data center and the
subscriber. In addition, CSPs have generally begun to expand the penetration of fiber into their access networks, thereby
shortening the length of the subscriber connection through lower bandwidth media types (such as copper-based or coaxial cable-
based networks). CSPs have also attempted to evolve their access networks to enable more efficient packet-based services by
adding Ethernet protocol on top of existing asynchronous transfer mode ("ATM"), and DSL protocols. In addition, CSPs have
often deployed separate equipment to facilitate the delivery of synchronous optical networking ("SONET"), Gigabit Ethernet and
10 Gigabit Ethernet transport, which connects CSP central offices and data centers with their access networks, further increasing
the complexity and the cost of their networks. This approach has left most CSPs with disparate architectures, features, functions
and capabilities in different parts of their networks. This increasingly complex, patchwork approach to deploying access networks
and delivering new services to their subscribers has created potential complications for CSPs within their access networks. These
potential complications limit data transmission capability, increase the cost of operation and maintenance and can negatively
impact the subscriber experience.
• Limited Capacity from Legacy Access Architectures—Legacy access network architectures were designed to address earlier-
generation communication demands of wireline telephone, cable television and cellular services. Such access networks have
physical limitations in their ability to scale bandwidth, avoid latency issues and deliver the advanced broadband services
subscribers demand today and are expected to increasingly demand in the future. In addition, CSPs understand the need to add
fiber to their networks to provide the bandwidth required to scale advanced broadband services. However, it is costly and complex
to integrate fiber-based technologies into legacy access networks.
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•
•
Inflexible Technologies Increase Network Switching Costs—Legacy access networks were architected around a narrow set of
technologies. For example, traditional voice calls use circuit switching technology to allocate a fixed amount of network capacity
to each call, regardless of whether such capacity is fully utilized. The emergence of packet-based technologies, primarily IP and
Ethernet, has significantly improved the ability to transmit data efficiently across networks as bandwidth is only consumed when
signals are actually being transmitted. Most legacy access networks do not allow circuit- and packet-based technologies to co-exist
or to evolve from one technology to another.
Inefficient Service Roll-out Constrains Subscriber Offerings—Legacy access networks were designed to support a narrow range of
services and as a result, they limit the ability of CSPs to provision the advanced broadband services increasingly demanded by
their subscribers. Packet-based networks are more flexible and efficient than traditional circuit-switched networks. For example, to
provision additional business services in a legacy access network, a CSP would typically deploy additional physical connections
and equipment, whereas packet-based infrastructure allows a CSP to change or add services virtually, without the presence of a
service technician or the installation of new equipment. In order to deploy these services quickly and efficiently, CSPs must be
able to utilize their existing infrastructure while upgrading the legacy access network to packet-based technologies.
• Highly Reliable Access Products are Difficult to Engineer and Manage—Given the critical nature of access networks and their
typical deployment in remote and distant locations, access infrastructure products must be highly reliable. Unlike most other
communications equipment which is deployed in environmentally controlled data centers, central offices or similar facilities, a
great deal of access equipment is deployed in outdoor environments and must be specifically engineered to operate in variable and
often extremely harsh conditions, as well as fit into smaller spaces, such as on a street corner, near office buildings or on the side
of a house or cellular tower. Since the access portion of the network is broadly distributed, it is expensive as well as difficult to
manage and maintain. CSPs require access network equipment that can perform reliably in these uncontrolled environments and be
deployed in a variety of form factors, thereby adding significant engineering and product development challenges as compared to
most other forms of communications infrastructure equipment. In addition, some portion of the access market is supported by
government initiatives and products sold into this segment require additional government certifications and approvals in order to
qualify for deployment.
• Expensive to Deploy and Operate—As a result of deploying multiple networks with discrete functions, legacy access networks
require a wide variety of equipment to be installed, maintained and ultimately replaced, thereby placing a significant and recurring
capital and operating expense burden on the CSP. Once installed, this equipment occupies valuable space inside a data center or
central office, requires frequent labor-intensive maintenance and consumes meaningful amounts of power. Moreover, the lack of
integration across protocols and fiber- and copper-based network architectures negatively impacts network performance. Inferior
network performance diminishes the subscriber experience and increases network operating costs by increasing service calls, the
number of required support staff and the frequency of equipment upgrades and replacements.
Given these limitations of legacy access networks, we believe CSPs will over time increasingly emphasize fiber- and Ethernet-based
technologies in their access networks thereby enabling the rapid, cost-effective deployment of advanced broadband services. Such
technologies reduce overhead expenses, simplify network architectures and seamlessly integrate legacy and next-generation networks. We
therefore believe that successful CSPs will be those that evolve from providing basic subscriber connectivity to providing the most relevant
services and subscriber experience.
The Calix Solution
We are a leading global provider of broadband communications access systems and software for fiber- and copper-based network
architectures that enable CSPs to connect to their residential and business subscribers. Our Unified Access Infrastructure portfolio enables
CSPs to quickly meet subscriber demands for both basic voice and data as well as advanced broadband services, while providing CSPs with
the flexibility to optimize and transform their networks at a pace that balances their financial, competitive and technological needs. Our
systems and software leverage packet-based technologies that enable CSPs to offer a wide range of revenue-generating services, regardless of
protocol or network connection media. Our Unified Access Infrastructure portfolio consists of our E-Series platforms and nodes, our B-Series
nodes, our C-Series platform, and the BLM1500 GPON access terminal. These platforms, nodes, and terminals are complemented by the P-
Series and T-Series optical network terminals, residential gateways, GigaCenter premises service delivery platforms, CMS, EntriView
element management software, OpenLink Cable software and the Compass suite of value-added software applications.
We believe that our Unified Access portfolio of network and premises-based solutions provides the following benefits to CSPs:
• Single Unified Access Network for Basic and Advanced Services - Our Unified Access portfolio allows for a broad range of
subscriber services to be provisioned and delivered over a single unified network. These systems can deliver basic voice and data,
advanced broadband services, including high-speed Internet, IPTV, mobile broadband, high-definition video and online gaming, as
well as integrated transport within our Unified Access portfolio, all of which can be monitored and managed by CMS. The
BLM1500 terminals and their management system, EntriView, acquired in November 2012, have been integrated with CMS. In
addition, our systems can be deployed in both small and large form factors across multiple deployment scenarios depending on
subscriber proximity and service requirements. Introduced in 2014, the Open Link Cable software solution provides cable MSOs
with the operational advantage of being able to provision GPON services via their traditional DOCSIS back office infrastructure.
These are examples of our multiservice approach that allows CSPs to utilize their legacy access networks during the course of their
equipment upgrade and network transformation, saving them time and money in delivering both basic voice and data and
advanced broadband services.
• High Capacity and Operational Efficiency - Our Unified Access portfolio is designed to facilitate the evolution of CSP access
networks to fiber- and Ethernet-based network architectures. Our portfolio includes platforms that exceed the capacity of the
products of our competitors. Our platforms are designed and optimized for fiber- and copper-based network architectures. We also
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have a broad portfolio of feature-rich fiber ONTs that serve as the on-premises gateways for new services to subscribers. Our
extended reach GPON offers our customers greater capacity and operational efficiencies, including the ability to reach subscribers
further away from a CSP’s central office or data center, allowing CSPs to consolidate multiple central offices and further reduce
operating expense. Furthermore, our ONTs auto-detect fiber access technologies support both GPON and point-to-point Gigabit
Ethernet and provide CSPs additional cost and management efficiencies.
• Highly Flexible Technology Solutions - Our Unified Access portfolio enables CSPs to utilize legacy access network infrastructure
during their migration towards fiber- and Ethernet-based access networks. Our portfolio supports multiple protocols, different form
factors and modular options optimized for a variety of installation locations and environments, and multiple services delivered
over fiber- and copper-based network architectures.
• Seamless Transition to Advanced Services - Our Unified Access portfolio enables CSPs to better manage the evolution of their
access networks by transitioning the delivery of basic voice and data services to advanced broadband services. Our C-Series
platform supports ongoing demand for basic voice and data services, and facilitates a seamless and controlled migration to IP-
based services. For CSPs without legacy network constraints, our E-Series and B-Series platforms and nodes, and our BLM1500
terminals, allow CSPs to deploy advanced broadband services rapidly and cost effectively to their subscribers.
• Highly Reliable and Purpose-Built Solutions for Demands of Access - Our Unified Access portfolio is designed for high
availability and purpose-built for the demands of access network deployments. Our carrier-class products are environmentally
hardened and field-tested to be capable of withstanding harsh environmental conditions, including temperatures between -40 and
65 degrees Celsius, extremely dry or wet conditions and physical abuse. Our access systems are built and tested to meet or exceed
network equipment-building system standards, which are a set of safety, spatial and environmental design guidelines for
telecommunications equipment. Our products are highly compatible and designed to be easily integrated into the existing
operational and management infrastructure of CSP access networks. Our portfolio can be deployed in multiple form factors and
power configurations to address a wide range of deployment scenarios influenced by space and power constraints.
• Compelling Customer Value Proposition - We believe our Unified Access portfolio offers CSPs a compelling value proposition.
Our portfolio provides CSPs the flexibility to upgrade their networks over time, reduce operational costs and maximize their return
on capital expenditures. Our packet-based platforms enable CSPs to offer new services more quickly and generate new revenue
opportunities. We believe the interoperability and compatibility of our portfolio reduces the complexity and cost of managing CSP
networks.
Our Strategy
Our Unified Access portfolio enables the delivery of basic voice and data and advanced broadband services across multiple protocols
and form factors over fiber- and copper-based network architectures. Our objective is to leverage our Unified Access portfolio to become the
leading supplier of access systems and software that enable CSPs to transform their networks and business models to meet the changing
demands of their subscribers. The principal elements of our strategy are:
• Continue Our Sole Focus on Access Systems and Software - Our dedicated focus on access has been an important driver of our
success with our customers. We believe our focus has allowed us to develop innovative access systems and a highly efficient
service and deployment model that have been widely implemented by CSPs. Virtually all of our large competitors in the access
market devote some percentage of their resources to products outside of the access network, and in some cases, products not even
designed for CSPs. We intend to continue to focus our efforts on the access market, which we believe will enable us to continue to
deliver compelling, timely and innovative access solutions to CSPs.
• Continue to Enable our Customers to Transform Their Networks and Business Models - We believe that residential and business
subscribers are pressuring CSPs to expand their offerings through the delivery of superior subscriber experiences. In response,
CSPs need to transform their networks and business models by rapidly provisioning new services while minimizing the capital and
operational costs of their networks. We believe our Unified Access portfolio enables CSPs to introduce new revenue-generating
services as demanded by their subscribers.
• Continue to Engage Directly with Customers - We operate a differentiated business model focused on aligning with our
customers, predominantly through direct engagement, service, and support, complemented in most international markets by a high
touch Fiber Forward Partner Program that leverages a combination of local channel partners and closely aligned Calix sales
support. Our direct customer engagement model allows us to target our sales resources as well as align our product development
efforts closely to our customers' needs. Our direct engagement model is a key differentiator for our business and is critical to our
continued market leadership.
• Leverage our Growing Customer Footprint - As of December 31, 2014, over 19 million ports of our Unified Access portfolio
have been deployed at a growing number of CSPs worldwide, whose networks serve over 100 million subscriber lines in total. Our
customers include many of the world's largest communications providers. This footprint provides us with the opportunity to sell
additional components of our Unified Access portfolio to existing customers. For example, the vast majority of our existing
customers have purchased additional line cards and other products from us after their initial purchase. We have also demonstrated
that our footprint, combined with the flexibility of our portfolio, gives us incumbency benefits to sell complementary or new
offerings in the future.
• Expand Deliberately into New Market and Applications - We believe that a disciplined approach to targeting markets and
applications is critical to our long-term success. For example, we initially focused on rural ILECs and have achieved an industry
leadership position as the majority of U.S. Independent Operating Companies ("IOCs") have deployed our access systems and
software. We have also recently entered new geographic markets, including Africa, Asia, Australia, Europe, and Latin America.
These deployments complement our significant deployments in Canada and the Caribbean. We will continue our disciplined
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approach of targeting new markets and applications in which we believe our products will rapidly gain customer adoption. For
example, we are targeting additional markets for our fiber access solutions, including the mobile backhaul and the cable MSO
markets.
• Pursue Strategic Relationships, Alliances and Acquisitions - We intend to continue to pursue strategic technology and
distribution relationships, alliances and acquisitions that align us with CSPs' strategic direction to increase revenue-generating
services while reducing the cost to deploy and operate their access networks. We believe these relationships, alliances and
acquisitions will allow us to grow our footprint and enhance our ability to sell our access systems and software. We developed and
invested in the Calix Compatible Program to assure interoperability across the ecosystems of the majority of vendors critical for
implementing and delivering new advanced broadband services. This program has approximately 62 technology members to date
and enables our customers to rapidly deploy proven solutions in their access networks. We work with Ericsson Inc. (“Ericsson”)
and others to provide advanced broadband solutions globally, including efforts to ensure successful interoperation between our
products and Ericsson's Mediaroom IPTV application. In addition, our acquisitions of Optical Solutions, Inc. ("OSI") in 2006 and
Occam Networks, Inc. ("Occam") in 2011, and our acquisition of fiber access assets from Ericsson in November 2012, have
provided us with leading copper and fiber access technologies that have been integrated into our Unified Access portfolio.
Customers
We operate a differentiated customer engagement model that focuses on direct alignment with our customers through sales, service and
support. In order to allocate our product development and sales efforts efficiently, we believe that it is critical to target markets, customers and
applications deliberately. We have traditionally targeted CSPs, which own, build and upgrade their own access networks and which also value
strong relationships with their access systems and software suppliers.
The U.S. ILEC market is composed of three distinct “tiers” of carriers, which we categorize based on their subscriber line counts and
geographic coverage. Tier 1 CSPs are very large with wide geographic footprints. They have greater than five million subscriber lines and
they generally correspond with the former Regional Bell Operating Companies. Tier 2 CSPs also operate typically within a wide geographic
footprint, but are smaller in scale, with subscriber line counts that range from approximately half a million to approximately five million
subscriber lines. Their service coverage areas are predominantly regional in scope and therefore they are often known as Regional Local
Exchange Carriers ("RLECs"). Tier 3 CSPs consist primarily of over 1,000 predominantly local operators (often called IOCs) typically
focused on a single community or a cluster of communities, although they also include a growing number of municipalities, electric
cooperatives, competitive overbuilders, and wireless internet solutions providers. These entities range in size from a few hundred to
approximately half a million subscriber lines.
To date, we have focused primarily on CSPs in the North American market. Our existing customers' networks serve over 100 million
subscriber lines. A representative Tier 1 customer is CenturyLink, Inc. ("CenturyLink"). Representative Tier 2 customers include Frontier,
Windstream, Fairpoint, TDS, Consolidated Communications, and Cincinnati Bell. Our Tier 3 CSP customers have historically accounted for a
large percentage of our sales. We also serve new entrants to the access services market who are building their own access networks, including
cable MSOs, such as Cox Communications, and municipalities, such as the City of Longmont, Colorado. Moreover, we have entered new
geographic markets, such as Africa, Asia, Australia, Europe, and Latin America that complement our significant market presence in Canada
and the Caribbean. We will continue to target CSPs globally as part of our expansion strategy.
We have a few large customers who have represented a significant portion of our sales in any given period. In 2014, 2013, and 2012,
we had one such customer, CenturyLink, who accounted for 23%, 26%, and 21% of our revenue, respectively.
Some of our customers within the United States use or expect to use government-supported loan programs or grants to finance capital
spending. Loans and grants through Rural Utility Service ("RUS"), which is a part of the United States Department of Agriculture, are used to
promote the development of telecommunications infrastructure in rural areas. In addition, the Broadband Stimulus initiatives under the ARRA
have also made funds available to certain of our customers.
Sales to customers outside of the United States represented approximately 12%, 13%, and 7% of our revenues for the years ended
December 31, 2014, 2013, and 2012, respectively. Historically, our sales outside of the United States were predominantly to customers in the
Caribbean and Canada. We expect growth in sales to other international locations to become more significant over time.
Customer Engagement Model
We design, market and sell our access systems and software predominantly through our direct sales force, supported by marketing and
product management personnel. We have expanded this model to include a small number of select channel partners in North America, over 70
international channel partners who are part of our Fiber Forward Partner Program, and a global reseller relationship with Ericsson. Our sales
effort is organized either by named accounts or regional responsibilities. Account teams comprise sales managers, supported by sales
engineers and account managers, who work to target and sell to existing and prospective CSPs. The sales process includes analyzing CSPs’
existing networks and identifying how they can utilize our products within their networks. We also offer advice regarding eligibility for, and
support proposals to, appropriate sources of government funding. Even in circumstances where a channel partner is involved, our sales and
marketing personnel are often selling side-by-side with the channel partner. We believe that our direct customer engagement approach
provides us with significant differentiation in the customer sales process by aligning us more closely with our customers' changing needs.
As part of our sales process, CSPs will often perform a lab trial or a field trial of our access systems prior to full-scale commercial
deployment. This is most common for CSPs purchasing a particular access system for the first time. Upon successful completion, the CSP
generally accepts the lab and field trial equipment installed in its network and may continue with deployment of additional access systems.
Our sales cycle, from initial contact with a CSP through the signing of a purchase agreement, may, in some cases, take several quarters.
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Typically our customer agreements contain general terms and conditions applicable to purchases of our access systems and software.
By entering into a customer agreement with us, a customer does not become obligated to order or purchase any fixed or minimum quantities
of our access systems and software. Our customers generally order access systems and software from us by submitting purchase orders that
describe, among other things, the type and quantities of our access systems and software that they desire to order, delivery and installation
terms and other terms. Customers who have been awarded RUS loans or grants are required to contract under form contracts approved by
RUS.
Our direct customer engagement model extends to service and support. Our service and support organization works closely with our
customers to ensure the successful installation and ongoing support of our Unified Access portfolio. Our service and support organization
provides technical product support and consults with our customers to address their needs. We offer our customers a range of support
offerings, including program management, training, installation and post-sales technical support. As a part of our pre-sales effort, our
engineers design the implementation of our products in our customers’ access networks to meet our customers’ performance and
interoperability requirements. Although some of our reseller arrangements allow resellers to provide support, training, installation, and post-
sales technical support, these resellers still rely heavily on us to provide support to the customer.
Our U.S- and China-based technical support organization offers support 24 hours a day, seven days a week. With an active Calix
Advantage agreement, customers receive a license to CMS, access to telephone support and online technical information, software product
upgrades and maintenance releases, advance return materials authorization and on-site support, if necessary. Calix Advantage agreements are
renewable on an annual basis. Most of our customers renew their Calix Advantage agreements. In addition, we offer extended warranty
periods for our products in one- to five-year durations, which include the right to warranty coverage beyond the standard warranty period. The
purchase of such extended warranties is initially recorded as deferred revenue. At the end of 2014, we had $22.2 million of deferred revenue
associated with such extended warranties. For customers not under a Calix Advantage agreement or who have not purchased extended
warranty services, product support and warranty services are provided for a fee on a per-incident basis. Outside North America, we typically
cooperate with channel partners to provide local service and support to our end customers in those locations.
Products and Technology
We develop, sell and support carrier-class hardware and software products, which we refer to as our Unified Access portfolio. Our
Unified Access portfolio enables CSPs to deliver both basic voice and data and advanced broadband services over legacy and next-generation
access networks. Our Unified Access portfolio consists of the following key features:
• Broad Product Offering — We offer a comprehensive portfolio of access systems and software that is deployed in the portion of
the network that extends from the data center, central office, or similar facilities to a subscriber's premises. We sell our access
systems in a variety of form factors, modular options and configurations that are important to CSPs. Our network-based products
include our Ethernet-focused E-Series platforms, which provide cost-effective, flexible service delivery of IP-based services, our
B-Series nodes, which provides multiservice over Ethernet via distributed nodes, and our C-Series platform, which is our
multiservice, multiprotocol access platform. Our premises-based offerings consist of our P-Series and T-Series ONTs and
residential gateways, as well as our GigaCenter premises service delivery platforms which are deployed in combination with our
E-Series, B-Series, and C-Series platforms and nodes, as well as the BLM1500 terminal, to enable our customers to connect to
their subscribers across a diverse set of form factors, protocols and functionality requirements.
• Multiservice and Multiprotocol — We develop our products and an extensive offering of service interfaces to ensure CSPs can
connect to their subscribers to enable the delivery of basic voice and data or advanced broadband services over fiber- and copper-
based network architectures regardless of protocol. Our C-Series platform also enables CSPs to integrate IP and legacy protocols,
as well as fiber- and copper-based connectivity, in a single chassis. In doing so, the C-Series platform allows CSPs to evolve their
access infrastructures over time. Our E-Series platforms and nodes, and B-Series nodes are multiservice but focus solely on
Ethernet. Our E-Series platforms and nodes are well suited for CSPs who are using Ethernet to transform their networks. Our B-
Series nodes are focused on CSPs using Ethernet over copper and fiber and a distributed architecture to transform their networks.
Our E-Series, B-Series, and C-Series platforms and nodes are often, but are not required to be, deployed together so that the C-
Series platform can act as a protocol gateway for our E-Series and B-Series platforms and nodes.
• Common Operating System Kernel — All of our access systems are interoperable and are designed to be easily deployed and
managed together as a single, unified access network. The C7, E7 and most other E-Series nodes utilize a common Ethernet
kernel, which we refer to as the Ethernet eXtensible Architecture ("EXA"), which was developed based on industry standard
protocols and focused on the needs of the access network. Because our core platforms leverage this common operating system
kernel, we can develop, test and introduce new access systems and software rapidly, and enable our customers to deploy advanced
broadband services at their desired pace.
• Unified Network Management — Our CMS is server-based network management software capable of overseeing and managing
multiple E-Series, B-Series, and C-Series networks. In addition, CMS performs all provisioning, maintenance and troubleshooting
operations across disparate access technologies and networks through a common user interface. This enables CSPs to manage and
unify the various elements of our Unified Access portfolio as a single, scalable platform. CMS is often integrated by our customers
with their back-office systems for billing and provisioning. EntriView, the element management system for the BLM1500, is
integrated with CMS.
Our Unified Access portfolio allows CSPs to transform their legacy and mixed protocol access networks to fiber and Ethernet over
time. CSPs often deploy our E-Series platforms and nodes, B-Series nodes, and C-Series platforms, and our BLM1500, together in data
centers, central offices, or similar facilities to interconnect data centers and central offices. Our C-Series platform can act as a protocol
gateway when deployed with our E-Series and B-Series platforms and nodes. Our E-Series and B-Series platforms and nodes can be deployed
either in data centers, central offices, remote network locations, existing cabinets or in customer premises locations depending upon the CSP's
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requirements. All of our E-Series, B-Series and C-Series platforms and nodes, and BLM1500 terminals, interoperate with and can terminate
network traffic from our P-Series ONTs.
A graphic representation of how the various components of our Unified Access portfolio work together as of the end of 2014 is shown
in the network diagram below:
The graphic above depicts how a CSP might deploy our Unified Access portfolio in a CSP network. The network is divided into four
segments: (1) the cloud, (2) the data center / central office, (3) the outside plant and (4) the premises. First, voice, video or data content is
aggregated by a router in the cloud and transferred to an E7, B6, C7, or BLM1500. The content is then sent around a redundant Ethernet
transport ring, which operates using the 10 Gigabit Ethernet or Gigabit Ethernet standard. The ring consists of a variety of Calix access
platforms or nodes, including E7s, E5s, E3s, B6s, and C7s, each of which may be located in a central office or in remote terminal locations
closer to subscribers. Content can be pulled from any one of these locations and delivered either to a Calix platform located at a remote node
or directly to a subscriber premises. In the case where content is delivered to another Calix platform, the content can be delivered over a
variety of fiber-based technologies, such as 10 Gigabit Ethernet, Gigabit Ethernet or multiple Gigabit Ethernet, or NxGE. Delivery to the
subscriber premises over fiber or copper transmission lines is the final part of the access network. Delivery over fiber lines uses GPON, point-
to-point Ethernet services, and delivery over copper lines uses DSL services or plain old telephone service ("POTS"). Our CMS manages all
aspects of the Unified Access portfolio and supports features that allow remote management of equipment across the network, including
equipment at the subscriber premises.
Calix E-Series Ethernet Service Access Platforms and Nodes
Our E-Series Ethernet service access platforms and Ethernet service access nodes ("E-Series platforms and nodes"), consist of chassis-
based platforms as well as fixed form factor nodes that are designed to support an array of advanced IP-based services offered by CSPs. Our
E-Series platforms and nodes are designed to be carrier-class and enable CSPs to implement advanced Ethernet transport and aggregation, as
well as voice, data and video services over both fiber- and copper-based network architectures. Our E-Series platforms and nodes are
environmentally hardened and can be deployed in a variety of network locations, including data centers, central offices, remote terminals,
video headends and co-location facilities. In addition, due to the small size of many of our E-Series platforms, most can be installed in
confined locations such as remote nodes and multi-dwelling units. As such, many of our E-Series platforms and nodes can be deployed in
most competitor and other third-party cabinets, or as stand-alone sealed nodes in our access network. Our E-Series platforms and nodes are
managed using our CMS and can be deployed in conjunction with our B-Series nodes, C-Series platform, BLM1500 terminal, T-Series and P-
Series. We believe the deployment flexibility and Ethernet focus of our E-Series platforms and nodes make them well suited for CSPs
extending Ethernet services and fiber closer to the subscriber premises.
Our E7 has two form factors. Our E7-2 is a one rack unit chassis with two line card slots, whereas the E7-20 is a 13 rack unit chassis
with two common control card slots and 20 service line card slots. Our E7s deliver Ethernet services over copper and fiber, including a wide
range of GPON, point-to-point Gigabit Ethernet, VDSL2, and 10 Gigabit Ethernet services. Our other E-Series nodes include the fixed form
factor E5-48, E5-48C, E5-300, and E5-500 node families, as well as the E3-12C, E3-48 and E3-48C sealed Ethernet service access nodes,
which collectively deliver high-speed broadband with interfaces that range from 10 Gigabit Ethernet transport and aggregation to ADSL2+,
VDSL2, and point-to-point Gigabit Ethernet, as well as Carrier Ethernet 2.0 business services.
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Key technology differentiators of the E-Series platforms and nodes are:
• Standards-Based Switching Architecture—Our E7 and many of our E5s and E3s utilize a common Ethernet kernel, the EXA, that
was developed based on industry standard protocols and focused on the needs of the access network. EXA facilitates cross network
awareness, installation, management and provisioning for our C-Series platform and our E-Series platforms.
• Multiservice over Ethernet—Our E-Series platforms and nodes enable CSPs to offer high bandwidth, advanced broadband and low
latency services across Ethernet over fiber- and copper-based network architectures.
• Deployment Flexibility—Our E-Series platforms and nodes are composed of eight distinct small form factor configurations
between 1 and 1.5 rack units in height and a 13 rack unit large chassis. The E-Series platforms and nodes are designed to deliver
operational efficiencies without sacrificing deployment flexibility or service functionality. Our E-Series platforms are optimally
sized to deliver high bandwidth services from a data center, central office, remote terminal, remote node or MDU. For CSPs
seeking additional flexibility and performance, the E7-2 is modular and stackable and can be combined with other E7s or other B-
Series, C-Series and E-Series platforms and nodes, all of which are managed by our CMS. Also managed by CMS, the E7-20 was
built for the high capacity, low latency needs of the future.
• High Capacity and Reliability—Our E-Series platforms and nodes have high data throughput capacity and are designed to meet the
demanding bandwidth and low latency requirements of advanced broadband services for residential and business subscribers. Our
E-Series platforms and nodes support a range of transport options from six 10 Gigabit Ethernet uplinks in each E7-2 chassis down
to redundant Gigabit Ethernet in the E5-48 node family. Our chassis-based E7-2 supports a redundant 100 gigabits per second
backplane in each deployable module with line cards that further support a minimum of 100 gigabits per second switching
capacity. The E7-20 supports the same 100 gigabits per second line card switching capacity per card, but houses each card in a 20
service line card slot chassis with a two terabits per second backplane. The E7 also supports transparent local area network
services and are designed to be Metro Ethernet Forum compliant and to meet NEBS requirements.
• Broad Array of Advanced Services Support—Our E-Series platforms and nodes support a broad array of advanced services. Our
E3-12C supports up to 12 VDSL2 combination voice and DSL services ports as well as DSL port bonding, and offers multiple
Gigabit Ethernet network uplinks. Our E3-48, E3-48C, E5-48, and E5-48C support up to 48 VDSL2 service ports as well as DSL
port bonding and port vectoring, and offer multiple 10 Gigabit Ethernet and 2.5 or single Gigabit Ethernet uplinks. Our E7s,
E5-300s, and E5-520 support a mix of GPON, multiple Gigabit Ethernet and 10 Gigabit Ethernet ports, and well as select Metro
Ethernet Forum (MEF) advanced business services. E7 line card options include a mix of GPON, point-to-point Gigabit Ethernet,
10 Gigabit Ethernet services, and in the case of the E7-2, 48 ports of VDSL2 combo services on a line card, which translates into
an industry-leading 96 VDSL2 combo ports in a 1 rack unit form factor, as well as traffic management and queuing, performance
monitoring and virtual local area network stacking to support quality of service.
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The following pictures depict the E-Series platforms and nodes:
Calix B-Series Ethernet Service Access Nodes
Our B-Series Ethernet service access nodes consist of chassis-based nodes that are designed to support an array of advanced IP-based
services offered by CSPs. Our B-Series nodes are designed to be carrier-class and enable CSPs to implement advanced Ethernet transport and
aggregation, as well as voice, data and video services over both fiber- and copper-based network architectures. Our B-Series nodes are
environmentally hardened and can be deployed in a variety of network locations, including data centers, central offices, remote terminals,
video headends and co-location facilities. In addition, due to the small size of some of our B-Series nodes, many can be installed in confined
locations such as remote nodes and multi-dwelling units. As such, many of our B-Series nodes can be deployed in most competitor and other
third-party cabinets, or as stand-alone sealed nodes in our access network. Our B-Series nodes are managed using our CMS and can be
deployed in conjunction with our E-Series and C-Series platforms as well as our P-Series ONTs. We believe the deployment flexibility and
Ethernet focus of our B-Series nodes make them well suited for CSPs extending Ethernet services and fiber closer to the subscriber premises.
Our B6 has three form factors. Our B6-001 is a one rack unit chassis with one line card slot, whereas the B6-006 is a 7 rack unit chassis
with six line card slots and the B6-012 is a 12 rack unit chassis with 20 service line card slots. Our B6s deliver Ethernet services over fiber,
including a wide range of GPON, point-to-point Gigabit Ethernet, and 10 Gigabit Ethernet services.
Key technology differentiators of the B-Series nodes are:
• Multiservice over Ethernet—Our B-Series nodes enable CSPs to offer high bandwidth, advanced broadband and low latency
services across Ethernet over fiber- and copper-based network architectures.
• Deployment Flexibility—Our B-Series nodes are composed of three distinct form factor chassis between 1 and 12 rack units in
height. The B-Series nodes are designed to deliver operational efficiencies without sacrificing deployment flexibility or service
functionality. Our B-Series node options are optimally sized to deliver high bandwidth services from a data center, central office,
remote terminal, remote node or MDU. For CSPs seeking additional flexibility and performance, the B6s can be combined with C-
Series and E-Series platforms and nodes, all of which are managed by our CMS.
• High Capacity and Reliability—Our B-Series nodes have high data throughput capacity and are designed to meet the demanding
bandwidth and low latency requirements of advanced broadband services for residential and business subscribers. Our B-Series
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nodes support a range of transport options from multiple 10 Gigabit Ethernet uplinks in each chassis down to redundant Gigabit
Ethernet ports. The distributed intelligence of the B6s supports 10 gigabits per second in each deployed line card. The B6s also
support T1 circuit emulation and are designed to be Metro Ethernet Forum (MEF 9 and MEF 14) compliant and to meet Network
Equipment-Building System ("NEBS") requirements.
• Broad Array of Advanced Services Support—Our B-Series nodes support a broad array of advanced services including up to 48
VDSL2 and 48 ADSL2+ overlay or combination voice and DSL services ports as well as DSL port bonding on each line card, and
offers multiple Gigabit Ethernet network uplinks. Our B6s also support a mix of GPON, point-to-point gigabit Ethernet and
multiple Gigabit Ethernet and 10 Gigabit Ethernet ports. Line card options include a mix of GPON, point-to-point gigabit
Ethernet, and 10 Gigabit Ethernet services, as well as traffic management and queuing, performance monitoring, and virtual local
area network stacking to support quality of service.
The following pictures depict the B-Series nodes:
Calix C-Series Multiservice, Multiprotocol Access Platform
Our C7 multiservice, multiprotocol access platform ("C-Series platform"), is designed to support a wide array of basic voice and data
services offered by CSPs, while also supporting advanced, high-speed, packet-based services such as Gigabit Ethernet, GPON and DSL
(including very high-speed digital subscriber line 2 ("VDSL2"), and asymmetrical digital subscriber line 2+ ("ADSL2+") and advanced
applications like IPTV. In so doing, our C-Series platform facilitates network transformation by integrating the functions required to transport
and deliver voice, data and video services over both fiber- and copper-based network architectures. Our C-Series platform is a chassis-based
product with 23 line card slots, three of which are used for common logic, switching fabric and uplinks, with the remaining 20 slots available
for any service interface card we offer. Our C-Series platform is managed using our CMS. Our high-capacity C-Series platform is flexible and
is designed to be deployed in a variety of locations, including data centers, central offices, remote terminals, video headends and co-location
facilities. Our C-Series platform leverages a common operating system kernel, the EXA, that it shares with most of our E-Series platforms
and nodes, allowing for common provisioning and facilitated platform interoperability. The multiprotocol and integrated transport capabilities
of our C-Series platform allow it to be deployed as an aggregation or gateway device for our E-Series and B-Series platforms and nodes, and
P-Series ONTs.
Key technology differentiators of the C-Series platform are:
• Protocol Independent—Our C-Series platform enables the integration of multiple protocols through a system architecture where
line cards perform specific protocol processing.
• High Capacity—Our C-Series platform can enable up to 200 gigabits per second total throughput capacity. It can provide service
delivery speeds of up to 10 gigabits per second in network transport rings or directly to subscribers, which is significantly greater
than the bandwidth that CSPs are typically providing to their subscribers. This enables CSPs to scale their advanced broadband
service offerings over time without the need to change their equipment.
• Flexible Switching Architecture—Our C-Series platform supports a highly scalable switching architecture with characteristics
similar to high performance routers. All services are converted to packets on line cards allowing our platform to natively switch
circuits, cells and packets. As a result, both legacy and advanced packet-based services can be supported simultaneously or
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uniformly, allowing the C-Series to be deployed as a pure Ethernet delivery platform, a traditional service delivery platform or a
hybrid services platform.
• Density—In typical applications, a single 14-inch high C-Series platform shelf can terminate 480 copper-based subscriber
connections, or up to 5,120 fiber-to-the premises, or FTTP, subscribers using GPON. This functionality allows up to 2,400
subscribers of advanced broadband services over copper-based networks or over 25,000 subscribers over fiber-based networks to
be served out of a single seven-foot rack in the central office.
• Reduced Risk of Technological Obsolescence—As new services and technologies are introduced to the network, our flexible C-
Series architecture allows CSPs to add or swap line cards to introduce new functionality into the access system. New services such
as IPTV and voice over Internet protocol require new features like Internet Group Management Protocol channel change
processing and protocol gateway support, which can easily be added without substantial changes to existing equipment. As a
result, equipment purchased by CSPs can have longer useful lives, which can reduce CSPs’ capital expenditures.
• Extensive Line Card Offering—Currently our C-Series platform offers 47 line cards that enable a diverse set of trunk and
subscriber interfaces, ranging from basic voice service and specialized circuits to advanced broadband services such as packet-
based Fast and gigabit Ethernet, SONET (up to optical carrier-48, or OC-48), VDSL2 and ADSL2+ across multiple copper pairs
and GPON. In addition, our C-Series platform supports multiple combinations of service interface cards in any slot at any time.
We believe this flexibility provides CSPs the ability to evolve networks toward higher-capacity, packet-based service offerings in a
minimally disruptive and cost-effective manner.
The following pictures depict the C-Series platform and sample line cards:
Calix BLM1500 Gigabit Passive Optical Network Access Terminals
Our BLM1500 GPON access terminals are chassis-based systems that are designed to support an array of advanced IP-based services
offered by CSPs. Our BLM1500 terminals are designed to be carrier-class and enable CSPs to implement advanced services such as voice,
data and video services over fiber-based network architectures. Our BLM1500 terminals are deployed in data centers and central offices and
are managed using our EntriView element management system. Our T-Series ONTs and residential gateways are deployed with the BLM1500
terminals. We believe the GPON and Ethernet focus of our BLM1500 terminals make them well suited for CSPs building large, carrier-class
fiber access network. We launched our BLM1500 terminals in November 2012, following our acquisition of Ericsson's EDA 1500 GPON
technology.
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Our BLM1500 is a 17 rack unit chassis with two common control card slots and 18 service line card slots. Our BLM1500s deliver
GPON-based Ethernet services over fiber. Key technology differentiators of the BLM1500 terminals are:
• Multiservice over Ethernet—Our BLM1500 terminals enable CSPs to offer high bandwidth, advanced broadband and low latency
GPON services across Ethernet over fiber-based network architectures.
• High Capacity and Reliability—Our BLM1500 terminals have high data throughput capacity and are designed to meet the
demanding bandwidth and low latency requirements of advanced broadband services for residential subscribers. Our BLM1500
supports a 320 gigabits per second backplane and houses up to 18 service line cards, including both 4-port and 8-port GPON line
cards.
• Global Tier 1 Backoffice Integration—Our BLM1500 terminals and the EntriView element management system have been
integrated into backoffice systems and deployed at dozens of Tier 1 CSPs globally.
The following picture depicts a BLM1500 terminal:
Calix P-Series Optical Network Terminals, Residential Gateways, and GigaCenters
Our P-Series ONTs, residential gateways, and GigaCenters consist of a broad range of customer premises solutions, including
standards-based ONTs, residential gateways, and GigaCenters for residential and business use in conjunction with our E-Series, B-Series and
C-Series platforms and nodes and BLM1500 terminals. Our P-Series ONTs and residential gateways can auto-detect the bandwidth of the
network and enable CSPs to change line rates and features without expensive truck rolls or hardware replacements. GigaCenter premises
service delivery platforms combine: the ability to support a gigabit experience and host advanced applications with Carrier Class Wi-Fi - a
wireless technology that enables extraordinary coverage and capacity through the use of the 802.11ac protocol, a 4x4 multiple-in, multiple-out
(MIMO) antenna array, and beamforming technology. Our family of ONTs, residential gateways, and GigaCenters is designed to support
advanced broadband services, such as IPTV, RF video, business services and mobile backhaul (including Ethernet OAM support for
conformance with service level agreements). The design and flexibility of the P-Series allows CSPs to lower initial capital expenditures as
well as reduce operational costs. To meet the deployment and service requirement needs of CSPs, we offer a growing number of ONT,
residential gateway, and GigaCenter models available in a variety of form factors tailored to multiple deployment scenarios, including single
homes, MDUs, businesses and cellular towers as illustrated below:
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Calix T-Series Optical Network Terminals and Home Gateways
Our T-Series ONTs consist of a broad range of customer premises solutions, including standards-based ONTs and home gateways, for
residential and business use with our BLM1500 terminals and E7 ESAPs. Our T-Series ONTs and home gateways are designed to support
advanced broadband services, such as IPTV, high speed data, and voice services. We launched our T-Series ONTs and home gateways in
November 2012, following our acquisition of Ericsson's EDA 1500 GPON technology and its supplementary ONT portfolio.
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To meet the deployment and service requirement needs of CSPs, we currently offer a variety of ONT and home gateway models
available in an array of indoor form factors as illustrated below:
Calix Management System and EntriView
Our CMS and EntriView element management systems are server-based network management software systems, which enable CSPs to
remotely manage their access networks and scale bandwidth capacity to support advanced broadband services and video. Our CMS and
EntriView systems are capable of overseeing and managing multiple standalone networks and perform all provisioning, maintenance and
troubleshooting operations for these networks across our E-Series, B-Series and C-Series platforms and nodes (CMS) and BLM1500
terminals (EntriView). Additionally, our CMS and EntriView systems are designed to scale from small networks to large, geographically
dispersed networks consisting of hundreds or even thousands of our access systems. Our CMS provides an enhanced graphical user interface
and delivers a detailed view and interactive control of various management functions, such as access control lists, alarm reporting and
security. For very large CSPs, our CMS and EntriView systems can be used in conjunction with operational support systems to manage large,
global networks with tens of millions of subscribers. Our CMS and EntriView systems are scalable to support large networks and enables
integration into the other management systems of our customers. For smaller CSPs, our CMS operates as a standalone element management
system, managing service provisioning and network troubleshooting for hundreds of independent E-Series and C-Series networks consisting
of thousands of shelves and P-Series ONTs.
We offer CSPs a graphical user interface-based management system for provisioning and troubleshooting service, and the capacity for
bulk provisioning and reporting for thousands of elements simultaneously. Our CMS also has open application programming interfaces that
allow third-party software developers to extend our functionality to include home provisioning, remote troubleshooting and applications
monitoring and management. The following pictures are sample screenshots illustrating CMS and EntriView functionality and a variety of
third-party applications:
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Compass by Calix
Compass is an expanding suite of software applications that enables CSPs to accelerate their business transformation. Each Compass
application is designed to directly affect key business and market functions within CSPs, and can help them to expand revenue, increase
customer satisfaction, optimize network resources, and reduce the cost of delivering services. Compass applications are primarily offered
using a software-as-a-service (“SaaS”) model based on a low monthly service fee and no upfront hardware or licensing fees. Most
applications are hosted in a cloud-based data center, alleviating CSPs’ need to deploy, operate, or maintain physical hardware for Compass
applications, and are accessed through our Command Center subscriber interface.
Flow Analyze offers a tool that provides an in-depth view of the traffic in CSP networks on a real-time basis. This view of traffic is non-
intrusive, and can be focused on a per-service, per-subscriber, per-location, and per-interface basis-both in real time and as a historical report.
As a result, service providers can see what actually happened when a problem occurred in their network at any time. By monitoring subscriber
usage data, as well as tracking universal subscriber identification mapping, Flow Analyze provides a low-cost solution for generating monthly
usage billing reports and diagnosing subscriber complaints.
Consumer Connect enables service providers to remotely activate new broadband devices and manage home networks, creating new
revenue sources, improved customer satisfaction, and reduced service delivery costs. Consumer Connect provides TR-069 ACS device
management via a cloud-based SaaS solution hosted by Calix, and offers such features as auto-discovery of intelligent devices within the
home, auto-support of new TR-069 devices, bulk gateway maintenance, and DHCP server functionality as well as the ability to push service
profiles to gateways. Consumer Connect also shares a common customer ID with Flow Analyze, allowing the applications to work closely
together. Consumer connect can also provide remote customer LAN diagnostics as well as LAN visibility to help track consumer electronics
trends.
Introduced in 2014, Service Verify gives service providers the tools to comprehensively validate quality of service commitments for
their business subscribers. Service Verify automates collection and analysis of key performance metrics from intelligent Ethernet access
devices, and provides custom, real-time reporting that can be analyzed internally or shared externally with demanding business customers.
Predictive analytics help identify performance issues before service level agreements are jeopardized.
Also introduced in 2014, Open Link Cable is a Compass software product that enables cable operators to deliver gigabit services over
Calix E7-2 and E7-20 GPON optical line terminals (OLTs) and Calix ONUs/ONTs while continuing to use traditional back office and
DOCSIS command and control procedures. In addition, Open Link Cable is designed to support the CableLabs DPoG 1.0 standards in order
to accelerate deployments without changing operational procedures and systems.
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The following are a sample screenshot of Flow Analyze and an illustration of Consumer Connect functionality:
Research and Development
Continued investment in research and development is critical to our business. Our research and development team is composed of
engineers with expertise in hardware, software and optics. Our team of engineers is primarily based in our Petaluma, California headquarters,
the Minneapolis, Minnesota facility, the Santa Barbara and San Jose, California facilities, and the Nanjing, China facility, with additional
engineers located in Acton, Massachusetts. We also outsource a portion of our software development to a team of software engineers based in
Shenyang, China. Our research and development team is responsible for designing, developing and enhancing our hardware and software
platforms, performing product and quality assurance testing and ensuring the compatibility of our products with third-party hardware and
software products. We have made significant investments in our Unified Access portfolio. We intend to continue to dedicate significant
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resources to research and development and to develop new product capabilities to support the performance, scalability and management of
our Unified Access portfolio. For the years ended 2014, 2013, and 2012, our research and development expenses totaled $80.3 million, $79.3
million, and $66.7 million, respectively.
Manufacturing
We work closely with third parties to manufacture and deliver our products. Our manufacturing organization consists primarily of
supply chain managers, new product introduction personnel and test engineers. We outsource our manufacturing and order fulfillment and
tightly integrate our supply chain management and new product introduction activities. We primarily utilize Flextronics International Ltd.
("Flextronics"), as our contract manufacturer. Our relationship with Flextronics allows us to conserve working capital, reduce product costs
and minimize delivery lead times while maintaining high product quality. Generally, new product introduction occurs in Flextronics’ facilities
in Suzhou, China. Once product manufacturing quality and yields reach a satisfactory level, volume production and testing of circuit board
assemblies also occur in Suzhou, China. Final system and cabinet assembly and testing are performed in Flextronics’ facilities in Guadalajara,
Mexico. Order fulfillment is performed by Pegasus Logistics Group, Inc. in Texas. We also evaluate and utilize other vendors for various
portions of our supply chain from time to time, including order fulfillment of our circuit boards. This model allows us to operate with low
inventory levels while maintaining the ability to scale quickly to handle increased order volume.
Product reliability is essential for our customers, who place a premium on continuity of service for their subscribers. We perform
rigorous in-house quality control testing to help ensure the reliability of our systems. Our internal manufacturing organization designs,
develops and implements complex test processes to help ensure the quality and reliability of our products.
The manufacturing of our products by contract manufacturers is a complex process and involves certain risks, including the potential
absence of adequate capacity, the unavailability of or interruptions in access to certain process technologies, and the reduced control over
delivery schedules, manufacturing yields, quality and costs. As such, we may experience production problems or manufacturing delays in the
future. Additionally, shortages in components that we use in our systems are possible and our ability to predict the availability of such
components, some sourced from a single or limited source of supply, may be limited. Our systems include some components that are
proprietary in nature and only available from a single source, as well as some components that are generally available from a number of
suppliers. The lead times associated with certain components are lengthy and preclude rapid changes in product specifications or delivery
schedules. In some cases, significant time would be required to establish relationships with alternate suppliers or providers of proprietary
components. We generally do not have long-term contracts with component providers that guarantee the supply of components or their
manufacturing services. If we experience any difficulties in managing relationships with our contract manufacturers, or any interruption in our
own operations or our contract manufacturers operations or if a supplier is unable to meet our needs, we may encounter manufacturing delays
that could impede our ability to meet our customers’ requirements and harm our business, operating results and financial condition. Our
ability to deliver products in a timely manner to our customers would be adversely impacted materially if we needed to qualify replacements
for any of the components used in our systems.
To date, we have not experienced significant delays or material unanticipated costs resulting from the use of our contract manufacturers.
Additionally, we believe that our current contract manufacturers and our facilities can accommodate an increase in capacity for production
sufficient for the foreseeable future.
Seasonality
Fluctuations in our revenue occur due to many factors, including the varying budget cycles for our customers 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 many cases also challenged by winter weather conditions that inhibit fiber deployment in the outside plant.
Intellectual Property
Our success depends upon our ability to protect our core technology and intellectual property. To accomplish this, we rely on a
combination of intellectual property rights, including patents, trade secrets, copyrights and trademarks, as well as customary contractual
protections. In addition, we generally control access to and the use of our proprietary technology and other confidential information. This
protection is accomplished through a combination of internal and external controls, including contractual protections with employees,
contractors, customers and partners, and through a combination of U.S. and international intellectual property laws.
As of December 31, 2014, we held 95 U.S. patents and had 38 pending U.S. patent applications. One of the U.S. patents is also covered
by granted international patents in three countries. As of December 31, 2014, we had no pending international patent applications. Patents
generally have a term of twenty years from filing. As our patent portfolio has been built over time, the remaining terms on the individual
patents vary. Information pertaining to our patents such as filing dates and terms is available free-of-charge at the United States Patent and
Trademark Office website at www.uspto.gov.
We rely on intellectual property laws, as well as nondisclosure agreements, licensing arrangements and confidentially provisions, to
establish and protect our proprietary rights. U.S. patent, copyright and trade secret laws afford us only limited protection, and the laws of
some foreign countries do not protect proprietary rights to the same extent. Our pending patent applications may not result in issued patents,
and the issued patents may not be enforceable. Any infringement of proprietary rights could result in significant litigation costs. Further, any
failure by us to adequately protect our proprietary rights could result in competitors offering similar products, resulting in the loss of our
competitive advantage and decreased sales.
We believe that the frequency of assertions of patent infringement continues to increase, as patent holders, including entities that are not
in our industry and others who purchase patents as an investment or to monetize such rights by obtaining royalties, use such actions as a
competitive tactic as well as a source of additional revenue. Any claim of infringement from a third party, even those without merit, could
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cause us to incur substantial costs defending against such claims and could distract our management from running our business. Furthermore,
a party making such a claim, if successful, could secure a judgment that requires us to pay substantial damages. A judgment could also include
an injunction or other court order that could prevent us from selling our products. In addition, we might be required to seek a license for the
use of such intellectual property, which may not be available on commercially reasonable terms or at all. Alternatively, we may be required to
develop non-infringing technology, which would require significant effort and expense and may ultimately not be successful.
Competition
The communications access equipment market is highly competitive. Competition in this market is based on any one or a combination
of the following factors:
• price;
• functionality;
• existing business and customer relationships;
• the ability of products and services to meet customers’ immediate and future network requirements;
• product quality;
• installation capability;
• service and support;
• scalability; and
• manufacturing capability.
We compete with a number of companies within markets that we serve and we anticipate that competition will intensify. ADTRAN,
Inc., enjoys strong supplier relationships with the largest U.S. ILECs and has a broad international business. Other established suppliers with
which we compete include Alcatel-Lucent S.A.; Arris Group, Inc.; Ciena Corporation; Cisco Systems, Inc.; Huawei Technologies Co. Ltd.;
and ZTE Corporation. There are also a number of smaller companies with which we compete in various geographic or vertical markets,
including Zhone Technologies, Inc. While most of these smaller competitors lack broad national scale and product portfolios, they can offer
strong competition on a deal-by-deal basis. As we expand into adjacent markets, we expect to encounter new competitors. Many of our
competitors have substantially greater name recognition and technical, financial and marketing resources, and greater manufacturing capacity,
as well as better established relationships with CSPs, than we do. Many of our competitors have greater resources to develop products or
pursue acquisitions, and more experience in developing or acquiring new products and technologies and in creating market awareness for
their products and technologies. In addition, a number of our competitors have the financial resources to offer competitive products at below
market pricing levels that could prevent us from competing effectively.
Government Funding Initiatives
Many of our customers fund deployment of and improvements to telecommunications network infrastructure using government funds.
In the United States, CSPs are required under the Federal Communications Commission's rules to contribute a percentage of their revenues to
the federal Universal Service Fund. In early October 2011, the then-chairman of the FCC outlined a plan to transform the Universal Service
Fund, an $8 billion fund that is paid for by the nation's telephone customers and used to subsidize basic telephone service in rural areas, into
one that will help expand broadband Internet service to 18 million Americans who lack high-speed access. These funds, now governed by a
new set of rules now called the Connect America Fund ("CAF"), are distributed as subsidies to CSPs serving rural subscribers that are
expensive to reach as well as to low-income consumers, schools and libraries, and rural health care facilities. As of the end of 2014, the FCC
was finalizing the rules for the annual $3.8 billion in CAF distributions targeted at broadband deployment in underserved and unserved parts
of the U.S. RUS administers funds through a separate U.S. government initiative to promote the development of telecommunications
infrastructure in rural areas through loans, loan guarantees and grants. Some of our U.S. customers have been awarded RUS loans, and we
have provided the network equipment for such projects.
Employees
As of December 31, 2014, we employed a total of 782 full-time employees, of which 603 employees were located in the United
States. None of our employees is represented by a labor union with respect to his or her employment with us. We have not experienced any
work stoppages, and we consider our relations with our employees to be good.
Corporate Information
Calix, Inc., a Delaware corporation, was founded in August 1999. Our principal executive offices are located at 1035 N. McDowell
Boulevard, Petaluma, California 94954, and our telephone number is (707) 766-3000. Our website address is www.calix.com. We do not
incorporate the information on or accessible through our website into this Form 10-K, and you should not consider any information on, or that
can be accessed through, our website as part of this Form 10-K. Calix®, the Calix logo design, B6®, C7®, E3®, E5®, E7®, Compass®,
Consumer Connect SM, Fiber Forward TM, and other trademarks or service marks of Calix appearing in this report on Form 10-K are the
property of Calix. Trade names, trademarks and service marks of other companies appearing in this report on Form 10-K are the property of
the respective holders. Calix is subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934
("Exchange Act") and files periodic reports, proxy statements and other information with the Securities and Exchange Commission ("SEC").
Such periodic reports, proxy statements and other information are available for inspection and copying at the SEC’s Public Reference Room
at 100 F Street, NE., Washington, DC 20549 or may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a
Web site at http://www.sec.gov that contains reports, proxy statements and other information regarding issuers that file electronically with the
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SEC. Calix posts on the Investor Relations page of its Web site, www.calix.com, a link to its filings with the SEC, as soon as reasonably
practical after they are filed electronically with the SEC.
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. Investors should carefully consider the risks described below, together with the other information set forth in this Annual Report
on Form 10-K, 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 make 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. In addition, we likely will 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. Also, softness in demand across any
of our customer markets, including due to macro-economic conditions beyond our control or uncertainties associated with the implementation
of regulatory reforms, has in the past and could in the future lead to unexpected slowdown in capital expenditures by service providers. As a
result, it is difficult to forecast our future revenues and plan our operating expenses appropriately, which also 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 maintain positive cash flows in the future.
We have experienced net losses in each year of our existence. For the years ended December 31, 2014, December 31, 2013, and
December 31, 2012, we incurred net losses of $20.8 million, $17.3 million, and $28.3 million, respectively. As of December 31, 2014, we had
an accumulated deficit of $530.6 million.
We expect to continue to incur significant expenses for research and development, sales and marketing, customer support and general
and administrative functions as we expand our operations. 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. If we are unable to generate positive operating income and maintain positive cash flows from operations, our liquidity, results of
operations and financial condition will be adversely affected.
Fluctuations in our quarterly and annual operating results may make it difficult to predict our future performance, which could cause
our operating results to fall below investor or analyst expectations, which could adversely affect the trading price of our stock.
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 price of our common stock would likely decline. Moreover, we may experience delays in recognizing revenue under applicable
revenue-recognition rules, particularly from government-funded contracts, such as those funded by U.S. Department of Agriculture’s RUS.
The extent of these delays and their impact on our revenues can fluctuate over a given time period depending on the number and size of
purchase orders under these contracts during such 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 may contribute to the variability of our operating
results include:
• our ability to predict our revenue and plan our expenses appropriately;
• the capital spending patterns of CSPs and any decrease or delay in capital spending by CSPs due to macro-economic conditions,
regulatory implementation or uncertainties, or other reasons;
• the impact of government-sponsored programs on our customers;
• intense competition;
• our ability to develop new products or enhancements that support technological advances and meet changing CSP requirements;
• our ability to achieve market acceptance of our products and CSPs' willingness to deploy our new products;
• the concentration of our customer base;
• the length and unpredictability of our sales cycles;
• our focus on CSPs with limited revenue potential;
• our lack of long-term, committed-volume purchase contracts with our customers;
• our ability to increase our sales to larger North American as well as international CSPs;
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• our exposure to the credit risks of our customers;
• fluctuations in our gross margin;
• the interoperability of our products with CSP networks;
• our dependence on sole- and limited-source suppliers;
• our ability to manage our relationships with our contract manufacturers;
• our ability to forecast our manufacturing requirements and manage our inventory;
• our products' compliance with industry standards;
• our ability to expand our international operations;
• our ability to protect our intellectual property and the cost of doing so;
• the quality of our products, including any undetected hardware defects or bugs in our software;
• our ability to estimate future warranty obligations due to product failure rates;
• our ability to obtain necessary third-party technology licenses at reasonable costs;
• the regulatory and physical impacts of climate change and other natural events;
• the attraction and retention of qualified employees and key management personnel;
• our ability to build and sustain the proper information technology infrastructure; and
• our ability to maintain proper and effective internal controls.
Our business is dependent on the capital spending patterns of CSPs, and any decrease or delay in capital spending by CSPs, in response
to economic conditions, uncertainties associated with the implementation of regulatory reforms, or otherwise, would reduce our revenues
and harm our business.
Demand for our products depends on the magnitude and timing of capital spending by CSPs as they construct, expand, upgrade and
maintain their access networks. Any future economic downturn may cause a slowdown in telecommunications industry spending, including in
the specific geographies and markets in which we operate. In response to reduced consumer spending, challenging capital markets or
declining liquidity trends, capital spending for network infrastructure projects of CSPs could be delayed or canceled. In addition, capital
spending is cyclical in our industry and sporadic among individual CSPs, and can change on short notice. As a result, we may not have
visibility into changes in spending behavior until nearly the end of a given quarter.
CSP spending on network construction, maintenance, expansion and upgrades is also affected by reductions in their budgets, delays in
their purchasing cycles, access to external capital, e.g., government grants and loan programs or the capital markets, and seasonality and
delays in capital allocation decisions. For example, our CSP customers tend to spend less in the first fiscal quarter as they are still
finalizing their annual budgets
.
Many factors affecting our results of operations are beyond our control, particularly in the case of large CSP orders and network
infrastructure deployments involving multiple vendors and technologies where the achievement of certain thresholds for acceptance is subject
to the readiness and performance of the CSP or other providers, and changes in CSP requirements or installation plans. Further, CSPs may not
pursue infrastructure upgrades that require our access systems and software. Infrastructure improvements may be delayed or prevented by a
variety of factors including cost, regulatory obstacles (including uncertainties associated with the implementation of regulatory reforms),
mergers, lack of consumer demand for advanced communications services and alternative approaches to service delivery. Reductions in
capital expenditures by CSPs may slow our rate of revenue growth. As a consequence, our results for a particular period may be difficult to
predict, and our prior results are not necessarily indicative of results likely in future periods.
Government-sponsored programs could impact the timing and buying patterns of CSPs, which may cause fluctuations in our operating
results.
Many of our U.S. customers are Independent Operating Companies ("IOCs"), which have revenues that are particularly dependent
upon interstate and intrastate access charges, and federal and state subsidies. The Federal Communications Commission ("FCC"), and some
states are considering changes to such payments and subsidies, and these changes could reduce IOC revenues. Furthermore, many IOCs use
or expect to use, government-supported loan programs or grants, such as RUS loans and grants to finance capital spending. Changes to these
programs could reduce the ability of IOCs to access capital and thus reduce our revenue opportunities.
Many of our customers were awarded grants or loans under government stimulus programs such as the Broadband Stimulus programs
under the American Recovery and Reinvestment Act of 2009 ("ARRA") and have purchased and will continue to purchase products from us
or other suppliers while such programs and funding remain in place. However, customers may substantially curtail future purchases of
products as ARRA funding winds down or because all purchases have been completed. Projects funded under the Broadband Initiatives
Program, which is administered by the RUS, must be completed by June 30, 2015.
The revenue recognition guidelines related to the sales of our products to CSPs who have received RUS funds may create uncertainties
around the timing of our revenue, which could harm our financial results. In addition, any changes in government regulations and subsidies
could cause our customers to change their purchasing decisions, which could have an adverse effect on our operating results and financial
condition.
We face intense competition that could reduce our revenue and adversely affect our financial results.
The market for our products is highly competitive, and we expect competition from both established and new companies to increase.
Our competitors include companies such as ADTRAN, Inc., Alcatel-Lucent S.A., Arris Group, Inc., Ciena Corporation, Cisco Systems, Inc.,
Huawei Technologies Co. Ltd. and ZTE Corporation, among others.
Our ability to compete successfully depends on a number of factors, including:
• the successful development of new products;
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• our ability to anticipate CSP and market requirements and changes in technology and industry standards;
• our ability to differentiate our products from our competitors' offerings based on performance, cost-effectiveness or other factors;
• our ongoing ability to successfully integrate acquired product lines and customer bases into our business;
• our ability to gain customer acceptance of our products; and
• our ability to market and sell our products.
The broadband access equipment market has undergone consolidation in recent years, as participants have merged, made acquisitions
or entered into partnerships or other strategic relationships with one another to offer more comprehensive solutions than they individually had
offered. Examples include our acquisitions of Occam in February 2011 and of Ericsson's fiber access assets in November 2012; Adtran's
acquisition of Nokia Siemens' broadband access line business in May 2012; Arris’s acquisitions of BigBand Networks in October 2011 and of
Motorola Mobility’s Home Unit from Google in December 2012; and Cisco’s acquisition of ClearAccess in May 2012. We expect this trend
to continue as companies attempt to strengthen or maintain their market positions in an evolving industry.
Many of our current or potential competitors have longer operating histories, greater name recognition, larger customer bases and
significantly greater financial, technical, sales, marketing and other resources than we do and are better positioned to acquire and offer
complementary products and services. Many of our competitors have broader product lines and can offer bundled solutions, which may
appeal to certain customers. Our competitors may also invest additional resources in developing more compelling product offerings. Potential
customers may also prefer to purchase from their existing suppliers rather than a new supplier, regardless of product performance or features,
because the products that we and our competitors offer require a substantial investment of time and funds to install.
Some of our competitors may offer substantial discounts or rebates to win new customers or to retain existing customers. If we are
forced to reduce prices in order to secure customers, we may be unable to sustain gross margins at desired levels or achieve profitability.
Competitive pressures could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses and failure
to increase, or the loss of, market share, any of which could reduce our revenue and adversely affect our financial results.
Product development is costly and if we fail to develop new products or enhancements that meet changing CSP requirements, we could
experience lower sales.
Our market is characterized by rapid technological advances, frequent new product introductions, evolving industry standards and
unanticipated changes in subscriber requirements. Our future success will depend significantly on our ability to anticipate and adapt to such
changes, and to offer, on a timely and cost-effective basis, products and features that meet changing CSP demands and industry standards.
We intend to continue making significant investments in developing new products and enhancing the functionality of our existing products.
Developing our products is expensive, complex and involves uncertainties. We may not have sufficient resources to successfully manage
lengthy product development cycles. For the years ended December 31, 2014, 2013 and 2012, our research and development expenses were
$80.3 million, or 20% of our revenue, $79.3 million, or 21% of our revenue, and $66.7 million, or 20% of our revenue, respectively. We
believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our
competitive position. These investments may take several years to generate positive returns, if ever. In addition, we may experience design,
manufacturing, marketing and other difficulties that could delay or prevent the development, introduction or marketing of new products and
enhancements. If we fail to meet our development targets, demand for our products will decline.
In addition, the introduction of new or enhanced products also requires that we manage the transition from older products to these new
or enhanced products in order to minimize disruption in customer ordering patterns, fulfill ongoing customer commitments and ensure that
adequate supplies of new products are available for delivery to meet anticipated customer demand. If we fail to maintain compatibility with
other software or equipment found in our customers' existing and planned networks, we may face substantially reduced demand for our
products, which would reduce our revenue opportunities and market share. Moreover, as customers complete infrastructure deployments, they
may require greater levels of service and support than we have provided in the past. We may not be able to provide products, services and
support to compete effectively for these market opportunities. If we are unable to anticipate and develop new products or enhancements to
our existing products on a timely and cost-effective basis, we could experience lower sales, which would harm our business.
Our new products are early in their life cycles and are subject to uncertain market demand. If our customers are unwilling to install our
new products or deploy our new services or we are unable to achieve market acceptance of our new products, our business and financial
results will be harmed.
Our new products are early in their life cycles and are subject to uncertain market demand. They also may face obstacles in
manufacturing, deployment and competitive response. Potential customers may choose not to invest the additional capital required for initial
system deployment of new products. In addition, demand for new products is dependent on the success of our customers in deploying and
selling advanced services to their subscribers. Our products support a variety of advanced broadband services, such as high-speed Internet,
Internet protocol television, mobile broadband, high-definition video and online gaming. If subscriber demand for such services does not
grow as expected or declines, or if our customers are unable or unwilling to deploy and market these services, demand for our products may
decrease or fail to grow at rates we anticipate.
Our customer base is concentrated, and there are a limited number of potential customers for our products. The loss of any of our key
customers, a decrease in purchases by our key customers or our inability to grow our customer base would adversely impact our revenues.
Historically, a large portion of our sales has been to a limited number of customers. For example, for the years ended December 31,
2014, 2013 and 2012, CenturyLink accounted for 23%, 26% and 21%, respectively, of our revenue. However, we cannot anticipate the level
of CenturyLink's purchases in the future.
We anticipate that a large portion of our revenues will continue to depend on sales to a limited number of customers. In addition, some
larger customers may demand discounts and rebates or desire to purchase their access systems and software from multiple providers. As a
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result of these factors, our future revenue opportunities may be limited and our margins could be reduced, and our profitability may be
adversely impacted. The loss of, or reduction in, orders from any key customer would significantly reduce our revenues and harm our
business.
Furthermore, in recent years, the CSP market has undergone substantial consolidation. Industry consolidation generally has negative
implications for equipment suppliers, including a reduction in the number of potential customers, a decrease in aggregate capital spending,
and greater pricing leverage on the part of CSPs over equipment suppliers. Continued consolidation of the CSP industry and among the
Incumbent Local Exchange Carrier ("ILEC") and IOC customers, who represent a large part of our business, could make it more difficult for
us to grow our customer base, increase sales of our products and maintain adequate gross margins.
Our sales cycles can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, our sales are
difficult to predict and may vary substantially from quarter to quarter, which may cause our operating results to fluctuate significantly.
The timing of our revenues is difficult to predict. Our sales efforts often involve educating CSPs about the use and benefits of our
products. CSPs typically undertake a significant evaluation process, which frequently involves not only our products but also those of our
competitors and results in a lengthy sales cycle. We spend substantial time, effort and money in our sales efforts without any assurance that
our efforts will produce any sales. In addition, product purchases are frequently subject to budget constraints, multiple approvals and
unplanned administrative, processing and other delays. If sales expected from a specific customer for a particular quarter are not realized in
that quarter or at all, we may not achieve our revenue forecasts and our financial results would be adversely affected.
Our focus on CSPs with relatively small networks limits our revenues from sales to any one customer and makes our future operating
results difficult to predict.
We currently focus a large portion of our sales efforts on IOCs, MSOs and selected international CSPs. Our current and potential
customers generally operate small networks with limited capital expenditure budgets. Accordingly, we believe the potential revenues from the
sale of our products to any one of these customers is limited. As a result, we must identify and sell products to new customers each quarter to
continue to increase our sales. In addition, the spending patterns of many of our customers are characterized by small and sporadic purchases.
As a consequence, we have limited backlog and will likely continue to have limited visibility into future operating results.
We do not have long-term, committed-volume purchase contracts with our customers, and therefore have no guarantee of future revenues
from any customer.
Our sales are made predominantly via purchase orders, and typically we have not entered into long-term, committed-volume purchase
contracts with our customers, including our key customers which account for a material portion of our revenues. As a result, any of our
customers may cease to purchase our products at any time. In addition, our customers may attempt to renegotiate terms of sale, including
price and quantity. If any of our key customers stop purchasing our access systems and software for any reason, our business and results of
operations would be harmed.
Our efforts to increase our sales to larger North American as well as international CSPs, including MSOs, may be unsuccessful.
Our sales and marketing efforts have been focused on CSPs, including cable MSOs, in North America. A part of our long-term strategy
is to increase sales to larger North American as well as international CSPs, including MSOs. We will be required to devote substantial
technical, marketing and sales resources to the pursuit of these larger CSPs, who have lengthy equipment qualification and sales cycles,
without any assurance of generating sales. In particular, sales to these larger CSPs may require us to upgrade our products to meet more
stringent performance criteria, develop new customer-specific features or adapt our product to meet international standards. If we are unable
to successfully increase our sales to larger CSPs, our operating results and long-term growth may be negatively impacted.
We are exposed to the credit risks of our customers, and if we have inadequately assessed their creditworthiness we may have more
exposure to accounts receivable risk than we anticipate. Failure to collect our accounts receivable in amounts that we anticipate could
adversely affect our operating results and financial condition.
In the course of our sales to customers, we may encounter difficulty collecting accounts receivable and could be exposed to risks
associated with uncollectible accounts receivable. We maintain an allowance for doubtful accounts for estimated losses resulting from the
inability or unwillingness of our customers to make required payments. However, these allowances are based on our judgment and a variety
of factors about which our judgment may be wrong or that may change.
We perform credit evaluations of our customers' financial condition. However, our evaluation of the creditworthiness of customers may
not be accurate if they do not provide us with timely and accurate financial information, or if their situations change after we evaluate their
credit. While we attempt to monitor these situations carefully and attempt to adjust our allowances for doubtful accounts as appropriate, and
take appropriate measures to collect accounts receivable balances, we have written down accounts receivable and written off doubtful
accounts in prior periods and may be unable to avoid additional write-downs or write-offs of doubtful accounts in the future. Such write-
downs or write-offs could negatively affect our operating results for the period in which they occur, and could harm our operating results.
Our gross margin may fluctuate over time and our current level of product gross margins may not be sustainable.
Our current level of product gross margins may not be sustainable and may be adversely affected by numerous factors, including:
• changes in customer, geographic or product mix, including the mix of configurations within each product group;
• increased price competition, including the impact of customer discounts and rebates;
• our inability to reduce and control product costs;
• changes in component pricing;
• changes in contract manufacturer rates;
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• charges incurred due to inventory holding periods if parts ordering does not correctly anticipate product demand;
• introduction of new products;
• changes in shipment volume;
• changes in distribution channels;
• increased warranty costs;
• excess and obsolete inventory and inventory holding charges;
• expediting costs incurred to meet customer delivery requirements; and
• liquidated damages relating to customer contractual terms.
Our products must interoperate with many software applications and hardware products found in our customers' networks. If we are
unable to ensure that our products interoperate properly, our business would be harmed.
Our products must interoperate with our customers' existing and planned networks, which often have varied and complex
specifications, utilize multiple protocol standards, include software applications and products from multiple vendors and contain multiple
generations of products that have been added over time. As a result, we must continually ensure that our products interoperate properly with
these existing and planned networks. To meet these requirements, we must undertake development efforts that require substantial capital
investment and employee resources. We may not accomplish these development goals quickly or cost-effectively, if at all. If we fail to
maintain compatibility with other software or equipment found in our customers' existing and planned networks, we may face substantially
reduced demand for our products, which would reduce our revenue opportunities and market share.
We have entered into interoperability arrangements with a number of equipment and software vendors for the use or integration of their
technology with our products. These arrangements give us access to, and enable interoperability with, various products that we do not
otherwise offer. If these relationships fail, we may have to devote substantially more resources to the development of alternative products and
processes, and our efforts may not be as effective as the combined solutions under our current arrangements. In some cases, these other
vendors are either companies that we compete with directly, or companies that have extensive relationships with our existing and potential
customers and may have influence over the purchasing decisions of those customers. Some of our competitors have stronger relationships
with some of our existing and potential other interoperability partners and, as a result, our ability to have successful interoperability
arrangements with these companies may be harmed. Our failure to establish or maintain key relationships with third-party equipment and
software vendors may harm our ability to successfully sell and market our products.
We do not have manufacturing capabilities, and therefore we depend upon a small number of outside contract manufacturers. We do not
have supply contracts with these contract manufacturers, and our operations could be disrupted if we encounter problems with any of
these contract manufacturers.
We do not have internal manufacturing capabilities, and rely upon a small number of contract manufacturers to build our products. In
particular, we rely on Flextronics for the manufacture of most of our products. Our reliance on a small number of contract manufacturers
makes us vulnerable to possible capacity constraints and reduced control over component availability, delivery schedules, manufacturing
yields and costs.
We do not have supply contracts with Flextronics or some of our other contract manufacturers. Consequently, these contract
manufacturers are not obligated to supply products to us for any specific period, in any specific quantity or at any certain price. In addition,
we have limited control over our contract manufacturers' quality systems and controls, and therefore may not be able to ensure levels of
quality manufacture suitable for our customers.
The revenues that Flextronics and other contract manufacturers generate from our orders represent a relatively small percentage of
those manufacturers' overall revenues. As a result, fulfilling our orders may not be considered a priority in the event such manufacturers are
constrained in their ability to fulfill all of their customer obligations in a timely manner. In addition, a substantial part of our manufacturing is
done in our contract manufacturer facilities that are located outside of the United States. We believe that the location of these facilities outside
of the United States increases supply risk, including the risk of supply interruptions or reductions in manufacturing quality or controls.
If Flextronics or any of our other contract manufacturers were unable or unwilling to continue manufacturing our products in required
volumes and at high quality levels, we would have to identify, qualify and select acceptable alternative contract manufacturers. An alternative
contract manufacturer may not be available to us when needed or may not be in a position to satisfy our production requirements at
commercially reasonable prices and quality. Any significant interruption in manufacturing would require us to reduce our supply of products
to our customers, which in turn would reduce our revenues and harm our relationships with our customers.
Our contract manufacturers depend on sole-source and limited-source suppliers for key components. If they are unable to source these
components on a timely basis, we will not be able to deliver our products to our customers.
Our contract manufacturers depend on sole-source and limited-source suppliers for key components of our products. For example,
certain of our application-specific integrated circuit processors and resistor networks are purchased from sole-source suppliers.
Any of the sole-source and limited-source suppliers upon whom our contract manufacturers rely could stop producing our components,
cease operations, or enter into exclusive arrangements with our competitors. In addition, purchase volumes of such components may be too
low for Calix to be considered a priority customer by these suppliers. As a result, these suppliers could stop selling to our contract
manufacturers at commercially reasonable prices, or at all. Any such interruption or delay may force our contract manufacturers to seek
similar components from alternative sources, which may not be available. Switching suppliers could also require that we redesign our
products to accommodate new components, and could require us to re-qualify our products with our customers, which would be costly and
time-consuming. Any interruption in the supply of sole-source or limited-source components for our products would adversely affect our
ability to meet scheduled product deliveries to our customers, could result in lost revenue or higher expenses and would harm our business.
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We utilize third parties to design and manufacture certain of our products. If these manufacturers fail to provide these products, we could
incur additional costs and delays or lose revenue.
From time to time we enter into original design manufacturer ("ODM") and original equipment manufacturer ("OEM") agreements for
the design and manufacture of certain products, in order to enable us to offer products on an accelerated basis. For example, a third party
assisted in the design of and currently manufactures portions of our E-series platform family. If any of these ODMs and OEMs stop
producing these products, for any reason, we would have to obtain similar products from alternative sources, which may not be available on
commercially reasonable terms, if at all. In addition switching manufacturers could require us to re-qualify our products with our customers,
which would also be costly and time-consuming. Any interruption in the supply of products would adversely affect our ability to meet
scheduled product deliveries to our customers, could result in lost revenue or higher expenses and would harm our business.
If we fail to forecast our manufacturing requirements accurately or fail to properly manage our inventory with our contract
manufacturers, we could incur additional costs, experience manufacturing delays and lose revenue.
We bear inventory risk under our contract manufacturing arrangements and our ODM and OEM agreements. Lead times for the
materials and components that we order through our manufacturers vary significantly and depend on numerous factors, including the specific
supplier, contract terms and market demand for a component at a given time. Lead times for certain key materials and components
incorporated into our products are currently lengthy, requiring our manufacturers to order materials and components several months in
advance of manufacture.
If we overestimate our production requirements, our manufacturers may purchase excess components and build excess inventory. If
our manufacturers, at our request, purchase excess components that are unique to our products or build excess products, we could be required
to pay for these excess parts or products and their storage costs. Historically, we have reimbursed our primary contract manufacturers for a
portion of inventory purchases when our inventory has been rendered obsolete, for example due to manufacturing and engineering change
orders resulting from design changes manufacturing discontinuation of parts by suppliers, or in cases where inventory levels greatly exceed
projected demand. If we incur payments to our manufacturers associated with excess or obsolete inventory, this would have an adverse effect
on our gross margins, financial condition and results of operations.
We have experienced unanticipated increases in demand from customers, which resulted in delayed shipments and variable shipping
patterns. If we underestimate our product requirements, our manufacturers may have inadequate component inventory, which could interrupt
manufacturing of our products and result in delays or cancellation of sales.
As the market for our products evolves, changing customer requirements may adversely affect the valuation of our inventory.
Customer demand for our products can change rapidly in response to market and technology developments. Demand can be affected
not only by customer- or market-specific issues, but also by broader economic and/or geopolitical factors. We may, from time to time, adjust
inventory valuations downward in response to our assessment of demand from our customers for specific products or product lines.
If we fail to comply with evolving industry standards, sales of our existing and future products would be adversely affected.
The markets for our products are characterized by a significant number of standards, both domestic and international, which are
evolving as new technologies are developed and deployed. As we expand into adjacent markets and increase our international footprint, we
are likely to encounter additional standards. Our products must comply with these standards in order to be widely marketable. In some cases,
we are compelled to obtain certifications or authorizations before our products can be introduced, marketed or sold in new markets or to
customers that we have not historically served. For example, our ability to maintain Operations System Modification for Intelligent Network
Elements ("OSMINE") certification for our products will affect our ongoing ability to continue to sell our products to CenturyLink and other
Tier 1 CSPs.
In addition, our ability to expand our international operations and create international market demand for our products may be limited
by regulations or standards adopted by other countries that may require us to redesign our existing products or develop new products suitable
for sale in those countries. Although we believe our products are currently in compliance with domestic and international standards and
regulations in countries in which we currently sell, we may not be able to design our products to comply with evolving standards and
regulations in the future. This ongoing evolution of standards may directly affect our ability to market or sell our products. Further, the cost of
complying with the evolving standards and regulations, or the failure to obtain timely domestic or foreign regulatory approvals or
certification such that we may not be able to sell our products where these standards or regulations apply, would result in lower revenues and
lost market share.
We may be unable to successfully expand our international operations. In addition, we may be subject to a variety of international risks
that could harm our business.
We currently generate most of our sales from customers in North America and have less experience marketing, selling and supporting
our products and services outside North America or managing the administrative aspects of a worldwide operation. While we are in the
process of expanding our international operations, we may not be able to create or maintain international market demand for our products. In
addition, as we expand our operations internationally, our support organization will face additional challenges including those associated with
delivering support, training and documentation in languages other than English. If we invest substantial time and resources to expand our
international operations and are unable to do so successfully and in a timely manner, our business, financial condition and results of
operations will suffer.
In the course of expanding our international operations and operating overseas, we will be subject to a variety of risks, including:
• differing regulatory requirements, including tax laws, trade laws, labor regulations, tariffs, export quotas, custom duties or other
trade restrictions;
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• liability or damage to our reputation resulting from corruption or unethical business practices;
• fluctuation in currency exchange rates;
• longer collection periods and difficulties in collecting accounts receivable;
• greater difficulty supporting and localizing our products;
• different or unique competitive pressures as a result of, among other things, the presence of local equipment suppliers;
• challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the
need to implement appropriate systems, policies, compensation and benefits and compliance programs;
• limited or unfavorable intellectual property protection;
• risk of change in international political or economic conditions, terrorist attacks or acts of war; and
• restrictions on the repatriation of earnings.
We engage resellers to promote, sell, install and support our products to some customers in North America and internationally. Their
failure to do so or our inability to recruit or retain appropriate resellers may reduce our sales and thus harm our business.
We engage some value added resellers ("VARs"), who provide sales and support services for our products. In particular, the non-
exclusive reseller agreement entered into with Ericsson in 2012 has provided us with an extensive new global reseller channel. We compete
with other telecommunications systems providers for our VARs' business and many of our VARs, including Ericsson, are free to market
competing products. Our use of VARs and other third-party support partners, and the associated risks of doing so, are likely to increase as we
expand sales outside of North America. If Ericsson or any other VAR promotes a competitor's products to the detriment of our products or
otherwise fails to market our products and services effectively, we could lose market share. In addition, the loss of a key VAR or the failure of
VARs to provide adequate customer service could have a negative effect on customer satisfaction and could cause harm to our business. If we
do not properly recruit and train VARs to sell, install and service our products, our business, financial condition and results of operations may
suffer.
We may have difficulty managing our growth, which could limit our ability to increase sales.
We have experienced significant growth in sales and operations in recent years. We expect to continue to expand our research and
development, sales, marketing and support activities. Our historical growth has placed, and planned future growth is expected to continue to
place, significant demands on our management, as well as our financial and operational resources, to:
• manage a larger organization;
• expand our manufacturing and distribution capacity;
• increase our sales and marketing efforts;
• broaden our customer-support capabilities;
• implement appropriate operational and financial systems; and
• maintain effective financial disclosure controls and procedures.
If we cannot grow, or fail to manage our growth effectively, we may not be able to execute our business strategies and our business,
financial condition and results of operations would be adversely affected.
We may not be able to protect our intellectual property, which could impair our ability to compete effectively.
We depend on certain proprietary technology for our success and ability to compete. As of December 31, 2014, we held 95 U.S. patents
and had 38 pending U.S. patent applications. One of the U.S. patents is also covered by granted international patents in three countries. We
currently have no pending international patent applications. We rely on intellectual property laws, as well as nondisclosure agreements,
licensing arrangements and confidentiality provisions, to establish and protect our proprietary rights. U.S. patent, copyright and trade secret
laws afford us only limited protection, and the laws of some foreign countries do not protect proprietary rights to the same extent. Our
pending patent applications may not result in issued patents, and our issued patents may not be enforceable. Any infringement of our
proprietary rights could result in significant litigation costs. Further, any failure by us to adequately protect our proprietary rights could result
in our competitors offering similar products, resulting in the loss of our competitive advantage and decreased sales.
Despite our efforts to protect our proprietary rights, attempts may be made to copy or reverse engineer aspects of our products or to
obtain and use information that we regard as proprietary. Accordingly, we may be unable to protect our proprietary rights against
unauthorized third-party copying or use. Furthermore, policing the unauthorized use of our intellectual property is difficult for us. Litigation
may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of
the proprietary rights of others. Litigation could result in substantial costs and diversion of resources and could harm our business.
We could become subject to litigation regarding intellectual property rights that could harm our business.
We may be subject to intellectual property infringement claims that are costly to defend and could limit our ability to use some
technologies in the future. Third parties may assert patent, copyright, trademark or other intellectual property rights to technologies or rights
that are important to our business. Such claims may involve non-practicing entities, patent holding companies or other adverse patent owners
who have no relevant product revenue, and therefore our own issued and pending patents may provide little or no deterrence to suit from
these entities.
We have received in the past and expect that in the future we may receive communications from competitors and other companies
alleging that we may be infringing their patents, trade secrets or other intellectual property rights or offering licenses to such intellectual
property or threatening litigation. In addition, we have agreed, and may in the future agree, to indemnify our customers for any expenses or
liabilities resulting from certain claimed infringements of patents, trademarks or copyrights of third parties. Any claims asserting that our
products infringe the proprietary rights of third parties, with or without merit, could be time-consuming, resulting in costly litigation and
diverting the efforts of our engineering teams and management. These claims could also result in product shipment delays or require us to
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modify our products or enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available to
us on acceptable terms, if at all.
The quality of our support and services offerings is important to our customers, and if we fail to continue to offer high quality support and
services, we could lose customers, which would harm our business.
Once our products are deployed within our customers' networks, they depend on our support organization to resolve any issues relating
to those products. A high level of support is critical for the successful marketing and sale of our products. If we do not effectively assist our
customers in deploying our products, succeed in helping them quickly resolve post-deployment issues or provide effective ongoing support, it
could adversely affect our ability to sell our products to existing customers and harm our reputation with potential new customers. As a result,
our failure to maintain high quality support and services could result in the loss of customers, which would harm our business.
Our products are highly technical and may contain undetected hardware defects or software bugs, which could harm our reputation and
adversely affect our business.
Our products are highly technical and, when deployed, are critical to the operation of many networks. Our products have contained and
may contain undetected defects, bugs or security vulnerabilities. Some defects in our products may only be discovered after a product has
been installed and used by customers, and may in some cases only be detected under certain circumstances or after extended use. Any errors,
bugs, defects or security vulnerabilities discovered in our products after commercial release could result in loss of revenues or delay in
revenue recognition, loss of customers and increased service and warranty cost, any of which could adversely affect our business, operating
results and financial condition. In addition, we could face claims for product liability, tort or breach of warranty. Our contracts with customers
contain provisions relating to warranty disclaimers and liability limitations, which may not be upheld. Defending a lawsuit, regardless of its
merit, is costly and may divert management's attention and adversely affect the market's perception of us and our products. In addition, if our
business liability insurance coverage proves inadequate or future coverage is unavailable on acceptable terms or at all, our business, operating
results and financial condition could be adversely impacted.
Our estimates regarding future warranty obligations may change due to product failure rates, shipment volumes, field service obligations
and rework costs incurred in correcting product failures. If our estimates change, the liability for warranty obligations may be increased,
impacting future cost of revenue.
Our products are highly complex, and our product development, manufacturing and integration testing may not be adequate to detect
all defects, errors, failures and quality issues. Quality or performance problems for products covered under warranty could adversely impact
our reputation and negatively affect our operating results and financial position. The development and production of new products with high
complexity often involves problems with software, components and manufacturing methods. If significant warranty obligations arise due to
reliability or quality issues arising from defects in software, faulty components or improper manufacturing methods, our operating results and
financial position could be negatively impacted by:
• cost associated with fixing software or hardware defects;
• high service and warranty expenses;
• high inventory obsolescence expense;
• delays in collecting accounts receivable;
• payment of liquidated damages for performance failures; and
• declining sales to existing customers.
Our use of open source software could impose limitations on our ability to commercialize our products.
We incorporate open source software into our products. Although we closely monitor our use of open source software, the terms of
many open source software licenses have not been interpreted by the courts, and there is a risk that such licenses could be construed in a
manner that could impose unanticipated conditions or restrictions on our ability to sell our products. In such event, we could be required to
make our proprietary software generally available to third parties, including competitors, at no cost, to seek licenses from third parties in
order to continue offering our products, to re-engineer our products or to discontinue the sale of our products in the event re-engineering
cannot be accomplished on a timely basis or at all, any of which could adversely affect our revenues and operating expenses.
If we are unable to obtain necessary third-party technology licenses, our ability to develop new products or product enhancements may be
impaired.
While our current licenses of third-party technology generally relate to commercially available off-the-shelf technology, we may in the
future be required to license additional technology from third parties to develop new products or product enhancements. These third-party
licenses may be unavailable to us on commercially reasonable terms, if at all. Our inability to obtain necessary third-party licenses may force
us to obtain substitute technology of lower quality or performance standards or at greater cost, any of which could harm the competitiveness
of our products and result in lost revenues.
Our failure or the failure of our manufacturers to comply with environmental and other legal regulations could adversely impact our
results of operations.
The manufacture, assembly and testing of our products may require the use of hazardous materials that are subject to environmental,
health and safety regulations, or materials subject to international laws restricting the use of conflict minerals. Our failure or the failure of our
contract manufacturers, ODMs and OEMs to comply with any of these requirements could result in regulatory penalties, legal claims or
disruption of production. In addition, our failure or the failure of our manufacturers to properly manage the use, transportation, emission,
discharge, storage, recycling or disposal of hazardous materials could subject us to increased costs or liabilities. Existing and future
environmental regulations and other legal requirements may restrict our use of certain materials to manufacture, assemble and test products.
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Any of these consequences could adversely impact our results of operations by increasing our expenses and/or requiring us to alter our
manufacturing processes.
Regulatory and physical impacts of climate change and other natural events may affect our customers and our contract manufacturers,
resulting in adverse effects on our operating results.
As emissions of greenhouse gases continue to alter the composition of the atmosphere, affecting large-scale weather patterns and the
global climate, any new regulation of greenhouse gas emissions may result in additional costs to our customers and our contract
manufacturers. In addition, the physical impacts of climate change and other natural events, including changes in weather patterns, drought,
rising ocean and temperature levels, earthquakes and tsunamis may impact our customers, suppliers, contract manufacturers, and our
operations. These potential physical effects may adversely affect our revenues, costs, production and delivery schedules, and cause harm to
our results of operations and financial condition.
We have in the past pursued, and may in the future continue to pursue acquisitions, which involve a number of risks and uncertainties. If
we are unable to address and resolve these risks and uncertainties successfully, such acquisitions could disrupt our business and result in
higher costs than we anticipate.
On February 22, 2011, we acquired Occam Networks, and on November 2, 2012, we acquired Ericsson's fiber access assets. We may
in the future acquire other businesses, products or technologies to expand our product offerings and capabilities, customer base and business.
We have evaluated, and expect to continue to evaluate, a wide array of potential strategic transactions. We have limited experience making
such acquisitions or integrating these businesses after such acquisitions. Unanticipated costs to us from these historical transactions, as well
as both anticipated and unanticipated costs to us related to any future transactions, could be in excess of amounts that are covered by
insurance and could be material to our financial condition and results of operations. For example, the Occam acquisition has resulted in
litigation, and we currently expect that, if the case proceeds to trial, defense costs are likely to exceed available Directors & Officers liability
insurance coverage. In addition, the anticipated benefit of any acquisitions we do may never materialize or the process of integrating acquired
businesses, products or technologies may create unforeseen operating difficulties and expenditures.
Some of the areas where we have experienced and may in the future experience acquisition-related risks include:
• expenses and distractions, including diversion of management time, related to the ongoing Occam litigation, which is described
in more detail in Note 7, “Commitments and Contingencies - Litigation” of the Notes to Consolidated Financial Statements
included in Part II, Item 8 of this Annual Report on Form 10-K;
• expenses and distractions related to potential claims resulting from any possible future acquisitions, whether or not they are
completed;
• retaining and integrating employees from any businesses we may acquire;
• issuance of dilutive equity securities or incurrence of debt;
• integrating various accounting, management, information, human resource and other systems to permit effective management;
• incurring possible write-offs, impairment charges, contingent liabilities, amortization expense of intangible assets or impairment
of goodwill;
• difficulties integrating and supporting acquired products or technologies;
• unexpected capital expenditure requirements;
• insufficient revenues to offset increased expenses associated with the acquisition; and
• opportunity costs associated with committing capital to such acquisitions.
Foreign acquisitions would involve risks in addition to those mentioned above, including those related to integration of operations
across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific
countries. We may not be able to address these risks and uncertainties successfully, or at all, without incurring significant costs, delays or
other operating problems.
Our inability to address or anticipate any of these risks and uncertainties could disrupt our business and could have a material impact
on our financial condition and results of operations.
Our use of and reliance upon development resources in China may expose us to unanticipated costs or liabilities.
We operate a wholly foreign owned enterprise in Nanjing, China, where a dedicated team of engineers performs product development,
quality assurance, cost reduction and other engineering work. We also outsource a portion of our software development to a team of software
engineers based in Shenyang, China. Our reliance upon development resources in China may not enable us to achieve meaningful product
cost reductions or greater resource efficiency. Further, our development efforts and other operations in China involve significant risks,
including:
• difficulty hiring and retaining appropriate engineering resources due to intense competition for such resources and resulting wage
inflation;
• the knowledge transfer related to our technology and exposure to misappropriation of intellectual property or confidential
information, including information that is proprietary to us, our customers and third parties;
• heightened exposure to changes in the economic, security and political conditions of China;
• fluctuation in currency exchange rates and tax risks associated with international operations; and
• development efforts that do not meet our requirements because of language, cultural or other differences associated with
international operations, resulting in errors or delays.
Difficulties resulting from the factors above and other risks related to our operations in China could expose us to increased expense,
impair our development efforts, harm our competitive position and damage our reputation.
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Our customers are subject to government regulation, and changes in current or future laws or regulations that negatively impact our
customers could harm our business.
The FCC has jurisdiction over all of our U.S. customers. FCC regulatory policies that create disincentives for investment in access
network infrastructure or impact the competitive environment in which our customers operate may harm our business. For example, future
FCC regulation affecting providers of broadband Internet access services could impede the penetration of our customers into certain markets
or affect the prices they may charge in such markets. Furthermore, many of our customers are subject to FCC rate regulation of interstate
telecommunications services, and are recipients of Connect America Fund capital incentive payments, which are intended to subsidize
broadband and telecommunications services in areas that are expensive to serve. In early October 2011, the then-chairman of the FCC
outlined a plan to transform the Universal Service Fund, an $8 billion fund that is paid for by telephone customers in the U.S. and was used to
subsidize basic telephone service in rural areas, into one that will help expand broadband Internet service to 18 million Americans who lack
high-speed access. In late 2013, the new FCC chairman shared plans to review the implementation of this program, and some slight
modifications were made in 2014. Changes to these programs that could affect the ability of IOCs to access capital and reduce our revenue
opportunities remain possible.
In addition, many of our customers are subject to state regulation of intrastate telecommunications services, including rates for such
services, and may also receive funding from state universal service funds. Changes in rate regulations or universal service funding rules,
either at the U.S. federal or state level, could adversely affect our customers' revenues and capital spending plans. In addition, various
international regulatory bodies have jurisdiction over certain of our non-U.S. customers. Changes in these domestic and international
standards, laws and regulations, or judgments in favor of plaintiffs in lawsuits against CSPs based on changed standards, laws and regulations
could adversely affect the development of broadband networks and services. This, in turn, could directly or indirectly adversely impact the
communications industry in which our customers operate.
Many jurisdictions, including international governments and regulators, are also evaluating, implementing and enforcing regulations
relating to cyber security, privacy and data protection, which can affect the market and requirements for networking and communications
equipment. To the extent our customers are adversely affected by laws or regulations regarding their business, products or service offerings,
our business, financial condition and results of operations would suffer.
Privacy concerns relating to our products and services could affect our business practices, damage our reputation and deter customers
from purchasing our products and services.
Government and regulatory authorities in the U.S. and around the world have implemented and are continuing to implement laws and
regulations concerning data protection. The interpretation and application of these data protection laws and regulations are often uncertain
and in flux, and it is possible that they may be interpreted and applied in a manner that is inconsistent with our data practices. Complying
with these various laws could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our
business.
Concerns about, or regulatory actions involving our practices with regard to the collection, use, disclosure, or security of customer
information or other privacy related matters, even if unfounded, could damage our reputation and adversely affect operating results. While we
strive to comply with all data protection laws and regulations, the failure or perceived failure to comply may result in inquiries and other
proceedings or actions against us by government entities or others, or could cause us to lose customers, which could potentially have an
adverse effect on our business.
We may be subject to governmental export and import controls that could subject us to liability or impair our ability to compete in
additional international markets.
Our products may be or become subject to U.S. export controls that will restrict our ability to export them outside of the free-trade
zones covered by the North American Free Trade Agreement, Central American Free Trade Agreement and other treaties and laws. Therefore,
future international shipments of our products may require export licenses or export license exceptions. In addition, the import laws of other
countries may limit our ability to distribute our products, or our customers' ability to buy and use our products, in those countries. Changes in
our products or changes in export and import regulations or duties may create delays in the introduction of our products in international
markets, prevent our customers with international operations from deploying our products or, in some cases, prevent the export or import of
our products to certain countries altogether. Any change in export or import regulations, duties or related legislation, shift in approach to the
enforcement or scope of existing regulations, or change in the countries, persons or technologies targeted by such regulations, could
negatively impact our ability to sell, profitably or at all, our products to existing or potential international customers.
If we lose any of our key personnel, or are unable to attract, train and retain qualified personnel, our ability to manage our business and
continue our growth would be negatively impacted.
Our success depends, in large part, on the continued contributions of our key management, engineering, sales and marketing personnel,
many of whom are highly skilled and would be difficult to replace. None of our senior management or key technical or sales personnel is
bound by a written employment contract to remain with us for a specified period. In addition, we do not currently maintain key man life
insurance covering our key personnel. If we lose the services of any key personnel, our business, financial condition and results of operations
may suffer.
Competition for skilled personnel, particularly those specializing in engineering and sales, is intense. We cannot be certain that we will
be successful in attracting and retaining qualified personnel, or that newly hired personnel will function effectively, both individually and as a
group. In particular, we must continue to expand our direct sales force, including hiring additional sales managers, to grow our customer base
and increase sales. In addition, if we offer employment to personnel employed by competitors, we may become subject to claims of unfair
hiring practices, and incur substantial costs in defending ourselves against these claims, regardless of their merits. If we are unable to
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effectively recruit, hire and utilize new employees, execution of our business strategy and our ability to react to changing market conditions
may be impeded, and our business, financial condition and results of operations may suffer.
Volatility or lack of performance in our stock price may also affect our ability to attract and retain our key personnel. Our executive
officers and employees hold a substantial number of shares of our common stock and vested stock options. Employees may be more likely to
leave us if the shares they own or the shares underlying their vested options have significantly appreciated in value relative to the original
purchase prices of the shares or the exercise prices of the options, or if the exercise prices of the options that they hold are significantly above
the market price of our common stock. If we are unable to retain our employees, our business, operating results and financial condition will
be harmed.
If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be
impaired, which would adversely affect our operating results, our ability to operate our business and our stock price.
Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial
statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. We have in the past discovered,
and may in the future discover, areas of our internal financial and accounting controls and procedures that need improvement.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide
reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting principles. Our management does not expect that our internal control over financial
reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system's objectives will be met. Because of the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and
instances of fraud, if any, within our company will have been detected.
We are required to comply with Section 404 of the Sarbanes-Oxley Act ("SOX"), which requires us to expend significant resources in
developing the required documentation and testing procedures. We cannot be certain that the actions we have taken and are taking to improve
our internal controls over financial reporting will be sufficient to maintain effective internal controls over financial reporting in subsequent
reporting periods, or that we will be able to implement our planned processes and procedures in a timely manner. In addition, new and revised
accounting standards and financial reporting requirements may occur in the future, and implementing changes required by new standards,
requirements or laws may require a significant expenditure of our management's time, attention and resources and may adversely affect our
reported financial results. If we are unable to produce accurate financial statements on a timely basis, investors could lose confidence in the
reliability of our financial statements, which could cause the market price of our common stock to decline and make it more difficult for us to
finance our operations and growth.
Interruptions, failures or material breaches in our information technology and communications systems could harm our business,
customer relations and financial condition.
Information technology helps us operate efficiently, interface with customers, maintain financial accuracy and efficiency and
accurately produce our financial statements. If we do not allocate and effectively manage the resources necessary to build and sustain the
proper technology infrastructure, we could be subject to transaction errors, processing inefficiencies, the loss of customers, business
disruptions or the loss of or damage to intellectual property through security breach. If our data management systems do not effectively
collect, store, process and report relevant data for the operation of our business, whether due to equipment malfunction or constraints,
software deficiencies or human error, our ability to effectively plan, forecast and execute our business plan and comply with laws and
regulations will be impaired, perhaps materially. Any such impairment could materially and adversely affect our financial condition, results of
operations, cash flows and the timeliness with which we internally and externally report our operating results.
We have applied multiple layers of security to control access to our information technology systems. We also use encryption and
authentication technologies to secure the transmission and storage of data. These security measures may be compromised as a result of third-
party security breaches, employee error, malfeasance, faulty password management or other irregularity, and result in persons obtaining
unauthorized access to our data or accounts. Third parties may attempt to fraudulently induce employees into disclosing user names,
passwords or other sensitive information, which may in turn be used to access our information technology systems.
While we apply best practice policies and devote significant resources to network security, data encryption and other security measures
to protect our information technology and communications systems and data, these security measures cannot provide absolute security. We
may experience a breach of our systems and may be unable to protect sensitive data. The costs to us to eliminate or alleviate network security
problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to address
these problems may not be successful and could result in unexpected interruptions, delays, cessation of service and may harm our business
operations.
Although our systems have been designed around industry-standard architectures to reduce downtime in the event of outages or
catastrophic occurrences, they remain vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication
failures, terrorist attacks, cyber-attacks, viruses, denial-of-service attacks, human error, hardware or software defects or malfunctions, and
similar events or disruptions. Some of our systems are not fully redundant, and our disaster recovery planning is not sufficient for all
eventualities. Our systems are also subject to break-ins, sabotage, and intentional acts of vandalism. Despite any precautions we may take, the
occurrence of a natural disaster, a decision by any of our third-party hosting providers to close a facility we use without adequate notice for
financial or other reasons, or other unanticipated problems at our hosting facilities could cause system interruptions and delays, and result in
loss of critical data and lengthy interruptions in our services.
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We incur significant increased costs as a result of operating as a public company, which may adversely affect our operating results and
financial condition.
As a public company, we incur significant accounting, legal and other expenses, including costs associated with our public company
reporting requirements. We also anticipate that we will continue to incur costs associated with corporate governance requirements, including
requirements under SOX and the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), as well as rules
implemented by the SEC, and the New York Stock Exchange ("NYSE"). Furthermore, these laws and regulations could make it more difficult
or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept
reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these
requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board
committees or as executive officers.
New laws and regulations as well as changes to existing laws and regulations affecting public companies, including the provisions of
SOX and Dodd-Frank and rules adopted by the SEC and the NYSE, would likely result in increased costs to us as we respond to their
requirements. We are investing resources to comply with evolving laws and regulations, and this investment may result in increased general
and administrative expense and a diversion of management's time and attention from revenue generating activities to compliance activities.
Risks Related to Ownership of Our Common Stock
Our stock price may be volatile, and the value of an investment in our common stock may decline.
The trading price of our common stock has been, and is likely to continue to be, volatile, which means that it could decline
substantially within a short period of time and could be subject to wide fluctuations in response to various factors, some of which are beyond
our control. These factors include those discussed in the “Risk Factors” section of this Form 10-K and others such as:
• quarterly variations in our results of operations or those of our competitors;
• failure to meet any guidance that we have previously provided regarding our anticipated results;
• changes in earnings estimates or recommendations by securities analysts;
• failure to meet securities analysts’ estimates;
• announcements by us or our competitors of new products, significant contracts, commercial relationships, acquisitions or capital
commitments;
• developments with respect to intellectual property rights;
• our ability to develop and market new and enhanced products on a timely basis;
• our commencement of, or involvement in, litigation and developments relating to such litigation, including any developments in
the ongoing Occam litigation described in more detail in Note 7, “Commitments and Contingencies - Litigation” of the Notes to
Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K;
• changes in governmental regulations; and
• a slowdown in the communications industry or the general economy.
In recent years, the stock market in general, and the market for technology companies in particular, has experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and
industry factors may seriously affect the market price of our common stock, regardless of our actual operating performance. In addition, in
the past, following periods of volatility in the overall market and the market price of a particular company's securities, securities class action
litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a
diversion of our management's attention and resources.
If securities or industry analysts do not publish research or reports about our business or if they issue an adverse or misleading opinion
regarding our stock, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish
about us or our business. If any of the analysts who cover us issue an adverse or misleading opinion regarding our stock, our stock price
would likely decline. If several of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose
visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable and
may lead to entrenchment of our management and board of directors.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could have the effect of
delaying or preventing changes in control or changes in our management or our board of directors. These provisions include:
• a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the
membership of a majority of our board of directors;
• no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
• the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors
or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of
directors;
• the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms of those shares,
including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership
of a hostile acquirer;
• a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special
meeting of our stockholders;
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• the requirement that a special meeting of stockholders may be called only by the chairman of the board of directors, the chief
executive officer or the board of directors, which may delay the ability of our stockholders to force consideration of a proposal or
to take action, including the removal of directors; and
• advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to
propose matters to be acted upon at a stockholders' meeting, which may discourage or deter a potential acquirer from conducting
a solicitation of proxies to elect the acquirer's own slate of directors or otherwise attempting to obtain control of us.
We are also subject to certain anti-takeover provisions under Delaware law. Under Delaware law, a corporation may not, in general,
engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or,
among other things, the board of directors has approved the transaction.
We may need additional capital in the future to finance our business.
We may need to raise additional capital to fund operations in the future. Although we believe that, based on our current level of
operations and anticipated growth, our existing cash and cash equivalents will provide adequate funds for ongoing operations, planned capital
expenditures and working capital requirements for at least the next 12 months, we may need additional capital if our current plans and
assumptions change. If future financings involve the issuance of equity securities, our then-existing stockholders would suffer dilution. If we
raise additional debt financing, we may be subject to restrictive covenants that limit our ability to conduct our business. We may not be able
to raise sufficient additional funds on terms that are favorable to us, if at all. If we fail to raise sufficient funds and continue to incur losses,
our ability to fund our operations, take advantage of strategic opportunities, develop products or technologies or otherwise respond to
competitive pressures could be significantly limited. Any failure to obtain financing when and as required could force us to curtail our
operations, which would harm our business.
We do not currently intend to pay dividends on our common stock and, consequently, our stockholders' ability to achieve a return on their
investment will depend on appreciation in the price of our common stock.
We do not currently intend to pay any cash dividends on our common stock for the foreseeable future. We currently intend to invest our
future earnings, if any, to fund our growth. Additionally, the terms of our credit facility restrict our ability to pay dividends under certain
circumstances. Therefore, our stockholders are not likely to receive any dividends on our common stock for the foreseeable future.
ITEM 1B.
Unresolved Staff Comments.
None.
ITEM 2.
Properties.
We currently lease approximately 264,000 square feet of office space worldwide. Information concerning our principal leased
properties as of December 31, 2014 is set forth below:
Location
Petaluma, California (1)
San Jose, California
Fremont, California
Minneapolis, Minnesota (3)
Principal Use
Corporate headquarters, sales, marketing, product design, service
and repair engineering, distribution, research and development
Product design, research and development, administration
Not applicable (2)
Product design, research and development, service and repair
engineering
Nanjing, China
Research and development
Richardson, Texas
Service and test engineering
Santa Barbara, California
Research and development
Acton, Massachusetts
Richardson, Texas (4)
Research and development
Service and repair engineering
Square
Footage
Lease
Expiration Date
82,100
February 2019
46,100
36,000
28,500
32,200
14,400
12,400
6,200
6,100
264,000
August 2018
July 2015
March 2019
February 2016
January 2022
June 2019
June 2016
July 2017
(1) On January 28, 2013, we entered into an amendment to this Petaluma lease and extended the lease expiration date to February 2019.
(2) A portion of the property is sublet under a sublease expiring in 2015. The remaining area of the property, for which we have been
actively seeking a sublease, was vacated in March 2013. Employees in this location were consolidated into our San Jose, California
location.
(3) In October 2013, we entered into an amendment to this Minneapolis lease to extend the lease term from March 2014 to March 2019.
Effective as of January 1, 2014, the square footage has been reduced from 33,200 to 28,500 square feet.
(4) The property, for which we have been actively seeking a sublease, was vacated in September 2014. Employees in this location were
relocated into our new site also in Richardson, Texas.
We believe that our facilities are in good condition and are generally suitable to meet our needs for the foreseeable future. However, we
may continue to seek additional space as needed, and we believe this space will be available on commercially reasonable terms.
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ITEM 3.
Legal Proceedings
For a description of our material pending legal proceedings, please refer to Note 7, “Commitments and Contingencies – Litigation” of
the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, which is incorporated by
reference.
ITEM 4.
Mine Safety Disclosures.
Not applicable.
PART II
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Comparative Stock Prices
Our common stock has been trading on the New York Stock Exchange, under the trading symbol “CALX” since our initial public
offering on March 24, 2010. Prior to this time, there was no public market for our common stock. The following table sets forth, for the fiscal
periods indicated, the high and low sale prices per share of our common stock as reported on NYSE.
Fiscal Year 2014
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year 2013
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$
$
9.75
9.28
10.92
11.60
High
9.17
10.98
13.98
13.36
$
$
Low
7.12
7.40
7.67
8.26
7.26
7.29
9.96
8.43
Number of Common Stock Holders and Number of Shares Outstanding
On February 25, 2015, there were approximately 297 stockholders of record of our common stock who held an aggregate of 51,805,177
shares of our common stock. The closing price of our common stock as of February 25, 2015 was $8.40. A substantially greater number of
holders of Calix common stock are street name or beneficial holders, whose shares are held of record by banks, brokers and other financial
institutions.
Dividends
We have never declared or paid any cash dividends on our common stock. Our credit facility does not limit the company’s ability to pay
dividends on our common stock if credit extensions under the credit facility are less than $5 million and certain conditions are met; otherwise
the maximum amount of dividends permitted to be paid under the credit facility is $15 million a year if certain conditions are met. We
currently expect to be able to meet these conditions. However, we do not currently intend to pay any cash dividends on our common stock in
the foreseeable future.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.
Performance Graph
The following graph shows a comparison of the cumulative total shareholder return on our common stock with the cumulative total
returns of the NYSE Composite Index and the Morningstar Communication Equipment Index. The graph tracks the performance of a $100
investment in our common stock and in each of the indexes during the period from March 24, 2010 (the date our common stock commenced
trading on NYSE) through December 31, 2014. Data for the NYSE Composite Index and the Morningstar Communication Equipment Index
assume reinvestment of dividends. Shareholder returns over the indicated period are based on historical data and should not be considered
indicative of future shareholder returns.
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This performance graph shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities under that Section, and shall
not be deemed to be incorporated by reference into any filing of Calix, Inc. under the Securities Act of 1933, as amended.
ITEM 6.
Selected Financial Data.
The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and the
related notes thereto, of this Form 10-K, the section titled “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and the other financial information and data appearing elsewhere in this Form 10-K. The selected financial data included in this
section is not intended to replace and is not a substitute for, the financial statements and related notes in this Form 10-K.
We derived the statements of operations data for the years ended December 31, 2014, 2013 and 2012 and the balance sheet data as of
December 31, 2014 and 2013 from our audited financial statements and related notes thereto of this Form 10-K. We derived the statements of
operations data for the years ended December 31, 2011 and 2010, and the balance sheet data as of December 31, 2012, 2011 and 2010 from
our audited financial statements and related notes which are not included in this Form 10-K. Historical results for any prior period are not
necessarily indicative of future results for any period.
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Statements of Operations Data:
Revenue
Cost of revenue:
Products and services (2)
Acquisition-related expenses
Amortization of intangible assets
Total cost of revenue
Gross profit
Operating expenses:
Research and development (2)
Sales and marketing (2)
General and administrative (2)
Amortization of intangible assets
Acquisition-related expenses (2)
Total operating expenses
Loss from operations
Interest and other income (expense), net (3)
Loss before provision for (benefit from) income taxes
Provision for (benefit from) income taxes
Net loss
Preferred stock dividends
Net loss attributable to common stockholders
Net loss per common share:
Basic and diluted
Weighted-average number of shares used to compute net
loss per common share:
Basic and diluted
Balance Sheet Data:
Cash, cash equivalents and marketable securities
Working capital
Total assets
Common stock and additional paid-in capital
Total stockholders’ equity
$
$
$
2014
2013
Years Ended December 31,
2012 (1)
(In thousands, except per share data)
2011 (1)
2010
$
401,227
$
382,618
$
330,218
$
344,669
$
287,043
215,085
—
8,353
223,438
177,789
80,311
76,283
31,371
10,208
—
198,173
(20,384)
151
(20,233)
581
(20,814)
—
(20,814)
(0.41)
203,191
—
8,353
211,544
171,074
79,299
68,075
31,945
10,208
—
189,527
(18,453)
1,174
(17,279)
(14)
(17,265)
—
(17,265)
(0.35)
$
$
185,103
—
7,539
192,642
137,576
66,748
62,129
26,114
10,208
1,401
166,600
(29,024)
856
(28,168)
158
(28,326)
—
(28,326)
(0.59)
$
$
195,698
19,966
9,552
225,216
119,453
67,725
55,551
27,002
8,569
12,927
171,774
(52,321)
(5)
(52,326)
224
(52,550)
—
(52,550)
(1.15)
$
$
168,873
—
5,440
174,313
112,730
55,412
42,121
27,998
740
3,942
130,213
(17,483)
(989)
(18,472)
81
(18,553)
900
(19,453)
(0.65)
$
$
50,808
49,419
48,180
45,546
29,778
2014
2013
As of December 31,
2012 (1)
(In thousands, except per share data)
2011 (1)
2010
111,679
131,693
370,221
803,101
272,591
$
82,747
114,366
383,599
783,509
273,923
$
46,995
84,255
377,897
761,454
269,075
$
38,938 $
77,745
358,103
741,504
277,417
98,324
126,957
257,556
606,907
195,303
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(1) We acquired Ericsson's fiber access assets in November 2012 and Occam in February 2011. Our Consolidated Statements of Operations
and Consolidated Balance Sheets data include the results of these acquired businesses only for periods subsequent to their respective
acquisition dates. See Note 2, “Business Combinations" of the Notes to the Consolidated Financial Statements in this Form 10-K for
more details.
(2) Includes stock-based compensation as follows:
Cost of revenue
Research and development
Sales and marketing
General and administrative
Acquisition-related expenses
Total
2014
2013
2012
2011
2010
$
$
1,120
5,056
5,601
4,240
—
16,017
$
$
1,468
4,896
5,577
7,980
—
19,921
$
$
1,433
4,227
5,160
6,617
—
17,437
$
$
1,503
4,828
4,500
9,538
1,234
21,603
$
$
1,745
5,966
4,555
13,309
—
25,575
(3) 2013 includes $1.7 million of gain from utilization of inventory credit from Ericsson, 2012 includes $1.0 million of gain on bargain
purchase of Ericsson's fiber access assets and 2010 include $1.2 million of interest expense which is primarily for a term loan that was
repaid in May 2010.
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements
regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 (the “Securities
Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). All statements other than statements of historical facts are statements
that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections
about the industries in which we operate and the beliefs and assumptions of our management. In some cases, forward-looking statements can
be identified by the use of words such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “potential,” or “continue” or the
negative thereof or other comparable terminology. In addition, any statements that refer to projections of our future financial performance,
our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking
statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and
assumptions that are difficult to predict, including those identified in the Risk Factors discussed in Item 1A, in the discussion below, as well
as in other sections of this Annual Report on Form 10-K. Therefore, actual results may differ materially and adversely from those expressed
in any forward-looking statements. All forward-looking statements and reasons why results may differ included in this report are made as of
the date hereof, and we assume no obligation to update these forward-looking statements or reasons why actual results might differ.
Overview
We are a leading global provider of broadband communications access systems and software for fiber- and copper-based network
architectures that enable communications service providers to 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 develop and sell carrier-class hardware and software
products, which is referred to as the Unified Access portfolio that are designed to enhance and transform CSP access networks to meet the
changing demands of subscribers rapidly and cost-effectively.
We market our access systems and software to CSPs globally through our direct sales force as well as a limited number of resellers. As
of December 31, 2014, over 19 million ports of our Unified Access portfolio have been deployed at a growing number of CSPs worldwide,
whose networks serve over 100 million subscriber lines in total. Our customers include many of the world's largest communications
providers. In addition, we have enabled over 1,000 customers to deploy gigabit passive optical network, Active Ethernet and point-to-point
Ethernet fiber access networks.
Our revenue increased to $401.2 million for 2014 from $382.6 million for 2013 and $330.2 million for 2012. During the first half of
2012, we experienced softness in our business due to lower demand across multiple customer markets, which was due to a slowdown in
capital expenditures by service providers increasingly concerned about macro-economic conditions and uncertainties associated with the
implementation of regulatory reforms. However, beginning in the second half of 2012 and during 2013 and 2014, we experienced steady
improvement in our operating results. 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, including in particular, large CSPs and customers in international markets. Since
our inception we have incurred significant losses, and as of December 31, 2014, we had an accumulated deficit of $530.6 million. Our net
loss was $20.8 million, $17.3 million, and $28.3 million for the years ended December 31, 2014, 2013, and 2012, respectively.
Revenue fluctuations result from many factors, including: increases or decreases in customer orders for our products and services,
large customer purchase agreements with delayed revenue recognition, 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 many cases also
challenged by winter weather conditions that inhibit fiber deployment in the outside plant. As of December 31, 2014, our deferred revenue of
$32.1 million primarily included extended warranty services contracts that are recognized ratably over the period during which the services
are to be performed, as well as certain contracts with customers who receive government-supported loans and grants under programs like
ARRA and RUS that require installation services. The timing of deferred recognition may cause significant fluctuations in our revenue and
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operating results from period to period. The revenue generated from ARRA contracts is expected to decline in 2015 as those projects are
expected to reach completion by June 30, 2015.
Cost of revenue is strongly correlated to revenue and will tend to fluctuate from all of the above factors that could impact revenue.
Other factors that impact cost of revenue include: changes in the mix of products and services delivered, customer type and location, changes
in the cost of our inventory and inventory write-downs. Cost of revenue includes fixed expenses related to our internal operations, which
could impact our cost of revenue as a percentage of revenue if there are large sequential fluctuations to revenue.
Our gross profit and gross margin have been, and will likely be, impacted by several factors, including new product introduction or
upgrades to existing products, changes in customer mix, changes in the mix of products and services demanded and sold (and any related
write-downs of existing inventory), shipment volumes, changes in our product costs, changes in pricing and the extent of customer rebates
and incentive programs. We believe our gross margin could increase due to favorable changes in these factors, for example, increases in sales
of our advanced E-Series Ethernet service access platforms, new introductions of our P-Series optical network terminals and reductions in the
impact of rebate or similar programs. We believe our gross margin could decrease due to unfavorable changes in factors such as increased
product costs, pricing decreases due to competitive pressure and an unfavorable customer or product mix. Changes in these factors could have
a material impact on our future average selling prices and unit costs. Also, the timing of deferred revenue recognition and related deferred
costs can have a material impact on our gross profit and gross margin results. The timing of recognition and the relative size of these
arrangements could cause large fluctuations in our gross profit from period to period. Additionally, our gross margin could be impacted by
inventory write-downs.
Our operating expenses have fluctuated based on the following factors: hiring, timing of variable compensation expenses due to
fluctuations in order volumes, timing of salary increases which have historically occurred in the second quarter, timing of bonus expenses due
to changes in the Company’s performance, timing of research and development expenses including prototype builds and intermittent
outsourced development projects, fluctuations in stock-based compensation expenses due to increased equity grants or modifications to
outstanding equity awards, and changes in acquisition-related expenses. As a result of our international expansion, we have incurred
increased compensation costs due to the additional sales headcount. We anticipate that our operating expenses will increase in absolute dollar
amounts but will decline as a percentage of revenue over time.
As a result of the fluctuations described above and a number of other factors, many of which are outside our control, our annual
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.
Acquisition of Ericsson's Fiber Access Assets
On November 2, 2012, we acquired the fiber access assets of Ericsson, including the Ericsson EDA 1500 GPON solution and its
complementary ONT portfolio, under an Asset Purchase Agreement ("EFAA Acquisition"). Total consideration for the purchase was $12.0
million in cash.
In connection with this acquisition, Calix and Ericsson also signed a non-exclusive global reseller agreement, under which Calix
became Ericsson's preferred global partner for broadband access applications. This partnership provides Calix with an extensive global
reseller channel, and we believe our acquisition of Ericsson's fiber access portfolio complemented our industry-leading Unified Access
portfolio. We believe this partnership also provides Ericsson's existing fiber access customers with world-class support and maintenance, and
an expanded portfolio of access systems and software from a leading company totally focused on access.
The transaction is accounted for using the acquisition method of accounting in accordance with the accounting standard for business
combinations. As a result of this acquisition, we recognized a bargain purchase gain of $1.0 million in 2012. We have included the financial
results of the acquired Ericsson's fiber access assets in the Consolidated Financial Statements from the date of acquisition. See Note 2,
“Business Combinations” of the Notes to Consolidated Financial Statements in this Form 10-K for additional information related to this
acquisition.
Acquisition of Occam Networks
On February 22, 2011, we completed our acquisition of Occam, a provider of innovative broadband access products, in a stock and
cash transaction valued at approximately $213.1 million which consisted of $94.5 million of cash consideration and a value of $118.6 million
of common stock and equity awards issued. The combined organization provides CSPs globally with an enhanced portfolio of advanced
broadband access systems, and accelerates innovation across our expanded Unified Access portfolio.
As a result of this acquisition, we recorded $50.6 million in goodwill and $97.7 million in other intangible assets. We are amortizing
the finite-lived intangible assets over their useful lives. See “Critical Accounting Policies and Estimates-Valuation of Goodwill and Intangible
Assets” section below for information relating to these items and our test for impairment. The results of operations of Occam have been
included in our consolidated financial statements since the acquisition date.
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. We base our estimates, assumptions and judgments on historical experience
and on various other factors that are believed to be reasonable under the circumstances. To the extent there are material differences between
these estimates and actual results, our financial statements will be affected. We evaluate our estimates, assumptions and judgments on an
ongoing basis.
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We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our
financial statements.
Business Combination
We accounted for our business acquisitions under Accounting Standards Codification ("ASC") Topic 805, “Business Combinations."
Under this guidance, all of the assets acquired and liabilities assumed are recognized at their fair value as of the acquisition date. The excess
of the purchase price over the estimated fair values of the net tangible and intangible assets acquired is recorded as goodwill. If a business
combination results in a bargain purchase for us, the economic gain resulting from the fair value received being greater than the purchase
price is recorded as a gain included in other income (expense), net, in the Consolidated Statements of Comprehensive Loss. Prior to
recognizing the gain, we reassess whether we have correctly identified all of the assets acquired and liabilities assumed and recognize any
additional assets or liabilities that result from that review. We also review the measurement procedures used in valuing the assets acquired and
liabilities assumed.
While we use our best estimates and assumptions as a part of calculating the fair value at the acquisition date, our estimates are
inherently uncertain and subject to refinement. These assumptions and estimates include a market participant’s use of the asset and an
appropriate discount rate. Our estimates are based on historical experience and information obtained from the management of the acquired
companies. Our significant assumptions and estimates can include, but are not limited to, the cash flows that an asset is expected to generate
in the future, the appropriate weighted-average cost of capital, and the cost savings expected to be derived from acquiring an asset. These
estimates are inherently uncertain and unpredictable. In addition, unanticipated events and circumstances may occur which may affect the
accuracy or validity of such estimates. As a result, during the measurement period, which may be up to one year from the acquisition date, we
may record adjustments retrospectively to the fair value of assets acquired and liabilities assumed, with the corresponding offset to goodwill
as of the acquisition date, or other income or expense in the case of a bargain purchase for the period of the acquisition. Upon the conclusion
of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any
subsequent adjustments are recorded to our Consolidated Statements of Comprehensive Loss.
Revenue Recognition
We derive revenue primarily from the sale of hardware products and related software. Revenue is recognized when all of the following
criteria have been met:
• Persuasive evidence of an arrangement exists. We generally rely upon sales agreements and customer purchase orders as evidence
of an arrangement.
• Delivery has occurred. We use the shipping terms of the arrangement or evidence of customer acceptance to verify delivery or
performance.
• Sales price is fixed or determinable. We assess whether the sales price is fixed or determinable based on the payment terms and
whether the sales price is subject to refund or adjustment. Payment terms to customers can range from net 30 to net 120 days.
• Collectability is reasonably assured. We assess collectability based primarily on creditworthiness of customers and their payment
histories.
Revenue from installation and training services are recognized as the services are completed. Post-sales software support revenue and
extended warranty services revenue are deferred and recognized ratably over the period during which the services are to be performed. To
date, service revenue has comprised an insignificant portion of our revenue and we have not reported service revenue separately from product
revenue in our financial statements. In instances where substantive acceptance provisions are specified in the customer agreement, revenue is
deferred until all acceptance criteria have been met. From time to time, we offer customers sales incentives, which include volume rebates
and discounts. These amounts are estimated on a quarterly basis and recorded net of revenue.
We enter into arrangements with certain of our customers who receive government supported loans and grants from the RUS to finance
capital spending. Under the terms of an RUS equipment contract that includes installation services, the customer does not take possession and
control and title does not pass until formal acceptance is obtained from the customer. Under this type of arrangement, we do not recognize
revenue until we have received formal acceptance from the customer. For RUS arrangements that do not involve installation services, we
recognize revenue in accordance with the revenue recognition policy described above.
Our products contain both software and non-software components that function together to deliver the products' essential functionality.
When we enter into sales arrangements that consist of multiple deliverables of our product and service offerings, we allocate the total
consideration of the arrangement to each separable deliverable based on their relative selling price. We limit the amount allocable to delivered
elements to the amount that is not contingent upon the delivery of additional items or meeting specified performance conditions, and
recognize revenue on each deliverable in accordance with our revenue policy. The determination of selling price for each deliverable is based
on a selling price hierarchy, which is vendor-specific objective evidence (“VSOE”) if available, third-party evidence (“TPE”) if VSOE is not
available, or estimated selling price (“ESP”) if neither VSOE nor TPE is available. VSOE of selling price is based on the price charged when
the element is sold separately. In determining VSOE, we require that a substantial majority of the selling prices of an element fall within a
narrow range when each element is sold separately. We have established VSOE for our training and post-sales software support services
based on the normal pricing practices of these services when sold separately. TPE of selling price is established by evaluating whether there
are similar competitor products or services that are sold in stand-alone sales transaction to similarly situated customers. Generally, our
marketing strategy differs from that of our peers and our offerings contain a significant level of customization and differentiation such that the
comparable pricing of products with similar functionality cannot be obtained. Additionally, as we are unable to reliably determine what
similar competitor products' selling prices are on a stand-alone basis, we are not typically able to determine TPE. ESP is established
considering multiple factors including, but not limited to geographies market conditions, competitive landscape, internal costs, gross margin
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objectives, characteristics of targeted customers and pricing practices. The determination of ESP is made through consultation with and
formal approval by management, taking into consideration the go-to-market strategy.
Stock-Based Compensation
In accordance with ASC Topic 718, "Compensation - Stock Compensation," stock-based awards are recorded at fair value as of the
grant date and recognized to expense over the employee’s requisite service period (generally the vesting period), which we have elected to
amortize on a straight-line basis.
We value restricted stock units ("RSUs") and restricted stock awards ("RSAs") at the closing market price of our common stock on the
date of grant. The fair value of performance restricted stock units ("PRSUs") with a market condition is estimated on the date of grant, using a
Monte Carlo simulation model to estimate the total return ranking of our common 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.
We estimate the fair value of stock options and employee stock purchase rights at the grant date using the Black-Scholes option-pricing
model. This model requires the use of highly judgmental assumptions, including expected stock price volatility and expected life of option
awards, which have a significant impact on the fair value estimates and are discussed in detail in Note 9, "Stockholders' Equity" of the Notes
to Consolidated Financial Statements in this Form 10-K. Changes to these estimates will cause the fair values of our stock options and related
stock-based compensation expense that we record to vary.
In addition, we apply an estimated forfeiture rate to awards granted and record stock-based compensation expense only for those
awards that are expected to vest. Forfeiture rates are estimated at the time of grant based on our historical experience. Further, to the extent
our actual forfeiture rate is different from our estimate, stock-based compensation is adjusted accordingly.
Inventory Valuation
Inventory, which primarily consisted of finished goods purchased from contract manufacturers, is stated at the lower of cost,
determined by the first-in, first-out method, or market value. Inbound shipping costs are included in cost of inventory. In addition, the
Company, from time to time, procures component inventory primarily as a result of manufacturing discontinuation of critical components by
suppliers. We regularly monitor inventory quantities on-hand and record write-downs for excess and obsolete inventories based on our
estimate of demand for our products, potential obsolescence of technology, product life cycle and whether pricing trends or forecasts indicate
that the carrying value of inventory exceeds our estimated selling price. These factors are impacted by market and economic conditions,
technology changes and new product introductions and require estimates that may include elements that are uncertain. Actual demand may
differ from forecasted demand and may have a material effect on gross margins. If inventory is written down, a new cost basis is established
that cannot be increased in future periods. The sale of previously reserved inventory has not had a material impact on our gross margins.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required
payments. We record a specific allowance based on an analysis of individual past-due balances. Additionally, based on historical write-offs
and our collection experience, we record an additional allowance based on a percentage of outstanding receivables. We perform credit
evaluations of our customers’ financial condition. These evaluations require significant judgment and are based on a variety of factors
including, but not limited to, current economic trends, payment history and a financial review of the customer. Actual collection losses may
differ from management’s estimates, and such differences could be material to our financial position and results of operations.
Warranty
We offer initial limited warranties for our hardware products for a period of one or five years, depending on the product type. We
recognize estimated costs related to warranty activities as a component of cost of revenue upon product shipment. The estimates are based on
historical product failure rates and historical costs incurred in correcting product failures. The recorded amount is adjusted from time to time
for specifically identified warranty exposure. Actual warranty expenses are charged against our estimated warranty liability when incurred.
Factors that affect our warranty liability include the number of installed units and historical and anticipated rates of warranty claims and cost
per claim.
Valuation of Goodwill and Intangible Assets
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. We evaluate goodwill on an annual basis as of the end of the second quarter of each year. Management has
determined that we operate as a single reporting unit and, therefore, evaluates goodwill impairment at the enterprise level. Intangible assets
are reviewed for impairment whenever events or changes in circumstances indicate an asset’s carrying value may not be recoverable.
In an annual impairment test, we first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative
goodwill impairment test. In assessing the qualitative factors, management considers 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. If management determines as a result of the qualitative assessment that it is more likely than not (that is, a
likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, then the quantitative test is required.
Otherwise, no further testing is required.
In a quantitative test, we compare the Company's fair value to its carrying value including goodwill. We determine the Company's fair
value using both an income approach and a market approach. Under the income approach, we determine fair value based on estimated future
cash flows, discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of the Company and
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the rate of return an outside investor would expect to earn. Under the market-based approach, we utilize information regarding the Company
as well as publicly available industry information to determine earnings multiples that are used to value the Company. If the carrying value of
the Company exceeds its fair value, we will determine the amount of impairment loss by comparing the implied fair value of goodwill with
the carrying value of goodwill. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair
value.
At the end of the second quarter of 2014, we completed our annual goodwill impairment test. Based on our assessment of the above
qualitative factors, we concluded that the fair value of the Company was more likely than not greater than its carrying amount as of June 28,
2014. As such, it was not necessary to perform the two-step quantitative goodwill impairment test at the time. Subsequent to the 2014 annual
impairment test, there have been no significant events or circumstances affecting the valuation of goodwill. As of December 31, 2014, there
were no events or changes in circumstances that indicated that the carrying amount of intangible assets may not be recoverable or that
goodwill shall be tested for impairment. Therefore, there was no impairment to the carrying value of the Company's goodwill. There were no
impairment losses for goodwill during 2013 and 2012.
Intangible assets with finite useful lives are amortized over their estimated useful life, generally five years. We periodically evaluate
intangible assets for impairment whenever events or changes in circumstances indicate that a potential impairment may have occurred. If such
events or changes in circumstances arise, we compare the carrying amount of the intangible assets to the estimated future undiscounted cash
flows expected to be generated by the assets. If the estimated aggregate undiscounted cash flows are less than the carrying amount of the
intangible assets, an impairment charge, calculated as the amount by which the carrying amount of the assets exceeds the fair value of the
assets, is recorded. The fair value of intangible assets is determined based on the estimated discounted cash flows expected to be generated
from the assets. We have reviewed events and changes to our business during the year and have determined that there was no impairment to
our intangible assets during 2014. We did not incur any impairment losses for intangible assets during 2013 and 2012.
Income Taxes
We evaluate our tax positions and estimate our current tax exposure in each jurisdiction in which we operate. This includes assessing
the temporary differences resulting from differing treatment of items not currently deductible for tax purposes. These differences result in
deferred tax assets and liabilities on our consolidated balance sheets, which are calculated based upon the difference between the financial
statement and tax bases of assets and liabilities using the enacted tax rates that will be in effect when these differences reverse. In general,
deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in our statements of operations
become deductible expenses under applicable income tax laws or loss or credit carry-forwards are utilized. Since realization of our deferred
tax assets is dependent on future taxable income against which these deductions, losses and credits can be utilized, we must assess the
likelihood that our deferred tax assets will be recovered from future taxable income. To the extent we believe that recovery is below the more
likely than not threshold, we must establish a valuation allowance against the net deferred tax asset. Significant judgment is required in
determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against net deferred
tax assets.
Since inception, we have incurred operating losses and accordingly have federal and state net operating loss carry-forwards of $549.1
million and $119.1 million, respectively, as of December 31, 2014. The U.S. federal net operating loss carryforwards will expire at various
dates beginning in 2019 and through 2033, if not utilized. The state net operation loss carryforwards will expire at various dates beginning in
2015 and through 2033, if not utilized. Additionally, we had U.S. federal and state research and development credits of $20.1 million and
$25.7 million as of December 31, 2014. The credits have varying expiration dates between 2015 and 2034 with California credits having no
expiration. These two items account for the bulk of our net deferred tax asset of $212.9 million as of December 31, 2014. Excluding our
foreign operations, we have recorded a full valuation allowance against the net deferred assets at each balance sheet date presented. We
believe that based on the available evidence and history of operation losses, it is more likely than not that we will not be able to utilize all of
our deferred assets before expiration. We intend to maintain the full valuation allowances until sufficient evidence exists to support the
reversal of the valuation allowances.
Results of Operations for Years Ended December 31, 2014, 2013 and 2012
Revenue
The following table sets forth our revenue (in thousands, except for percentages):
Years Ended December 31,
2014 vs 2013 Change
2013 vs 2012 Change
2014
2013
2012
$
%
$
%
Revenue
$
401,227
$
382,618
$
330,218
$ 18,609
5% $ 52,400
16%
Our revenue is principally derived in the United States. During 2014, 2013, and 2012, revenue generated in the United States
represented approximately 88%, 87% and 93%, respectively. We expect that our international revenue will continue to grow and become a
larger proportion of our revenue as we continue our expansion into international markets.
2014 compared to 2013: The increase in revenue during 2014 compared with 2013 resulted from stronger bookings and shipments across all
territories due to increased customer demand. We also recognized revenue derived from contracts funded by the Broadband Stimulus
Programs under the American Recovery and Reinvestment Act of 2009 as we received project acceptance from our customers. Our revenue is
principally derived in the United States. During the year ended 2014, revenue generated in the United States represented approximately
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$352.5 million or 88% of our total revenue. International revenue remained stable at $48.8 million or 12%. We expect international and
overall revenue to grow as we expand our international markets as we add new customers.
We had one customer representing more than 10% of revenue in 2014 and 2013.
2013 compared to 2012: The increase in revenue during 2013 compared with 2012 primarily resulted from improved macro-economic
conditions and our continuous efforts to expand our worldwide footprint. We experienced an increase in shipment volume across our existing
customer base and from the addition of new customers. In addition, our revenue increased in 2013 as a result of completing and recognizing
more revenue on RUS-funded projects, which were previously in deferred revenue. During 2013, our revenue from the United States,
European and Caribbean customers increased by $27.4 million, $17.1 million, and $8.1 million, respectively, as compared with 2012.
Historically, our sales outside of the United States were predominantly to customers in the Caribbean and Canada. We expect growth in sales
to other international locations to become more important over time.
Cost of Revenue and Gross Profit
Our cost of revenue is comprised of the following:
• Products and services revenue—Cost of products revenue includes the inventory costs of our products that have shipped, accrued
warranty costs for our standard warranty program, outbound freight costs to deliver products to our customers, overhead from our
manufacturing operations cost centers, including stock-based compensation, and other manufacturing related costs associated with
manufacturing our products and managing our inventory. We outsource our manufacturing to third-party manufacturers. Inventory costs
are estimated using standard costs, which reflect the cost of historical direct labor, direct overhead and materials used to build our
inventory. Cost of services revenue includes direct installation material costs, direct costs from third-party installers, professional service
costs, repair fees charged by our outsourced repair contractors to refurbish product returns under an extended warranty or per incident
repair agreement, and other miscellaneous costs to support our services.
• Amortization of acquired intangible assets—In connection with the acquisitions of Occam in 2011, we recorded amortizable intangible
assets of $30.3 million which included core developed technologies, purchase order backlog and the trade name. These amounts are
amortized to cost of revenue over their estimated useful lives. In addition, we acquired $16.3 million in-process technology from Occam.
At the end of the first quarter of 2012, upon the completion of the research and development efforts associated with this in-process
technology, we determined that this technology had a useful life of 5 years and therefore reclassified it as core developed technology and
began amortizing this intangible asset to cost of revenue during the second quarter of 2012.
The following table sets forth our cost of revenue (in thousands, except for percentages):
Years Ended December 31,
2014 vs 2013 Change
2013 vs 2012 Change
2014
2013
2012
$
%
$
%
Cost of revenue:
Products and services
Amortization of intangible assets
Total cost of revenue
Gross profit
Gross margin
$ 215,085
8,353
$ 223,438
$ 177,789
$ 203,191
8,353
$ 211,544
$ 171,074
$ 185,103
7,539
$ 192,642
$ 137,576
44%
45%
42%
$
$
$
11,894
—
11,894
6,715
6% $
—%
6% $
4% $
18,088
814
18,902
33,498
10%
11%
10%
24%
2014 compared to 2013: The increase in cost of revenue of $11.9 million during 2014 compared with 2013 was primarily due to increased
shipments, changes in product and customer mix and to inventory write-downs taken in 2014. In 2014, we wrote down $5.8 million of
inventory primarily related to lower than anticipated sales of products we acquired from Ericsson in November 2012 as well as other slow
moving inventory for sale in North America and international markets. In 2013, we wrote-down $1.4 million of inventory. The amortization
of intangible assets remained at the same level.
Gross margin decreased to 44% in 2014 from 45% in 2013 mainly due to inventory write-downs recorded in 2014 compared to 2013.
Without these inventory write-downs, gross margin would have increased compared to 2013. Standard margins on sales of products increased
in 2014 compared to 2013 mainly due to increase in sale of higher margin products. This increase was partly offset by the recognition of
revenue derived from RUS contracts which are lower margins revenues.
We expect to have lower inventory write-downs in future periods, and as a result we do not expect that our gross margin in future
periods will be similarly negatively impacted.
2013 compared to 2012: The increase in cost of revenue during 2013 compared with 2012 was due to an $18.1 million increase in products
and services cost, which was primarily related to increased shipments, the completion and expense recognition of several RUS-funded
projects and a $2.1 million increase in provision for write-downs of excess and obsolete inventories, and a $0.8 million increase in
amortization of intangible assets resulted from core developed technology that began amortizing in the second quarter of 2012. See Note 5,
“Goodwill and Intangible Assets” of the Notes to Consolidated Financial Statements included in this Form 10-K for details of this intangible
asset.
Gross margin increased in 2013 compared with 2012, primarily due to a combination of product mix and cost reductions. In 2013, we
shipped greater quantities of higher margin E-Series platforms as compared to 2012.
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Operating Expenses
Research and Development Expenses
Research and development expenses represent the largest component of our operating expenses and include personnel costs, consulting
services, depreciation on lab equipment, costs of prototypes and overhead allocations. We generally expense research and development costs
as incurred, since the costs of software development that we incur after a product has reached technological feasibility are not material. The
following table sets forth our research and development expenses (in thousands, except for percentages):
Research and development
Percent of total revenue
Years Ended December 31,
2014 vs 2013 Change
2013 vs 2012 Change
2014
2013
2012
$
%
$
$
80,311
$
79,299
$
66,748
$
1,012
1% $
12,551
%
19%
20%
21%
20%
2014 compared to 2013: The increase in research and development expenses during 2014 compared with 2013 was primarily driven by an
increase in compensation and employee benefits of $2.9 million, partially offset by a net decrease in consulting services related to back-office
certifications and other professional services of $1.8 million. We increased our research and development workforce by hiring new employees
which led to higher compensation cost.
The percentage of research and development expenses over total revenue remained relatively flat from year to year.
We are continuing our strategic investments in our Unified Access portfolio. We intend to continue to dedicate significant resources to
research and development and to develop new product capabilities to support the performance, scalability and management of our Unified
Access portfolio. We expect to continue to incur research and development expenses in connection with our new and existing products and
our expansion into international markets.
2013 compared to 2012: The increase in research and development expenses during 2013 compared with 2012 was primarily due to a $9.9
million increase in compensation and employee benefits expenses, including stock-based compensation expense, due to increased headcount
resulting from our acquisition of Ericsson's fiber access assets in November 2012, a company-wide salary increase, and bonuses earned in
2013. In 2012, we did not have a company-wide salary increase or bonus payout. In addition, during 2013, we had a $2.5 million increase in
depreciation and facility related costs as a result of the additional equipment that was acquired from Ericsson and entry into a lease for office
space in San Jose in November 2012.
Sales and Marketing Expenses
Sales and marketing expenses consist of personnel costs, employee sales commissions and marketing programs. The following table
sets forth our sales and marketing expenses (in thousands, except for percentages):
Sales and marketing
Percent of total revenue
Years Ended December 31,
2014 vs 2013 Change
2013 vs 2012 Change
2014
2013
2012
$
%
$
$
76,283
$
68,075
$
62,129
$
8,208
12% $
5,946
%
10%
19%
18%
19%
2014 compared to 2013: The increase in sales and marketing expenses during 2014 compared with 2013 was primarily due to an increase of
$6.0 million in compensation and employee benefits, marketing and advertising related expenses of $0.8 million, travel and entertainment of
$0.6 million and professional and consulting services of $0.1 million. Increases were mainly due to increased headcount resulting from the
hiring of additional employees in 2014 and increased sales and marketing efforts in order to support our domestic and international
expansion.
The percentage of total sales and marketing expenses over total revenue remained relatively flat from year to year.
We will 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.
2013 compared to 2012: The increase in sales and marketing expenses during 2013 compared with 2012 was primarily due to a $4.1 million
increase in compensation and employee benefits-related expenses, including stock-based compensation expense, due to increased headcount
resulting from the hiring of additional employees to pursue our international expansion, the company-wide salary increase, bonuses earned
during 2013, and increased commissions resulting from increased international sales. In addition, depreciation and amortization expenses
increased by $1.1 million primarily due to increased purchase of software applications, and consulting services expense increased by $0.8
million primarily due to the IT consulting services and support provided to the former Ericsson customers.
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General and Administrative Expenses
General and administrative expenses consist primarily of personnel costs and costs for facilities related to our executive, finance,
human resource, information technology and legal organizations and fees for professional services. Professional services consist of outside
legal, tax, and audit services. The following table sets forth our general and administrative expenses (in thousands, except for percentages):
General and administrative
Percent of total revenue
Years Ended December 31,
2014 vs 2013 Change
2013 vs 2012 Change
2014
2013
2012
$
%
$
$
31,371
$
31,945
$
26,114
$
(574)
(2)% $
5,831
%
22%
8%
8%
8%
2014 compared to 2013: The decrease in general and administrative expenses during 2014 compared with 2013 was primarily due to $3.7
million decrease in stock-based compensation due to executive equity awards that completed vesting in 2013; partially offset by additional
legal fees recognized in connection with the ongoing Occam class action litigation of $1.3 million mainly relating to fees not reimbursable
under our existing Directors & Officers liability insurance coverage and increases in consulting and other professional services of $1.2
million, salaries and other employee benefits of $0.5 million and facility expenses of $0.2 million.
Our general and administrative expenses as a percentage of total revenue remained flat at 8% from year to year.
2013 compared to 2012: The increase in general and administrative expenses during 2013 compared with 2012 was partly due to a $3.1
million increase in compensation and employee benefits related expenses, including stock-based compensation expense, primarily due to the
company-wide salary increase, bonuses earned during 2013, additional equity awards granted in 2013, and increased headcount. During 2013,
there was also a $1.6 million increase in professional and consulting service expenses resulting primarily from increased legal and audit fees
as well as increased projects on infrastructure hosting and application support.
Acquisition-related Expenses
We expense all acquisition-related costs as incurred. These costs generally include outside services for legal and accounting fees, costs
associated with consolidating facilities, severance and retention bonuses paid to transitional and certain other employees, and costs for other
integration services. The following table sets forth our acquisition-related expenses included in operating expenses (in thousands, except for
percentages):
Years Ended December 31,
2014 vs 2013 Change
2013 vs 2012 Change
2014
2013
2012
$
%
$
%
Acquisition-related expenses
Percent of total revenue
$
$
—
—%
—
—%
$
1,401
$
—
—% $
(1,401)
(100)%
—%
2014 compared to 2013: No business acquisitions occurred in 2014 and 2013.
2013 compared to 2012: Acquisition-related expenses for 2012 were related to our EFAA acquisition. The vast majority of the $1.4 million
acquisition-related expense consisted of one-time payments made to former Ericsson employees who transferred to Calix as a result of the
acquisition.
For more information regarding the EFAA acquisition, see Note 2, “Business Combinations” of the Notes to Consolidated Financial
Statements included in this Form 10-K.
Amortization of Intangible Assets
In connection with our acquisition of Occam in 2011, we recorded an amortizable intangible asset related to customer relationships of
$51.0 million. This amount is amortized to operating expenses over its estimated useful life. The following table sets forth our amortization of
intangible assets expenses included in operating expenses (in thousands, except for percentages):
Amortization of intangible assets
$
10,208
$
10,208
$
10,208
$
—
—% $
—
Percent of total revenue
3%
3%
3%
2014
2013
2012
$
%
$
%
—%
Years Ended December 31,
2014 vs 2013 Change
2013 vs 2012 Change
2014 compared to 2013: Amortization of intangible assets for 2014 had not changed compared with 2013 because there had been no changes
in our intangible assets.
2013 compared to 2012: Amortization of intangible assets for 2013 had not changed compared with 2012 because there had been no changes
in our intangible assets.
See Note 5, “Goodwill and Intangible Assets” of the Notes to Consolidated Financial Statements included in this Form 10-K for details
of this intangible asset.
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Interest and Other Income (Expense), net
The following table sets forth our interest and other income (expense), net (in thousands, except for percentages):
Years Ended December 31,
2014 vs 2013 Change
2013 vs 2012 Change
2014
2013
2012
$
%
$
%
Interest and other income (expense), net
Interest income
Interest expense
Utilization of inventory credit
Gain on bargain purchase
Other income (expense), net
$
729
(806)
—
—
228
$
7
(167)
1,651
—
(317)
$
15
(185)
—
1,029
(3)
$
722
(639)
(1,651)
—
545
10,314 % $
383 %
(100)%
— %
(172)%
(8)
18
1,651
(1,029)
(314)
(53)%
(10)%
100 %
(100)%
10,467 %
Total interest and other income (expense), net $
151
$ 1,174
$
Percent of total revenue
—%
—%
856
—%
$ (1,023)
(87)% $
318
37 %
2014 compared to 2013: The decrease in interest and other income (expense), net, for 2014 compared with 2013 was primarily attributable to
a $1.7 million gain we recognized in 2013 associated with inventories we obtained from Ericsson using a credit that we received as part of
our EFAA acquisition ("Ericsson Credit"). We did not use any legacy Ericsson Credit in 2014. This was partially offset by lower loss on
retirement of property and equipment which decreased by $0.5 million as compared to 2013.
2013 compared to 2012: The increase in interest and other income (expense), net, for 2013 compared with 2012 was primarily attributable to
a gain associated with inventories we obtained from Ericsson using the Ericsson Credit. We recorded such inventories at their fair market
value and recognized a gain of $1.7 million for the amount in excess of the fair value of the Ericsson Credit that was recorded at the date of
the EFAA acquisition. This increase was offset in part by a $1.0 million gain on bargain purchase recognized in connection with the EFAA
acquisition that was recorded in 2012 which did not recur in 2013. See Note 2, "Business Combinations" of the Notes to the Consolidated
Financial Statements in this Form 10-K for more details.
Provision for (benefit from) Income Taxes
The following table sets forth our provision for (benefit from) income taxes (in thousands, except percentages):
Provision for (benefit from) income taxes
$
Effective tax rate
$
581
(2.9)%
(14)
0.1%
$
158
(0.6)%
$
595
(4,250)% $
(172)
2014
2013
2012
$
%
$
%
(109)%
Years Ended December 31,
2014 vs 2013 Change
2013 vs 2012 Change
2014 compared to 2013: Income tax expense increased by $0.6 million in 2014 from $14 thousand benefit in 2013 to $0.6 million provision
in 2014. The increase was primarily due to higher income in taxable foreign jurisdictions and lower tax loss benefits.
As of December 31, 2014, we had unrecognized tax benefits of $15.4 million, none of which would affect our effective tax rate if recognized.
2013 compared to 2012: Income tax expense decreased by $0.2 million in 2013 from $0.2 million in 2012 to a $14 thousand benefit in 2013.
The decrease was primarily due to a 2012 federal AMT return to provision true-up of $0.3 million, a $0.1 million benefit due to the reversal
of an unrecognized tax benefit reserve, and a $0.3 million decrease in foreign income tax, partially offset by an increase resulting from the
federal and state benefit of $0.6 million recorded in 2012 on the bargain purchase gain related to the EFAA acquisition.
We have significant accumulated net operation losses which are subject to a full valuation allowance and, as such, we have not
received a benefit for these losses.
The income tax benefit for 2013 primarily consisted of state alternative minimum tax (AMT) and state and foreign income taxes, net of
a tax benefit recorded from the utilization of a portion of the AMT net operation loss (NOL) acquired from Occam. We will carry forward the
remainder of the AMT NOL, which was approximately $5.3 million as of December 31, 2013, to offset future AMT taxable income. The
income tax provision for 2012 primarily consisted of federal AMT and state and foreign income taxes. The effective tax rates differ from the
U.S. federal statutory rate of 34.0% due primarily to the tax affected change in the valuation allowance against our deferred tax assets.
As of December 31, 2013, we had unrecognized tax benefits of $14.4 million, none of which would affect our effective tax rate if
recognized.
Liquidity and Capital Resources
We have funded our operations primarily through cash generated from operations and the 2010 initial public offering of our common
stock. At December 31, 2014, we had cash and cash equivalents of $48.8 million including $3.8 million of cash held by our foreign
subsidiaries. Our cash and cash equivalents consisted of deposits held at banks and money market mutual funds held at major financial
institutions. Our intent is to permanently reinvest our earnings outside the U.S. and our current plans do not demonstrate a need to repatriate
the foreign cash to fund our U.S. operations.
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The following table presents the cash inflows and outflows by activity during 2014, 2013, and 2012 (in thousands):
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
Operating Activities
Years Ended December 31,
2014
2013
2012
$
$
38,075
(75,444)
3,575
$
40,818
(6,987)
1,818
27,678
(22,179)
2,513
Our operating activities provided cash of $38.1 million in 2014, $40.8 million in 2013 and $27.7 million in 2012. The decrease in cash
provided by operating activities during 2014 as compared to 2013 was due primarily to an unfavorable change of $6.7 million in our
operating results after adjustment of non-cash charges, offset partially by a $3.9 million increase in net cash inflow resulting from changes in
operating assets and liabilities.
In 2014, non-cash charges were $44.5 million (the majority of which consist of stock-based compensation expense, amortization
expenses and depreciation). Cash inflows from changes in operating assets and liabilities primarily resulted from a $12.8 million decrease in
net accounts receivable due to strong collections in 2014, a $4.3 million decrease in inventory due to timing of inventory receipts, a $0.5
million increase in accounts payable due to the timing of inventory receipts and payments, a $7.4 million increase in accrued expenses and a
$0.5 million increase in other long-term liabilities due to the timing of our sales commissions and other expenses accruals and payout. Cash
outflows from changes in operating assets and liabilities included primarily a $5.9 million increase in prepaid expenses and other assets, and a
$21.2 million decrease in deferred revenue as a result of revenue recognition for previous shipments related to certain RUS-funded contracts.
The increase in cash provided by operating activities during 2013 as compared to 2012 was due primarily to a favorable change
of $15.7 million in our operating results after adjustment of non-cash charges, offset partially by a $2.5 million decrease in net cash inflow
resulting from changes in operating assets and liabilities. In 2013, non-cash charges were $47.6 million (the majority of which consist of
stock-based compensation expense, amortization expenses and depreciation). Cash inflows from changes in operating assets and liabilities
primarily resulted from a $16.0 million decrease in net accounts receivable due to strong collections in 2013, a $6.4 million increase in
accounts payable due to the timing of inventory receipts and payments, and a $0.5 million decrease in prepaid expenses and other assets.
Cash outflows from changes in operating assets and liabilities included primarily a $6.1 million increase in inventory due to timing of
inventory receipts, a $4.2 million decrease in accrued liabilities primarily due to the timing of our sales commissions payout and the decrease
in warranty liability, a $1.8 million decrease in deferred revenue as a result of revenue recognition for previous shipments related to certain
RUS-funded contracts, and a $0.3 million increase in restricted cash to collateralize the outstanding letters of credit with Silicon Valley Bank.
In 2012, our operating activities provided cash of $27.7 million. This resulted primarily from non-cash charges of $43.0 million (the
majority of which consist of depreciation and amortization expenses and stock-based compensation expense). Cash inflows from changes in
operating assets and liabilities primarily resulted from a $26.4 million increase in deferred revenue as a result of increased shipments relating
to certain RUS-funded contracts, an $11.3 million decrease in inventory due to improved inventory management, and a $2.6 million increase
in accounts payable due to the timing of inventory receipts and payments. Cash outflows from changes in operating assets and liabilities
included primarily a $13.4 million increase in deferred cost of revenue primarily related to the deferral of certain RUS-funded contracts,
a $13.0 million increase in net accounts receivable due to the timing of sale and billing activities, and a $0.9 million decrease in accrued
liabilities.
Investing Activities
In 2014, our cash used in investing activities consisted of $63.5 million net purchases of marketable securities, which provide higher
income yields than money market funds, and $12.0 million of capital expenditures primarily as a result of leasehold improvements, purchases
of test equipment, computer equipment and software.
In 2013, our cash used in investing activities consisted of capital expenditures of $7.0 million primarily as a result of purchases of test
equipment, computer equipment and software.
In 2012, our cash used in investing activities primarily consisted of cash payment of $12.0 million to complete the acquisition of
Ericsson's fiber access assets, and capital expenditures of $10.2 million primarily as a result of purchases of computer equipment and
software.
Financing Activities
In 2014, our financing activities provided cash of $3.6 million, which consisted of proceeds of $4.6 million from the issuance of
common stock under the employee stock purchase plan (“ESPP”) and proceeds of $1.7 million from the exercises of stock options, offset by
$2.7 million payment of payroll taxes for the vesting of awards under equity incentive plans.
In 2013, our financing activities provided cash of $1.8 million, which consisted of proceeds of $4.8 million from the issuance of
common stock under the ESPP and proceeds of $0.7 million from the exercises of stock options, offset by $3.4 million payment of payroll
taxes for the vesting of awards under equity incentive plans and $0.3 million payments for debt issuance costs associated with the credit
agreement that we entered into with Bank of America.
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In 2012, our financing activities provided cash of $2.5 million, which consisted of proceeds of $4.1 million from the issuance of
common stock under the ESPP and proceeds of $0.2 million from the exercises of stock options, offset by $1.7 million payment of payroll
taxes for the vesting of awards under equity incentive plans.
Working Capital and Capital Expenditure Needs
We currently have no material cash commitments, except for normal recurring trade payables, expense accruals, operating leases and
firm purchase commitments. In addition, 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 also have a credit facility with an aggregate principal amount of up to $50.0 million. The credit facility matures in July 2016, but
may be extended up to two times (each extension for an additional one-year period) upon mutual agreement with the lenders. Proceeds of the
credit facility may be used for general corporate purposes and permitted acquisitions. As of December 31, 2014, there was $50.0 million
available for borrowing under this credit facility. For a detailed discussion of our credit facility, please refer to Note 12, "Credit Facility" of
the Notes to Consolidated Financial Statements included in this Form 10-K.
We believe based on our current operating plan, our existing cash, cash equivalents and existing amounts available under our credit
facility 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, the timing and extent of spending to support development efforts, 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. In the event that additional financing is required from
outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our
business, operating results and financial condition would be harmed.
Contractual Obligations and Commitments
Our principal commitments consist of obligations under operating leases for office space and non-cancelable outstanding purchase
obligations. The following table summarizes our contractual obligations at December 31, 2014 (in thousands):
Operating lease obligations (1)
Non-cancelable purchase commitments (2)
Total
Payments Due by Period
Total
Less Than 1
year
1-3 Years
3-5 Years
More Than 5
years
$
$
11,819
24,770
36,589
$
$
3,193
24,770
27,963
$
$
5,252
—
5,252
$
$
2,904
—
2,904
$
$
470
—
470
(1) The total minimum payments under our operating lease obligations have not been reduced by minimum sublease rentals of
$0.1 million due in the future under non-cancelable sublease of a portion of our office in Fremont, California.
(2) Represents outstanding non-cancelable purchase orders for finished goods to be delivered by our contract manufacturers.
Future minimum operating lease obligations in the table above include primarily payments for our office space in Petaluma, California,
and for our facilities in Minneapolis, Minnesota; Acton, Massachusetts; Nanjing, China; Richardson, Texas; and Fremont, San Jose, and Santa
Barbara, California, which expire at various dates through 2022, and for certain office equipment under non-cancelable operating lease
agreements, obtained through our acquisition of Occam, which expire at various dates through 2015. A portion of the office in Fremont,
California is sublet under a sublease expiring in 2015. We are also actively seeking to sublease our old Richardson, Texas facility that was
vacated in September 2014.
See Note 7, “Commitments and Contingencies” of the Notes to Consolidated Financial Statements included in this Form 10-K for
more discussions on our operating leases and purchase commitments.
Off-Balance Sheet Arrangements
As of December 31, 2014 and December 31, 2013, we did not have any off-balance sheet arrangements.
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The primary objectives of our investment activity are to preserve principal, provide liquidity and maximize income without
significantly increasing risk. By policy, we do not enter into investments for trading or speculative purposes. At December 31, 2014, we had
cash, cash equivalents and marketable securities of $111.7 million, and restricted cash of $0.3 million, which were held primarily in cash,
money market funds and highly liquid marketable securities such as corporate debt instruments and commercial paper. 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.
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Our exposure to interest rate risk also relates to the amount of interest we must pay on our borrowings under our credit facility, which
allows us to borrow up to a maximum amount of $50.0 million. Borrowings under our credit facility will accrue interest at a variable rate
based upon the applicable base rate or LIBOR plus a margin depending on the Company's leverage ratio of consolidated funded indebtedness
to consolidated Adjusted EBITDA (customarily defined). As of December 31, 2014, we had no borrowings under the credit facility.
Foreign Currency Exchange Risk
In our view, our primary foreign currency exposures are economic, translation, and transaction.
Economic Exposure
The direct effect of foreign currency fluctuations on our sales and expenses have not been material because our sales and expenses are
primarily denominated in U.S. dollars. 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 U.S. dollars. Changes in the local currency rates of these vendors in relation to the
U.S. dollar could cause an increase in the price of products that we purchase. Additionally, if the U.S. dollar 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 U.S. dollar 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 U.S. dollars and, therefore, the majority of our revenues are 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 China and the United Kingdom, whose functional currencies are the 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 China associated with
our research and development operations that are maintained there, and in the United Kingdom for our sales and services office there. Our
operating expenses are generally denominated in the functional currencies of our subsidiaries in which the operations are located. For 2014,
approximately 90% of our operating expenses were U.S.-dollar denominated, and 5% each of our expenses were denominated in GBP and
RMB, respectively. If the currency exchange rates in 2014 had been the same as in 2013, our 2014 operating results would have decreased by
approximately $0.4 million. If the U.S. dollar had appreciated or depreciated by 10%, relative to GBP and RMB, our operating expenses for
2014 would have decreased or increased by $2.0 million, or 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 U.S. dollars in preparing our Consolidated Balance Sheets. The effect of foreign exchange rate fluctuations on
our consolidated financial position for the year ended December 31, 2014 was a net translation loss of approximately $52 thousand. This loss
is recognized as an adjustment to stockholders’ equity through accumulated other comprehensive income.
Transaction Exposure
We have certain assets and liabilities, primarily receivables and accounts payable (including inter-company transactions) that are
denominated in currencies other than the relevant entity’s functional currency. In certain circumstances, changes in the functional currency
value of these assets and liabilities create fluctuations in our reported consolidated financial position, cash flows and results of operations.
Transaction gains and losses on these foreign currency denominated assets and liabilities are recognized each period within other income
(expense), net in our Consolidated Statements of Comprehensive Loss. During the year ended December 31, 2014, net loss we recognized
related to these foreign exchange assets and liabilities was approximately $11 thousand.
ITEM 8.
Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets, As of December 31, 2014 and 2013
Consolidated Statements of Comprehensive Loss, Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Stockholders’ Equity, Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows, Years Ended December 31, 2014, 2013 and 2012
Notes to Consolidated Financial Statements
52
53
54
55
56
57
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Calix, Inc.
We have audited the accompanying consolidated balance sheets of Calix, Inc. as of December 31, 2014 and 2013, and the related
consolidated statements of comprehensive loss, stockholders' equity and cash flows for each of the three years in the period ended December
31, 2014. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
Calix, Inc. at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the
period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Calix,
Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated
March 4, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
San Francisco, California
March 4, 2015
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Table of Contents
CALIX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents
Marketable securities
Restricted cash
Accounts receivable, net
Inventory
Deferred cost of revenue
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Goodwill
Intangible assets, net
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued liabilities
Deferred revenue
Total current liabilities
Long-term portion of deferred revenue
Other long-term liabilities
Total liabilities
Commitments and contingencies (See Note 7)
Stockholders’ equity:
December 31,
2014
December 31,
2013
$
$
$
48,829
62,850
295
30,744
46,753
5,080
12,936
207,487
20,144
116,175
25,179
1,236
$
82,747
—
295
43,520
51,071
21,076
5,757
204,466
17,473
116,175
43,740
1,745
370,221
$
383,599
$
23,629
39,443
12,722
75,794
19,393
2,443
97,630
23,163
32,075
34,862
90,100
18,431
1,145
109,676
Preferred stock, $0.025 par value; 5,000,000 shares authorized; no shares issued and outstanding
as of December 31, 2014 and December 31, 2013
—
—
Common stock, $0.025 par value; 100,000,000 shares authorized 51,628,257 shares and
50,224,952 shares issued and outstanding as of December 31, 2014 and December 31, 2013,
respectively
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
1,291
801,810
80
(530,590)
272,591
$
370,221
$
1,256
782,253
190
(509,776)
273,923
383,599
See accompanying notes to consolidated financial statements.
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CALIX, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands, except per share data)
Revenue
Cost of revenue:
Products and services (1)
Amortization of intangible assets
Total cost of revenue
Gross profit
Operating expenses:
Research and development (1)
Sales and marketing (1)
General and administrative (1)
Amortization of intangible assets
Acquisition-related expenses
Total operating expenses
Loss from operations
Interest and other income (expense), net:
Interest income
Interest expense
Utilization of inventory credit
Gain on bargain purchase
Other income (expense), net
Total interest and other income (expense), net
Loss before provision for (benefit from) income taxes
Provision for (benefit from) income taxes
Net loss
Net loss per common share:
Basic and diluted
Weighted-average number of shares used to compute net loss per common
share:
Basic and diluted
Other comprehensive income (loss), net of tax:
Unrealized losses on available-for-sale
marketable securities, net
Foreign currency translation adjustments, net
Total other comprehensive income (loss), net of tax
Comprehensive loss
(1) Includes stock-based compensation as follows:
Cost of revenue
Research and development
Sales and marketing
General and administrative
Years Ended December 31,
2014
2013
2012
$
401,227
$
382,618
$
330,218
215,085
8,353
223,438
177,789
80,311
76,283
31,371
10,208
—
198,173
(20,384)
729
(806)
—
—
228
151
(20,233)
581
(20,814)
203,191
8,353
211,544
171,074
79,299
68,075
31,945
10,208
—
189,527
(18,453)
7
(167)
1,651
—
(317)
1,174
(17,279)
(14)
(17,265)
185,103
7,539
192,642
137,576
66,748
62,129
26,114
10,208
1,401
166,600
(29,024)
15
(185)
—
1,029
(3)
856
(28,168)
158
(28,326)
$
$
$
$
$
(0.41)
$
(0.35)
$
(0.59)
50,808
49,419
48,180
(58)
(52)
(110)
(20,924)
1,120
5,056
5,601
4,240
16,017
$
$
$
$
— $
58
58
(17,207)
$
—
34
34
(28,292)
1,468
4,896
5,577
7,980
19,921
$
$
1,433
4,227
5,160
6,617
17,437
See accompanying notes to consolidated financial statements.
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CALIX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
Balance at December 31, 2011
Stock-based compensation
Exercise of stock options
Issuance of vested restricted stock units, net of taxes
withheld
Stock issued under employee stock purchase plan
Shares withheld for taxes for vested restricted stock
awards
Restricted stock awards forfeited
Net loss
Other comprehensive income
Balance at December 31, 2012
Stock-based compensation
Exercise of stock options
Issuance of vested restricted stock units, net of taxes
withheld
Stock issued under employee stock purchase plan
Shares withheld for taxes for vested restricted stock
awards
Restricted stock awards forfeited
Net loss
Other comprehensive income
Balance at December 31, 2013
Stock-based compensation
Exercise of stock options
Issuance of vested performance restricted stock
units, net of taxes withheld
Issuance of vested restricted stock units, net of taxes
withheld
Stock issued under employee stock purchase plan
Shares withheld for taxes for vested restricted stock
awards
Restricted stock awards forfeited
Net loss
Other comprehensive loss
Balance at December 31, 2014
Common Stock
Shares
47,825
Amount
1,195
$
—
115
400
619
(35)
(25)
—
—
—
3
10
16
(1)
(1)
—
—
48,899
—
1,222
—
160
529
686
(34)
(15)
—
—
4
14
17
(1)
—
—
—
50,225
1,256
—
224
99
449
683
(42)
(10)
—
—
—
6
2
11
17
(1)
—
—
—
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income
Accumulated
Deficit
Total
Stockholders’
Equity
$
740,309
$
17,437
191
(1,564)
4,047
(189)
1
—
—
760,232
19,921
743
(3,045)
4,811
(409)
—
—
—
782,253
16,017
1,662
(535)
(1,851)
4,610
(346)
—
—
—
98
—
—
—
—
—
—
—
34
132
—
—
—
—
—
—
58
190
—
—
—
—
—
—
—
—
(110)
$
(464,185)
$
—
—
—
—
—
—
(28,326)
—
(492,511)
—
—
—
—
—
(17,265)
—
(509,776)
—
—
—
—
—
—
—
(20,814)
—
277,417
17,437
194
(1,554)
4,063
(190)
—
(28,326)
34
269,075
19,921
747
(3,031)
4,828
(410)
—
(17,265)
58
273,923
16,017
1,668
(533)
(1,840)
4,627
(347)
—
(20,814)
(110)
51,628
$
1,291
$
801,810
$
80
$
(530,590)
$
272,591
See accompanying notes to consolidated financial statements.
55
Table of Contents
CALIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities:
$
(20,814)
$
(17,265)
$
(28,326)
Years Ended December 31,
2014
2013
2012
Depreciation and amortization
Loss on retirement of property and equipment
Amortization of intangible assets
Amortization of premiums relating to available-for-sale securities
Gain on sale of available-for-sale securities
Stock-based compensation
Utilization of inventory credit
Gain on bargain purchase
Changes in operating assets and liabilities:
Restricted cash
Accounts receivable, net
Inventory
Deferred cost of revenue
Prepaid expenses and other assets
Accounts payable
Accrued liabilities
Deferred revenue
Other long-term liabilities
Net cash provided by operating activities
Investing activities:
Purchases of property and equipment
Purchases of marketable securities
Sales of marketable securities
Maturities of marketable securities
Acquisitions, net of cash acquired
Net cash used in investing activities
Financing activities:
Proceeds from exercise of stock options
Proceeds from employee stock purchase plan
Taxes paid for awards vested under equity incentive plans
Payments for debt issuance costs
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures of cash flow information
Interest paid
Income taxes paid
Non-cash financing and investing activities
Property and equipment acquired using credits from Ericsson Inc.
9,263
50
18,561
574
(1)
16,017
—
—
—
12,776
4,319
15,996
(5,908)
467
7,440
(21,178)
513
38,075
(11,961)
(67,698)
615
3,600
—
(75,444)
1,668
4,627
(2,720)
—
3,575
(124)
(33,918)
82,747
48,829
159
72
$
$
10,181
569
18,561
—
—
19,921
(1,651)
—
(295)
15,999
(6,138)
1
535
6,359
(4,217)
(1,804)
62
40,818
(6,987)
—
—
—
—
(6,987)
747
4,828
(3,441)
(316)
1,818
103
35,752
46,995
82,747
57
96
— $
125
$
$
$
8,562
262
17,747
—
—
17,437
—
(1,029)
754
(13,011)
11,308
(13,379)
47
2,554
(869)
26,403
(782)
27,678
(10,179)
—
—
—
(12,000)
(22,179)
194
4,063
(1,744)
—
2,513
45
8,057
38,938
46,995
68
125
—
$
$
$
See accompanying notes to consolidated financial statements.
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Table of Contents
CALIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Significant Accounting Policies
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 systems and software for fiber- and
copper-based network architectures that enable communications service providers ("CSPs") to transform their networks and 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. The Company develops and sells carrier-class hardware and software products, which the Company refers to as the Unified
Access portfolio that are designed to enhance and transform CSP access networks to meet the changing demands of subscribers rapidly and
cost-effectively.
Basis of Presentation
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.
The accompanying 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”). In the opinion of management,
the consolidated 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.
Applicable Accounting Guidance
Any reference in these notes to applicable accounting guidance (“guidance”) is meant to refer to the authoritative U.S. generally
accepted accounting principles ("GAAP") as found in the Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”).
Use of Estimates
The preparation of financial statements is in conformity with U.S. GAAP, which requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. For the Company, these
estimates include, but are not limited to: allowances for doubtful accounts and sales returns, excess and obsolete inventory, allowances for
obligations to its contract manufacturers, valuation of stock-based compensation, useful lives assigned to long-lived assets and acquired
intangible assets, warranty costs, and contingencies. Actual results could differ from those estimates, and such differences could be material
to the Company's financial position and results of operations.
Business Combination
The Company accounted for its business acquisitions under ASC Topic 805, “Business Combinations” ("ASC Topic 805"). Under this
guidance all of the assets acquired and liabilities assumed are recognized at their fair value as of the acquisition date. The excess of the
purchase price over the estimated fair values of the net tangible and intangible assets acquired is recorded as goodwill. If a business
combination results in a bargain purchase for the Company, the economic gain resulting from the fair value received being greater than the
purchase price is recorded as a gain that is included in other income (expense), net in the Consolidated Statements of Comprehensive Loss.
Prior to recognizing the gain, the Company reassesses whether it has correctly identified all of the assets acquired and liabilities assumed and
recognizes any additional assets or liabilities that result from that review. The Company also reviews the measurement procedures used in
valuing the assets acquired and liabilities assumed.
While the Company uses its best estimates and assumptions as a part of calculating the fair value at the acquisition date, the Company's
estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which maybe up to one year from
the acquisition date, the Company may record adjustments retrospectively to the fair value of assets acquired and liabilities assumed, with the
corresponding offset to goodwill, or records a corresponding other income or expense in the case of a bargain purchase. Upon the conclusion
of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any
subsequent adjustments are recorded to the Company's Consolidated Statements of Comprehensive Loss.
Transaction costs associated with the business combinations are expensed as incurred, and are included in acquisition-related expenses
within operating expenses in the Consolidated Statements of Comprehensive Loss.
Revenue Recognition
The Company derives revenue primarily from the sale of hardware products and related software. Revenue is recognized when all of
the following criteria have been met:
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• Persuasive evidence of an arrangement exists. The Company generally relies upon sales agreements and customer purchase orders
as evidence of an arrangement.
• Delivery has occurred. The Company uses the shipping terms of the arrangement or evidence of customer acceptance to verify
delivery or performance.
• Sales price is fixed or determinable. The Company assesses whether the sales price is fixed or determinable based on the payment
terms and whether the sales price is subject to refund or adjustment. Payment terms to customers can range from net 30 to net 120
days.
• Collectability is reasonably assured. The Company assesses collectability based primarily on creditworthiness of customers and their
payment histories.
Revenue from installation and training services are recognized as the services are completed. Post-sales software support revenue and
extended warranty services revenue are deferred and recognized ratably over the period during which the services are to be performed. To
date, service revenue has comprised an insignificant portion of the Company's revenue and the Company has not reported service revenue
separately from product revenue in its financial statements. In instances where substantive acceptance provisions are specified in the
customer agreement, revenue is deferred until all acceptance criteria have been met. From time to time, the Company offers customers sales
incentives, which include volume rebates and discounts. These amounts are estimated on a quarterly basis and recorded as a reduction of
revenue.
The Company enters into arrangements with certain of its customers who receive government supported loans and grants from the U.S.
Department of Agriculture's Rural Utility Service (“RUS”) to finance capital spending. Under the terms of an RUS equipment contract that
includes installation services, the customer does not take possession and control and title does not pass until formal acceptance is obtained
from the customer. Under this type of arrangement, the Company does not recognize revenue until it has received formal acceptance from the
customer. For RUS arrangements that do not involve installation services, the Company recognizes revenue in accordance with the revenue
recognition policy described above.
The Company's products contain both software and non-software components that function together to deliver the products' essential
functionality. When the Company enters into sales arrangements that consist of multiple deliverables of its product and service offerings, the
Company allocates the total consideration of the arrangement to each separable deliverable based on its relative selling price. The Company
limits the amount allocable to delivered elements to the amount that is not contingent upon the delivery of additional items or meeting
specified performance conditions, and recognizes revenue on each deliverable in accordance with its revenue recognition policy. The
determination of selling price for each deliverable is based on a selling price hierarchy, which is vendor-specific objective evidence
(“VSOE”) if available, third-party evidence (“TPE”) if VSOE is not available, or estimated selling price (“ESP”) if neither VSOE nor TPE is
available. VSOE of selling price is based on the price charged when the element is sold separately. In determining VSOE, the Company
requires that a substantial majority of the selling prices of an element fall within a narrow range when each element is sold separately. The
Company has established VSOE for its training and post-sales software support services based on the normal pricing practices of these
services when sold separately. TPE of selling price is established by evaluating whether there are similar competitor products or services that
are sold in stand-alone sales transaction to similarly situated customers. Generally, the Company's marketing strategy differs from that of its
peers and its offerings contain a significant level of customization and differentiation such that the comparable pricing of products with
similar functionality cannot be obtained. Additionally, as the Company is unable to reliably determine what similar competitor products'
selling prices are on a stand-alone basis, it is not typically able to determine TPE. ESP is established considering multiple factors including,
but not limited to geographies market conditions, competitive landscape, internal costs, gross margin objectives, characteristics of targeted
customers and pricing practices. The determination of ESP is made through consultation with and formal approval by management, taking
into consideration the go-to-market strategy.
Cost of Revenue
Cost of revenue consists primarily of finished goods inventory purchased from the Company’s contract manufacturers, payroll and
related expenses associated with managing the relationships with contract manufacturers, depreciation of manufacturing test equipment,
warranty costs, excess and obsolete inventory costs, shipping charges, and amortization of certain intangible assets.
Stock-Based Compensation
In accordance with ASC Topic 718, "Compensation - Stock Compensation" ("ASC Topic 718"), stock-based awards are recorded at fair
value as of the grant date and recognized to expense over the employee’s requisite service period (generally the vesting period), which the
Company has elected to amortize on a straight-line basis. Stock-based compensation expense is reduced by the Company’s estimated
forfeitures on all unvested awards.
The fair value of stock option and employee stock purchase right is estimated at the grant date using the Black-Scholes option valuation
model. The fair value of restricted stock unit and restricted stock award is based on the closing market price of the Company's common stock
on the date of grant. The fair value of performance restricted stock unit ("PRSU") with a market condition is estimated on the date of grant,
using a Monte Carlo simulation model to estimate the total return ranking 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.
Warranty
The Company offers limited warranties for its hardware products for a period of one or five years, depending on the product type.
Warranty service revenues are deferred and recognized ratably over the period during which the services are to be performed. The Company
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recognizes estimated costs related to warranty activities as a component of cost of revenue upon product shipment. The estimates are based
on historical product failure rates and historical costs incurred in correcting product failures. The recorded amount is adjusted from time to
time for specifically identified warranty exposure. Actual warranty expenses are charged against the Company’s estimated warranty liability
when incurred. Factors that affect the Company’s warranty liability include the number of installed units and historical and anticipated rates
of warranty claims and cost per claim.
Research and Development
Research and development costs include costs of developing new products and processes, as well as design and engineering costs. Such
costs are charged to research and development expense as incurred.
Development costs related to software incorporated in the Company’s products incurred subsequent to the establishment of
technological feasibility are capitalized and amortized over the estimated useful lives of the related products. Technological feasibility is
established upon completion of a working model.
Credit Risk and Inventory Supplier Concentrations
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash
equivalents and accounts receivable. Cash equivalents consist of money market funds, which are invested through financial institutions in the
United States. Deposits in these financial institutions may, at times, exceed federally insured limits. The Company has not experienced any
losses in such accounts. The Company also has approximately $3.8 million of cash held by its foreign subsidiaries in China and the United
Kingdom. Management believes that the financial institutions that hold the Company’s cash and cash equivalents are financially sound and,
accordingly, minimal credit risk exists with respect to these cash and cash equivalents.
Concentrations of credit risk in relation to customers with an accounts receivable balance of 10% or greater of total accounts receivable
and customers with net revenues of 10% or greater of total revenues are presented below for the periods indicated.
CenturyLink
Ericsson (1)
Percentage of Accounts Receivable
At December 31,
2014
*
*
2013
15%
12%
Percentage of Revenue
Years Ended December 31,
2013
26%
*
2012
21%
*
2014
23%
*
(1) Includes certain of Ericsson's consolidated subsidiaries.
* Less than 10% of total accounts receivable or revenue.
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make
required payments. The Company records a specific allowance based on an analysis of individual past-due balances. Additionally, based on
its historical write-offs and collections experience, the Company records an additional allowance based on a percentage of outstanding
receivables. The Company performs credit evaluations of its customers’ financial condition. These evaluations require significant judgment
and are based on a variety of factors including, but not limited to, current economic trends, payment history and financial review of the
customer. Actual collection losses may differ from management’s estimates, and such differences could be material to the Company’s
financial position and results of operations.
The Company depends primarily on a small number of outside contract manufacturers for the bulk of its finished goods inventory. In
particular, the Company relies on Flextronics for the manufacture of most of its products. The Company generally purchases its products
through purchase orders with its suppliers or contract manufacturers. While the Company seeks to maintain a sufficient reserve of its
products, the Company’s business and results of operations could be adversely affected by a stoppage or delay in receiving such products, the
receipt of defective parts, an increase in price of such products or the Company’s inability to obtain lower prices from its contract
manufacturers and suppliers in response to competitive pressures.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, marketable securities, trade receivables, accounts payable, and other accrued
liabilities approximate their fair value due to their relatively short-term nature.
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 and commercial paper. 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 and commercial paper 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 and marketable securities are stated at amounts that approximate fair value based on quoted market prices.
The Company’s investments have been classified and accounted for as available-for-sale. Such investments are recorded at fair value
and unrealized holding gains and losses are reported as a separate component of comprehensive loss in the stockholders’ equity until realized.
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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 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 December 31, 2014 and has determined that no investments with
unrealized losses are other-than-temporarily impaired. No investments have been in a continuous loss position greater than one year.
Restricted Cash
As of each of December 31, 2014 and 2013, the Company had $0.3 million cash restricted for collateralizing the outstanding letters of
credit with Silicon Valley Bank.
Inventory
Inventory, which primarily consisted of finished goods purchased from contract manufacturers, is stated at the lower of cost,
determined by the first-in, first-out method, or market value. Inbound shipping costs are included in cost of inventory. In addition, the
Company, from time to time, procures component inventory primarily as a result of manufacturing discontinuation of critical components by
suppliers. The Company regularly monitors inventory quantities on hand and records write-downs for excess and obsolete inventories based
on the Company’s estimate of demand for its products, potential obsolescence of technology, product life cycles, and whether pricing trends
or forecasts indicate that the carrying value of inventory exceeds its estimated selling price. These factors are impacted by market and
economic conditions, technology changes, and new product introductions and require estimates that may include elements that are uncertain.
Actual demand may differ from forecasted demand and may have a material effect on gross margins. If inventory is written down, a new cost
basis is established that cannot be increased in future periods. Shipments from our suppliers or contract manufacturers before the Company
receives them are recorded as in-transit inventory when title and the significant risks and rewards of ownership have passed to the Company.
Deferred Cost of Revenue
When the Company’s products have been shipped, but the product revenue associated with the arrangement has been deferred as a
result of not meeting the criteria for immediate revenue recognition, the Company also defers the related inventory costs for the delivered
items until all criteria are met for revenue recognition. Deferred cost of revenue also includes installation service costs related to customer
installation projects in which the revenue has been deferred until completion of the project and, to a lesser extent, trial orders that are pending
acceptance.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation, and are depreciated using the straight-line method over the
estimated useful life of each asset. Computer equipment is depreciated over two years; purchased software is depreciated over three years;
test equipment is depreciated over three years; furniture and fixtures are depreciated over seven years; and leasehold improvements are
depreciated over the shorter of the respective lease term or the estimated useful life of the asset. Maintenance and repairs are charged to
expense as incurred.
Goodwill
The Company records goodwill when consideration paid in a business acquisition exceeds the fair value of the net tangible assets and
the identified intangible assets acquired. Goodwill is not amortized but instead is subject to an annual impairment test or more frequently if
events or changes in circumstances indicate that it may be impaired. The Company evaluates goodwill on an annual basis as of the end of the
second quarter of each fiscal year. Management has determined that it operates as a single reporting unit and, therefore, evaluates goodwill
impairment at the enterprise level.
In an annual impairment test, the Company first assesses qualitative factors to determine whether it is necessary to perform the two-
step quantitative goodwill impairment test. In assessing the qualitative factors, management considers 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. If the Company determines as a result of the qualitative assessment that it is more likely than not (that
is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, then the quantitative test is
required. Otherwise, no further testing is required.
In a quantitative test, the Company compares its fair value to its carrying value including goodwill. The Company determines its fair
value using both an income approach and a market approach. Under the income approach, the Company determines fair value based on
estimated future cash flows, discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of
the Company and the rate of return an outside investor would expect to earn. Under the market-based approach, the Company utilizes
information regarding the Company as well as publicly available industry information to determine earnings multiples that are used to value
the Company. If the carrying value of the Company exceeds its fair value, the Company will determine the amount of impairment loss by
comparing the implied fair value of goodwill with the carrying value of goodwill. An impairment charge is recognized for the excess of the
carrying value of goodwill over its implied fair value.
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At the end of the second quarter of 2014, the Company has completed its annual goodwill impairment test. Based on its assessment of
the above qualitative factors, management concluded that the fair value of the Company was more likely than not greater than its carrying
amount as of June 28, 2014. As such, it was not necessary to perform the two-step quantitative goodwill impairment test at the time.
Subsequent to the 2014 annual impairment test, there have been no significant events or circumstances affecting the valuation of goodwill. As
of December 31, 2014, there was no impairment to the carrying value of the Company's goodwill. There were no impairment losses for
goodwill during 2013 and 2012.
Intangible Assets and Other Long-Lived Assets
Intangible assets with finite useful lives are amortized over their estimated useful life, generally five years. The Company periodically
evaluates long-lived assets, including intangible assets, for impairment whenever events or changes in circumstances indicate that a potential
impairment may have occurred. If such events or changes in circumstances arise, the Company compares the carrying amount of the long-
lived assets to the estimated future undiscounted cash flows expected to be generated by the long-lived assets. If the estimated aggregate
undiscounted cash flows are less than the carrying amount of the long-lived assets, an impairment charge, calculated as the amount by which
the carrying amount of the assets exceeds the fair value of the assets, is recorded. The fair value of long-lived assets is determined based on
the estimated discounted cash flows expected to be generated from the assets. The Company has reviewed events and changes to its business
during the year and has determined that there was no impairment to its intangible assets and other long-lived assets during 2014. The
Company did not incur any impairment losses for intangible assets and other long-lived assets during 2013 and 2012.
Income Taxes
The Company evaluates its tax positions and estimates its current tax exposure along with assessing temporary differences that result
from different book to tax treatment of items not currently deductible for tax purposes. These differences result in deferred tax assets and
liabilities on the Company’s balance sheets, which are estimated based upon the difference between the financial statement and tax bases of
assets and liabilities using the enacted tax rates that will be in effect when these differences reverse. In general, deferred tax assets represent
future tax benefits to be received when certain expenses previously recognized in the Company’s statements of operations become deductible
expenses under applicable income tax laws or loss or credit carryforwards are utilized. Accordingly, realization of the Company’s deferred tax
assets is dependent on future taxable income against which these deductions, losses and credits can be utilized.
The Company must assess the likelihood that the Company’s deferred tax assets will be recovered from future taxable income, and to
the extent the Company believes that recovery is not more likely than not, the Company must establish a valuation allowance. Management
judgment is required in determining the Company’s provision for income taxes, the Company’s deferred tax assets and liabilities and any
valuation allowance recorded against the Company’s net deferred tax assets. Excluding our foreign operations, the Company recorded a full
valuation allowance at each balance sheet date presented because, based on the available evidence, the Company believes it is more likely
than not that it will not be able to utilize all of its deferred tax assets in the future. The Company intends to maintain the full valuation
allowances until sufficient evidence exists to support the reversal of the valuation allowances.
Foreign Currency Translation
Assets and liabilities of the Company’s wholly owned foreign subsidiaries are translated from their respective functional currencies at
exchange rates in effect at the balance sheet date, and revenues and expenses are translated at the monthly average exchanges rates. Any
material resulting translation adjustments are reflected as a separate component of stockholders’ equity. Realized foreign currency transaction
gains and losses were not significant during the years ended December 31, 2014, 2013 and 2012.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("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. The standard
will be effective for the Company in the first quarter of fiscal 2017. Early adoption is not permitted. The Company is currently assessing the
potential impact on its financial statements from adopting this new guidance.
In July 2013, the FASB issued Accounting Standards Update No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized
Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB
Emerging Issues Task Force) ("ASU 2013-11"), which provides explicit guidance on the financial statement presentation of an unrecognized
tax benefit when a net operating loss carryforward or a tax credit carryforward exists. Under the new standard, the Company’s unrecognized
tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward or a tax
credit carryforward. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. The
accounting standard update became effective for the Company in the first quarter of 2014. As the Company’s disclosures already conform to
the required presentation, adoption of this standard did not impact the financial position or results of operations of the Company.
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2. Business Combinations
Acquisition of Ericsson Fiber Access Assets
On November 2, 2012, Calix acquired the fiber access assets of Ericsson Inc. ("Ericsson"), including the Ericsson EDA 1500 GPON
solution and its complementary ONT portfolio, under an Asset Purchase Agreement ("EFAA Acquisition"). In connection with this
acquisition, Calix and Ericsson also signed a non-exclusive global reseller agreement, under which Calix became Ericsson's preferred global
partner for broadband access applications. Calix expected this partnership to provide Calix with an extensive new global reseller channel,
and Calix believed that its acquisition of Ericsson's fiber access portfolio delivered powerful new complements to Calix's industry-leading
Unified Access portfolio. Calix expected that this partnership would also provide Ericsson's existing fiber access customers with world-class
support and maintenance, and an expanded portfolio of access systems and software from a leading company totally focused on access.
The EFAA Acquisition was accounted for as a business combination under ASC Topic 805. The Company finalized the fair values of
the acquired assets and assumed liabilities from Ericsson, as summarized in the following table (in thousands), and closed the measurement
period in 2013.
Inventory
Other current asset
Property and equipment
Other current liabilities
Deferred tax liability
Net assets acquired
Gain on bargain purchase
Total purchase price
At November 2, 2012
9,361
$
739
3,616
(124)
(563)
13,029
(1,029)
12,000
$
Total consideration for the purchase price was $12.0 million in cash. Because the fair value of identifiable assets acquired, net of
liabilities assumed, exceeded the consideration transferred, the Company recognized a bargain purchase gain of $1.0 million, net of income
taxes. The Company reassessed the recognition and measurement of identifiable assets acquired and liabilities assumed and concluded that
all acquired assets and assumed liabilities were recognized and that the valuation procedures and resulting measures were appropriate. The
gain is included as a separate line item on the Company's Consolidated Statements of Comprehensive Loss for the year ended December 31,
2012.
Pursuant to the Asset Purchase Agreement, the Company received a credit of approximately $3.3 million ("Ericsson Credit") that
would expire on August 31, 2013 without cash value. The Ericsson Credit was recorded at fair value as of the date of the acquisition and it
could be used for consulting services, additional inventory, and test equipment agreed to by both parties. During 2013, due to the Company's
marketing and selling effort as well as changes in the market, the Company succeeded in obtaining inventories and equipment from Ericsson
using the Ericsson Credit in a total amount in excess of the fair value of the Ericsson Credit that was recorded by the Company upon the
completion of the acquisition. The Company recorded such inventories received at their fair market value and recognized a gain of $1.7
million for the amount in excess of the fair value of the Ericsson Credit within 'Utilization of inventory credit' in our consolidated statement
of comprehensive loss. Subsequent to the acquisition, Ericsson extended the expiration date of the Ericsson Credit to December 31, 2014.
The Company recognized $1.4 million of acquisition-related costs in 2012 in connection with the EFAA Acquisition. These costs are
included in the Consolidated Statements of Comprehensive Loss in the line item entitled “Acquisition-related expenses” within Operating
expenses.
The assets, liabilities, and operating results associated with the EFAA Acquisition have been included in the Company's consolidated
financial statements from the date of acquisition. For 2013 and onwards, it is impracticable to determine the results of operations or the
revenue which resulted from the EFAA acquisition as the acquired business had been integrated into our operations beginning in 2013. For
2012, approximately $0.6 million of our total revenue resulted from the EFAA acquisition. Pro forma results of operations have not been
presented because it is impracticable to obtain the historical operating results of EFAA before the acquisition on a standalone basis and that
the effect of the acquisition was not material to our consolidated results of operations.
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3. Cash, Cash Equivalents and Marketable Securities
Cash, cash equivalents and marketable securities consisted of the following (in thousands):
Cash and cash equivalents:
Cash
Money market funds
Total cash and cash equivalents
Marketable securities:
Corporate debt securities
Commercial paper
Total marketable securities
December 31,
2014
December 31,
2013
$
$
17,866
30,963
48,829
61,050
1,800
62,850
62,905
19,842
82,747
—
—
—
Total cash, cash equivalents and marketable securities
$
111,679
$
82,747
The carrying amounts of our money market funds approximate their fair values due to their nature, duration and short maturities.
The amortized cost and fair value of marketable securities as of December 31, 2014 were as follows (in thousands):
Corporate debt securities
Commercial paper
Total marketable securities
Amortized
Cost
$
$
61,108
1,800
62,908
$
$
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
1
—
1
$
$
$
(59)
—
(59)
$
$
61,050
1,800
62,850
As of December 31, 2014, there are no marketable securities, classified and accounted for as available-for-sale securities, that have
been in a continuous unrealized loss position in excess of twelve months.
As of December 31, 2014, the amortized cost and fair value of marketable securities by contractual maturity were as follows (in
thousands):
Due in 1 year or less
Due in 1-2 years
Total marketable securities
Amortized Cost
59,835
$
3,073
62,908
$
$
$
Fair Value
59,776
3,074
62,850
As of December 31, 2013, the Company did not hold any marketable securities.
4. Fair Value Measurements
In accordance with ASC Topic 820, "Fair Value Measurements and Disclosures," (“ASC Topic 820”), the Company measures its
cash equivalents and marketable securities at fair value on a recurring basis. ASC Topic 820 clarifies that 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. As a basis for considering such assumptions, ASC Topic 820 establishes a three-tier value
hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – Observable inputs other than quoted prices included in Level 1 for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active, and model-driven valuations in which all significant inputs and significant
value drivers are observable in active markets.
Level 3 – Unobservable inputs to the valuation derived from fair valuation techniques in which one or more significant inputs or
significant value drivers are unobservable. The fair value hierarchy also requires the Company to maximize the use of observable inputs,
when available, and to minimize the use of unobservable inputs when determining inputs and determining fair value.
The following table sets forth the Company's financial assets measured at fair value as of December 31, 2014 and December 31,
2013, based on the three-tier fair value hierarchy (in thousands):
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As of December 31, 2014
Money market funds
Corporate debt securities
Commercial paper
Total
As of December 31, 2013
Money market funds
Corporate debt securities
Commercial paper
Total
Level 1
Level 2
Total
$
30,963
$
— $
—
—
61,050
1,800
30,963
61,050
1,800
$
30,963
$
62,850
$
93,813
Level 1
Level 2
Total
$
19,842
$
— $
19,842
—
—
—
—
—
—
$
19,842
$
— $
19,842
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 and commercial paper 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 twelve months ended December 31, 2014 and
December 31, 2013.
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. ("OSI") in February 2006. This goodwill is not deductible for tax purposes, and there have been no adjustments or
impairment to goodwill since the acquisition dates.
Intangible Assets
Intangible assets are carried at cost, less accumulated amortization. The details of intangible assets as of December 31, 2014 and
2013 are disclosed in the following table (in thousands):
Core developed technology
Customer relationships
December 31, 2014
December 31, 2013
Gross
Carrying
Amount
$
68,964
54,740
Accumulated
Amortization
$
(55,694)
(42,831)
Net
$ 13,270
11,909
Gross
Carrying
Amount
$
68,964
54,740
Accumulated
Amortization
$
(47,339)
(32,625)
Net
$ 21,625
22,115
Total intangible assets, excluding goodwill
$ 123,704
$
(98,525)
$ 25,179
$ 123,704
$
(79,964)
$ 43,740
At the end of the first quarter of 2012, upon the completion of the research and development efforts associated with the $16.3
million in-process technology that was acquired from Occam, the Company determined that this technology had a useful life of 5 years and
therefore reclassified it as core developed technology. The Company began amortizing this intangible asset to cost of revenue during the
second quarter of 2012.
Amortization expense for intangible assets was $18.6 million, $18.6 million, and $17.7 million for the years ended December 31,
2014, 2013, and 2012, respectively. Expected future amortization expense for the fiscal years indicated is as follows (in thousands):
Period
2015
2016
2017
Total
Expected Amortization
Expense
$
$
18,561
5,805
813
25,179
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6. Balance Sheet Details
Accounts receivable, net consisted of the following (in thousands):
Accounts receivable
Allowance for doubtful accounts
Product return reserve
Accounts receivable, net
Inventory consisted of the following (in thousands):
Raw materials
Finished goods
Total inventory
Property and equipment, net consisted of the following (in thousands):
Test equipment
Computer equipment and purchased software
Furniture and fixtures
Leasehold improvements
Total
Accumulated depreciation and amortization
Property and equipment, net
December 31,
2014
December 31,
2013
$
$
$
$
$
$
31,493
(241)
(508)
30,744
December 31,
2014
3,180
43,573
46,753
December 31,
2014
40,766
30,355
1,852
6,550
79,523
(59,379)
20,144
$
$
$
$
$
$
44,642
(358)
(764)
43,520
December 31,
2013
6,591
44,480
51,071
December 31,
2013
36,932
27,280
1,614
7,077
72,903
(55,430)
17,473
Depreciation and amortization expense was $9.3 million, $10.2 million, $8.6 million for the years ended December 31, 2014, 2013,
and 2012, respectively.
Accrued liabilities consisted of the following (in thousands):
Accrued compensation and related benefits
Accrued warranty
Accrued professional and consulting fees
Accrued business travel expenses
Accrued excess and obsolete inventory at contract manufacturers
Accrued customer rebates
Accrued rent reserve
Sales and use tax payable
Accrued freight
Income taxes payable
Accrued other
Total accrued liabilities
Deferred revenue consisted of the following (in thousands):
Deferred Revenue:
Product and services - current
Extended warranty - current
Extended warranty - non-current
Product and services - non-current
Total deferred revenue
65
December 31,
2014
December 31,
2013
$
$
$
$
15,782
9,553
5,860
1,414
888
851
412
397
303
269
3,714
39,443
December 31,
2014
9,753
2,969
19,211
182
32,115
$
$
$
$
13,127
10,856
1,634
540
756
712
341
521
612
368
2,608
32,075
December 31,
2013
32,051
2,811
18,335
96
53,293
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Deferred cost of revenue consisted entirely of products and services.
7. Commitments and Contingencies
Lease Commitments
The Company leases office space under non-cancelable operating leases. Certain of the Company’s operating leases contain renewal
options and rent acceleration clauses. Future minimum payments under the non-cancelable operating leases consisted of the following as of
December 31, 2014 (in thousands):
Period
2015
2016
2017
2018
2019
Thereafter
Total
Minimum Future Lease
Payments
$
$
3,193
2,658
2,594
2,325
579
470
11,819
The above total minimum payments have not been reduced by minimum sublease rentals of $0.1 million due in the future under
non-cancelable sublease of a portion of the Company's office in Fremont, California.
The Company leases its primary office space in Petaluma, California under a lease agreement ("Petaluma Lease") that extends
through February 2014. On January 28, 2013, the Company entered into an amendment to its Petaluma Lease ("Amendment") to extend the
lease term to February 2019. In connection with the Petaluma Lease and the Amendment, the Company received lease incentives of $1.2
million and $0.4 million, respectively, which can be used for leasehold improvements or be applied as credits to rent payments. The
Company had capitalized the full amount of the lease incentives upon inception of the respective agreement and these incentives are being
amortized to reduce rent expense over the extended lease term. As of December 31, 2014, total unamortized lease incentive was $0.4
million of which $0.1 million and $0.3 million were included in "Accrued liabilities" and "Other long-term liabilities", respectively, in the
Consolidated Balance Sheet as of December 31, 2014. Payments under the Company’s operating leases that escalate over the term of the
lease are recognized as rent expense on a straight-line basis.
The above table also includes future minimum lease payments primarily for our facilities in Minneapolis, Minnesota; Acton,
Massachusetts; Nanjing, China; Richardson, Texas; and Fremont, San Jose, and Santa Barbara, California, which expire at various dates
through 2022, and for certain office equipment under non-cancelable operating lease agreements, which expire at various dates through
2015.
For the years ended December 31, 2014, 2013 and 2012, total rent expense of the Company, net of sublease income, was $4.1
million, $3.9 million, $3.5 million, respectively.
Purchase Commitments
The Company’s primary contract manufacturers place orders for component inventory in advance based upon the Company’s build
forecasts in order to reduce manufacturing lead times and ensure adequate component supply. The components are used by the contract
manufacturers to build the products included in the build forecasts. The Company does not take ownership of the components and any
outstanding orders do not represent firm purchase commitments pursuant to the Company’s agreement with the contract manufacturer. The
Company will provide purchase orders to its contract manufacturers in order to fulfill its monthly finished product inventory requirements.
The Company incurs a liability when the contract manufacturer has converted the component inventory to a finished product and takes
ownership of the inventory when transferred to the designated shipping warehouse. However, historically, the Company has reimbursed its
primary contract manufacturer for component inventory purchases when this inventory has been rendered excess or obsolete, for example
due to manufacturing and engineering change orders resulting from design changes, manufacturing discontinuation of parts by its
suppliers, or in cases where inventory levels greatly exceed projected demand. The estimated excess and obsolete inventory liabilities
related to such manufacturing and engineering change orders and other factors, which are included in accrued liabilities in the
accompanying balance sheets, were $0.9 million and $0.8 million as of December 31, 2014 and 2013, respectively. The Company records
these amounts in cost of products and services in its Consolidated Statements of Comprehensive Loss.
As of December 31, 2014, the Company had non-cancelable outstanding purchase orders of $24.8 million for finished goods to be
delivered by its contract manufacturers within one year.
Accrued Warranty
The Company provides a warranty for its hardware products. Hardware generally has a one to five-year warranty from the date of
shipment. The Company accrues for potential warranty claims based on the Company’s historical claims experience. The adequacy of the
accrual is reviewed on a periodic basis and adjusted, if necessary, based on additional information as it becomes available.
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Changes in the Company’s warranty reserve in the periods as indicated were as follows (in thousands):
Balance at beginning of period
Warranty charged to cost of revenue
Utilization of warranty
Balance at end of period
Litigation
2014
Years Ended December 31,
2013
2012
$
$
10,856
3,394
(4,697)
9,553
$
$
11,762
4,350
(5,256)
10,856
$
$
12,104
4,701
(5,043)
11,762
From time to time, the Company is involved in various legal proceedings arising from the normal course of business activities.
On September 16, 2010, the Company, two direct, wholly-owned subsidiaries of the Company, and Occam entered into an
Agreement and Plan of Merger and Reorganization (the “Merger Agreement”). In response to the announcement of the Merger Agreement
on October 6, 2010, a purported class action complaint was filed by stockholders of Occam in the Delaware Court of Chancery: Steinhardt
v. Howard-Anderson, et al. (Case No. 5878-VCL). On November 24, 2010, these stockholders filed an amended complaint (the “amended
Steinhardt complaint”). The amended Steinhardt complaint named Occam (which has since been merged into Calix) and the members of
the Occam board of directors as defendants. The amended Steinhardt complaint did not name Calix as a defendant.
The amended Steinhardt complaint sought injunctive relief rescinding the merger transaction and an award of damages in an
unspecified amount, as well as plaintiffs' costs, attorney's fees, and other relief.
The merger transaction was completed on February 22, 2011 (the “Effective Date”). On January 6, 2012, the Delaware court ruled
on a motion for sanctions brought by the defendants against certain of the lead plaintiffs. The Delaware court found that lead plaintiffs
Michael Steinhardt, Steinhardt Overseas Management, L.P., and Ilex Partners, L.L.C., collectively the “Steinhardt Plaintiffs,” had engaged
in improper trading of Calix shares, and dismissed the Steinhardt Plaintiffs from the case with prejudice. The court further held that the
Steinhardt Plaintiffs are: (i) barred from receiving any recovery from the litigation, (ii) required to self-report to the SEC, (iii) directed to
disclose their improper trading in any future application to serve as lead plaintiff, and (iv) ordered to disgorge trading profits of $0.5
million to be distributed to the remaining members of the class of former Occam stockholders. The Delaware court also granted the motion
of the remaining lead plaintiffs, Herbert Chen and Derek Sheeler, for class certification, and certified Messrs. Chen and Sheeler as class
representatives. The certified class is a non-opt-out class consisting of all owners of Occam common stock whose shares were converted to
shares of Calix on the date of the merger transaction, with the exception of the defendants in the Delaware action and their affiliates. Chen
and Sheeler, on behalf of the class of similarly situated former Occam stockholders, continue to seek an award of damages in an
unspecified amount.
Fact discovery in the case closed on April 30, 2013. On June 11, 2013, the plaintiffs filed their Second Amended Class Action
Complaint for Breach of Fiduciary Duty (“Second Amended Complaint”). The Second Amended Complaint adds Occam's former CFO as
a defendant, and alleges that each of the defendants breached their fiduciary duties by failing to attempt to obtain the best purchase price
for Occam and failing to disclose certain allegedly material facts about the merger transaction in the preliminary proxy statement and
prospectus included in the Registration Statement on Form S-4 filed with the SEC on November 2, 2010.
On July 17, 2013, attorneys representing all of the defendants named in the Second Amended Complaint filed Defendants' Opening
Brief in Support of Their Motion for Summary Judgment, arguing that all defendants are entitled to summary judgment on all counts of the
Second Amended Complaint. Plaintiffs' answering brief to the motion for summary judgment was filed on September 3, 2013, and
defendants' reply brief was filed on October 4, 2013. A hearing on the motion for summary judgment was held on December 6, 2013.
On April 8, 2014, the Court of Chancery of the State of Delaware issued an Opinion granting in part and denying in part the
Defendants’ Motion for Summary Judgment. The court granted summary judgment in favor of those defendants who served solely as
directors of Occam with respect to all claims alleging improper actions in connection with the Occam sale process. The ruling also granted
summary judgment on all claims as to Occam, the corporate entity. The court left in place process-based claims against Occam’s former
CEO and CFO, and also declined to grant summary judgment on separate claims that the director and officer defendants breached their
fiduciary duties by issuing a proxy statement for Occam’s stockholder vote that allegedly contained misleading disclosures and had
material omissions.
On June 12, 2014, the plaintiffs filed a Motion to Compel Production of Documents by Defendants and Jefferies & Company, Inc.
and For Sanctions Against Defendants. This motion sought additional documents from defendants and from Jefferies, Occam’s former
advisor, and requested that the court impose severe sanctions, up to and including a finding of liability against defendants. Defendants have
rejected the suggestion that any additional documents should be produced and vigorously opposed the imposition of any sanctions. On
September 3, 2014, the court denied the motion without prejudice as to defendants, directed counsel for the defendants to provide an
affidavit clarifying the prior conduct of discovery, and ordered discovery into defendants’ document collection and review methodologies.
The court also ordered Jefferies to produce additional documents. Those proceedings are ongoing, but the plaintiffs have indicated that they
do not intend to seek any sanctions against the defendants at this time. Instead, plaintiffs have filed a motion requesting leave to amend
their complaint to add Jefferies and Wilson Sonsini Goodrich & Rosati, P.C., former defense counsel in this lawsuit, as defendants. That
motion is scheduled to be heard by the Court on March 17, 2015.
The Company continues to believe that the allegations in the Second Amended Complaint are without merit and intends to continue
to vigorously contest the action as it moves forward toward trial. However, there can be no assurance that the defendants will be successful
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in defending this ongoing action. In addition, the Company has obligations, under certain circumstances, to hold harmless and indemnify
each of the former Occam directors and officers against judgments, fines, settlements and expenses related to claims against such directors
and officers to the fullest extent permitted under Delaware law and Occam's bylaws and certificate of incorporation. Such obligations may
apply to this lawsuit and may ultimately result in the payment of indemnification amounts by the Company, and the Company currently
expects that, if the case proceeds to trial, defense costs are likely to exceed available Directors & Officers liability insurance coverage.
In addition, under the engagement letter between Occam and Jefferies, the Company has obligations, under certain circumstances, to
hold harmless and indemnify Jefferies against judgments, fines, settlements and expenses related to Jefferies’ engagement by Occam, and
Jefferies has demanded that the Company indemnify Jefferies in connection with this litigation under this agreement. Following Jefferies
demand for indemnification the Company notified Occam’s insurance carriers, and such carriers have advised in writing that they do not
believe the Jefferies indemnification obligations are covered by the Company’s insurance. Thus, the Company’s indemnification
obligations to Jefferies may apply to this lawsuit and may not be covered by insurance.
As previously noted, the plaintiffs have not communicated any specific demand for damages. However, the plaintiffs’ valuation
expert has opined that the fair value of Occam’s common stock on the Effective Date exceeded the merger consideration by between $7.77
and $9.65 per share. Defendants’ valuation expert has opined that the fair value of Occam’s common stock on the Effective Date was less
than the merger consideration. The Company estimates that as of the Effective Date, the class held approximately 15,147,085 shares of
Occam’s common stock. In addition to the difference between the fair value of Occam’s common stock on the Effective Date and the
merger consideration, the plaintiffs also seek an award of attorneys’ fees and costs, pre-judgment interest relating back to the Effective
Date, and post-judgment interest.
At this time, the Company is unable to quantify its indemnification risk. The Company may have indemnity obligations that are in
excess of its insurance coverage, particularly if there is an adverse result at trial. Any such costs could have a material adverse effect on the
Company’s business, operating results or financial condition. Trial of the matter is currently scheduled to commence on April 20, 2015.
Additional information and other developments became available after December 31, 2014 relating to certain additional legal fees
and associated expenses incurred by advisers previously retained by Occam in connection with its acquisition by Calix and related to the
ongoing Occam class action litigation. Such information and developments enabled the Company to assess the need to recognize and
accrue for a potential associated loss contingency. As a result, the Company recognized and recorded additional legal fees and associated
expenses of approximately $1.0 million in the accompanying Consolidated Statement of Comprehensive Loss for the year ended December
31, 2014.
The Company is not currently a party to any other legal proceedings that, if determined adversely to the Company, would
individually or in the aggregate have a material adverse effect on the Company's business, operating results or financial condition.
Guarantees
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) certain agreements
with the Company’s officers, directors, and 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.
Generally, a maximum obligation under these contracts is not explicitly stated. Because the obligated amounts associated with these
types of agreements are not explicitly 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 Company’s balance sheets.
8. Net Loss per Share
The following table sets forth the computation of basic and diluted net loss per share for the periods indicated (in thousands, except per
share data):
Numerator:
Net loss
Denominator:
Weighted-average common shares outstanding
Basic and diluted net loss per common share
Potentially dilutive shares, weighted-average
Years Ended December 31,
2013
2012
2014
$
$
(20,814)
$
(17,265)
$
(28,326)
50,808
49,419
(0.41)
$
(0.35)
$
5,020
5,308
48,180
(0.59)
4,454
For all the three years presented, unvested restricted stock awards are included in the calculation of basic weighted-average shares
because such shares are participating securities, however the impact was immaterial.
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Potentially dilutive shares are excluded from the computation of the basic and diluted net loss per share because their effect is
antidilutive. These antidilutive shares were primarily from stock options, restricted stock units and performance restricted stock awards.
9. Stockholders’ Equity
Common Stock
On March 2, 2010, the Company’s board of directors approved an amended and restated certificate of incorporation that increased the
authorized common stock to 100 million shares and the authorized preferred stock to 5.0 million shares effective immediately prior to the
completion of the Company’s initial public offering on March 26, 2010.
On March 21, 2010, the Company’s board of directors approved an amended and restated certificate of incorporation effecting a 2-
for-3 reverse stock split of its common stock and all convertible preferred stock. The par value and the authorized shares of the common stock
and convertible preferred stock were not adjusted as a result of the reverse stock split. All issued and outstanding common stock, convertible
preferred stock, warrants for common stock, warrants for preferred stock, and per share amounts contained in the financial statements have
been retroactively adjusted to reflect this reverse stock split for all periods presented. The reverse stock split was effected on March 23, 2010.
On March 26, 2010, the Company completed its initial public offering in which 4,166,666 shares of common stock were sold by the
Company at a public offering price of $13.00 per share. Gross proceeds of $54.2 million from the sale of common stock by the Company
were reduced by issuance costs of $4.6 million and underwriters fees of $3.8 million. On April 8, 2010, the Company issued and sold 949,339
shares of common stock resulting from the exercise of the underwriters’ option to purchase common shares associated with the Company’s
initial public offering. This sale resulted in gross proceeds of $12.3 million based on an initial public offering price of $13.00 per share of
common stock, which were reduced by underwriters’ discount and offering expenses payable by the Company of $0.8 million.
On February 22, 2011, in connection with the acquisition of Occam, the Company issued 6.4 million shares of the Company’s common
stock, a value of $117.2 million.
Holders of our common stock are entitled to receive dividends, if any, as may be declared from time to time by our board of directors
out of legally available funds. No dividends have been declared or paid as of December 31, 2014. In the event of our liquidation, dissolution
or winding up, holders of our common stock will be entitled to share ratably in the net assets legally available for distribution to stockholders
after the payment of all of our debts and other liabilities and the satisfaction of any liquidation preference granted to the holders of any then
outstanding shares of preferred stock.
Preferred Stock
The board of directors has the authority, without action by stockholders with the exception of stockholders who hold board positions,
to designate and issue up to 5.0 million shares of preferred stock in one or more series and to fix the rights, preferences, privileges and
restrictions thereof. These rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series, any
or all of which may be greater than the rights of common stock. The issuance of the Company’s preferred stock could adversely affect the
voting power of holders of common stock and the likelihood that such holders will receive dividend payments and payments upon
liquidation. In addition, the issuance of preferred stock could have the effect of delaying, deferring or preventing a change in control of the
Company or other corporate action. Subsequent to the Company’s initial public offering and the conversion of all preferred stock outstanding
at that date, the board of directors has not designated any rights, preference or powers of any preferred stock and no shares of preferred stock
have been issued.
Equity Incentive Plans
Prior to March 2010, the Company had the 2000 Stock Plan ("2000 Plan") and the Amended and Restated 2002 Stock Plan ("2002
Plan") (together, "Prior Plans"). Under the Prior Plans, the Company may grant incentive stock options at a price not less than 100% of the
fair market value of the common stock on the date of grant and non-statutory stock options at a price not less than 85%, or, with respect to the
2002 Plan, 100% of the fair market value of the common stock on the date of grant. Before April 2004, certain options could be granted with
the right to exercise those options before vesting. The majority of the stock options granted under the Prior Plans vest over 4 years and expire
in 10 years.
On March 2, 2010, the Company’s Board of Directors approved the 2010 Equity Incentive Award Plan ("2010 Plan") which allows the
Company to grant stock options, restricted stock awards ("RSA"), restricted stock units ("RSU"), performance restricted stock units
("PRSU"), stock appreciation rights, dividend equivalents, deferred stock, and stock payments to employees, directors and consultants of the
Company. A total of 4,666,666 shares of common stock were reserved for future issuance under the 2010 Plan, which became effective upon
the completion of the Company’s initial public offering of common stock. In addition, on the first day of each year beginning in 2011 and
ending in 2020, the 2010 Plan provides for an annual automatic increase to the shares reserved for issuance and no more than 17,150,494
shares of Common Stock may be issued upon the exercise of Incentive Stock Options. Pursuant to the automatic annual increase, a total of
2,666,664 additional shares had been reserved under the 2010 Plan since 2011.
Upon the effectiveness of the 2010 Plan, equity awards were granted only under the 2010 Plan and shares of common stock previously
reserved for issuance under the Prior Plans became available for issuance under the 2010 Plan. To date, awards granted under the 2010 Plan
consist of stock options, RSAs, RSUs and PRSUs.
Stock options granted under the 2010 Plan are granted in general at a price not less than 100% of the fair market value of the common
stock on the date of grant. Generally, the options issued under the 2010 Plan vest 25% on the first anniversary of the vesting commencement
date and on a monthly basis thereafter for a period of an additional three years. The options have a maximum term of ten years.
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Each RSU granted under the 2010 Plan represents a right to receive one share of the Company’s common stock (subject to adjustment
for certain specified changes in the capital structure of the Company) upon the completion of a specific period of continued service. The
majority of RSUs granted vest over four years.
In July 2011, the Company granted 423,000 RSAs to executives under the 2010 Plan, which vest 25% per year for 4 years from the
grant date. Upon issuance of RSA, the holder is entitled to have all the rights of a stockholder, subject to the restrictions in his or her Award
Agreement, including the right to receive all dividends and other distributions paid or made with respect to the shares.
In 2012, the Company commenced granting PRSUs to its executives with two-year and three-year performance periods. The
performance criterion is based on the relative total shareholder return (“TSR”) of Calix common stock as compared to the TSR of the
Company’s peer group. The TSR is calculated by dividing (a) the average closing trading price for the 90-day period ending on the last day of
the applicable performance period by (b) the average closing trading price for the 90-day period immediately preceding the first day of the
applicable performance period. This TSR is then used to derive the achievement ratio, which is then multiplied by the number of units in the
grant to derive the common stock to be issued for each performance period, which may equal from zero percent (0%) to two hundred percent
(200%) of the target award.
Stock Option Exchange Program
On September 23, 2009, the Company completed a stock option exchange program, which was approved by its board of directors,
pursuant to which eligible employees were able to exchange eligible stock options for restricted stock units on a one-for-one basis. Pursuant
to the exchange, the Company canceled options for 3.4 million shares of the Company’s common stock and issued an equivalent number of
RSUs to eligible holders on September 23, 2009, of which 50% vested in October 2010 and the remaining 50% vested in May 2011. In
connection with the RSU grants, the unrecognized compensation expense related to the exchanged options was expensed over the remainder
of the original vesting period of the options exchanged. The incremental cost due to the exchange was deferred until a liquidity event, which
happened with the Company’s IPO, and had been recognized in accordance with the vesting periods described above.
Stock Options
The following table summarizes the activity of stock options under the Company’s equity incentive plans (in thousands, except per
share data):
Stock Options
Outstanding as of December 31, 2013
Granted
Exercised
Forfeited
Expired
Outstanding as of December 31, 2014
Vested and expected to vest as of December 31, 2014
Options exercisable as of December 31, 2014
Weighted-
Average
Exercise Price
Per Share
Weighted-Average
Remaining
Contractual Life
(in years)
Aggregate
Intrinsic
Value (1)
Number of
Shares
2,560
1,880
(224)
(258)
(257)
3,701
3,610
1,474
$
$
$
$
12.96
9.29
7.44
9.21
17.44
11.38
11.43
14.34
7.9
7.9
5.8
$
$
$
3,291
3,218
1,377
(1) Amounts represent the difference between the exercise price and the fair market value of common stock at December 31, 2014
for all in the money options outstanding.
During the years ended December 31, 2014, 2013, and 2012, total intrinsic value of stock options exercised was $0.6 million, $1.0
million, $0.6 million, respectively. Total cash received from employees as a result of stock option exercises in 2014, 2013, and 2012 was $1.7
million, $0.7 million, $0.2 million, respectively. Total fair values of stock options vested during 2014, 2013 and 2012 was $3.7 million, $3.9
million, $4.6 million, respectively.
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Restricted Stock Units, Performance Restricted Stock Units, and Restricted Stock Awards
The following table summarizes the activities of the Company's RSUs, PRSUs, and RSAs under the Company’s equity incentive plans
(in thousands, except per share data):
RSUs
PRSUs
RSAs
Weighted-
Average
Grant Date
Fair Value
Per Share
Weighted-
Average
Grant Date
Fair Value
Per Share
Weighted-
Average
Grant Date
Fair Value
Per Share
Number of
Shares
Number of
Shares
Number of
Shares
1,506
987
(661)
(98)
1,734
$
$
11.04
8.72
11.68
10.07
9.53
413
174
(168)
(57)
362
$
$
12.81
9.16
14.61
10.80
10.53
189
—
(117)
(10)
62
$
$
21.67
—
21.67
21.67
21.67
Outstanding at December 31, 2013
Granted
Vested
Canceled
Outstanding at December 31, 2014
Upon vesting of certain RSUs, PRSUs and RSAs, the Company withheld shares with value equivalent to the employees’ minimum
statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The
number of shares withheld was based on the value of the RSUs, PRSUs or RSAs on their vesting date as determined by the Company’s
closing stock price. The withheld shares are reserved for future grant and issuance under the 2010 Plan.
Modification of Stock Awards
In February 2013, the Company entered into a Transition and Separation Agreement ("Agreement") with Roger Weingarth, the
Company's former Executive Vice President and Chief Operating Officer. Under the Agreement, Mr. Weingarth transitioned to the role of
advisor to the Chief Executive Officer of the Company effective as of April 1, 2013, and would terminate his employment with the Company
on March 31, 2014 ("Termination Date"). Upon his termination, the Agreement provided for, among other things, the acceleration of the
vesting of his unvested stock options, RSAs and RSUs held by him as of the Termination Date. In accordance with ASC Topic 718, total fair
value of the accelerated stock awards after the modification is $0.6 million, which is being recognized on a straight-line basis over the
remaining service period through the Termination Date. During the years ended December 31, 2014 and 2013, $0.1 million and $0.5 million,
respectively, of the total fair value has been recognized in general and administrative expenses of the Consolidated Statement of
Comprehensive Loss in this Form 10-K.
Employee Stock Purchase Plan
The Company’s 2010 Employee Stock Purchase Plan, as amended (“2010 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 2010 ESPP are six-month periods commencing on June 1 and December 1 of each year. In January of
2015, the Compensation Committee of the Company’s Board of Directors changed those six-month period commencement dates to
November 2 and May 2, effective November 2, 2015. The price of common stock purchased under the plan is 85 percent of the lower of the
fair market value of the common stock on the commencement date and exercise date of each six-month offering period.
The 2010 ESPP, as amended in 2012, provides for the issuance of a maximum of 4.3 million shares of common stock. During the
twelve months ended December 31, 2014, 682,832 shares were purchased and issued. As of December 31, 2014, there were 1.9 million shares
available for issuance.
Stock Based Compensation
In accordance with ASC Topic 718, stock-based compensation expense associated with stock options, RSUs, PRSUs, RSAs, and
purchase rights under the 2010 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. During the years ended December 31, 2014, 2013, and 2012,
the Company recorded stock-based compensation expense of $16.0 million, $19.9 million and $17.4 million, respectively.
The following table summarizes the weighted-average grant date fair values of the Company's stock-based awards granted in the
periods indicated:
Stock options
RSUs
PRSUs
RSAs
ESPP
Years Ended December 31,
2013
2012
2014
4.79
8.72
9.16
N/A
2.46
$
$
$
$
4.89
9.20
11.24
N/A
2.94
$
$
$
$
4.68
6.55
14.81
N/A
2.34
$
$
$
$
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The Company values the RSUs and RSAs at the closing market price of the Company’s common stock on the date of grant.
The fair value of the PRSU 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.
The Company estimates the fair value of stock options and purchase rights under the 2010 ESPP at the grant date using the Black-
Scholes option-pricing model. This model requires the use of the following assumptions:
(i) Expected volatility of the Company's common stock - Starting in the fourth quarter of 2012, the Company computed its expected
volatility assumption based on a blended volatility (50% historical volatility and 50% implied volatility from traded options on the
Company's common stock). This change of the method was made as the Company's common stock has now been publicly traded
for more than two years, a sufficient history of stock prices had been developed. The selection of a blended volatility assumption
was based upon the Company's assessment that a blended volatility is more representative of the Company's future stock price trend
as it weighs the historical volatility with the future implied volatility. Expected volatilities computed using this new method for
stock options granted in the fourth quarter of 2012 was 66%. Prior to the fourth quarter of 2012, the Company’s computation of
expected volatility was based on the Company’s peer group in the industry in which the Company does business. Expected
volatilities computed using the old method for stock options granted in the first three quarters of 2012 ranged from 55% to 56%.
(ii) Expected life of the option award - Represents the weighted-average period that the stock options are expected to remain
outstanding. The Company’s computation of expected life utilizes the simplified method in accordance with Staff Accounting
Bulletin No. 110 ("SAB 110") due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to
estimate expected term. The mid-point between the vesting date and the expiration date is used as the expected term under this
method.
(iii) Expected dividend yield - Assumption is based on the Company's history of not paying dividends and no future expectations of
dividend payouts.
(iv) Risk-free interest rate - Based on the U.S. Treasury yield curve in effect at the time of grant with maturities approximating the
grant’s expected life.
The following table summarizes the weighted-average assumptions used in estimating the grant-date fair value of stock options and of
each employee’s purchase right under the 2010 ESPP in the periods indicated:
Stock Options
Expected volatility
Expected life (years)
Expected dividend yield
Risk-free interest rate
ESPP
Expected volatility
Expected life (years)
Expected dividend yield
Risk-free interest rate
2014
Years Ended December 31,
2013
2012
52%
6.21
—
1.87%
62%
6.05
—
1.14%
2014
Years Ended December 31,
2013
2012
45%
0.50
—
0.07%
50%
0.50
—
0.09%
56%
6.25
—
1.06%
63%
0.50
—
0.13%
In addition, the Company applies an estimated forfeiture rate to awards granted and records stock-based compensation expense only
for those awards that are expected to vest. Forfeiture rates are estimated at the time of grant based on the Company's historical experience.
Further, to the extent the Company's actual forfeiture rate is different from management's estimate, stock-based compensation is adjusted
accordingly.
On February 22, 2011, in connection with the acquisition of Occam, the Company issued 536,190 stock options and 42,654 RSUs to
certain Occam employees. The grants were in exchange for certain options and RSUs that were held by Occam employees prior to the
acquisition which retained the original vesting schedule of the initial Occam grants, except for certain equity awards held by Occam
executives that were accelerated in association with their severance agreements. The Company estimated the fair value of $5.8 million of the
options and RSUs in accordance with ASC Topic 718. In accordance with ASC Topic 805, the Company allocated the value of $1.4 million of
certain options and RSUs to consideration in the business combination with the remaining value of $4.5 million allocated to post-combination
expense to be recognized over the remaining service period of the grants.
As of December 31, 2014, unrecognized stock-based compensation expenses by award type, net of estimated forfeitures, and their
expected weighted-average recognition periods are summarized in the following table (in thousands).
Unrecognized stock-based compensation expense
Weighted-average amortization period (in years)
Stock Option
5,145
$
2.6
$
72
RSU
10,768
2.4
As of December 31, 2014
PRSU
RSA
ESPP
$
$
848
1.2
$
699
0.6
692
0.4
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Common Stock Warrants
Warrants to purchase convertible preferred stock that did not expire at the close of the Company’s initial public offering, in March
2010, converted to warrants to purchase common stock at the applicable conversion rate for the related preferred stock. As of December 31,
2014, the following warrants to purchase common stock were outstanding (in thousands, except per share data):
Expiration Date
September 4, 2017
Exercise Price
Per Share
Number of Warrants
Outstanding
$
19.56
15
Shares Reserved for Future Issuance
The Company had common shares reserved for future issuance as follows (in thousands):
Stock options outstanding
Restricted stock units outstanding
Performance restricted stock units outstanding
Shares available for future grant under 2010 Plan
Shares available for future issuance under ESPP
Common stock warrants
Total
2014
As of December 31,
2013
2012
3,701
1,734
362
2,283
1,891
15
9,986
2,560
1,506
413
3,652
2,574
23
10,728
2,213
1,762
183
3,959
3,260
23
11,400
10. Employee Benefit Plan
The Company sponsors a 401(k) tax-deferred savings plan for all employees who meet certain eligibility requirements. Participants
may contribute, on a pre-tax basis, a percentage of their annual compensation, but not to exceed a maximum contribution amount pursuant to
Section 401(k) of the Internal Revenue Code. The Company, at the discretion of the board of directors, may make additional matching
contributions on behalf of the participants. The Company made matching contributions totaling $1.5 million, $1.5 million, and $1.4 million in
2014, 2013 and 2012, respectively.
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Table of Contents
11. Accumulated Other Comprehensive Income
The table below summarizes the changes in accumulated other comprehensive income (loss) by component for the periods indicated (in
thousands).
Balance at beginning of period
Other comprehensive loss before
reclassification adjustments
Reclassification adjustment for realized gains on
marketable securities included in net loss
Other comprehensive loss
Balance at end of period
Balance at beginning of period
Other comprehensive income
Balance at end of period
Balance at beginning of period
Other comprehensive income
Balance at end of period
Year Ended December 31, 2014
Unrealized
Gains and
Losses on
Available-for-
Sale Marketable
Securities
Foreign
Currency
Translation
Adjustments
$
$
— $
190
$
(57)
(1)
(58)
(58)
$
(52)
—
(52)
138
$
Year Ended December 31, 2013
Unrealized
Gains and
Losses on
Available-for-
Sale Marketable
Securities
Foreign
Currency
Translation
Adjustments
$
$
— $
—
— $
132
58
190
$
$
Year Ended December 31, 2012
Unrealized
Gains and
Losses on
Available-for-
Sale Marketable
Securities
Foreign
Currency
Translation
Adjustments
$
$
— $
—
— $
98
34
132
$
$
Total
190
(109)
(1)
(110)
80
Total
Total
132
58
190
98
34
132
Realized gains and losses on sales of available-for-sale marketable securities, if any, are reclassified from accumulated other
comprehensive income to "Other income (expense)" in our Consolidated Statements of Comprehensive Loss.
12. Credit Facility
The Company had a revolving credit facility ("Prior Credit Facility") of $30.0 million with Silicon Valley Bank based upon a
percentage of eligible accounts receivable, which matured on June 30, 2013. After the Prior Credit Facility matured on June 30, 2013, the
Company cash collateralized the outstanding letters of credit with Silicon Valley Bank. As of December 31, 2014, the Company had $0.3
million cash restricted for collateralizing the outstanding letters of credit with Silicon Valley Bank.
On July 29, 2013, the Company entered into a credit agreement with Bank of America, N.A. The credit agreement is structured such
that other financial institutions can at a later time become party to the credit agreement through an amendment via a syndication process
(collectively, together with Bank of America, N.A., the "Lenders"). The credit agreement provides for a revolving facility in the aggregate
principal amount of up to $50.0 million, which includes a $20.0 million sublimit for the issuance of letters of credit and a $10.0
million sublimit for a swingline facility. Subject to customary conditions, up to $25.0 million of the revolving facility may be converted to a
term loan facility at any time prior to the maturity of the revolving facility. The revolving facility matures on July 29, 2016, but may be
extended up to two times (each extension for an additional one-year period) upon mutual agreement of the Company and the Lenders. The
credit facility is secured by substantially all of the Company's assets, including its intellectual property. Proceeds of the credit facility may be
used for general corporate purposes and permitted acquisitions.
Loans under the credit facility bear interest at an annual rate equal to the base rate plus 0.75% to 1.25% or LIBOR
plus 2.00% to 2.50% based on a leverage ratio of consolidated funded indebtedness to consolidated Adjusted EBITDA (customarily
74
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defined). Interest on the revolving facility is due quarterly, and any outstanding interest and principal is due on the maturity date of the
revolving facility. The Company is required to repay principal on a term loan in twenty equal quarterly payments from the date the Company
enters into a term loan, and all outstanding principal and accrued interest is due on the revolving facility maturity date. Swingline loans must
be repaid on the earlier of (i) ten business days after a loan is made and (ii) the revolving facility maturity date. The Company is also required
to pay commitment fees of 0.25% per year on any unused portions of this facility.
The credit facility includes affirmative and negative covenants applicable to the Company that are typical for credit facilities of this
type. Furthermore, the credit agreement requires us to maintain certain financial covenants, including a maximum consolidated leverage ratio,
and a minimum consolidated liquidity ratio of cash, cash equivalents and accounts receivable to consolidated funded indebtedness. As
of December 31, 2014, the Company was in compliance with these requirements. The credit facility also includes customary events of
default, the occurrence and continuation of which would provide the Lenders with the right to demand immediate repayment of any principal
and unpaid interest under the credit facility, and to exercise remedies against us and the collateral securing the loans under the credit facility.
As of December 31, 2014, the Company had no outstanding letters of credit or borrowings under the credit facility.
The Company incurred $0.3 million of debt issuance costs that were directly attributable to the issuance of this credit facility. These
costs will be amortized over three years starting from the effective date of the credit facility. As of December 31, 2014, the unamortized debt
issuance costs of $0.2 million were included within "Other assets" in the Company's Consolidated Balance Sheets.
13. Income Taxes
The domestic and foreign components of loss before provision for incomes taxes were as follows (in thousands):
Domestic
Foreign
Loss before provision for income taxes
Years Ended December 31,
2014
2013
2012
$
$
(21,495)
1,262
(20,233)
$
$
(18,500)
1,221
(17,279)
$
$
(28,987)
819
(28,168)
The Company recorded a provision for/(benefit from) income taxes of $0.6 million, $(14.0) thousand, and $0.2 million, in 2014, 2013
and 2012, respectively. The income tax provision for 2014 primarily consisted of state and foreign income taxes.
Provision for (benefit from) income taxes consisted of the following for the periods indicated (in thousands):
Federal current income tax (benefit)
State current income tax
Foreign current income tax
Federal deferred income tax (benefit)
State deferred income tax (benefit)
Foreign deferred income tax (benefit)
Provision for (benefit from) income taxes
Years Ended December 31,
2013
2012
2014
— $
104
469
—
—
8
581
$
(274)
41
315
—
—
(96)
(14)
$
$
152
73
440
(474)
(89)
56
158
$
$
The differences between the statutory tax rate and the effective tax rate, expressed as a percentage of loss before income taxes, were as
follows:
Federal statutory rate
State statutory rate
Foreign operations
Release of FIN 48 liability and interest
R&D tax credits
Release of valuation allowance related to EFAA acquisition
Acquisition-related costs
Other permanent items
Tax true-up
Valuation allowance
Effective tax rate
Years Ended December 31,
2013
2012
2014
34.0 %
2.5 %
(0.1)%
— %
9.2 %
— %
— %
(2.7)%
(0.2)%
(45.6)%
(2.9)%
34.0 %
3.4 %
1.4 %
0.7 %
13.1 %
— %
— %
(4.5)%
1.0 %
(49.0)%
0.1 %
34.0 %
5.2 %
0.1 %
— %
2.5 %
2.0 %
1.2 %
0.1 %
— %
(45.7)%
(0.6)%
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Table of Contents
The significant components of the Company’s deferred tax assets and liabilities were as follows (in thousands):
$
Deferred tax assets:
Net operating loss carryforwards
Tax credit carryforwards
Depreciation and amortization
Accruals and reserves
Deferred revenue
Stock-based compensation
Other
Gross deferred tax assets
Valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Intangible assets
Net deferred tax assets reflected in balance sheet
$
As of December 31,
2014
2013
$
166,150
25,052
1,275
13,810
9,930
5,138
498
221,853
(212,703)
9,150
168,431
22,507
2,996
11,479
12,037
5,570
450
223,470
(207,315)
16,155
(8,995)
155
$
(15,988)
167
The Company classified the net deferred tax assets of $0.2 million and $0.2 million as of December 31, 2014 and 2013, as follows (in
thousands):
Deferred tax assets, current
Deferred tax assets, long-term
Deferred tax liabilities, long-term
As of December 31,
2014
2013
$
$
785
155
(785)
155
$
$
—
167
—
167
Management reviews the recognition of deferred tax assets to determine if realization of such assets is more likely than not. The
realization of the Company’s deferred tax assets is dependent upon future earnings. The Company has been in a cumulative loss position
since inception, which represents a significant piece of negative evidence. Using the more likely than not criteria specified in the applicable
accounting guidance, this negative evidence cannot be overcome by positive evidence currently available to the Company and as a result the
Company has established a full valuation allowance against its deferred tax assets with the exception of certain foreign deferred tax assets.
The Company’s valuation allowance increased by $5.4 million in 2014 and decreased by $0.1 million in 2013. As of December 31, 2014 and
2013, respectively, the valuation allowance included $0.1 million related to excess tax benefits of stock option deductions prior to the
adoption of ASC Topic 718. The benefits will increase additional paid-in capital when realized.
As of December 31, 2014, the Company had U.S. federal and state net operating losses of approximately $549.1 million and $119.1
million, respectively. The U.S. federal net operation loss carryforwards will expire at various dates beginning in 2019 and through 2033 if not
utilized. The state net operation loss carryforwards will expire at various dates beginning in 2015 and through 2033, if not utilized. As of
December 31, 2014 and 2013, the Company had $37.6 million and $37.2 million in federal deductions, respectively, and $34.0 million and
$34.0 million in state deductions, respectively, related to excess tax benefits from stock options which are not included in the net operation
loss carryforward amounts in the table above since they have not met the realization criteria of ASC Topic 718. The tax benefits from these
deductions will increase additional paid-in capital when realized. Additionally, the Company has U.S. federal, California and other various
U.S. states research and development credits of approximately $20.1 million, $23.6 million and $2.1 million as of December 31, 2014,
respectively. The U.S. federal research and development credits will begin to expire in 2020 and through 2034, and the California research
and development credits have no expiration date. The credits related to other various U.S. states will begin to expire in 2015 and through
2029. During 2014, the Company engaged a third party service provider to perform an Internal Revenue Code Section 382 study (and similar
state provisions) through December 31, 2014, which results are anticipated to have no further adjustments or limitations to the Company’s net
operation loss carryforwards.
On December 19, 2014, the President signed into law The Tax Increase Prevention Act of 2014, which retroactively extends more than
50 expired tax provisions through 2014. Among the extended provisions is the Sec. 41 research credit for qualified research expenditures
incurred through the end of 2014. The benefit of the reinstated credit did not impact the income statement in the period of enactment, which
was the fourth quarter of 2014, as the research and development credit carryforwards are offset by a full valuation allowance.
The Company recognizes deferred tax liabilities associated with outside basis differences on investments in foreign subsidiaries, unless
the difference is considered essentially permanent in duration. Thus, the Company has not recorded deferred taxes on approximately $2.2
million of undistributed earnings, as they are intended to be permanently reinvested. As of December 31 2014, the determination of the
unrecorded deferred tax liability related to these earnings is not practicable. If circumstances change and it becomes apparent that some or all
of the undistributed earnings will not be invested indefinitely, or will be remitted in the foreseeable future, an additional deferred tax liability
will be recorded for some or all of the outside basis difference.
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Uncertain Tax Positions
ASC Topic 740, “Income Taxes,” prescribes a recognition threshold and measurement attribute to the financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return. The guidance also provides guidance on derecognition,
classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The standard requires the Company to
recognize the financial statement effects of an uncertain tax position when it is more likely than not that such position will be sustained upon
audit. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as interest expense and income tax
expense, respectively, in statements of operations.
The following table reconciles the Company's unrecognized tax benefits for the years ended December 31, 2014 and 2013 (in
thousands):
Balance at beginning of period
Additions for tax positions related to prior year
Reductions for tax positions related to prior year
Additions for tax positions related to current year
Reductions from a lapse of applicable statute of limitations
Balance at end of period
Years Ended December 31,
2013
2014
$
$
14,382
76
—
963
—
15,421
$
$
13,238
317
(48)
990
(115)
14,382
As of December 31, 2014 and 2013, the Company had unrecognized tax benefits of $15.4 million and $14.4 million, respectively, none
of which would affect the Company's effective tax rate if recognized. There were no accrued interest or penalties for uncertain income tax as
of December 31, 2014.
The Company files tax returns in the United State and various state jurisdictions, the United Kingdom and China. The tax years 1999
through 2014 remain open and subject to examination by the appropriate governmental agencies in the U.S. due to tax attribute
carryforwards.
14. Segment Information
The Company develops, markets and sells communications access systems and software, and there are no segment managers who are
held accountable for operations, operating results and plans for levels or components below the Company unit level. Accordingly, the
Company is considered to be in a single reporting segment and operating unit structure. The Company’s chief operating decision maker is the
Company’s Chief Executive Officer, who reviews financial information presented on a Company-wide basis, accompanied by disaggregated
information about revenues by geographic region for purposes of allocating resources and evaluating financial performance.
Geographic Information:
The following is a summary of revenues by geographic region based upon the location of the customers (in thousands):
United States
Caribbean
Europe
Canada
Other
Total
2014
Years Ended December 31,
2013
2012
$
$
352,458
18,725
5,948
9,995
14,101
401,227
$
$
333,403
17,466
17,397
10,231
4,121
382,618
$
$
306,003
9,343
268
10,894
3,710
330,218
The Company's property and equipment, net of accumulated depreciation, are located in the following geographical areas (in
thousands):
United States
China
Total
15. Quarterly Financial Data—Unaudited
2014
17,852
2,292
20,144
$
$
As of December 31,
2013
$
$
14,969
2,504
17,473
2012
18,390
2,693
21,083
$
$
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 one fewer day
in the first quarter of 2014 and one more day in the fourth quarter of 2014 than in the respective 2013 periods.
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The following table presents selected unaudited quarterly financial data of the Company (in thousands, except per share data). The
Company’s quarterly results of operations for these periods are not necessarily indicative of future results of operations.
Revenue
Gross profit
Operating loss
Net loss
Net loss per common share, basic
Net loss per common share, diluted
Revenue
Gross profit
Operating loss
Net income (loss)
Net income (loss) per common share, basic
Net income (loss) per common share, diluted
March 29
Fiscal Year 2014 Quarter Ended
June 28
September 27
December 31
$
$
$
$
$
$
85,820
36,926
(9,897)
(10,027)
(0.20)
(0.20)
March 30
90,548
41,115
(5,540)
(6,203)
(0.13)
(0.13)
$
$
$
$
$
$
98,005
44,342
(3,890)
(3,951)
(0.08)
(0.08)
$
$
$
105,769
45,080
(3,744)
(3,848)
(0.08)
(0.08)
$
$
$
111,633
51,441
(2,853)
(2,988)
(0.06)
(0.06)
Fiscal Year 2013 Quarter Ended
June 29
September 28
94,439
42,505
(4,845)
(5,153)
(0.10)
(0.10)
$
$
$
103,628
47,407
(12)
544
0.01
0.01
December 31 (1)
94,003
$
40,047
(8,056)
(6,453)
(0.13)
(0.13)
$
$
(1) For the fourth quarter of 2013, net loss included $1.7 million of gain from utilization of inventory credit from Ericsson. See Note
2, "Business Combinations" of these Notes to the Consolidated Financial Statements for details of the Ericsson Credit.
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
During the fiscal years ended December 31, 2014, 2013 and 2012, there were no changes in accountants nor any disagreements with
accountants on accounting and financial disclosure.
ITEM 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, which we refer to as the evaluation date, we carried out an evaluation under the
supervision and with the participation of management, including our principle executive officer and principle financial officer, of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended).
The purpose of this evaluation was to determine whether as of the evaluation date our disclosure controls and procedures were
effective to provide reasonable assurance that the information we are required to disclose in our filings with the Securities and Exchange
Commission, (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and
(ii) accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as
appropriate to allow timely decisions regarding required disclosure. Based upon this evaluation, our principal executive officer and our
principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this
report.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control
over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate. Management has evaluated the effectiveness of our internal control over financial reporting as of
December 31, 2014 using the criteria set forth in the Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") (2013 framework). Based on our evaluation, management has concluded that we
maintained effective control over financial reporting as of December 31, 2014 based on the COSO criteria. The effectiveness of our internal
control over financial reporting as of December 31, 2014 has been audited by Ernst & Young, LLP, an independent registered public
accounting firm, as stated in their report included in this Annual Report on Form 10-K.
Limitations on the Effectiveness of Controls
Our disclosure controls and procedures provide our principal executive officer and our principal financial officer reasonable assurances
that our disclosure controls and procedures will achieve their objectives. However, our management, including our principal executive officer
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and our principal 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. 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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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Calix Inc.
We have audited Calix, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) (the COSO criteria). Calix, Inc.’s management is responsible for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on
Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Calix, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31,
2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Calix, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of comprehensive loss,
stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2014, and its financial statement schedule
listed in the Index at Item 15(a), and our report dated March 4, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
San Francisco, California
March 4, 2015
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ITEM 9B.
Other Information.
None.
PART III
ITEM 10.
Directors, Executive Officers and Corporate Governance.
Information required by this Item 10 relating to our directors is incorporated by reference to the information set forth under the
captions “Proposal No. 1—Election of Directors” and “Director Compensation” and in other applicable sections of the Proxy Statement for
the 2015 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the
Exchange Act, or the Proxy Statement, to be filed within 120 days of the end of the fiscal year covered by this Report. Information required
by this Item 10 relating to our officers is incorporated by reference to the information set forth under the captions “Executive Officers” and
“Executive Compensation” and in other applicable sections of the Proxy Statement. Information regarding our Section 16 reporting
compliance is incorporated by reference to the information set forth under the captions “Security Ownership of Certain Beneficial Owners
and Management” and “Section 16(a) Beneficial Ownership Reporting Compliance” of the Proxy Statement.
We have adopted a code of ethics, which applies to all employees, officers and directors of Calix. The Code of Business Conduct and
Ethics meets the requirements of a “code of ethics” as defined by Item 406 of Regulation S-K, and applies to our Chief Executive Officer,
Chief Financial Officer, as well as all other employees, as indicated above. The Code of Business Conduct and Ethics also meets the
requirements of a code of conduct under NYSE listing standards. The Code of Business Conduct and Ethics is posted on our website at
www.calix.com under the links “About Calix—Investor Relations—Corporate Governance—Code of Conduct". We intend to disclose any
amendments to the Code of Business Conduct and Ethics, as well as any waivers for executive officers or directors, on our website at
www.calix.com.
ITEM 11.
Executive Compensation.
Information required by this Item 11 relating to executive compensation and other matters is incorporated by reference to the
information set forth under the caption “Compensation Discussion and Analysis” and in other applicable sections of the Proxy Statement.
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information required by this Item 12 relating to security ownership of certain beneficial owners and management and related
stockholder matters is incorporated by reference to the information set forth under the caption “Security Ownership of Certain Beneficial
Owners and Management” and in other applicable sections of the Proxy Statement. Information regarding securities authorized for issuance
under our equity compensation plans is incorporated by reference to the information set forth under the caption “Equity Compensation Plan
Information” of the Proxy Statement.
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence.
Information required by this Item 13 relating to certain relationships and related transactions and director independence is incorporated
by reference to the information set forth under the caption “Certain Relationships and Related Transactions” and in other applicable sections
of the Proxy Statement.
ITEM 14.
Principal Accountant Fees and Services.
Information required by this Item 14 relating to principal account fees and services is incorporated by reference to the information set
forth under the caption “Principal Accountant Fees and Services” of the Proxy Statement.
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PART IV
ITEM 15.
Exhibits, Financial Statement Schedules.
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements
The consolidated financial statements of Calix and the report of independent registered public accounting firm thereon are set forth
under Part II, Item 8 of this report.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets, As of December 31, 2014 and 2013
Consolidated Statements of Comprehensive Loss, Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Stockholders’ Equity, Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows, Years Ended December 31, 2014, 2013 and 2012
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedules
The following Financial Statement Schedule is filed as part of this Report:
Schedule II – Valuation and Qualifying Accounts
52
53
54
55
56
57
87
Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set
forth therein is included in the consolidated financial statements and notes thereto.
3. Exhibits.
The following exhibits are filed with or incorporated by reference in this report. Where such filing is made by incorporation by
reference to a previously filed registration statement or report, such registration statement or report is identified in parentheses. We will
furnish any exhibit upon request to: Calix Investor Relations, David Allen at david.allen@calix.com.
Exhibit
Number
Description
2.1
2.2
3.1
3.2
4.1
4.2
4.3
4.4
4.5
Agreement and Plan of Merger and Reorganization, dated as of September 16, 2010, by and among Calix, Inc., Ocean Sub
I, Inc., Ocean Sub II, LLC, Occam Networks, Inc. (filed as Exhibit 2.1 to Calix’s Registration Statement on Form S-4
originally filed with the Securities and Exchange Commission on November 2, 2010 (File No. 333-170282), as amended by
Amendment No. 1 filed December 14, 2010, as amended by Post-Effective Amendment No. 1, filed December 14, 2010
and as amended by Post-Effective Amendment No. 2, filed February 7, 2011 and incorporated by reference).
Support Agreement, dated September 16, 2010, by and among Calix, Inc., Ocean Sub I, Inc., Ocean Sub II, LLC and certain
stockholders of Occam Networks, Inc. (filed as Exhibit 2.2 to Calix’s Registration Statement on Form S-4 originally filed
with the Securities and Exchange Commission on November 2, 2010 (File No. 333-170282), as amended by Amendment
No. 1 filed December 14, 2010, as amended by Post-Effective Amendment No. 1, filed December 14, 2010 and as amended
by Post-Effective Amendment No. 2, filed February 7, 2011 and incorporated by reference).
Amended and Restated Certificate of Incorporation of Calix, Inc. (filed as Exhibit 3.3 to Amendment No. 7 to Calix’s
Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 23, 2010 (File No.
333-163252) and incorporated by reference).
Amended and Restated Bylaws of Calix, Inc. (filed as Exhibit 3.5 to Amendment No. 7 to Calix’s Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on March 23, 2010 (File No. 333-163252) and incorporated
by reference).
Form of Calix, Inc.’s Common Stock Certificate (filed as Exhibit 4.1 to Amendment No. 7 to Calix’s Registration Statement
on Form S-1 filed with the Securities and Exchange Commission on March 23, 2010 (File No. 333-163252) and
incorporated by reference).
Amended and Restated Investors’ Rights Agreement, by and between Calix, Inc. and the investors listed on Exhibit A
thereto, dated May 29, 2009 (filed as Exhibit 4.2 to Calix’s Registration Statement on Form S-1 filed with the SEC on
November 20, 2009 (File No. 333-163252) and incorporated by reference).
Warrant to Purchase Stock, between Optical Solutions, Inc. and Silicon Valley Bank, dated August 16, 2004 (filed as
Exhibit 4.22 to Calix’s Registration Statement on Form S-1 filed with the SEC on November 20, 2009 (File No.
333-163252) and incorporated by reference).
Assignment, between Silicon Valley Bank and Silicon Valley Bancshares, dated August 19, 2004 (filed as Exhibit 4.23 to
Calix’s Registration Statement on Form S-1 filed with the SEC on November 20, 2009 (File No. 333-163252) and
incorporated by reference).
Warrant to Purchase Stock, between Calix, Inc. and Greater Bay Venture Banking, a division of Greater Bay Bank N.A.,
dated September 4, 2007 (filed as Exhibit 4.27 to Calix’s Registration Statement on Form S-1 filed with the SEC on
November 20, 2009 (File No. 333-163252) and incorporated by reference).
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Exhibit
Number
10.1*
10.2*
10.3*
10.4*
10.5
10.6
10.7
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
10.20†
10.21*
10.22*
10.23*
Description
Calix Networks, Inc. Amended and Restated 2000 Stock Plan and related documents (filed as Exhibit 10.1 to Calix’s
Registration Statement on Form S-1 filed with the SEC on November 20, 2009 (File No. 333-163252) and incorporated by
reference).
Calix Networks, Inc. Amended and Restated 2002 Stock Plan and related documents (filed as Exhibit 10.2 to Amendment
No. 6 to Calix’s Registration Statement on Form S-1 filed with the SEC on March 8, 2010 (File No. 333-163252) and
incorporated by reference).
Optical Solutions, Inc. Amended and Restated 1997 Long-Term Incentive and Stock Option Plan and related documents
(filed as Exhibit 10.3 to Calix’s Registration Statement on Form S-1 filed with the SEC on November 20, 2009 (File No.
333-163252) and incorporated by reference).
Calix, Inc. 2010 Equity Incentive Award Plan and related documents (filed as Exhibit 10.2 to Amendment No. 6 to Calix’s
Registration Statement on Form S-1 filed with the SEC on March 8, 2010 (File No. 333-163252) and incorporated by
reference).
Form of Indemnification Agreement made by and between Calix, Inc. and each of its directors, executive officers and some
employees (filed as Exhibit 10.5 to Amendment No. 6 to Calix’s Registration Statement on Form S-1 filed with the SEC on
March 8, 2010 (File No. 333-163252) and incorporated by reference).
Lease, between RNM Lakeville, LLC and Calix, Inc., dated February 13, 2009 (filed as Exhibit 10.6 to Calix’s Registration
Statement on Form S-1 filed with the SEC on November 20, 2009 (File No. 333-163252) and incorporated by reference).
Credit Agreement, among Calix, Inc., certain of its subsidiaries, Bank of America, N.A. and the other lenders party thereto,
dated July 29, 2013 (filed as Exhibit 10.1 to Calix’s Form 10-Q filed with the SEC on August 6, 2013 (File No. 001-34674)
and incorporated by reference).
Offer Letter, between Calix, Inc. and Carl Russo, dated November 1, 2006 (filed as Exhibit 10.8 to Amendment No. 1 to
Calix’s Registration Statement on Form S-1 filed with the SEC on December 31, 2009 (File No. 333-163252) and
incorporated by reference).
Offer Letter, between Calix, Inc. and Tony Banta, dated August 25, 2005 (filed as Exhibit 10.10 to Amendment No. 1 to
Calix’s Registration Statement on Form S-1 filed with the SEC on December 31, 2009 (File No. 333-163252) and
incorporated by reference).
Offer Letter, between Calix, Inc. and John Colvin, dated March 3, 2004 (filed as Exhibit 10.11 to Amendment No. 1 to
Calix’s Registration Statement on Form S-1 filed with the SEC on December 31, 2009 (File No. 333-163252) and
incorporated by reference).
Offer Letter, between Calix, Inc. and Kevin Pope, dated December 21, 2008 (filed as Exhibit 10.12 to Amendment No. 1 to
Calix’s Registration Statement on Form S-1 filed with the SEC on December 31, 2009 (File No. 333-163252) and
incorporated by reference).
Offer Letter, between Calix, Inc. and Roger Weingarth, dated February 17, 2003, as amended April 13, 2004 (filed as
Exhibit 10.13 to Amendment No. 1 to Calix’s Registration Statement on Form S-1 filed with the SEC on December 31,
2009 (File No. 333-163252) and incorporated by reference).
Offer Letter, between Calix, Inc. and Michael Ashby, dated March 7, 2011 (filed as Exhibit 10.2 to Calix’s Form 8-K filed
with the SEC on March 7, 2011 (File No. 001-34674) and incorporated by reference).
Employment Agreement, between Calix, Inc. and Andrew Lockhart, dated February 2, 2011 (filed as Exhibit 10.20 to
Calix's Form 10-Q filed with the SEC on May 3, 2012 (File No. 001-34674) and incorporated by reference).
Offer Letter, between Calix, Inc. and William Atkins, dated December 21, 2013 (filed as Exhibit 10.15 to Calix's Form 10-
K filed with the SEC on February 20, 2014 (File No. 001-34674) and incorporated by reference).
Transition and Separation Agreement, by and between Michael Ashby and Calix, Inc., dated February 7, 2014 (filed as
Exhibit 10.16 to Calix's Form 10-K filed with the SEC on February 20, 2014 (File No. 001-34674) and incorporated by
reference).
Transition and Separation Agreement, by and between Roger Weingarth and Calix, Inc., dated February 6, 2013 (filed as
Exhibit 10.26 to Calix's Form 10-K filed with the SEC on February 22, 2013 (File No. 001-34674) and incorporated by
reference).
Calix, Inc. Amended And Restated Employee Stock Purchase Plan (Effective as of May 23, 2012) (filed as Exhibit 10.1 to
Calix’s Form 10-Q filed with the SEC on August 7, 2012 (File No. 001-34674) and incorporated by reference).
Calix, Inc. Non-Employee Director Equity Compensation Policy, as amended October 18, 2011 and July 25, 2012 (filed as
Exhibit 10.2 to Calix’s Form 10-Q filed with the SEC on August 7, 2012 (File No. 001-34674) and incorporated by
reference).
Asset Purchase Agreement between Ericsson Inc. and Calix, Inc., dated August 20, 2012 (filed as Exhibit 10.1 to Calix’s
Form 10-Q/A filed with the SEC on December 18, 2012 (File No. 001-34674) and incorporated by reference).
Calix, Inc. Non-Employee Director Cash Compensation Policy, effective January 31, 2014 (filed as Exhibit 10.21 to Calix's
Form 10-K filed with the SEC on February 20, 2014 (File No. 001-34674) and incorporated by reference).
Calix, Inc. Non-Employee Director Restricted Stock Unit Deferred Compensation Plan, effective January 1, 2013 (filed as
Exhibit 10.22 to Calix's Form 10-K filed with the SEC on February 22, 2013 (File No. 001-34674) and incorporated by
reference).
Calix, Inc. Management Bonus Program Under the 2010 Equity Incentive Award Plan (filed as Exhibit 10.1 to Calix's Form
8-K filed with the SEC on February 28, 2012 (File No. 001-34674) and incorporated by reference).
83
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Exhibit
Number
10.24*
10.25
10.26*
Description
Calix, Inc. Long Term Incentive Program Under the 2010 Equity Incentive Award Plan (filed as Exhibit 10.2 to Calix's
Form 8-K filed with the SEC on February 28, 2012 (File No. 001-34674) and incorporated by reference).
First Amendment to Lease, by and between 1031, 1035, 1039 North McDowell, LLC and Calix, Inc., effective January 28,
2013 (filed as Exhibit 10.25 to Calix's Form 10-K filed with the SEC on February 22, 2013 (File No. 001-34674) and
incorporated by reference).
Transition and Separation Agreement, by and between Anthony Banta and Calix, Inc., dated August 8, 2014 (filed as
Exhibit 10.1 to Calix’s Form 10-Q filed with the SEC on October 30, 2014 (File No. 001-34674) and incorporated by
reference).
10.27*
Transition and Separation Agreement, by and between Kevin Pope and Calix, Inc., dated December 18, 2014.
21.1
23.1
24.1
31.1
31.2
32.1
101.INS
101.SCH
101.CAL
101.DEF
Subsidiaries of the Registrant.
Consent of Ernst & Young LLP, independent registered public accounting firm.
Power of Attorney (included on signature page to this Annual Report on Form 10-K).
Certification of Principle Executive Officer of Calix, Inc. Pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934.
Certification of Principle Financial Officer of Calix, Inc. Pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934.
Certification of Principle Executive Officer and Principle Financial Officer of Calix, Inc. Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
XBRL Instance Document.
XBRL Taxonomy Extension Schema Document.
XBRL Taxonomy Extension Calculation Linkbase Document.
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
*
†
Indicates management contract or compensatory plan or arrangement.
Confidential treatment has been granted as to certain portions of this agreement.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
SIGNATURES
Dated: March 4, 2015
Dated: March 4, 2015
CALIX, INC.
(Registrant)
By:
/s/ Carl Russo
Carl Russo
Chief Executive Officer
(Principal Executive Officer)
By:
/s/ William J. Atkins
William J. Atkins
Chief Financial Officer
(Principal Financial Officer)
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Table of Contents
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and appoints Carl Russo and William J. Atkins, and each of
them, with full power of substitution and re-substitution and full power to act without the other, as his true and lawful attorney-in-fact and
agent to act in his name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated
below, and to file any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and
agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities indicated on March 4, 2015.
Signature
/s/ Carl Russo
Carl Russo
/s/ William J. Atkins
William J. Atkins
/s/ Don Listwin
Don Listwin
/s/ Christopher Bowick
Christopher Bowick
/s/ Kevin DeNuccio
Kevin DeNuccio
/s/ Michael Everett
Michael Everett
/s/ Michael Flynn
Michael Flynn
/s/ Adam Grosser
Adam Grosser
/s/ Michael Matthews
Michael Matthews
/s/ Thomas Pardun
Thomas Pardun
/s/ Kevin Peters
Kevin Peters
Title
Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
Chairman of the Board of Directors
Director
Director
Director
Director
Director
Director
Director
Director
Date
March 4, 2015
March 4, 2015
March 4, 2015
March 4, 2015
March 4, 2015
March 4, 2015
March 4, 2015
March 4, 2015
March 4, 2015
March 4, 2015
March 4, 2015
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Schedule II. Valuation and Qualifying Accounts
Year ended December 31, 2014
Allowance for doubtful accounts
Product return reserve
Year ended December 31, 2013
Allowance for doubtful accounts
Product return reserve
Year ended December 31, 2012
Allowance for doubtful accounts
Product return reserve
Balance
At Beginning
of Year
Additions
Charged to
Costs or
Expenses or
Revenue
Deductions
and Write
Offs
Balance At
End of Year
$
$
$
358
764
421
1,740
402
835
$
$
$
(In thousands)
154
4,805
(13)
3,535
112
5,474
$
$
$
(271)
(5,061)
(50)
(4,511)
(93)
(4,569)
$
$
$
241
508
358
764
421
1,740
87
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Exhibit
Number
EXHIBIT INDEX
Description
2.1
2.2
3.1
3.2
4.1
4.2
4.3
4.4
4.5
10.1*
10.2*
10.3*
10.4*
10.5
10.6
10.7
10.8*
10.9*
10.10*
Agreement and Plan of Merger and Reorganization, dated as of September 16, 2010, by and among Calix, Inc., Ocean Sub
I, Inc., Ocean Sub II, LLC, Occam Networks, Inc. (filed as Exhibit 2.1 to Calix’s Registration Statement on Form S-4
originally filed with the Securities and Exchange Commission on November 2, 2010 (File No. 333-170282), as amended by
Amendment No. 1 filed December 14, 2010, as amended by Post-Effective Amendment No. 1, filed December 14, 2010
and as amended by Post-Effective Amendment No. 2, filed February 7, 2011 and incorporated by reference).
Support Agreement, dated September 16, 2010, by and among Calix, Inc., Ocean Sub I, Inc., Ocean Sub II, LLC and certain
stockholders of Occam Networks, Inc. (filed as Exhibit 2.2 to Calix’s Registration Statement on Form S-4 originally filed
with the Securities and Exchange Commission on November 2, 2010 (File No. 333-170282), as amended by Amendment
No. 1 filed December 14, 2010, as amended by Post-Effective Amendment No. 1, filed December 14, 2010 and as amended
by Post-Effective Amendment No. 2, filed February 7, 2011 and incorporated by reference).
Amended and Restated Certificate of Incorporation of Calix, Inc. (filed as Exhibit 3.3 to Amendment No. 7 to Calix’s
Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 23, 2010 (File No.
333-163252) and incorporated by reference).
Amended and Restated Bylaws of Calix, Inc. (filed as Exhibit 3.5 to Amendment No. 7 to Calix’s Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on March 23, 2010 (File No. 333-163252) and incorporated
by reference).
Form of Calix, Inc.’s Common Stock Certificate (filed as Exhibit 4.1 to Amendment No. 7 to Calix’s Registration Statement
on Form S-1 filed with the Securities and Exchange Commission on March 23, 2010 (File No. 333-163252) and
incorporated by reference).
Amended and Restated Investors’ Rights Agreement, by and between Calix, Inc. and the investors listed on Exhibit A
thereto, dated May 29, 2009 (filed as Exhibit 4.2 to Calix’s Registration Statement on Form S-1 filed with the SEC on
November 20, 2009 (File No. 333-163252) and incorporated by reference).
Warrant to Purchase Stock, between Optical Solutions, Inc. and Silicon Valley Bank, dated August 16, 2004 (filed as
Exhibit 4.22 to Calix’s Registration Statement on Form S-1 filed with the SEC on November 20, 2009 (File No.
333-163252) and incorporated by reference).
Assignment, between Silicon Valley Bank and Silicon Valley Bancshares, dated August 19, 2004 (filed as Exhibit 4.23 to
Calix’s Registration Statement on Form S-1 filed with the SEC on November 20, 2009 (File No. 333-163252) and
incorporated by reference).
Warrant to Purchase Stock, between Calix, Inc. and Greater Bay Venture Banking, a division of Greater Bay Bank N.A.,
dated September 4, 2007 (filed as Exhibit 4.27 to Calix’s Registration Statement on Form S-1 filed with the SEC on
November 20, 2009 (File No. 333-163252) and incorporated by reference).
Calix Networks, Inc. Amended and Restated 2000 Stock Plan and related documents (filed as Exhibit 10.1 to Calix’s
Registration Statement on Form S-1 filed with the SEC on November 20, 2009 (File No. 333-163252) and incorporated by
reference).
Calix Networks, Inc. Amended and Restated 2002 Stock Plan and related documents (filed as Exhibit 10.2 to Amendment
No. 6 to Calix’s Registration Statement on Form S-1 filed with the SEC on March 8, 2010 (File No. 333-163252) and
incorporated by reference).
Optical Solutions, Inc. Amended and Restated 1997 Long-Term Incentive and Stock Option Plan and related documents
(filed as Exhibit 10.3 to Calix’s Registration Statement on Form S-1 filed with the SEC on November 20, 2009 (File No.
333-163252) and incorporated by reference).
Calix, Inc. 2010 Equity Incentive Award Plan and related documents (filed as Exhibit 10.2 to Amendment No. 6 to Calix’s
Registration Statement on Form S-1 filed with the SEC on March 8, 2010 (File No. 333-163252) and incorporated by
reference).
Form of Indemnification Agreement made by and between Calix, Inc. and each of its directors, executive officers and some
employees (filed as Exhibit 10.5 to Amendment No. 6 to Calix’s Registration Statement on Form S-1 filed with the SEC on
March 8, 2010 (File No. 333-163252) and incorporated by reference).
Lease, between RNM Lakeville, LLC and Calix, Inc., dated February 13, 2009 (filed as Exhibit 10.6 to Calix’s Registration
Statement on Form S-1 filed with the SEC on November 20, 2009 (File No. 333-163252) and incorporated by reference).
Credit Agreement, among Calix, Inc., certain of its subsidiaries, Bank of America, N.A. and the other lenders party thereto,
dated July 29, 2013 (filed as Exhibit 10.1 to Calix’s Form 10-Q filed with the SEC on August 6, 2013 (File No. 001-34674)
and incorporated by reference).
Offer Letter, between Calix, Inc. and Carl Russo, dated November 1, 2006 (filed as Exhibit 10.8 to Amendment No. 1 to
Calix’s Registration Statement on Form S-1 filed with the SEC on December 31, 2009 (File No. 333-163252) and
incorporated by reference).
Offer Letter, between Calix, Inc. and Tony Banta, dated August 25, 2005 (filed as Exhibit 10.10 to Amendment No. 1 to
Calix’s Registration Statement on Form S-1 filed with the SEC on December 31, 2009 (File No. 333-163252) and
incorporated by reference).
Offer Letter, between Calix, Inc. and John Colvin, dated March 3, 2004 (filed as Exhibit 10.11 to Amendment No. 1 to
Calix’s Registration Statement on Form S-1 filed with the SEC on December 31, 2009 (File No. 333-163252) and
incorporated by reference).
88
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Exhibit
Number
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
10.20†
10.21*
10.22*
10.23*
10.24*
10.25
10.26*
Description
Offer Letter, between Calix, Inc. and Kevin Pope, dated December 21, 2008 (filed as Exhibit 10.12 to Amendment No. 1 to
Calix’s Registration Statement on Form S-1 filed with the SEC on December 31, 2009 (File No. 333-163252) and
incorporated by reference).
Offer Letter, between Calix, Inc. and Roger Weingarth, dated February 17, 2003, as amended April 13, 2004 (filed as
Exhibit 10.13 to Amendment No. 1 to Calix’s Registration Statement on Form S-1 filed with the SEC on December 31,
2009 (File No. 333-163252) and incorporated by reference).
Offer Letter, between Calix, Inc. and Michael Ashby, dated March 7, 2011 (filed as Exhibit 10.2 to Calix’s Form 8-K filed
with the SEC on March 7, 2011 (File No. 001-34674) and incorporated by reference).
Employment Agreement, between Calix, Inc. and Andrew Lockhart, dated February 2, 2011 (filed as Exhibit 10.20 to
Calix's Form 10-Q filed with the SEC on May 3, 2012 (File No. 001-34674) and incorporated by reference).
Offer Letter, between Calix, Inc. and William Atkins, dated December 21, 2013 (filed as Exhibit 10.15 to Calix's Form 10-
K filed with the SEC on February 20, 2014 (File No. 001-34674) and incorporated by reference).
Transition and Separation Agreement, by and between Michael Ashby and Calix, Inc., dated February 7, 2014 (filed as
Exhibit 10.16 to Calix's Form 10-K filed with the SEC on February 20, 2014 (File No. 001-34674) and incorporated by
reference).
Transition and Separation Agreement, by and between Roger Weingarth and Calix, Inc., dated February 6, 2013 (filed as
Exhibit 10.26 to Calix's Form 10-K filed with the SEC on February 22, 2013 (File No. 001-34674) and incorporated by
reference).
Calix, Inc. Amended And Restated Employee Stock Purchase Plan (Effective as of May 23, 2012) (filed as Exhibit 10.1 to
Calix’s Form 10-Q filed with the SEC on August 7, 2012 (File No. 001-34674) and incorporated by reference).
Calix, Inc. Non-Employee Director Equity Compensation Policy, as amended October 18, 2011 and July 25, 2012 (filed as
Exhibit 10.2 to Calix’s Form 10-Q filed with the SEC on August 7, 2012 (File No. 001-34674) and incorporated by
reference).
Asset Purchase Agreement between Ericsson Inc. and Calix, Inc., dated August 20, 2012 (filed as Exhibit 10.1 to Calix’s
Form 10-Q/A filed with the SEC on December 18, 2012 (File No. 001-34674) and incorporated by reference).
Calix, Inc. Non-Employee Director Cash Compensation Policy, effective January 31, 2014 (filed as Exhibit 10.21 to Calix's
Form 10-K filed with the SEC on February 20, 2014 (File No. 001-34674) and incorporated by reference).
Calix, Inc. Non-Employee Director Restricted Stock Unit Deferred Compensation Plan, effective January 1, 2013 (filed as
Exhibit 10.22 to Calix's Form 10-K filed with the SEC on February 22, 2013 (File No. 001-34674) and incorporated by
reference).
Calix, Inc. Management Bonus Program Under the 2010 Equity Incentive Award Plan (filed as Exhibit 10.1 to Calix's Form
8-K filed with the SEC on February 28, 2012 (File No. 001-34674) and incorporated by reference).
Calix, Inc. Long Term Incentive Program Under the 2010 Equity Incentive Award Plan (filed as Exhibit 10.2 to Calix's
Form 8-K filed with the SEC on February 28, 2012 (File No. 001-34674) and incorporated by reference).
First Amendment to Lease, by and between 1031, 1035, 1039 North McDowell, LLC and Calix, Inc., effective January 28,
2013 (filed as Exhibit 10.25 to Calix's Form 10-K filed with the SEC on February 22, 2013 (File No. 001-34674) and
incorporated by reference).
Transition and Separation Agreement, by and between Anthony Banta and Calix, Inc., dated August 8, 2014 (filed as
Exhibit 10.1 to Calix’s Form 10-Q filed with the SEC on October 30, 2014 (File No. 001-34674) and incorporated by
reference).
10.27*
Transition and Separation Agreement, by and between Kevin Pope and Calix, Inc., dated December 18, 2014.
21.1
23.1
24.1
31.1
31.2
32.1
101.INS
101.SCH
101.CAL
101.DEF
Subsidiaries of the Registrant.
Consent of Ernst & Young LLP, independent registered public accounting firm.
Power of Attorney (included on signature page to this Annual Report on Form 10-K).
Certification of Principle Executive Officer of Calix, Inc. Pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934.
Certification of Principle Financial Officer of Calix, Inc. Pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934.
Certification of Principle Executive Officer and Principle Financial Officer of Calix, Inc. Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
XBRL Instance Document.
XBRL Taxonomy Extension Schema Document.
XBRL Taxonomy Extension Calculation Linkbase Document.
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
89
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*
†
Indicates management contract or compensatory plan or arrangement.
Confidential treatment has been granted as to certain portions of this agreement.
90
Exhibit 10.27
TRANSITION AND SEPARATION AGREEMENT
This Transition and Separation Agreement (“Agreement”) is made between Kevin Pope (“Executive”) and Calix, Inc., a Delaware
corporation (“Calix”), effective December 15, 2014 (“Effective Date”). Executive and Calix may be collectively referred to as “Parties."
A.
Executive currently serves as the Senior Vice President, Systems Software Development of Calix;
B.
The Parties desire that Executive transition to the role of Advisor for Systems Software Development effective December
15, 2014 (“Transition Date”);
C.
E.
The Parties desire that Executive terminate employment with Calix on February 27, 2015 (“Termination Date”); and
The Parties want to transition Executive’s duties and end their relationship amicably and also to establish the obligations
of the Parties, including all amounts due and owing to Executive.
The Parties agree as follows:
1.
Continued Employment. Executive acknowledges that, while continuing to serve as Calix’s Advisor for Systems
Software Development, Executive shall continue to be subject to the requirements of Section 16 of the Securities Exchange Act of 1934, as
amended (“Exchange Act”). Executive shall no longer be eligible to participate in Calix’s Amended and Restated Executive Change in
Control and Severance Plan (“Severance Plan”), which is entirely superseded by this Agreement.
2.
Transition.
(a) Transition Period. Unless Executive’s employment with Calix is terminated for cause or Executive voluntarily resigns
from Calix during the period of time commencing on the Transition Date and ending on the Termination Date (“Transition Period”),
Executive shall remain employed by Calix as Advisor for Systems Software Development. Executive shall provide transition
services in Executive’s areas of expertise and such other duties as shall be assigned by Calix’s Chief Executive Officer (“CEO”) or
other Calix officer designated by the CEO (“Transition Duties”). Executive agrees that, during the Transition Period, Executive
shall not, directly or indirectly, become employed by or provide assistance to any Competitor (as defined below) of Calix and may
only accept employment with a Competitor if Executive receives written consent from the CEO. Executive shall otherwise devote
such time and attention to Executive’s Transition Duties as shall reasonably be required. For purposes of this Agreement,
“Competitor” means any company that could reasonably be considered to be a competitor of Calix, including all of the following
entities and their respective parents, affiliates and subsidiaries: Accedian Networks Inc.; ADTRAN, Inc.; Alcatel-Lucent, S.A.; BTI
Systems Inc.; CIENA Corp.; Cisco Systems, Inc.; Cyan, Inc.; Huawei Technologies Co., Ltd.; Zhone Technologies Inc.; and ZTE
Corporation.
(b) Salary and Benefits Continuation. During the Transition Period, Executive will continue to be paid an annual base salary
of $265,200.00, in bi-weekly installments in accordance with Calix’s standard payroll practices, accrue paid vacation and be
eligible for all employee benefit plans available to senior executives of Calix (other than the Severance Plan) through the
Termination Date. All payments made to Executive during the Transition Period will be subject to standard payroll deductions and
withholdings.
(c) Equity Awards. Each stock option, restricted stock award and restricted stock unit award held by Executive shall continue
to vest in accordance with its terms and remain outstanding based upon Executive’s continued service during the Transition Period.
(d) Business Expenses. Calix shall reimburse Executive for all outstanding expenses incurred prior to the Termination Date
which are consistent with Calix’s travel, entertainment and other business expenses policies, subject to Calix’s requirements with
respect to reporting and documenting such expenses.
(e) SEC Reporting. Executive acknowledges that to the extent required by the Exchange Act, Executive will have continuing
obligations under Section 16(a) and 16(b) of the Exchange Act to report certain transactions in Calix common stock for six months
following the Transition Date. Executive agrees not to undertake, directly or indirectly, any reportable transactions until the end of
such six-month period.
(f) Protection of Information. Executive agrees that, except for the purposes of performing the Transition Duties, he will not
seek to obtain any confidential or proprietary information or materials of Calix.
3.
Severance. Without admission of any liability, fact or claim, Calix agrees, subject to the execution of this Agreement and
Executive’s delivery to Calix of the General Release of Claims attached as Exhibit A (“Release of Claims”) that becomes effective and
irrevocable 30 days following the Termination Date, and Executive’s performance of his continuing obligations under this Agreement and the
confidentiality agreement signed by Executive upon his initial acceptance of employment with Calix (“Confidentiality Agreement”), to
provide Executive the severance benefits set forth below:
Exhibit 10.27
(a) Six months of Executive’s base salary (as set forth in Section 2(b) above) payable in a lump sum no later than ten days
following the date the Release of Claims is no longer subject to revocation, which will be $132,600.00, less applicable withholding
obligations;
(b) Six months of Executive’s annual target cash bonus opportunity payable in a lump sum no later than ten days following
the date the Release of Claims is no longer subject to revocation, which will be $53,040.00, less applicable withholding obligations;
(c) Each outstanding equity award held by Executive as of the Termination Date that vests solely based upon continued
service will vest, and if applicable, become exercisable to the same extent such equity award would have vested had Executive
continued to remain employed by Calix for six months following the Termination Date. Except as set forth above, each equity
award held by Executive as of the Termination Date that is unvested as of the Termination Date shall immediately terminate; and
(d) If Executive elects to continue health insurance under the Consolidated Omnibus Budget Reconciliation Act of 1985, as
amended (“COBRA”), Calix will pay or, at its election, reimburse Executive for, premiums for health insurance coverage to the
same extent it paid health insurance premiums on Executive’s behalf immediately prior to the Termination Date for a period of six
months following the Termination Date, provided, however, that such Calix-paid premiums will terminate earlier if Executive
cancels the underlying coverage or coverage otherwise ends sooner because Executive obtains health coverage with another
employer. If Executive’s Calix-paid premiums include dependents at the Termination Date, Calix will continue to pay premiums
for such dependents to the same extent, and for the same duration, unless Executive elects otherwise.
4.
Final Paycheck. Executive acknowledges and agrees that, unless his employment with Calix is terminated earlier by
Calix for cause or by Executive for any reason, Executive’s status as an employee of Calix will end on the Termination Date. As soon as
administratively practicable after the Termination Date, Calix will pay Executive all accrued but unpaid base salary and all accrued and
unused vacation earned through the Termination Date, subject to standard payroll deductions and withholdings. Executive is entitled to these
payments regardless of whether he executes or revokes this Agreement or the Release of Claims. Following the Termination Date, Executive
may elect to receive continued healthcare coverage under COBRA.
5.
Full Payment. Executive acknowledges that the payment and arrangements set forth above shall constitute full and
complete satisfaction of all amounts due and owing to Executive as a result of his employment with Calix and the termination of that
employment.
6.
Executive’s Release of Calix. Executive understands that by agreeing to the release provided by this Section 6, Executive
is agreeing not to sue, or otherwise file any claim against, Calix or any of its employees or other agents for any reason, based on anything that
has occurred as of the date Executive signs this Agreement.
(a) On behalf of Executive and his heirs, assigns, executors, administrators, trusts, spouse and estate, Executive releases and
forever discharges “Releasees,” consisting of Calix and each of its shareholders, affiliates, subsidiaries, predecessors, successors,
assigns, agents, directors, officers, partners, employees and insurers, and all persons acting by, through, under or in concert with
them, from all actions, causes of action in law or equity, debts, liens, agreements, promises, liability, claims, demands, damages,
loss, cost or expense, of any nature, known or unknown, fixed or contingent (“Claims”), which Executive now has or may later
have against any Releasee by reason of any matter, cause, or thing from the beginning of time to the Effective Date, including any
and all Claims arising out of, based upon, or relating to Executive’s hire, employment, remuneration or termination by the
Releasees, brought under federal, state, or local laws relating to employment, including those of any kind that may be brought in
any court or administrative agency arising under: Title VII of the Civil Rights Act of 1964, as amended by the Civil Rights Act of
1991, 42 U.S.C. § 2000 et seq.; the Equal Pay Act, 29 U.S.C. § 206(d); the Civil Rights Act of 1866, 42 U.S.C. § 1981; the Family
and Medical Leave Act of 1993, 29 U.S.C. § 2601 et seq.; the Americans with Disabilities Act of 1990, 42 U.S.C. § 12101 et seq.;
the False Claims Act, 31 U.S.C. § 3729 et seq.; the Employee Retirement Income Security Act, 29 U.S.C. § 1001 et seq.; the
Worker Adjustment and Retraining Notification Act, 29 U.S.C. § 2101 et seq.; the Fair Labor Standards Act, 29 U.S.C. § 215 et
seq.; the Sarbanes-Oxley Act of 2002; the California Labor Code; the employment and civil rights laws of California; for breach of
contract; arising in tort, including Claims of wrongful dismissal or discharge, discrimination, harassment, retaliation, fraud,
misrepresentation, defamation, libel, infliction of emotional distress, violation of public policy, or breach of the implied covenant of
good faith and fair dealing; and other proceedings providing for damages or other remedies, including compensatory damages,
punitive damages, injunctive relief and attorney’s fees.
(b) However, Executive does not release the following claims:
(i)
Claims for unemployment compensation or any state disability insurance benefits under the terms of state law;
(ii)
policy or fund of Calix;
Claims for workers’ compensation insurance benefits under the terms of any worker’s compensation insurance
(iii)
COBRA;
Claims to continued participation in certain of Calix’s group benefit plans under the terms and conditions of
Exhibit 10.27
(iv)
terms of any Calix employee benefit plan;
Claims to any benefit entitlements vested as the date of Executive’s employment termination, under written
(v)
California Labor Code Section 2802 or any other applicable law; and
Claims for indemnification under Calix’s Bylaws, any indemnification agreement between Calix and Executive,
Executive’s right to bring to the attention of the Equal Employment Opportunity Commission claims of
(vi)
discrimination; provided, however, that Executive does release Executive’s right to secure any damages for alleged
discriminatory treatment.
(c) Executive acknowledges that he has been advised of and is familiar with the provisions of California Civil Code section
1542, which provides:
“A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the
time of executing the release, which, if known by him or her, must have materially affected his or her settlement with the
debtor.”
Being aware of said Code section, Executive expressly waives any rights he may have thereunder, as well as under any other
similar statutes or common law principles.
7.
agrees that:
Non-Disparagement, Transition, Transfer of Calix Property and Limitations on Service. Executive further
(a) Non-Disparagement. Executive agrees that he shall not disparage, criticize or defame Calix, its affiliates and their
respective affiliates, directors, officers, agents, partners, stockholders, employees, products, services, technology or business, either
publicly or privately. Calix agrees that it shall not, and it shall instruct its officers and members of its Board of Directors to not,
disparage, criticize or defame Executive, either publicly or privately. Nothing in this Section 7(a) shall have application to any
evidence or testimony required by any court, arbitrator or government agency.
(b) Transition. Each of Calix and Executive shall use their respective reasonable efforts to cooperate with each other in good
faith to facilitate a smooth transition of Executive’s duties to other executives of Calix.
(c) Transfer of Calix Property. On or before the Termination Date, Executive shall turn over to Calix all files, memoranda,
records, and other documents, and any other physical or personal property which are the property of Calix and which he has in his
possession, custody or control on the Termination Date.
8.
Executive Representations. Executive warrants and represents that (a) he has not filed or authorized the filing of any
complaints, charges or lawsuits against Calix or any affiliate of Calix with any governmental agency or court, and that if, unbeknownst to
Executive, such a complaint, charge or lawsuit has been filed on his behalf, he will immediately cause it to be withdrawn and dismissed, (b)
he has reported all hours worked as of the date of this Agreement and has been paid all compensation, wages, bonuses, commissions, and/or
benefits to which he may be entitled and no other compensation, wages, bonuses, commissions and/or benefits are due to him, except as
provided in this Agreement, (c) he has no known workplace injuries or occupational diseases and has been provided and/or has not been
denied any leave requested under the Family and Medical Leave Act or any similar state law, (d) the execution, delivery and performance of
this Agreement by Executive does not and will not conflict with, breach, violate or cause a default under any agreement, contract or
instrument to which Executive is a party or any judgment, order or decree to which Executive is subject, and (e) upon the execution and
delivery of this Agreement by Calix and Executive, this Agreement will be a valid and binding obligation of Executive, enforceable in
accordance with its terms.
9.
No Assignment by Executive. Executive warrants and represents that no portion of any of the matters released, or of any
recovery or settlement to which Executive might be entitled, has been assigned or transferred to any other person or entity not a party to this
Agreement, in any manner, including by way of subrogation or operation of law. If any claim, action, demand or suit should be made against
Calix or any other Releasee because of any actual assignment, subrogation or transfer by Executive, Executive agrees to indemnify and hold
harmless Calix and all other Releasees against such claim, action, suit or demand, including necessary expenses of investigation, attorneys’
fees and costs. In the event of Executive’s death, this Agreement shall inure to the benefit of Executive’s executors, administrators, heirs,
distributees, devisees, and legatees. None of Executive’s rights or obligations may be assigned or transferred by Executive, other than
Executive’s rights to payments under this Agreement, which may be transferred only upon Executive’s death by will or operation of law.
10.
Governing Law. This Agreement shall be construed and enforced in accordance with the laws of the State of California
or, where applicable, United States federal law, in each case without regard to any conflicts of laws provisions. The Parties consent to the
exclusive jurisdiction of, and venue in, the state and federal courts within San Francisco County, California for the resolution of any disputes
arising out of or in any way related to this Agreement.
11.
Miscellaneous. This Agreement, collectively with the Confidentiality Agreement, the Release of Claims and all
agreements relating to Executive’s outstanding equity awards, constitutes the entire agreement between the Parties with regard to its subject
Exhibit 10.27
matter and supersedes any other agreements between the Parties with regard to its subject matter. Executive acknowledges that there are no
other agreements, written, oral or implied, and that he may not rely on any prior negotiations, discussions, representations or agreements.
This Agreement may be modified only by a writing signed by Executive and an authorized officer or director of Calix. This Agreement may
be executed in separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same
agreement. The Parties agree that signatures delivered by scan, email or other electronic means shall be considered original signatures for all
purposes under this Agreement.
12.
Calix Assignment and Successors. Calix shall assign its rights and obligations under this Agreement to any successor to
all or substantially all of the business or the assets of Calix (by merger or otherwise). This Agreement shall be binding upon and inure to the
benefit of Calix and its successors, assigns and legal representatives.
13.
Maintaining Confidential Information. Executive reaffirms his obligations under his Confidentiality Agreement.
Executive acknowledges and agrees that the payments provided in Section 3 above shall be subject to Executive’s continued compliance with
Executive’s obligations under the Confidentiality Agreement.
14.
Executive’s Cooperation. After the Termination Date, Executive shall cooperate with Calix and its affiliates, upon Calix’s
reasonable request, with respect to any internal investigation or administrative, regulatory or judicial proceeding involving matters within the
scope of Executive’s duties and responsibilities during his employment with Calix (including Executive being available to Calix upon
reasonable notice for interviews and factual investigations, appearing to give testimony without requiring service of a subpoena or other legal
process, and turning over to Calix all relevant Calix documents which are or may have come into Executive’s possession during his
employment).
DATED: December 15, 2014
DATED: December 15, 2014
/s/ Kevin Pope
Kevin Pope
Calix, Inc.
By: /s/ William Atkins
William Atkins
EXHIBIT A
GENERAL RELEASE OF CLAIMS
This General Release of Claims (“Release”) is entered into December 15, 2014, between Kevin Pope (“Executive”) and Calix, Inc.,
a Delaware corporation (“Calix”) (collectively the “Parties”), effective eight days after Executive’s signature (“Effective Date”), unless
Executive revokes his acceptance of this Release as provided in Paragraph 1(c), below.
1.
Executive’s Release of Calix. Executive understands that by agreeing to this Release, Executive is agreeing not to sue, or
otherwise file any claim against, Calix or any of its employees or other agents for any reason whatsoever based on anything that has occurred
as of the date Executive signs this Release.
(a) On behalf of Executive and his heirs, assigns, executors, administrators, trusts, spouse and estate, Executive releases and
forever discharges “Releasees,” consisting of Calix and each of its shareholders, affiliates, subsidiaries, predecessors, successors,
assigns, agents, directors, officers, partners, employees and insurers, and all persons acting by, through, under or in concert with
them, from all actions, causes of action in law or equity, debts, liens, agreements, promises, liability, claims, demands, damages,
loss, cost or expense, of any nature, known or unknown, fixed or contingent (“Claims”), which Executive now has or may later
have against any Releasee by reason of any matter, cause, or thing from the beginning of time to the Effective Date, including any
and all Claims arising out of, based upon, or relating to Executive’s hire, employment, remuneration or termination by the
Releasees, brought under federal, state, or local laws relating to employment, including those of any kind that may be brought in
any court or administrative agency arising under: Title VII of the Civil Rights Act of 1964, as amended by the Civil Rights Act of
1991, 42 U.S.C. § 2000 et seq.; the Equal Pay Act, 29 U.S.C. § 206(d); the Civil Rights Act of 1866, 42 U.S.C. § 1981; the Family
and Medical Leave Act of 1993, 29 U.S.C. § 2601 et seq.; the Americans with Disabilities Act of 1990, 42 U.S.C. § 12101 et seq.;
the False Claims Act, 31 U.S.C. § 3729 et seq.; the Employee Retirement Income Security Act, 29 U.S.C. § 1001 et seq.; the
Worker Adjustment and Retraining Notification Act, 29 U.S.C. § 2101 et seq.; the Fair Labor Standards Act, 29 U.S.C. § 215 et
seq.; the Sarbanes-Oxley Act of 2002; the California Labor Code; the employment and civil rights laws of California; for breach of
contract; arising in tort, including Claims of wrongful dismissal or discharge, discrimination, harassment, retaliation, fraud,
misrepresentation, defamation, libel, infliction of emotional distress, violation of public policy, or breach of the implied covenant of
good faith and fair dealing; and other proceedings providing for damages or other remedies, including compensatory damages,
punitive damages, injunctive relief and attorney’s fees.
Exhibit 10.27
(b)
However, Executive does not release the following claims:
(i)
(ii)
Claims for unemployment compensation or any state disability insurance benefits;
Claims for workers’ compensation insurance benefits under the terms of any worker’s
compensation insurance policy or fund of Calix;
terms and conditions of COBRA;
(iii)
Claims to continued participation in certain of Calix’s group benefit plans pursuant to the
termination, under written terms of any Calix employee benefit plan;
(iv)
Claims to any benefit entitlements vested as the date of Executive’s employment
Executive, Calix’s Bylaws, California Labor Code Section 2802 or any other law; and
(v)
Claims for indemnification under any indemnification agreement between Calix and
(vi)
Executive’s right to bring to the attention of the Equal Employment Opportunity
Commission claims of discrimination; provided, however, that Executive does release Executive’s right to secure any
damages for alleged discriminatory treatment.
the following:
(c)
In accordance with the Older Workers Benefit Protection Act of 1990, Executive has been advised of
(i)
(ii)
(iii)
Executive has the right to consult with an attorney before signing this Release;
Executive has been given at least 21 days to consider this Release;
Executive has seven days after signing this Release to revoke it, and Executive will not
receive the severance benefits provided by Section 3 of the Transition and Separation Agreement entered into between the
Parties on December 15, 2014 (the “Transition and Separation Agreement”) unless and until such seven-day period has
expired. If Executive wishes to revoke this Release, Executive must deliver notice of Executive’s revocation in writing,
no later than 5:00 p.m. Pacific Time on the 7th day following Executive’s execution of this Release to General Counsel,
Calix, Inc., 1035 N. McDowell Blvd., Petaluma, CA 94954 (CalixLegal@calix.com).
(d)
Civil Code section 1542, which provides:
Executive acknowledges that he has been advised of and is familiar with the provisions of California
“A general release does not extend to claims which the creditor does not know or suspect to exist in his or her
favor at the time of executing the release, which, if known by him or her, must have materially affected his or
her settlement with the debtor.”
Being aware of said Code section, Executive expressly waives any rights he may have thereunder, as well as under any other
similar statutes or common law principles.
2.
Executive Representations. Executive represents and warrants that:
(a)
(b)
Executive has returned to Calix all Calix property in Executive’s possession;
Executive is not owed wages, commissions, bonuses or other compensation, other than any payments
that become due under Section 4 of the Transition and Separation Agreement;
(c)
During the course of Executive’s employment Executive did not sustain any injuries for which he
might be entitled to compensation under worker’s compensation law or Executive has disclosed any injuries of which he is
currently, reasonably aware for which he might be entitled to compensation under worker’s compensation law;
Exhibit 10.27
(d)
From the date Executive executed the Transition and Separation Agreement through the date
Executive executes this Release, Executive has not made any disparaging comments about Calix, nor will he do so in the future;
and
person or entity released, nor will Executive do so in the future, except as specifically allowed by this Release.
(e)
Executive has not initiated any adversarial proceedings of any kind against Calix or against any other
3.
Maintaining Confidential Information. Executive reaffirms his obligations under the confidentiality agreement signed by
Executive upon his initial acceptance of employment with Calix (“Confidentiality Agreement”). Executive acknowledges and agrees that the
payments provided in Section 3 of the Transition and Separation Agreement shall be subject to Executive’s continued compliance with his
obligations under the Confidentiality Agreement.
4.
Cooperation with Calix. Executive reaffirms his obligations to cooperate with Calix under Section 13 of the Transition
and Separation Agreement.
5.
Severability. The provisions of this Release are severable. If any provision is held to be invalid or unenforceable, it shall
not affect the validity or enforceability of any other provision.
6.
Choice of Law. This Release shall in all respects be governed and construed in accordance with the laws of the State of
California, including all matters of construction, validity and performance, without regard to conflicts of law principles.
7.
Integration Clause. This Release and the Transition and Separation Agreement contain the Parties’ entire agreement with
regard to the transition and separation of Executive’s employment, and supersede any prior agreements as to those matters, whether oral or
written. This Release may not be modified, in whole or in part, except by an instrument in writing signed by Executive and the Chief
Executive Officer of Calix.
8.
Execution in Counterparts. This Release may be executed in counterparts with the same force and effectiveness as
though executed in a single document. Electronic signatures shall have the same force and effectiveness as original signatures.
9.
Intent to be Bound. The Parties have carefully read this Release in its entirety; fully understand and agree to its terms and
provisions; and intend and agree that it is final and binding on all Parties.
EXECUTIVE
CALIX, INC.
/s/ Kevin Pope
Kevin Pope
/s/ William Atkins
By: William Atkins
Title: Executive VP and CFO
Date: December 18, 2014
Date: December 15, 2014
SUBSIDIARIES OF THE REGISTRANT
Exhibit 21.1
Entity Name
Calix Networks Canada, Inc.
Calix Network Technology Development (Nanjing) Co. Ltd.
Calix Networks UK, Ltd
Calix Brasil Servicos Ltda
Jurisdiction
Canada
China
England, UK
Brazil
SUBSIDIARIES OF THE REGISTRANT
Exhibit 21.1
Entity Name
Calix Networks Canada, Inc.
Calix Network Technology Development (Nanjing) Co. Ltd.
Calix Networks UK, Ltd
Calix Brasil Servicos Ltda
Jurisdiction
Canada
China
England, UK
Brazil
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
We consent to the incorporation by reference in the Registration Statement (Form S-8 Nos. 333-194054, 333-185025, 333-172379, and
333-166245) of Calix, Inc. of our reports dated March 4, 2015, with respect to the consolidated financial statements and schedule of Calix,
Inc., and the effectiveness of internal control over financial reporting of Calix, Inc., included in this Annual Report (Form 10-K) for the year
ended December 31, 2014.
San Francisco, California
March 4, 2015
/s/ ERNST & YOUNG LLP
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Carl Russo, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Calix, Inc. for the year ended December 31, 2014;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 4, 2015
/s/ Carl Russo
Carl Russo
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF PRINCIPLE FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, William J. Atkins, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Calix, Inc. for the year ended December 31, 2014;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 4, 2015
/s/ William J. Atkins
William J. Atkins
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Carl Russo, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the
Annual Report of Calix, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2014 fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form
10-K fairly presents in all material respects the financial condition and results of operations of the Company.
Exhibit 32.1
Date: March 4, 2015
/s/ Carl Russo
Carl Russo
Chief Executive Officer
(Principal Executive Officer)
I, William J. Atkins, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
the Annual Report of Calix, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2014 fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form
10-K fairly presents in all material respects the financial condition and results of operations of the Company.
Date: March 4, 2015
/s/ William J. Atkins
William J. Atkins
Chief Financial Officer
(Principal Financial Officer)
This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission
and is not to be incorporated by reference into any filing of Calix, Inc. under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-K), irrespective of any general incorporation
language contained in such filing.