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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549 
 
FORM 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020
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: 001-37771
 
Acacia Communications, Inc.
(Exact Name of Registrant as Specified in its Charter)
 
Delaware
 
27-0291921
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
Three Mill and Main Place, Suite 400
Maynard, Massachusetts 01754
(Address of principal executive offices)
(978) 938-4896
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, $0.0001 par value per share
 
ACIA
 
The Nasdaq Global Select Market
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
  
Accelerated filer
 
 
 
 
 
 
 
Non-accelerated filer
 
 
  
Smaller reporting company
 
 
 
 
 
 
 
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.             
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes     No   
As of July 31, 2020, the registrant had 42,039,179 shares of common stock outstanding.
 




ACACIA COMMUNICATIONS, INC.
Table of Contents
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EX-31.1
 
(CERTIFICATION OF THE CEO PURSUANT TO SECTION 302)
 
 
EX-31.2
 
(CERTIFICATION OF THE CFO PURSUANT TO SECTION 302)
 
 
EX-32.1
 
(CERTIFICATION OF THE CEO PURSUANT TO SECTION 906)
 
 
EX-32.2
 
(CERTIFICATION OF THE CFO PURSUANT TO SECTION 906)
 
 


i


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by terms such as “may,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” “will” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and assumptions described in the section titled “Risk Factors” under Part II, Item 1A below and elsewhere in this Quarterly Report on Form 10-Q. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as indicative of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Some of the key factors that could cause actual results to differ from our expectations include:
the occurrence of any event, change or other circumstances that could give rise to the termination of the Agreement and Plan of Merger we have entered into with Cisco Systems, Inc. and Amarone Acquisition Corp. and any inability to complete the proposed merger due to the failure to satisfy conditions to completion of the proposed merger, including that a governmental entity may prohibit, delay or refuse to grant approval for the consummation of the proposed merger;
uncertainty regarding the extent to which the COVID-19 pandemic and related response measures will adversely affect our business, results of operations and financial condition, or the business and financial condition of our customers and suppliers;
our ability to sustain or increase revenue from our larger customers, generate revenues from new customers, or offset the discontinuation of concentrated purchases by our larger customers with purchases by new or existing customers;
our ability to anticipate the timing and scale of demand for our products, including from our largest customers;
the adverse impact of negative economic conditions created or exacerbated by the ongoing COVID-19 pandemic;
our expectations regarding our expenses and revenue, our ability to maintain and expand gross profit, the sufficiency of our cash resources and needs for additional financing;
our ability to produce products free of problems, defects, errors and vulnerabilities;
our anticipated growth strategies;
our expectations regarding competition;
the anticipated trends and challenges in our business and the markets in which we operate;
our expectations regarding, and the capacity and stability of, our supply chain and manufacturing;
the size and growth of the potential markets for our products and the ability to serve those markets;
the scope, progress, expansion, and costs of developing and commercializing our products;
the timing, rate and degree of introducing any of our products into the market and the market acceptance of any of our products;
our ability to establish and maintain development partnerships;
our ability to attract or retain key personnel;

1


our expectations regarding federal, state and foreign regulatory requirements, including export controls, tax law changes and interpretations, economic sanctions and anti-corruption regulations;
regulatory or legislative developments in the United States and foreign countries, including trade policy and tariffs and export control laws or regulations that could impede our ability to sell our products to our customer ZTE Kangxun Telecom Co. Ltd. or any of its affiliates, or that could impede our ability to sell our products to other customers in certain foreign jurisdictions, particularly in China, or that could impede sales by such customers in the United States; and
our ability to obtain and maintain intellectual property protection for our products.
Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events or otherwise.


2


PART I—FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited).
ACACIA COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(Unaudited)

 
June 30, 2020
 
December 31, 2019
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
245,534

 
$
36,617

Marketable securities - short-term
198,125

 
300,129

Accounts receivable
115,109

 
97,948

Inventory
32,457

 
40,820

Prepaid expenses and other current assets
7,951

 
6,518

Total current assets
599,176

 
482,032

Marketable securities - long-term
70,718

 
134,632

Property and equipment, net
27,355

 
26,801

Operating lease right-of-use assets
29,731

 
25,046

Deferred tax asset
52,436

 
51,798

Other assets
850

 
1,106

Total assets
$
780,266

 
$
721,415

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
53,653

 
$
46,957

Accrued liabilities
62,271

 
61,680

Deferred revenue
4,033

 
4,483

Total current liabilities
119,957

 
113,120

Income taxes payable
6,280

 
7,117

Non-current operating lease liabilities
19,182

 
15,726

Other long-term liabilities
5,538

 
7,029

Total liabilities
150,957

 
142,992

 
 
 
 
Commitments and contingencies (Note 12)


 


 
 
 
 
Stockholders’ equity:
 

 
 

Preferred stock, $0.0001 par value; 5,000 shares authorized; none issued and outstanding at June 30, 2020 and December 31, 2019

 

Common stock, $0.0001 par value; 150,000 shares authorized; 42,965 and 42,399 shares issued at June 30, 2020 and December 31, 2019, respectively
4

 
4

Treasury stock, at cost; 974 shares at June 30, 2020 and December 31, 2019
(39,712
)
 
(39,712
)
Additional paid-in capital
420,415

 
402,032

Accumulated other comprehensive income
1,498

 
720

Retained earnings
247,104

 
215,379

Total stockholders’ equity
629,309

 
578,423

Total liabilities and stockholders’ equity
$
780,266

 
$
721,415

 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3


ACACIA COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
Revenue
$
135,215

 
$
111,183

 
$
260,841

 
$
216,399

Cost of revenue
70,007

 
60,096

 
136,351

 
115,470

Gross profit
65,208

 
51,087

 
124,490

 
100,929

Operating expenses:
 
 
 
 
 

 
 

Research and development
32,575

 
28,976

 
64,670

 
59,929

Sales, general and administrative
18,276

 
29,899

 
32,647

 
45,686

Total operating expenses
50,851

 
58,875

 
97,317

 
105,615

Income (loss) from operations
14,357

 
(7,788
)
 
27,173

 
(4,686
)
Other income, net:
 
 
 
 
 

 
 

Interest income, net
1,625

 
2,902

 
3,918

 
5,348

Other expense, net
(34
)
 
(55
)
 
(77
)
 
(107
)
Total other income, net
1,591

 
2,847

 
3,841

 
5,241

Income (loss) before benefit from income taxes
15,948

 
(4,941
)
 
31,014

 
555

Benefit from income taxes
(133
)
 
(2,916
)
 
(711
)
 
(4,397
)
Net income (loss)
$
16,081

 
$
(2,025
)
 
$
31,725

 
$
4,952

Earnings (loss) per share:
 
 
 
 
 

 
 

Basic
$
0.38

 
$
(0.05
)
 
$
0.76

 
$
0.12

Diluted
$
0.37

 
$
(0.05
)
 
$
0.74

 
$
0.12

Weighted-average shares used to compute earnings (loss) per share:
 
 
 
 
 

 
 

Basic
41,887

 
40,777

 
41,731

 
40,532

Diluted
43,139

 
40,777

 
43,117

 
42,154


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4


ACACIA COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
Net income (loss)
$
16,081

 
$
(2,025
)
 
$
31,725

 
$
4,952

Other comprehensive income:
 
 
 
 
 

 
 

Changes in unrealized income (loss) on marketable securities, net of income taxes of $(216), $(177), $(72) and $(160) for the three and six months ended June 30, 2020 and 2019, respectively
1,791

 
478

 
778

 
1,033

Comprehensive income (loss)
$
17,872

 
$
(1,547
)
 
$
32,503

 
$
5,985


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5


ACACIA COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(Unaudited)
 
 
 
Common Stock
 
Treasury Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive (Loss) Income
 
Retained Earnings
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Total
Balance at December 31, 2018
 
41,024

 
$
4

 
974

 
$
(39,712
)
 
$
360,267

 
$
(372
)
 
$
182,540

 
$
502,727

Exercise of common stock options
 
190

 

 
 
 
 
 
1,400

 
 

 
 

 
1,400

Vesting of restricted stock units
 
316

 

 
 
 
 
 

 
 
 
 
 

Stock-based compensation expense
 
 

 
 

 
 
 
 
 
7,967

 
 

 
 

 
7,967

Unrealized gains on marketable securities, net of tax of $(88)
 
 
 
 
 
 
 
 
 
 
 
555

 
 
 
555

Net income
 
 

 
 

 
 
 
 
 
 

 
 

 
6,977

 
6,977

Balance at March 31, 2019
 
41,530

 
$
4

 
974

 
$
(39,712
)
 
$
369,634

 
$
183

 
$
189,517

 
$
519,626

Exercise of common stock options
 
72

 

 
 
 
 
 
413

 
 
 
 
 
413

Vesting of restricted stock units
 
297

 

 
 
 
 
 


 
 
 
 
 

Common stock issued under employee stock purchase plan
 
56

 

 
 
 
 
 
2,131

 
 
 
 
 
2,131

Stock-based compensation expense
 
 
 
 
 
 
 
 
 
8,927

 
 
 
 
 
8,927

Unrealized gains on marketable securities, net of tax of $(72)
 
 
 
 
 
 
 
 
 
 
 
478

 
 
 
478

Net loss
 
 
 
 
 
 
 
 
 
 
 
 
 
(2,025
)
 
(2,025
)
Balance at June 30, 2019
 
41,955

 
$
4

 
974

 
$
(39,712
)
 
$
381,105

 
$
661

 
$
187,492

 
$
529,550

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2019
 
42,399

 
$
4

 
974

 
$
(39,712
)
 
$
402,032

 
$
720

 
$
215,379

 
$
578,423

Exercise of common stock options
 
36

 

 
 
 
 
 
323

 
 

 
 

 
323

Vesting of restricted stock units
 
255

 

 
 
 
 
 

 
 

 
 

 

Stock-based compensation expense
 
 

 
 

 
 
 
 
 
9,263

 
 

 
 

 
9,263

Unrealized losses on marketable securities, net of tax of $39
 
 

 
 

 
 
 
 
 
 

 
(1,013
)
 
 

 
(1,013
)
Net income
 
 

 
 

 
 
 
 
 
 

 
 

 
15,644

 
15,644

Balance at March 31, 2020
 
42,690

 
$
4

 
974

 
$
(39,712
)
 
$
411,618

 
$
(293
)
 
$
231,023

 
$
602,640

Exercise of common stock options
 
12

 

 
 
 
 
 
150

 
 
 
 
 
150

Vesting of restricted stock units
 
263

 

 
 
 
 
 
 
 
 
 
 
 

Stock-based compensation expense
 
 
 
 
 
 
 
 
 
8,647

 
 
 
 
 
8,647

Unrealized gains on marketable securities, net of tax of $(216)
 
 
 
 
 
 
 
 
 
 
 
1,791

 
 
 
1,791

Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
16,081

 
16,081

Balance at June 30, 2020
 
42,965

 
$
4

 
974

 
$
(39,712
)
 
$
420,415

 
$
1,498

 
$
247,104

 
$
629,309


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6


ACACIA COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited) 
 
Six Months Ended June 30,
 
2020
 
2019
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

Net income
$
31,725

 
$
4,952

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
5,315

 
6,330

Stock-based compensation
18,168

 
17,007

Deferred income taxes
(638
)
 
(4,506
)
Non-cash lease expense
1,994

 
2,406

Other non-cash benefits
(537
)
 
(1,439
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(17,161
)
 
1,335

Inventory
8,363

 
(13,040
)
Prepaid expenses and other current assets
(1,433
)
 
5,568

Other assets
263

 
(247
)
Accounts payable
7,121

 
(390
)
Accrued liabilities
18

 
20,216

Deferred revenue
(2,467
)
 
(920
)
Income taxes payable
(837
)
 
(1,674
)
Lease liabilities
(2,649
)
 
(1,697
)
Other long-term liabilities
162

 
165

Net cash provided by operating activities
47,407

 
34,066

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Purchases of property and equipment
(6,189
)
 
(6,072
)
Purchases of marketable securities
(81,937
)
 
(229,695
)
Sales and maturities of marketable securities
249,170

 
183,488

Deposits
(7
)
 

Net cash provided by (used in) investing activities
161,037

 
(52,279
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Proceeds from the issuance of common stock under stock-based compensation plans
473

 
3,944

Net cash provided by financing activities
473

 
3,944

 
 
 
 
Net increase (decrease) in cash and cash equivalents
208,917

 
(14,269
)
Cash and cash equivalents—Beginning of period
36,617

 
60,444

Cash and cash equivalents—End of period
$
245,534

 
$
46,175

 
 
 
 
Supplemental cash flow disclosures:
 

 
 

Cash paid (refunds received) for income taxes, net
$
611

 
$
(996
)
 
 
 
 
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Right of use assets acquired under operating leases
$
4,913

 
$
7,084

Capital expenditures incurred but not yet paid
$
913

 
$
1,618


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

7


Acacia Communications, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
 
1. NATURE OF THE BUSINESS AND OPERATIONS
Acacia Communications, Inc. was incorporated on June 2, 2009, as a Delaware corporation. Acacia Communications, Inc. and its wholly-owned subsidiaries (the “Subsidiaries”) are collectively referred to as the Company. The Company’s mission is to deliver high-speed coherent optical interconnect products that transform communications networks, relied upon by cloud infrastructure operators and content and communication service providers, through improvements in performance and capacity and reductions in associated costs. By implementing optical interconnect technology in a silicon-based platform, a process the Company refers to as the siliconization of optical interconnect, the Company believes it is leading a disruption that is analogous to the computing industry’s integration of multiple functions into a microprocessor. The Company’s products fall into three product groups: embedded modules, pluggable modules and semiconductors. The Company’s embedded module and pluggable module product groups consist of optical interconnect modules with transmission speeds ranging from 100 to 1,200 gigabits per second (“Gbps”), for use in long-haul, metro and inter-data center markets. The Company’s semiconductor product group consists of its low-power coherent digital signal processor application-specific integrated circuits (“DSP ASICs”) and its silicon photonic integrated circuits (“silicon PICs”) which are either integrated into the Company’s embedded and pluggable modules or sold to customers on a standalone basis for integration into internally developed or other merchant modules. The Company is also developing a 400ZR module that will expand its pluggable module product group, and enable inter-data center transmission capacity of 400 Gbps in the same compact pluggable form factors used for 400G client optics, including QSFP-DD and OSFP. The Company’s 400 Gbps pluggable product family will also include a new CFP2-DCO module that supports transmission rates up to 400 Gbps and the OpenROADM specification. The Company’s modules perform a majority of the digital signal processing and optical functions in optical interconnects and offer low power consumption, high density and high speeds at attractive price points. Through the use of standard interfaces, the Company’s modules can be easily integrated with customers’ network equipment. The advanced software in the Company’s modules enables increased configurability and automation, provides insight into network and connection point characteristics and helps identify network performance problems, all of which increase flexibility and reduce operating costs.
The Company is headquartered in Maynard, Massachusetts, and has wholly-owned subsidiaries in North America, Europe and Asia.
Proposed Merger with Cisco Systems
On July 8, 2019, the Company, Cisco Systems, Inc., a California corporation (the “Parent”), and Amarone Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of the Parent (the “Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which, among other things, the Merger Sub will be merged with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of the Parent. The Merger Agreement was adopted by the Company’s stockholders at a special meeting held on September 6, 2019. Completion of the Merger is subject to customary closing conditions, including (i) obtaining antitrust approval in China, (ii) the absence of governmental injunctions or other legal restraints prohibiting the Merger or imposing certain antitrust restraints and (iii) the absence of a “Material Adverse Effect,” as defined in the Merger Agreement. The Company and the Parent have already received antitrust clearance for the Merger in the United States, Germany and Austria. Other than customary closing conditions that are to be satisfied at the time of closing, regulatory clearance from the State Administration for Market Regulation of the People’s Republic of China represents the only remaining outstanding closing condition set forth in the Merger Agreement. If the Merger is completed, each share of the Company’s common stock issued and outstanding immediately prior to the effective time of the Merger, subject to certain exceptions, will be converted into the right to receive $70.00 in cash. The parties expect the Merger to close no later than the third business day following the satisfaction or waiver of these closing conditions.
For additional information related to the Merger Agreement, refer to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 9, 2019, which includes the full text of the Merger Agreement as Exhibit 2.1.
The Company recorded acquisition-related costs of $1.0 million and $0.6 million during the three months ended June 30, 2020 and 2019, respectively, and $1.9 million and $0.6 million during the six months ended June 30, 2020 and 2019, respectively, in sales, general and administrative expense within our condensed consolidated statements of operations.

8


Impact of COVID-19
An outbreak of the novel coronavirus, severe acute respiratory syndrome coronavirus 2 (“SARS-CoV-2”), and the coronavirus disease, COVID-19, was identified in China in late 2019 and has spread globally. The Centers for Disease Control and Prevention has recognized this outbreak as a pandemic which has resulted in authorities imposing, and businesses and individuals implementing, numerous unprecedented measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place/stay-at-home and social distancing orders and shutdowns. These measures have impacted and may further impact the Company’s workforce and operations, the operations of the Company’s customers, and those of the Company’s and its customers’ respective vendors, suppliers and partners. While the COVID-19 pandemic did not have a material impact on the Company’s financial results for the three or six month periods ended June 30, 2020, the extent to which the COVID-19 pandemic could impact the Company’s results of operations going forward depends on future developments that are highly uncertain and cannot be predicted, including the adverse impact of negative economic conditions created or exacerbated by the pandemic, new information that may emerge concerning the severity of the virus and required or voluntary actions to contain its impact. Due to the inherent uncertainty of this unprecedented and evolving situation, the Company is unable to predict with any confidence the likely impact of COVID-19 on its future business, results of operations and financial condition. Additional information regarding COVID-19 related risks and uncertainties may be found in the section titled “Risk Factors” under Part II, Item 1A in this Quarterly Report on Form 10-Q.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited condensed consolidated financial statements include the accounts of Acacia Communications, Inc. and its Subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. For further information, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the SEC on February 18, 2020. There have been no significant changes in the Company’s accounting policies from those disclosed in the Annual Report on Form 10-K that have had a material impact on the Company’s condensed consolidated financial statements.
The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements as of and for the year ended December 31, 2019, and in management’s opinion, include all adjustments, consisting of only normal recurring adjustments, necessary for the fair statement of the Company’s condensed consolidated balance sheet as of June 30, 2020, its condensed consolidated statements of operations for the three and six months ended June 30, 2020 and 2019, its condensed consolidated statements of comprehensive income (loss) for the three and six months ended June 30, 2020 and 2019, its condensed consolidated statements of stockholders’ equity for the three and six months ended June 30, 2020 and 2019, and its condensed consolidated statements of cash flows for the six months ended June 30, 2020 and 2019. All intercompany balances and transactions have been eliminated in consolidation. The financial data and the other financial information disclosed in the notes to these condensed consolidated financial statements related to the three and six months ended June 30, 2020 and 2019 are also unaudited. The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results to be expected for the full fiscal year or any other period.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 is intended to provide more decision-useful information about expected credit losses on financial instruments, including trade receivables, and other commitments to extend credit held by a reporting entity at each reporting date. The main provisions include presenting financial assets measured at amortized cost at the amount expected to be collected, which is net of an allowance for expected credit losses, and recording credit losses related to available-for-sale securities through an allowance for credit losses. On January 1, 2020, the Company adopted ASU 2016-13 using the modified retrospective approach. There was no impact from the adoption of ASU 2016-13 on the Company’s condensed consolidated financial statements. The Company is exposed to credit losses through sales of its products. The Company determines if there is an expected loss on its accounts receivables using historical collection experience, current and future economic and market conditions and a review of the current status of customers' trade accounts receivables. The Company has not recorded any

9


allowance for credit losses as of June 30, 2020 or December 31, 2019. Refer to Note 4 for information regarding how the Company assesses credit losses on its available-for-sale debt securities.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 is intended to simplify the accounting for income taxes by, among other things, eliminating certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. Upon adoption, ASU 2019-12 will require companies to apply certain aspects of this standard retrospectively for all periods presented, while requiring other aspects to be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company expects the impact of adopting this new standard to be immaterial to its condensed consolidated financial statements.
3. REVENUE
The opening and closing balances of the Company’s accounts receivable and deferred revenue for the six months ended June 30, 2020 are as follows (in thousands):
 
Balance at Beginning of Period
 
Increase / (Decrease)
 
Balance at End of Period
Six Months Ended June 30, 2020
 
 
 
 
 
Accounts receivable
$
97,948

 
17,161

 
$
115,109

Deferred revenue (current)
$
4,483

 
(450
)
 
$
4,033

Deferred revenue (non-current)
$
3,444

 
(2,017
)
 
$
1,427


The amount of revenue recognized in the period that was included in the opening deferred revenue balances was approximately $2.8 million for the six months ended June 30, 2020. Generally, increases in current and non-current deferred revenue are related to billings to, or advance payments from, customers for which the Company has not yet fulfilled its performance obligations, and decreases are related to revenue recognized. Deferred revenue not expected to be recognized within the Company’s operating cycle of one year is presented as a component of “Other long-term liabilities” on the condensed consolidated balance sheets.
At times, the Company receives orders for products that may be delivered over multiple dates that may extend across reporting periods. The Company invoices for each delivery upon shipment and recognizes revenues for each distinct product delivered, assuming transfer of control has occurred. Generally, scheduled delivery dates are within one year, and the Company has elected to use the optional exemption whereby revenues allocated to partially completed contracts with an expected duration of one year or less are not disclosed. As of June 30, 2020, the Company had no contracts with unsatisfied performance obligations with a duration of more than one year.
Disaggregation of Revenue
The following table provides information about disaggregated revenue based on product group (in thousands). Further disaggregation of revenue by geographic country can be found in Note 14.
 
Three Months Ended June 30, 2020
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2020
 
Six Months Ended June 30, 2019
 
Revenue ($)
 
Revenue (%)
 
Revenue ($)
 
Revenue (%)
 
Revenue ($)
 
Revenue (%)
 
Revenue ($)
 
Revenue (%)
Embedded modules
$
46,738

 
35
%
 
$
21,844

 
20
%
 
$
68,507

 
26
%
 
$
39,270

 
18
%
Pluggable modules
61,104

 
45
%
 
54,905

 
49
%
 
119,762

 
46
%
 
110,422

 
51
%
Semiconductors
27,373

 
20
%
 
34,434

 
31
%
 
72,572

 
28
%
 
66,707

 
31
%
Total revenue
$
135,215

 
100
%
 
$
111,183

 
100
%
 
$
260,841

 
100
%
 
$
216,399

 
100
%

4. FINANCIAL INSTRUMENTS
The following tables set forth the Company’s cash, cash equivalents and short- and long-term marketable securities as of June 30, 2020 and December 31, 2019 (in thousands):

10


 
As of June 30, 2020
 
 
 
Gross Unrealized
 
 
 
 
 
 
 
Amortized Cost
 
Gains
 
Losses(1)
 
Estimated Fair Value
 
Cash and Cash Equivalents
 
Marketable Securities
Cash
$
179,420

 
$

 
$

 
$
179,420

 
$
179,420

 
$

Money market funds
66,114

 

 

 
66,114

 
66,114

 

U.S. treasury bonds
52,693

 
367

 

 
53,060

 

 
53,060

Commercial paper
17,344

 
8

 

 
17,352

 

 
17,352

Certificates of deposit
12,708

 
39

 
(1
)
 
12,746

 

 
12,746

Asset-backed securities
49,523

 
302

 

 
49,825

 

 
49,825

Corporate debt securities
134,877

 
988

 
(5
)
 
135,860

 

 
135,860

Total
$
512,679

 
$
1,704

 
$
(6
)
 
$
514,377

 
$
245,534

 
$
268,843

(1) Losses represent marketable securities that were in loss positions for less than one year.

 
As of December 31, 2019
 
 
 
Gross Unrealized
 
 
 
 
 
 
 
Amortized Cost
 
Gains
 
Losses(1)
 
Estimated Fair Value
 
Cash and Cash Equivalents
 
Marketable Securities
Cash
$
29,116

 
$

 
$

 
$
29,116

 
$
29,116

 
$

Money market funds
2,010

 

 

 
2,010

 
2,010

 

U.S. treasury bonds
116,710

 
126

 
(1
)
 
116,835

 

 
116,835

Commercial paper
44,300

 

 

 
44,300

 
5,491

 
38,809

Certificates of deposit
24,522

 
19

 
(2
)
 
24,539

 

 
24,539

Asset-backed securities
73,370

 
134

 
(5
)
 
73,499

 

 
73,499

Corporate debt securities
180,607

 
475

 
(3
)
 
181,079

 

 
181,079

Total
$
470,635

 
$
754

 
$
(11
)
 
$
471,378

 
$
36,617

 
$
434,761


(1) Losses represent marketable securities that were in loss positions for less than one year.
The proceeds from the sales and maturities of marketable securities, which were primarily reinvested and resulted in realized gains and losses, were as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
Proceeds from the sales and maturities of marketable securities
$
137,469

 
$
93,198

 
$
249,170

 
$
183,488

Realized gains
$
45

 
$
3

 
$
109

 
$
6

Realized losses
$

 
$

 
$

 
$
(2
)

 The contractual maturities of short-term and long-term marketable securities held at June 30, 2020 and December 31, 2019 are as follows (in thousands):
 
As of June 30, 2020
 
As of December 31, 2019
 
Amortized Cost Basis
 
Aggregate Fair Value
 
Amortized Cost Basis
 
Aggregate Fair Value
Due within one year
$
196,941

 
$
198,125

 
$
299,725

 
$
300,129

Due after one year through three years
70,204

 
70,718

 
134,292

 
134,632

Total
$
267,145

 
$
268,843

 
$
434,017

 
$
434,761



As of June 30, 2020, the Company believed that none of its unrealized losses on its available-for-sale investments were attributable to credit losses and therefore were not impaired. The investments with unrealized losses consisted primarily of corporate debt securities. In making the determination that the decline in fair value of these securities did not indicate impairment, the Company considered various factors, including, but not limited to: the extent to which fair value was less than cost; the financial condition and near-term prospects of the issuers; and the Company’s intent not to sell these securities and the assessment that it is more likely than not that the Company would not be required to sell these securities before the recovery of their amortized cost basis.

11


Unrealized gains and losses, net of taxes, are reported as a component of accumulated other comprehensive (loss) income in the Company’s condensed consolidated statements of stockholders’ equity. No material amounts were reclassified out of accumulated other comprehensive (loss) income during the three and six months ended June 30, 2020 and 2019 for realized gains or losses on available-for-sale investments.
5. INVENTORY
Inventory consisted of the following as of June 30, 2020 and December 31, 2019 (in thousands):
 
June 30, 2020
 
December 31, 2019
Raw materials
$
21,708

 
$
24,777

Work-in-process
172

 
673

Finished goods
10,577

 
15,370

Inventory
$
32,457

 
$
40,820


6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of June 30, 2020 and December 31, 2019 (in thousands):
 
June 30, 2020
 
December 31, 2019
Engineering laboratory equipment
$
60,887

 
$
58,320

Computer software
3,802

 
3,730

Computer equipment
8,683

 
7,837

Furniture and fixtures
3,641

 
3,641

Leasehold improvements
4,186

 
3,999

Construction in progress
4,646

 
2,449

Total property and equipment
85,845

 
79,976

Less: Accumulated depreciation
(58,490
)
 
(53,175
)
Property and equipment, net
$
27,355

 
$
26,801


Depreciation expense was $2.6 million and $3.1 million for the three months ended June 30, 2020 and 2019, respectively, and $5.3 million and $6.3 million for the six months ended June 30, 2020 and 2019, respectively.
7. ACCRUED LIABILITIES
Accrued liabilities consisted of the following as of June 30, 2020 and December 31, 2019 (in thousands):
 
June 30, 2020
 
December 31, 2019
Employee-related liabilities
$
10,645

 
$
10,816

Current maturities of operating leases
4,448

 
4,228

Goods and services received not invoiced
2,831

 
2,297

Accrued manufacturing related expenses
2,807

 
3,781

Warranty reserve
9,629

 
10,354

Litigation and settlement accrual
25,000

 
20,000

Other accrued liabilities
6,911

 
10,204

Accrued liabilities
$
62,271

 
$
61,680


8. LEASES
The Company leases real estate assets and equipment. For leases with terms greater than 12 months, the Company records the related right-of-use (“ROU”) asset and lease obligation at the present value of lease payments over the term. Many leases include fixed rental escalation clauses, renewal options and/or termination options that are factored into the determination of lease payments when appropriate. The Company’s leases do not usually provide a readily determinable implicit discount rate; therefore, an estimate of the Company’s incremental borrowing rate is used to discount the lease payments based on information available at lease commencement, including observable rates, adjusted for various factors

12


including financing spreads and other lease specific adjustments, as applicable. The Company has elected not to record an ROU asset and lease obligation for short-term leases (with terms less than 12 months) or separate non-lease components from associated lease components for its real estate lease assets.
The Company’s leases have remaining lease terms of less than one year to eight years. Some leases include one or more options to renew with renewal terms that can extend the lease term from three years to five years, or options to terminate the leases, both at the Company’s discretion. The Company’s lease terms include options to extend or terminate leases when the Company concludes it is reasonably certain that it would exercise those options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Company’s lease agreements do not contain any variable lease payments, material residual value guarantees or material restrictive covenants.
The table below presents the lease-related assets and liabilities recorded on the condensed consolidated balance sheet as of June 30, 2020 (in thousands):
 
 
Classification on the Balance Sheet
 
June 30, 2020
Assets
 
 
 
 
Operating lease assets
 
Operating lease right-of-use assets
 
$
29,731

Liabilities
 
 
 
 
Current - operating
 
Accrued liabilities
 
4,448

Noncurrent - operating
 
Noncurrent operating lease liabilities
 
19,182

Total lease liabilities
 
 
 
$
23,630

Weighted-average remaining lease term - operating leases
 
6.4 years

Weighted-average discount rate - operating leases
 
4.24
%

Operating lease costs were $1.5 million and $1.4 million during the three months ended June 30, 2020 and 2019, respectively, and $3.0 million and $2.6 million during the six months ended June 30, 2020 and 2019, respectively. Short-term lease costs during the three and six months ended June 30, 2020 and 2019 were immaterial. Cash paid for amounts included in the measurement of lease liabilities was $1.1 million and $1.0 million during the three months ended June 30, 2020 and 2019, respectively, and $2.2 million and $2.0 million during the six months ended June 30, 2020 and 2019, respectively, which were operating cash outflows.
The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the operating lease liabilities recorded on the condensed consolidated balance sheet as of June 30, 2020 (in thousands):
 
 
Operating Leases
Remaining 2020
 
$
2,187

2021
 
4,423

2022
 
4,263

2023