Commitments and Contingencies

Commitments

The Company’s principal commitments consist of obligations under operating leases for office space and non-cancelable outstanding purchase obligations. These commitments as of December 31, 2015 are disclosed in our Annual Report on Form 10-K, and have not changed materially during the nine months ended September 24, 2016.

Contingencies

The Company evaluates the circumstances regarding outstanding and potential litigation and other contingencies on a quarterly basis to determine whether there is at least a reasonable possibility that a loss exists requiring accrual or disclosure, and if so, whether an estimate of the possible loss or range of loss can be made, or whether such an estimate cannot be made. When a loss is probable and reasonably estimable, the Company accrues for such amount based on its estimate of the probable loss considering information available at the time. When a loss is reasonably possible, the Company discloses the estimated possible loss or range of loss in excess of amounts accrued if material. Except as otherwise disclosed below, the Company does not believe that there was a reasonable possibility that a material loss may have been incurred during the period presented with respect to the matters disclosed.

Accrued Warranty

The Company provides a standard warranty for its hardware products. Hardware generally has a one, three or five-year standard warranty from the date of shipment. The Company accrues for potential warranty claims based on the Company’s historical product failure rates and historical costs incurred in correcting product failures along with other relevant information. The Company's warranty accruals are based on estimates of losses that are probable based on information available. The adequacy of the accrual is reviewed on a periodic basis and adjusted, if necessary, based on additional information as it becomes available.

Changes in the Company’s warranty reserve were as follows (in thousands):



	Three Months Ended						Nine Months Ended
	September 24, 2016			September 26, 2015			September 24, 2016			September 26, 2015
Balance at beginning of period	$	9,152		$	9,325		$	9,564		$	9,553
Warranty charged to cost of revenue	3,180			781			6,292			2,929
Utilization of warranty	(948		)	(722		)	(4,073		)	(3,098		)
Adjustments to pre-existing warranty	(11		)	(400		)	(410		)	(400		)
Balance at end of period	$	11,373		$	8,984		$	11,373		$	8,984

Litigation

From time to time, the Company is involved in various legal proceedings arising from the normal course of business activities.

Steinhardt v. Howard-Anderson, et al.

As previously disclosed, in connection with the Company’s February 22, 2011 merger transaction with Occam Networks, Inc. (“Occam”) a complaint was filed on October 6, 2010 by stockholders of Occam in the Delaware Court of Chancery styled as Steinhardt v. Howard-Anderson, et al. (Case No. 5878-VCL). The complaint, as initially amended, 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, and also alleged that Occam (which has since merged into Calix), each Occam director and the Occam CFO 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 for the transaction. In July 2015, the complaint was amended to add Wilson Sonsini Goodrich & Rosati, P.C. (“Wilson Sonsini”), Occam’s counsel and former defense counsel in this lawsuit. Trial on the matter commenced on April 11, 2016 before the Delaware Court of Chancery.

On April 14, 2016, the parties entered into a memorandum of understanding of a settlement in principle (“Settlement”) to resolve all of the claims pending before the Delaware Court of Chancery and related claims for a total settlement consideration of $35.0 million. The Settlement was made without any admission of any wrongdoing on the part of the Company or its officers and directors. Further, the Settlement terms provide that neither the Company nor any of its officers or directors would be required to make any contribution to the settlement consideration of $35 million to be paid for the benefit of the plaintiff class. On May 31, 2016, the parties signed a global settlement agreement reflecting the terms of the Settlement and filed the agreement for court approval. The court approved the global settlement at a hearing held on August 26, 2016 and, on September 7, 2016, issued its Order and Final Judgment, terminating the case before the Delaware Court of Chancery.

The Company did not previously accrue any estimated loss in connection with this action and, as a result of the Settlement, will not recognize any loss related to this action. The Company incurred defense costs related to this litigation in connection with its obligations, under certain circumstances, to hold harmless and indemnify each of the former Occam directors and officers named as defendants in this action 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. In addition, the Company has paid fees and expenses incurred by Jefferies in connection with this matter pursuant to Jefferies indemnity demand under the engagement letter between Occam and Jefferies. Defense costs that were in excess of available insurance coverage or for which the Company’s insurance carriers denied coverage were recorded as operating expense in the Company’s Consolidated Statement of Comprehensive Income (Loss) in the periods incurred. Until the Settlement was reached, the Company continued to incur significant litigation expenses, including expenses that were not covered by insurance, to defend and litigate this matter. For the nine months ended September 24, 2016, the Company recorded litigation defense costs and expenses in excess of its insurance coverage of $6.4 million as operating expense in the accompanying Condensed Consolidated Statements of Comprehensive Income (Loss). The deadline for appeal of the Order and Final Judgment was October 7, 2016. No appeals were filed and the Company expects to receive the $4.5 million cash payment on or before November 22, 2016.

Under the terms of the Settlement (and separate from the settlement consideration), the Company will receive a cash payment of $4.5 million in partial recovery of its out-of-pocket expenses incurred in the litigation, payable to the Company within 45 days of the court’s order entering judgment in the litigation. As disclosed above, the Delaware court issued its Order and Final Judgment on September 7, 2016. Accordingly, during the fiscal quarter ended September 24, 2016, the Company accrued $4.5 million as “Litigation settlement gain”, presented as a reduction to operating expenses in the accompanying Condensed Consolidated Statements of Comprehensive Income (Loss).

The Company is not currently a party to any other legal proceedings that, if determined adversely to the Company, in management’s opinion, is currently expected to individually or in the aggregate have a material adverse effect on the Company's business, operating results or financial condition taken as a whole.

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) agreements with the Company’s officers, directors, and certain employees, under which the Company may be required to indemnify such persons for liabilities arising out of their relationship with the Company, (iii) contracts under which the Company may be required to indemnify customers against third-party claims that a Company product infringes a patent, copyright, or other intellectual property right and (iv) procurement or license agreements, under which the Company may be required to indemnify licensors or vendors for certain claims that may be brought against them arising from the Company’s acts or omissions with respect to the supplied products or technology.

Because any potential obligation associated with these types of contractual provisions are not quantified or stated, the overall maximum amount of the obligation cannot be reasonably estimated. Historically, the Company has not been required to make payments under these obligations, and no liabilities have been recorded for these obligations in the accompanying Condensed Consolidated Balance Sheets.