Company Quick10K Filing
Quick10K
Harmonic
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$5.73 89 $509
10-Q 2019-03-29 Quarter: 2019-03-29
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-28 Quarter: 2018-09-28
10-Q 2018-06-29 Quarter: 2018-06-29
10-Q 2018-03-30 Quarter: 2018-03-30
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-29 Quarter: 2017-09-29
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-07-01 Quarter: 2016-07-01
10-Q 2016-04-01 Quarter: 2016-04-01
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-10-02 Quarter: 2015-10-02
10-Q 2015-07-03 Quarter: 2015-07-03
10-Q 2015-04-03 Quarter: 2015-04-03
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-26 Quarter: 2014-09-26
10-Q 2014-06-27 Quarter: 2014-06-27
10-Q 2014-03-28 Quarter: 2014-03-28
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-07-09 Other Events
8-K 2019-06-05 Shareholder Vote
8-K 2019-04-29 Earnings, Exhibits
8-K 2019-02-04 Earnings, Exhibits
8-K 2018-10-29 Earnings, Exhibits
8-K 2018-10-15 Officers, Amend Bylaw, Exhibits
8-K 2018-07-31 Other Events
8-K 2018-07-30 Earnings, Exhibits
8-K 2018-06-08 Shareholder Vote
8-K 2018-04-30 Earnings, Exhibits
8-K 2018-03-30 Accountant, Exhibits
8-K 2018-03-26 Officers, Exhibits
8-K 2018-02-28 Earnings, Earnings, Exhibits
8-K 2018-02-12 Officers, Amend Bylaw, Exhibits
TSN Tyson Foods 28,430
SHOP Shopify 25,860
ETRN Equitrans Midstream 5,140
EAT Brinker 1,580
GSM Ferroglobe 364
PICO Pico Holdings 232
SANW S&W Seed 88
ARTX Arotech 65
DHCP Ditech Holding 0
CCE Coca-Cola European Partners 0
HLIT 2019-03-29
Part I
Item 1. Financial Statements
Note 1: Basis of Presentation and Significant Accounting Policies
Note 2: Recent Accounting Pronouncements
Note 3: Revenue
Note 4: Leases
Note 5: Investments in Equity Securities
Note 6: Derivatives and Hedging Activities
Note 7: Fair Value Measurements
Note 8: Balance Sheet Components
Note 9: Goodwill and Identified Intangible Assets
Note 10: Restructuring and Related Charges
Note 11: Convertible Notes, Other Debts and Finance Leases
Note 12: Employee Benefit Plans and Stock-Based Compensation
Note 13: Income Taxes
Note 14: Net Loss per Share
Note 15: Warrants
Note 16: Segment Information
Note 17: Commitments and Contingencies
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-31.1 hlit-20190329xex311.htm
EX-31.2 hlit-20190329xex312.htm
EX-32.1 hlit-20190329xex321.htm
EX-32.2 hlit-20190329xex322.htm

Harmonic Earnings 2019-03-29

HLIT 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 hlit-20190329x10q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________
Form 10-Q
_____________________________________________________
(Mark One)
ý
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 29, 2019

¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File No. 000-25826
_____________________________________________________
HARMONIC INC.
(Exact name of registrant as specified in its charter)
_____________________________________________________
Delaware
77-0201147
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
4300 North First Street
San Jose, CA 95134
(408) 542-2500
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
____________________________________________
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  ý    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  ý    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
ý
 
 
 
 
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  ý

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, $0.001 par value
 
HLIT
 
The NASDAQ Stock Market LLC
The number of shares of the registrant’s Common Stock, $.001 par value, outstanding on April 26, 2019 was 88,794,608.




TABLE OF CONTENTS
 

3


PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARMONIC INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except per share data)
 
March 29, 2019
 
December 31, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
69,916

 
$
65,989

Accounts receivable, net
58,930

 
81,795

Inventories
29,325

 
25,638

Prepaid expenses and other current assets
22,900

 
23,280

Total current assets
181,071

 
196,702

Property and equipment, net
20,976

 
22,321

Operating lease right-of-use assets
21,616

 

Goodwill
239,848

 
240,618

Intangibles, net
10,704

 
12,817

Other long-term assets
39,962

 
38,377

Total assets
$
514,177

 
$
510,835

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Other debts and finance lease obligations, current
$
7,124

 
$
7,175

Accounts payable
25,436

 
33,778

Income taxes payable
884

 
1,099

Deferred revenue
47,422

 
41,592

Accrued and other current liabilities
53,238

 
52,761

Total current liabilities
134,104

 
136,405

Convertible notes, long-term
116,413

 
114,808

Other debts and finance lease obligations, long-term
12,402

 
12,684

Income taxes payable, long-term
466

 
460

Other non-current liabilities
30,231

 
18,228

Total liabilities
293,616

 
282,585

Commitments and contingencies (Note 17)

 

Stockholders’ equity:

 
 
Preferred stock, $0.001 par value, 5,000 shares authorized; no shares issued or outstanding

 

Common stock, $0.001 par value, 150,000 shares authorized; 88,784 and 87,057 shares issued and outstanding at March 29, 2019 and December 31, 2018, respectively
89

 
87

Additional paid-in capital
2,300,259

 
2,296,795

Accumulated deficit
(2,077,322
)
 
(2,067,416
)
Accumulated other comprehensive loss
(2,465
)
 
(1,216
)
Total stockholders’ equity
220,561

 
228,250

Total liabilities and stockholders’ equity
$
514,177

 
$
510,835

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

4



HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
 
Three months ended
 
March 29, 2019
 
March 30, 2018
Revenue:
 
 
 
Appliance and integration
$
52,365

 
$
63,986

SaaS and service
27,741

 
26,141

Total net revenue
80,106

 
90,127

Cost of revenue:
 
 
 
Appliance and integration
27,054

 
30,576

SaaS and service
11,203

 
12,368

Total cost of revenue
38,257

 
42,944

Total gross profit
41,849

 
47,183

Operating expenses:
 
 
 
Research and development
21,401

 
23,457

Selling, general and administrative
28,011

 
31,163

Amortization of intangibles
788

 
804

Restructuring and related charges
57

 
1,086

Total operating expenses
50,257

 
56,510

Loss from operations
(8,408
)
 
(9,327
)
Interest expense, net
(2,906
)
 
(2,757
)
Other expense, net
(311
)
 
(532
)
Loss before income taxes
(11,625
)
 
(12,616
)
Provision for (benefit from) income taxes
(319
)
 
1,078

Net loss
$
(11,306
)
 
$
(13,694
)
 
 
 
 
Net loss per share:
 
 
 
Basic and diluted
$
(0.13
)
 
$
(0.16
)
Shares used in per share calculation:
 
 
 
Basic and diluted
88,165

 
83,912

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

5


HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited, in thousands)
 
Three months ended
 
March 29, 2019
 
March 30, 2018
Net loss
$
(11,306
)
 
$
(13,694
)
Loss reclassified into earnings
157

 

Change in foreign currency translation adjustments
(1,300
)
 
1,734

Other comprehensive income before tax
(1,143
)
 
1,734

Less: Provision for income taxes
106

 

Other comprehensive income (loss), net of tax
(1,249
)
 
1,734

Total comprehensive loss
(12,555
)
 
(11,960
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

6


HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in thousands)
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Balance at December 31, 2017
82,554

 
83

 
2,272,690

 
(2,057,812
)
 
3,382

 
218,343

Cumulative effect to retained earnings related to adoption of ASC 606

 

 

 
11,431

 

 
11,431

Balance at January 1, 2018
82,554

 
83

 
2,272,690

 
(2,046,381
)
 
3,382

 
229,774

Net loss

 

 

 
(13,694
)
 

 
(13,694
)
Other comprehensive income, net of tax

 

 

 

 
1,734

 
1,734

Issuance of common stock under option, stock award and purchase plans
2,640

 
2

 
2,345

 

 

 
2,347

Stock-based compensation

 

 
5,812

 

 

 
5,812

Balance at March 30, 2018
85,194

 
85

 
2,280,847

 
(2,060,075
)
 
5,116

 
225,973

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
87,057

 
87

 
2,296,795

 
(2,067,416
)
 
(1,216
)
 
228,250

Cumulative effect to retained earnings related to adoption of Topic 718 (1)

 

 

 
1,400

 

 
1,400

Balance at January 1, 2019
87,057

 
87

 
2,296,795

 
(2,066,016
)
 
(1,216
)
 
229,650

Net loss

 

 

 
(11,306
)
 

 
(11,306
)
Other comprehensive loss, net of tax

 

 

 

 
(1,249
)
 
(1,249
)
Issuance of common stock under option, stock award and purchase plans
1,727

 
2

 
1,353

 

 

 
1,355

Stock-based compensation

 

 
2,111

 

 

 
2,111

Balance at March 29, 2019
88,784

 
89

 
2,300,259

 
(2,077,322
)
 
(2,465
)
 
220,561

(1) See Note 2, “Recent Accounting Pronouncements” for more information on the adoption of Accounting Standard Update (“ASU”) No. 2018-07, Compensation-Stock Compensation (“Topic 718”): Improvements to Nonemployee Share-Based Payment Accounting issued by the Financial Accounting Standards Board.


7


HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Three months ended
 
March 29, 2019
 
March 30, 2018
Cash flows from operating activities:
 
 
 
Net loss
$
(11,306
)
 
$
(13,694
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Amortization of intangibles
2,083

 
2,099

Depreciation
2,846

 
3,456

Stock-based compensation
2,113

 
5,757

Amortization of discount on convertible debt and issuance cost
1,605

 
1,453

Amortization of non-cash warrant
25

 
111

Restructuring, asset impairment and loss on retirement of fixed assets
103

 
40

Deferred income taxes, net
(538
)
 

Foreign currency adjustments
(638
)
 
835

Provision for excess and obsolete inventories
254

 
458

Allowance for doubtful accounts and returns
417

 
1,122

Other non-cash adjustments, net
287

 
132

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
22,351

 
(5,925
)
Inventories
(4,157
)
 
424

Prepaid expenses and other assets
1,417

 
(6,511
)
Accounts payable
(8,177
)
 
(5,710
)
Deferred revenue
4,750

 
10,009

Income taxes payable
(192
)
 
253

Accrued and other liabilities
(9,027
)
 
(933
)
Net cash provided by (used in) operating activities
4,216

 
(6,624
)
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(1,674
)
 
(1,775
)
Net cash used in investing activities
(1,674
)
 
(1,775
)
Cash flows from financing activities:
 
 
 
Proceeds from other debts and finance leases
160

 

Repayment of other debts and finance leases
(97
)
 
(448
)
Proceeds from common stock issued to employees
2,012

 
2,347

Payment of tax withholding obligations related to net share settlements of restricted stock units
(657
)
 

Net cash provided by financing activities
1,418

 
1,899

Effect of exchange rate changes on cash, cash equivalents and restricted cash
(33
)
 
73

Net increase (decrease) in cash, cash equivalents and restricted cash
3,927

 
(6,427
)
Cash, cash equivalents and restricted cash at beginning of period
65,989

 
58,757

Cash, cash equivalents and restricted cash at end of period
$
69,916

 
$
52,330

Supplemental disclosures of cash flow information:
 
 
 
Income tax payments, net
490

 
586

Interest payments, net
92

 
148

Supplemental schedule of non-cash investing and financing activities:
 
 
 
Capital expenditures incurred but not yet paid
91

 
325

 
 
 
 
Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets
 
 
 
Cash and cash equivalents
$
69,916

 
$
52,045

Restricted cash included in prepaid expenses and other current assets

 
285

    Total cash, cash equivalents and restricted cash
$
69,916

 
$
52,330


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

8


HARMONIC INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1: BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) which Harmonic Inc. (“Harmonic,” or the “Company”) considers necessary to present fairly the results of operations for the interim periods covered and the consolidated financial condition of the Company at the date of the balance sheets. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission (“SEC”) on March 1, 2019 (the “2018 Form 10-K”). The interim results presented herein are not necessarily indicative of the results of operations that may be expected for the full fiscal year ending December 31, 2019, or any other future period. The Company’s fiscal quarters are based on 13-week periods, except for the fourth quarter, which ends on December 31.
The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated balance sheet as of December 31, 2018 was derived from audited financial statements, and the unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the SEC for interim reporting. As permitted under those requirements, certain footnotes or other financial information that are normally required by generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. 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 financial statements and the reported amounts of revenue and expenses during the reporting period. The Company’s reported financial positions or results of operations may be materially different under changed conditions or when using different estimates and assumptions, particularly with respect to significant accounting policies. If estimates or assumptions differ from actual results, subsequent periods are adjusted to reflect more current information.
Reclassifications
Certain prior period balances have been reclassified to conform to the current period’s presentation. These reclassifications did not have a material impact on previously reported financial statements.

Beginning in the first quarter of fiscal 2019, the Company revised the classification of total revenue in the Condensed Consolidated Statements of Operations from the two previous categories, “Product” and “Service”, to two new categories, “Appliance and integration” and “SaaS and service”. The Company has also reclassified revenue into the two new categories for all prior periods to conform to the current period’s presentation. This reclassification within revenue did not have an impact on total revenue or any segment revenue for any periods presented.

Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2 to its audited Consolidated Financial Statements included in the 2018 Form 10-K. There have been no significant changes to these policies during the three months ended March 29, 2019 other than those disclosed in Note 2, “Recent Accounting Pronouncements”.


9


NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements

Accounting Standards Codification (ASC) Topic 842, “Leases”

On January 1, 2019, the Company adopted ASC 842, Leases (“Topic 842”), using the modified retrospective method, applying Topic 842 to all leases existing at the date of initial application. The Company elected to use the effective date as the date of initial application. Consequently, prior period balances and disclosures have not been restated. The Company elected certain practical expedients, which among other things, allowed the Company to carry forward prior conclusions about lease identification and classification.

Adoption of the standard resulted in the balance sheet recognition of additional lease assets and liabilities of approximately $23.3 million; however, the adoption of the standard did not have an impact on the Company’s beginning retained earnings, results from operations or cash flows. See Note 4, “Leases” for additional information.

ASU No. 2018-07, Compensation-Stock Compensation (Topic 718)

In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (“Topic 718”): Improvements to Nonemployee Share-Based Payment Accounting. The new ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost. The Company adopted this new standard in the first quarter of fiscal 2019, and the adoption resulted in an adjustment of $1.4 million as the cumulative effect adjustment to opening retained earnings relating to the accounting of warrants which were previously granted to Comcast. This represents the cumulative impact of the remeasurement of unvested Comcast warrants on the date of adoption. See Note 15, “Warrants” for additional information.

ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40)

In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. This new standard requires an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. Costs for implementation activities in the application development stage can be capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post-implementation stages are expensed as the activities are performed. The costs capitalized are expensed over the term of the hosting arrangement. The amendments in the new ASU also require the entity to present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element.

The Company early adopted this new standard in the third quarter of fiscal 2018 and applied it prospectively to all implementation costs incurred after the date of adoption. The adoption of this standard did not have a significant impact on the Company’s Consolidated Financial Statements for the year ended December 31, 2018. During the three months period ended March 29, 2019, the Company incurred a total implementation cost of $0.1 million which were included in “Other long-term assets” on the Company’s Condensed Consolidated Balance Sheets.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets and certain other instruments. For trade receivables and other instruments, the Company will be required to use a new forward-looking “expected loss” model.  Additionally, credit losses on available-for-sale debt securities should be recorded through an allowance for credit losses limited to the amount by which fair value is below amortized cost. The new ASU will be effective for the Company beginning in the first quarter of fiscal 2020 and early adoption is permitted. The adoption of the new ASU is not expected to have a material impact on the Company’s consolidated financial statements.


10


In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new ASU removes Step 2 of the goodwill impairment test and requires the assessment of fair value of individual assets and liabilities of a reporting unit to measure goodwill impairments. Goodwill impairment will then be the amount by which a reporting unit's carrying value exceeds its fair value. The new ASU will be effective for the Company beginning in the first quarter of fiscal 2020 on a prospective basis, and early adoption is permitted. The Company is currently evaluating the impact of adopting the new ASU on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, which removes, modifies and adds to the disclosure requirements on fair value measurements in Topic 820. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. This guidance will become effective for the Company in fiscal years beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted upon issuance of this updated guidance. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this updated guidance and delay adoption of the additional disclosures until their effective date. The Company does not currently hold any level 3 assets or liabilities which require recurring measurements and the Company expects the impact to its disclosure will be relatively limited.

In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General Subtopic 715-20 - Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans, which is designed to improve the effectiveness of disclosures by removing and adding disclosures related to defined benefit plans. The new ASU is effective for the Company for fiscal years ending after December 15, 2020, and early adoption is permitted. The Company is currently evaluating the impact of adopting the new ASU on its consolidated financial statements.

NOTE 3: REVENUE
The Company’s principal sources of revenue are from the sale of hardware, software, hardware and software maintenance contracts, and end-to-end solutions, encompassing design, manufacture, test, integration and installation of products. The Company also derives recurring revenue from subscriptions, which are comprised of subscription fees from customers utilizing the Company’s cloud-based video processing solutions.

Beginning in the first quarter of fiscal 2019, the Company revised the classification of total revenue in the Condensed Consolidated Statement of Operations from the two previous categories, “Product” and “Service”, to two new categories, “Appliance and integration” and “SaaS and service”. The “Appliance and integration” revenue category includes hardware, licenses and professional services and is reflective of non-recurring revenue, while the “SaaS and service” category includes usage fees for the Company’s SaaS platform and support revenue stream from the Company’s appliance-based customers and reflects the Company’s recurring revenue stream.

Significant Judgments. The Company has revenue arrangements that include promises to transfer multiple products and services to a customer. The Company may exercise significant judgment when determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together.

The Company allocates the transaction price to all separate performance obligations based on the SSP of each obligation. The Company’s best evidence for SSP is the price the Company charges for that good or service when the Company sells it separately in similar circumstances to similar customers. If goods or services are not always sold separately, the Company uses the best estimate of SSP in the allocation of the transaction price. The objective of determining the best estimate of SSP is to estimate the price at which the Company would transact a sale if the product or service were sold on a standalone basis. The Company’s process for determining the best estimate of SSP involves management’s judgment, and considers multiple factors including, but not limited to, major product groupings, geographies, gross margin objectives and pricing practices. Pricing practices taken into consideration include contractually stated prices, discounts and applicable price lists. These factors may vary over time, depending upon the unique facts and circumstances related to each deliverable. If the facts and circumstances underlying the factors considered change or should future facts and circumstances lead the Company to consider additional factors, the Company’s best estimate of SSP may also change.

Contract Balances. Deferred revenue represents the Company’s obligation to transfer goods or services to a customer for which the Company has received consideration (or an amount of consideration is due) from the customer. The Company’s payment terms vary by the type and location of its customer and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, the Company requires payment before the products or services are delivered to the customer.

11



Contract assets exist when the Company has satisfied a performance obligation but does not have an unconditional right to consideration (e.g., because the entity first must satisfy another performance obligation in the contract before it is entitled to invoice the customer).

Contract assets and deferred revenue consisted of the following:
 
As of
 
March 29,
2019
 
March 30,
2018
Contract assets
$
3,707

 
$
3,834

Deferred revenue
51,628

 
46,922


Contract assets and Deferred revenue (long-term) are reported as components of “Prepaid expenses and other current assets” and “Other non-current liabilities”, respectively, on the Condensed Consolidated Balance Sheets. See Note 8, “Balance Sheet Components” for additional information.

During the three months ended March 29, 2019 and March 30, 2018, the Company recognized revenue of $21.2 million and $19.9 million, respectively, that was included in the deferred revenue balance at the beginning of the period.

The Company elected the practical expedient under Topic 606 to not disclose the transaction price allocated to remaining performance obligations, since the majority of the Company’s arrangements have original expected durations of one year or less, or the invoicing corresponds to the value of the Company’s performance completed to date.

See Note 16, “Segment Information” for disaggregated revenue information.

NOTE 4: LEASES
Under Topic 842, operating lease expense is generally recognized evenly over the term of the lease. The Company has operating leases primarily consisting of facilities with remaining lease terms of one year to ten years. The lease term represents the non-cancelable period of the lease. For certain leases, the Company has an option to extend the lease term. These renewal options are not considered in the remaining lease term unless it is reasonably certain that the Company will exercise such options.

Leases with an initial term of twelve months or less are not recorded on the balance sheet. The Company combines the lease and non-lease components in determining the lease liabilities and right-of-use assets. The Company also elected to carry forward prior conclusions about lease identification and classification.

The Company’s lease contracts do not provide an implicit borrowing rate, hence the Company determined the incremental borrowing rate based on information available at lease commencement to determine the present value of lease liability. The Company uses the parent entity’s incremental borrowing rates as the treasury operations are managed centrally by the parent entity and, consequently, the pricing of leases at a subsidiary level is typically significantly influenced by the credit risk evaluated at the parent or consolidated group level on the basis of guarantees or other payment mechanisms that allow the lessor to look beyond just the subsidiary for payment.

The components of lease expense are as follows:
 
Three months ended
 
March 29, 2019
Operating lease cost
$
1,996

Variable lease cost
779

Total lease cost
$
2,775


12


Other information related to leases are as follows:
 
Three months ended
 
March 29, 2019
Supplemental cash flow information
 
Operating cash flows from operating leases

$
2,130

Operating leases
 
Weighted-average remaining lease term (years)
6.9 years

Weighted-average discount rate
5.5
%
Future minimum lease payments under non-cancelable operating leases as of March 29, 2019 are as follows (in thousands):
Years ending December 31,
 
2019 (remaining nine months)
$
8,329

2020
8,494

2021
3,914

2022
2,487

2023
2,189

Thereafter
6,614

Total future minimum lease payments
$
32,027

Less: imputed interest
(5,044
)
Total
$
26,983

Future minimum lease payments under non-cancelable operating leases as of December 31, 2018, as disclosed in our 2018 Annual Report on Form 10-K filed with SEC, were as follows (in thousands):
Years ending December 31,
 
2019
$
13,515

2020
10,139

2021
4,088

2022
2,523

2023
2,220

Thereafter
6,694

Total future minimum lease payments
$
39,179



13


NOTE 5: INVESTMENTS IN EQUITY SECURITIES
EDC

In 2014, the Company acquired an 18.4% interest in Encoding.com, Inc. (“EDC”), a privately held video transcoding service company headquartered in San Francisco, California, for $3.5 million by purchasing EDC’s Series B preferred stock. EDC is considered a VIE but the Company determined that it is not the primary beneficiary of EDC. As a result, EDC is measured at its cost minus impairment, if any.

The Company determined that there were no indicators at March 29, 2019 that the EDC investment was impaired. The Company’s maximum exposure to loss from the EDC’s investment at March 29, 2019 was limited to its investment cost of $3.6 million, including $0.1 million of transaction costs.

NOTE 6: DERIVATIVES AND HEDGING ACTIVITIES
The Company uses forward contracts to manage exposures to foreign currency exchange rates. The Company’s primary objective in holding derivative instruments is to reduce the volatility of earnings and cash flows associated with fluctuations in foreign currency exchange rates and the Company does not use derivative instruments for trading purposes. The use of derivative instruments exposes the Company to credit risk to the extent that the counterparties may be unable to meet their contractual obligations. As such, the potential risk of loss with any one counterparty is closely monitored by the Company.
Derivatives Not Designated as Hedging Instruments (Balance Sheet Hedges)
The Company’s balance sheet hedges consist of foreign currency forward contracts that generally mature within three months, are carried at fair value, and are used to minimize the short-term impact of foreign currency exchange rate fluctuation on cash and certain trade and inter-company receivables and payables. Changes in the fair value of these foreign currency forward contracts are recognized in “Other expense, net” in the Condensed Consolidated Statement of Operations and are largely offset by the changes in the fair value of the assets or liabilities being hedged.
Losses on the non-designated derivative instruments recognized during the periods presented were as follows (in thousands):
 
 
 
Three months ended
 
Financial Statement Location
 
March 29, 2019
 
March 30, 2018
Derivatives not designated as hedging instruments:
 
 
 
 
 
Losses recognized in income
Other expense, net
 
$
(565
)
 
$
(113
)
The U.S. dollar equivalents of all outstanding notional amounts of foreign currency forward contracts are summarized as follows (in thousands):

 
March 29, 2019
 
December 31, 2018
Derivatives not designated as hedging instruments:
 

 

Purchase
 
$
26,617

 
$
28,975

The locations and fair value amounts of the Company’s derivative instruments reported in its Condensed Consolidated Balance Sheets are as follows (in thousands):
 
 
 
 
Asset Derivatives
 
 
 
Derivative Liabilities
 
 
Balance Sheet Location
 
March 29, 2019
 
December 31, 2018
 
Balance Sheet Location
 
March 29, 2019
 
December 31, 2018
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
 
Prepaid expenses and other current assets
 
$
22

 
$

 
Accrued and other current liabilities
 
$
181

 
$
333

Total derivatives
 
 
 
$
22

 
$

 
 
 
$
181

 
$
333

Offsetting of Derivative Assets and Liabilities
The Company recognizes all derivative instruments on a gross basis in the Condensed Consolidated Balance Sheets. However, the arrangements with its counterparties allows for net settlement, which are designed to reduce credit risk by permitting net settlement with the same counterparty. As of March 29, 2019, information related to the offsetting arrangements was as follows (in thousands):
 
 
Gross Amounts of Derivatives
 
Gross Amounts of Derivatives Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts of Derivatives Presented in the Condensed Consolidated Balance Sheets
Derivative assets
 
$
22

 

 
$
22

Derivative liabilities
 
$
181

 

 
$
181

In connection with foreign currency derivatives entered in Israel, the Company’s subsidiaries in Israel are required to maintain a compensating balance with their bank at the end of each month. The compensating balance arrangements do not legally restrict the use of cash. As of March 29, 2019, the total compensating balance maintained was $1.0 million.


14


NOTE 7: FAIR VALUE MEASUREMENTS
The authoritative accounting guidance establishes a framework for measuring fair value and requires disclosure about the fair value measurements of assets and liabilities. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date. This guidance requires the Company to classify and disclose assets and liabilities measured at fair value on a recurring basis, as well as fair value measurements of assets and liabilities measured on a nonrecurring basis in periods subsequent to initial measurement, in a three-tier fair value hierarchy as described below.
Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The guidance describes three levels of inputs that may be used to measure fair value:
Level 1 — Observable inputs that reflect quoted prices for identical assets or liabilities in active markets.
Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The forward exchange contracts are classified as Level 2 because they are valued using quoted market prices and other observable data for similar instruments in an active market.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The following table sets forth the fair value of the Company’s financial assets and liabilities measured at fair value on a recurring basis based on the three-tier fair value hierarchy (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
As of March 29, 2019
 
 
 
 
 
 
 
Prepaid expenses and other current assets
 
 
 
 
 
 
 
Derivative assets
$

 
$
22

 
$

 
$
22

Total assets measured and recorded at fair value
$

 
$
22

 
$

 
$
22

Accrued and other current liabilities
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
181

 
$

 
$
181

Total liabilities measured and recorded at fair value
$

 
$
181

 
$

 
$
181

 
Level 1
 
Level 2
 
Level 3
 
Total
As of December 31, 2018
 
 
 
 
 
 
 
Accrued and other current liabilities
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
333

 
$

 
$
333

Total liabilities measured and recorded at fair value
$

 
$
333

 
$

 
$
333


The Company’s liability for the TVN VDP (as defined below) was $1.8 million and $2.4 million as of March 29, 2019 and December 31, 2018, respectively. This amount is not included in the table above because its fair value at inception, based on Level 3 inputs, was determined during the fourth quarter of fiscal 2016. The fair value of this liability has not been subsequently remeasured based on the applicable accounting guidance. See Note 10, “Restructuring and related charges-TVN VDP,” for additional information on the Company’s TVN VDP liabilities.

The carrying value of the Company’s financial instruments, including cash equivalents, restricted cash, accounts receivable, accounts payable and accrued and other current liabilities, approximate fair value due to their short maturities.

15


The Company uses the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The fair value of the Company’s convertible notes is influenced by interest rates, the Company’s stock price and stock market volatility. The fair value of the Company’s convertible notes was approximately $147.8 million and $136.5 million as of March 29, 2019 and December 31, 2018, respectively, and represents a Level 2 valuation. The Company’s other debts assumed from the Thomson Video Networks (“TVN”) acquisition are classified within Level 2 because these borrowings are not actively traded and the majority of them have a variable interest rate structure based upon market rates currently available to the Company for debt with similar terms and maturities, therefore, the carrying value of these debts approximate its fair value. The other debts, excluding finance leases, outstanding as of March 29, 2019 and December 31, 2018 were in the aggregate of $19.4 million and $19.7 million, respectively. (See Note 11, “Convertible Notes, Other debts and Finance Leases” for additional information).
During the three months ended March 29, 2019, there were no nonrecurring fair value measurements of assets and liabilities subsequent to initial recognition.

NOTE 8: BALANCE SHEET COMPONENTS
The following tables provide details of selected balance sheet components (in thousands):
 
March 29, 2019

December 31, 2018
Accounts receivable, net:
 
 
 
Accounts receivable
$
61,345

 
$
85,292

Less: allowances for doubtful accounts and sales returns
(2,415
)
 
(3,497
)
     Total
$
58,930

 
$
81,795


 
March 29, 2019
 
December 31, 2018
Inventories:
 
 
 
Raw materials
$
2,536

 
$
1,705

Work-in-process
833

 
991

Finished goods
15,769

 
12,267

Service-related spares
10,187

 
10,675

Total
$
29,325

 
$
25,638


 
March 29, 2019

December 31, 2018
Prepaid expenses and other current assets:
 
 
 
  French R&D tax credits receivable(1)
$
7,159

 
$
7,305

Prepaid expenses
6,219

 
4,834

  Contract assets(2)
3,707

 
3,834

Deferred cost of revenue
1,318

 
3,671

  Capitalized commission
933

 
1,098

Other
3,564

 
2,538

Total
$
22,900

 
$
23,280

(1) The Company’s TVN subsidiary in France (the “TVN French Subsidiary”) participates in the French Crédit d’Impôt Recherche program (the “R&D tax credits”) which allows companies to monetize eligible research expenses. The R&D tax credits can be used to offset against income tax payable to the French government in each of the four years after being incurred, or if not utilized, are recoverable in cash. The amount of R&D tax credits recoverable are subject to audit by the French government. The R&D tax credits receivable at March 29, 2019 were approximately $27.4 million and are expected to be recoverable from 2019 through 2022 with $7.2 million reported as a component of “Prepaid expenses and other current assets” and $20.2 million reported as a component of “Other long-term assets” on the Company’s Condensed Consolidated Balance Sheets.

16


(2) Contract assets reflect the satisfied performance obligations for which the Company does not yet have an unconditional right to consideration.
 
March 29, 2019
 
December 31, 2018
Property and equipment, net:
 
 
 
   Machinery and equipment
$
74,956

 
$
75,094

   Capitalized software
32,861

 
32,696

   Leasehold improvements
14,953

 
14,951

   Furniture and fixtures
6,031

 
6,049

      Property and equipment, gross
128,801

 
128,790

      Less: accumulated depreciation and amortization
(107,825
)
 
(106,469
)
         Total
$
20,976

 
$
22,321


 
March 29, 2019
 
December 31, 2018
Other long-term assets:
 
 
 
   French R&D tax credits receivable
$
20,200

 
$
19,249

   Deferred tax assets
9,198

 
8,695

   Equity investment
3,593

 
3,593

   Other
6,971

 
6,840

      Total
$
39,962

 
$
38,377


 
March 29, 2019
 
December 31, 2018
Accrued and other current liabilities:
 
 
 
   Accrued employee compensation and related expenses
$
15,483

 
$
21,451

   Operating lease liability (short-term)
10,660

 

   Accrued warranty
4,587

 
4,869

   Contingent inventory reserves
2,259

 
2,500

   Accrued TVN VDP, current (1)
1,515

 
1,585

   Accrued Avid litigation settlement, current
1,500

 
1,500

   Others
17,234

 
20,856

      Total
$
53,238

 
$
52,761


(1) See Note 10, “Restructuring and related charges-TVN VDP,” for additional information on the Company’s TVN VDP liabilities.

 
March 29, 2019
 
December 31, 2018
Other non-current liabilities:
 
 
 
Operating lease liability (long-term)
$
16,323

 
$

Deferred revenue (long-term)
4,206

 
5,330

Others
9,702

 
12,898

      Total
$
30,231

 
$
18,228



17


NOTE 9: GOODWILL AND IDENTIFIED INTANGIBLE ASSETS
Goodwill
Goodwill represents the difference between the purchase price and the estimated fair value of the identifiable assets acquired and liabilities assumed. Goodwill is allocated among and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment. The Company has two reporting units, Video and Cable Access.

The Company tests for goodwill impairment at the reporting unit level on an annual basis, or more frequently if events or changes in circumstances indicate that the asset is more likely than not impaired. The Company’s annual goodwill impairment test is performed in the fiscal fourth quarter, with a testing date at the end of October. In evaluating goodwill for impairment, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value (including goodwill). If the Company concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying value, then no further testing is required. However, if the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then the two-step goodwill impairment test is performed to identify a potential goodwill impairment and measure the amount of impairment to be recognized, if any. The two-step impairment test involves estimating the fair value of all assets and liabilities of the reporting unit, including the implied fair value of goodwill, through either estimated discounted future cash flows or market-based methodologies. No impairment indicators were identified as of March 29, 2019.

The changes in the carrying amount of goodwill for the three months ended March 29, 2019 were as follows (in thousands):
 
Video
 
Cable Access
 
Total
Balance as of December 31, 2018
$
179,839

 
$
60,779

 
$
240,618

   Foreign currency translation adjustment
(786
)
 
16

 
(770
)
Balance as of March 29, 2019
$
179,053

 
$
60,795

 
$
239,848


Intangible Assets, Net
The following is a summary of intangible assets, net (in thousands):
 
 
 
March 29, 2019
 
December 31, 2018
 
Weighted Average Remaining Life (Years)
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Developed core technology
0.9
 
$
31,707

 
$
(26,871
)
 
$
4,836

 
$
31,707

 
$
(25,576
)
 
$
6,131

Customer relationships/contracts
1.9
 
44,583

 
(38,855
)
 
5,728

 
44,650

 
(38,146
)
 
6,504

Trademarks and trade names
0.9
 
610

 
(470
)
 
140

 
623

 
(441
)
 
182

Maintenance agreements and related relationships
n/a
 
5,500

 
(5,500
)
 

 
5,500

 
(5,500
)
 

Order backlog
n/a
 
3,087

 
(3,087
)
 

 
3,112

 
(3,112
)
 

Total identifiable intangibles
 
 
$
85,487

 
$
(74,783
)
 
$
10,704

 
$
85,592

 
$
(72,775
)
 
$
12,817


18



Amortization expense for the identifiable purchased intangible assets for the three months ended March 29, 2019 and March 30, 2018 was allocated as follows (in thousands):
 
Three months ended
 
March 29,
2019
 
March 30,
2018
Included in cost of revenue
$
1,295

 
$
1,295

Included in operating expenses
788

 
804

Total amortization expense
$
2,083

 
$
2,099

The estimated future amortization expense of purchased intangible assets with definite lives is as follows (in thousands):
 
Cost of Revenue
 
Operating
Expenses
 
Total
Year ended December 31,
 
 
 
 
 
2019 (remaining nine months)
$
3,885

 
$
2,356

 
$
6,241

2020
951

 
3,014

 
3,965

2021

 
498

 
498

Total future amortization expense
$
4,836

 
$
5,868

 
$
10,704


NOTE 10: RESTRUCTURING AND RELATED CHARGES
The Company has implemented several restructuring plans in an effort to better align its resources with its business strategy. The goal of these plans was to bring operational expenses to appropriate levels relative to its net revenues, while simultaneously implementing extensive company-wide expense control programs. These restructuring plans have primarily been comprised of excess facilities, severance payments and termination benefits related to headcount reductions.

In the three months ended March 29, 2019, the Company recorded an aggregate amount of $0.3 million of restructuring and related charges for severance and employee benefits for certain employees, primarily in one specific function within the Video segment. The activities associated with the charges were substantially completed in the first quarter of fiscal 2019. The Company made $0.1 million in payments in the first quarter of 2019, with the remaining $0.2 million liability outstanding as of March 29, 2019.

The Company initiated restructuring plans during fiscal 2018 and prior years. During fiscal 2018, the Company revised certain estimates made in connection with the prior restructuring plans and recorded credits of $0.2 million. As of March 29, 2019, total liabilities related to the prior restructuring plans were $4.2 million.

The Company accounts for its restructuring plans under the authoritative guidance for exit or disposal activities. The restructuring and related charges are included in “Cost of revenue” and “Operating expenses - Restructuring and related charges” in the Condensed Consolidated Statements of Operations. The following table summarizes the restructuring and related charges (in thousands):
 
Three months ended
 
March 29,
2019

March 30,
2018
Restructuring and related charges in:
 
 
 
Cost of revenue
$
301

 
$
762

Operating expenses - Restructuring and related charges
57

 
1,086

Total restructuring and related charges
$
358

 
$
1,848

As of March 29, 2019 and December 31, 2018, the Company’s total restructuring liability was $4.4 million and $5.3 million, respectively, of which $3.2 million and $3.3 million, respectively, were reported as a component of “Accrued and other current liabilities”, and the remaining $1.2 million and $2.0 million, respectively, were reported as a component of “Other non-current liabilities” on the Company’s Condensed Consolidated Balance Sheets.

19



The following table summarizes the activities related to the Company’s restructuring plans during the three months ended March 29, 2019 (in thousands):

 
 
Excess facilities
 
Severance and benefits
 
TVN VDP (1)
 
Total
Balance at December 31, 2018
 
$
2,926

 
$

 
$
2,409

 
$
5,335

Charges for current period
 

 
346

 

 
346

Adjustments to restructuring provisions
 
37

 

 
(25
)
 
12

Cash payments
 
(506
)
 
(144
)
 
(579
)
 
(1,229
)
Foreign exchange effect
 

 

 
(44
)
 
(44
)
Balance at March 29, 2019
 
$
2,457

 
$
202

 
$
1,761

 
$
4,420


(1) “TVN VDP” consists of restructuring-related costs in connection with the TVN acquisition that included global workforce reductions, exiting certain operating facilities and disposing of excess assets and an employee voluntary departure plan in France.

Excess Facility in San Jose, California

In August 2018, the Company exited an additional excess facility at its U.S. headquarters in San Jose, California and recorded $0.9 million in facility exit costs. As of March 29, 2019, the remaining liability for the additional excess facility exited in August 2018 was $0.9 million, which will be paid out over the remainder of the leased properties’ term through August 2020.

TVN VDP

The amount recorded for the three months ended March 29, 2019 and March 30, 2018 was immaterial. The TVN VDP liability balance as of March 29, 2019 was $1.8 million, payable through 2020.

NOTE 11: CONVERTIBLE NOTES, OTHER DEBTS AND FINANCE LEASES
4.00% Convertible Senior Notes
In December 2015, the Company issued $128.25 million in aggregate principal amount of 4.00% Senior Convertible Notes due 2020 (the “offering” or “Notes”, as applicable) pursuant to an indenture (the “Indenture”), dated December 14, 2015, by and between the Company and U.S. Bank National Association, as trustee. The Notes bear interest at a rate of 4.00% per year, payable in cash on June 1 and December 1 of each year and the Notes will mature on December 1, 2020 unless earlier repurchased or converted. The Notes will be convertible into cash, shares of the Company’s common stock, par value $0.001 (“Common Stock”), or a combination thereof, at the Company’s election, at an initial conversion rate of 173.9978 shares of Common Stock per $1,000 principal amount of Notes (which is equivalent to an initial conversion price of approximately $5.75 per share). The conversion rate, and thus the effective conversion price, may be adjusted under certain circumstances, including in connection with conversions made following certain fundamental changes and under other circumstances, in each case, as set forth in the Indenture.
Prior to the close of business on the business day immediately preceding September 1, 2020, the Notes will be convertible only under the following circumstances: (1) during any fiscal quarter (and only during such fiscal quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price of the Notes on each applicable trading day; (2) during the five business day period after any 5 consecutive trading day period (the “measurement period ”) in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. Commencing on September 1, 2020 until the close of business on the second scheduled trading day immediately preceding the maturity date, the Notes will be convertible in multiples of $1,000 principal amount regardless of the foregoing circumstances.
If a fundamental change occurs, holders of the Notes may require the Company to purchase all or any portion of their Notes for cash at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

20



Concurrent with the closing of the offering, the Company used $49.9 million of the net proceeds to repurchase 11.1 million shares of the Company’s common stock from purchasers of Notes in the offering in privately negotiated transactions. In addition, the Company incurred approximately $4.1 million of debt issuance cost, resulting in net proceeds to the Company of approximately $74.2 million, which was used to fund the TVN acquisition.
In accordance with the accounting guidance on embedded conversion features, the conversion feature associated with the Notes was valued at $26.1 million and bifurcated from the host debt instrument and recorded in stockholders’ equity. The resulting debt discount on the Notes is being amortized to interest expense at the effective interest rate over the contractual term of the Notes. The following table presents the components of the Notes as of March 29, 2019 and December 31, 2018 (in thousands, except for years and percentages):
 
March 29, 2019
 
December 31, 2018
Liability:
 
 
 
  Principal amount
$
128,250

 
$
128,250

  Less: Debt discount, net of amortization
(10,563
)
 
(11,996
)
  Less: Debt issuance costs, net of amortization
(1,274
)
 
(1,446
)
  Carrying amount
$
116,413

 
$
114,808

  Remaining amortization period (years)
1.7

 
1.9

  Effective interest rate on liability component
9.94
%
 
9.94
%
  Carrying amount of equity component
$
26,062

 
$
26,062

The following table presents interest expense recognized for the Notes (in thousands):
 
Three months ended
 
March 29, 2019
 
March 30, 2018
Contractual interest expense
$
1,283

 
$
1,283

Amortization of debt discount
1,433

 
1,297

Amortization of debt issuance costs
172

 
156

  Total interest expense recognized
$
2,888

 
$
2,736


Other Debts and Finance Leases

The Company has a variety of debt and credit facilities in France to satisfy the financing requirements of TVN operations. These arrangements are summarized in the table below (in thousands):
 
March 29, 2019
 
December 31, 2018
Financing from French government agencies related to various government incentive programs (1)
$
18,566

 
$
18,783

Term loans
819

 
914

Obligations under finance leases
141

 
162

  Total debt obligations
19,526

 
19,859

  Less: current portion
(7,124
)
 
(7,175
)
  Long-term portion
$
12,402

 
$
12,684

(1) As of March 29, 2019 and December 31, 2018, loans backed by French R&D tax credit receivables were $16.4 million and $16.7 million, respectively. As of March 29, 2019, the TVN French Subsidiary had an aggregate of $27.4 million of R&D tax credit receivables from the French government from 2019 through 2022. See Note 8, “Balance Sheet Components” for additional information. These tax loans have a fixed rate of 0.6%, plus EURIBOR 1 month + 1.3% and mature between 2019 through 2021. The remaining loans of $2.2 million at March 29, 2019, primarily relate to financial support from French government agencies for R&D innovation projects at minimal interest rates, and these loans mature between 2019 through 2025.


21


Future minimum repayments

The table below presents the future minimum repayments of debts and finance lease obligations for TVN as of March 29, 2019 (in thousands):

Years ending December 31,
Finance lease obligations
 
Other Debt obligations
2019 (remaining nine months)
$
106

 
$
6,866

2020
35

 
6,475

2021

 
5,226

2022

 
443

2023

 
151

Thereafter

 
224

Total
$
141

 
$
19,385


Line of Credit
On September 27, 2017, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (the “Bank”). The Loan Agreement provides for a secured revolving credit facility in an aggregate principal amount of up to $15.0 million. Under the terms of the Loan Agreement, the principal amount of loans, plus the face amount of any outstanding letters of credit, at any time cannot exceed up to 85% of the Company’s eligible receivables. Under the terms of the Loan Agreement, the Company may also request letters of credit from the Bank. The proceeds of any loans under the Loan Agreement will be used for working capital and general corporate purposes.
Loans under the Loan Agreement will bear interest, at the Company’s option, and subject to certain conditions, at an annual rate of either a prime rate or a LIBOR rate plus an applicable margin of 2.25%. There will be no applicable margin for prime rate advances when the Company is in compliance with the liquidity requirement of at least $20.0 million in the aggregate of consolidated cash plus availability under the Loan Agreement (the “Liquidity Requirement”) and a 0.25% margin for prime rate advances when the Company is not in compliance with the Liquidity Requirement. The Company may not request LIBOR advances when it is not in compliance with the Liquidity Requirement. Interest on each advance is due and payable monthly and the principal balance is due at maturity. The Company’s obligations under the revolving credit facility are secured by a security interest on substantially all of its assets, excluding intellectual property.

The Loan Agreement contains customary affirmative and negative covenants. The Company must comply with financial covenants requiring it to maintain (i) a short-term asset to short-term liabilities ratio of at least 1.10 to 1.00 and (ii) a minimum adjusted EBITDA, in the amounts and for the periods as set forth in the Loan Agreement. The Company must also maintain a minimum liquidity amount, comprised of unrestricted cash held at accounts with the Bank plus proceeds available to be drawn under the Loan Agreement, equal to at least $10.0 million at all times. As of March 29, 2019, the Company was in compliance with the covenants under the Loan Agreement.

As of March 29, 2019, the Company committed $1.8 million towards security for letters of credit issued under the Loan Agreement. There were no other borrowings under the Loan Agreement as of March 29, 2019.

NOTE 12: EMPLOYEE BENEFIT PLANS AND STOCK-BASED COMPENSATION
Equity Award Plans
The Company’s stock benefit plans include the 2002 Employee Stock Purchase Plan (“ESPP”) and current active stock plans adopted in 1995 and 2002. See Note 12, “Employee Benefit Plans and Stock-based Compensation” of Notes to Consolidated Financial Statements in the 2018 Form 10-K for details pertaining to each plan.

As of March 29, 2019, there were 0.8 million and 4.8 million shares of common stock reserved for future grants under the Company’s ESPP and active stock plans, respectively.


22


Stock Option Activities

The following table summarizes the Company’s stock option activities and related information during the three months ended March 29, 2019 (in thousands, except per share amounts and terms):
 
 
Stock Options Outstanding
 
 
Number
of
Shares
 
Weighted
Average
Exercise Price
Per Share
 
Weighted
Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic
Value
Balance at December 31, 2018
 
3,068

 
$
5.76

 
 
 
 
Exercised
 
(6
)
 
2.25

 
 
 
 
Canceled or expired
 
(379
)
 
6.14

 
 
 
 
Balance at March 29, 2019
 
2,683

 
5.71

 
2.4
 
$
1,646.6

As of March 29, 2019
 
 
 
 
 
 
 
 
Vested and expected to vest
 
2,683

 
5.71

 
2.4
 
$
1,646.3

Exercisable
 
2,673

 
5.72

 
2.4
 
$
1,633.5

The aggregate intrinsic value disclosed above represents the difference between the exercise price of the options and the fair value of the Company’s common stock. There were no employee stock options granted in the three months ended March 29, 2019.

There were no realized tax benefits attributable to stock options exercised in jurisdictions where this expense is deductible for tax purposes for the three months ended March 29, 2019 and March 30, 2018, respectively.

Restricted Stock Units (“RSUs”) Activities

The following table summarizes the Company’s RSUs activities and related information during the three months ended March 29, 2019 (in thousands, except per share amounts):
 
 
Restricted Stock Units Outstanding
 
 
Number
of
Shares
 
Weighted
Average Grant
Date Fair Value
Per Share
Balance at December 31, 2018
 
3,403

 
$
3.99

Granted
 
35

 
5.49

Vested
 
(1,313
)
 
3.91

Forfeited
 
(20
)
 
4.01

Balance at March 29, 2019
 
2,105

 
4.10

French Retirement Benefit Plan
The Company assumed obligations under a defined benefit pension plan in connection with the acquisition of TVN in 2016. The plan is unfunded and there are no contributions required by laws or funding regulations, discretionary contributions or non-cash contributions expected to be made. The table below presents the components of net periodic benefit costs (in thousands):
 
Three months ended
 
March 29, 2019
 
March 30, 2018
Service cost
$
57

 
$
63

Interest cost
20

 
19

  Net periodic benefit cost
$
77

 
$
82


23


The present value of the Company’s pension obligation as of March 29, 2019 was $4.9 million, of which $0.1 million was reported as a component of “Accrued and other current liabilities” and $4.8 million was reported as a component of “Other non-current liabilities” on the Company’s Condensed Consolidated Balance Sheets. The present value of the Company’s pension obligation as of December 31, 2018 was $4.9 million.

401(k) Plan
The Company has a retirement/savings plan for its U.S. employees, which qualifies as a thrift plan under Section 401(k) of the Internal Revenue Code. This plan allows participants to contribute up to the applicable Internal Revenue Code limitations under the plan. The Company has made discretionary contributions to the plan of 25% of the first 4% contributed by eligible participants, up to a maximum contribution per participant of $1,000 per year. The contributions for the three months ended March 29, 2019 and March 30, 2018 were $122,000 and $112,000, respectively.

Stock-based Compensation
The following table summarizes stock-based compensation for all plans (in thousands):
 
Three months ended
 
March 29,
2019
 
March 30,
2018
Stock-based compensation in:
 
 
 
Cost of revenue
$
225

 
$
515

Research and development expense
616

 
1,804

Selling, general and administrative expense
1,272

 
3,438

Total stock-based compensation in operating expense
1,888

 
5,242

Total stock-based compensation
$
2,113

 
$
5,757

As of March 29, 2019, total unrecognized stock-based compensation cost related to unvested RSUs was $6.9 million and is expected to be recognized over a weighted-average period of approximately 1.44 years.
Valuation Assumptions
The Company estimates the fair value of employee stock options and stock purchase rights under the ESPP using a Black-Scholes option valuation model. The value of the stock purchase rights under the ESPP consists of: (1) the 15% discount on the purchase of the stock; (2) 85% of the fair value of the call option; and (3) 15% of the fair value of the put option. The call option and put option were valued using the Black-Scholes option pricing model.

 
ESPP Purchase Period Ending
 
July 1,
2019
 
July 2,
2018
Expected term (years)
0.5

 
0.5

Volatility
43
%
 
60
%
Risk-free interest rate
2.5
%
 
1.7
%
Expected dividends
0.0
%
 
0.0
%
Estimated weighted average fair value per share at purchase date
$1.31
 
$1.34
The expected term of the stock purchase rights under the ESPP represents the period of time from the beginning of the offering period to the purchase date. The Company uses its historical volatility for a period equivalent to the expected term of the options to estimate the expected volatility. The risk-free interest rate assumption is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term. The Company has not paid and does not plan to pay any cash dividends in the foreseeable future.


24


NOTE 13: INCOME TAXES
The Company reported the following operating results for the periods presented (in thousands):
 
Three months ended
 
March 29,
2019
 
March 30,
2018
Loss before income taxes
$
(11,625
)
 
$
(12,616
)
Provision for (benefit from) income taxes
(319
)
 
1,078

Effective income tax rate
2.7
%
 
(8.5
)%
The Company operates in multiple jurisdictions and its profits are taxed pursuant to the tax laws of these jurisdictions. The Company’s effective income tax rate may be affected by changes in, or interpretations of tax laws and tax agreements in any given jurisdiction, utilization of net operating loss and tax credit carry forwards, changes in geographical mix of income and expense, and changes in management’s assessment of matters such as the ability to realize deferred tax assets. The Company’s effective tax rate varies from year to year primarily due to the absence of several onetime, discrete items that benefited or decremented the tax rates in the previous years.

The Company's effective income tax rate of 2.7% for the three months ended March 29, 2019 was different from the U.S. federal statutory rate of 21%, primarily due to geographical mix of income and losses, full valuation allowance against U.S. federal, California and other states deferred tax assets, foreign withholding taxes and income taxes on earnings from operations in foreign tax jurisdictions. In addition, during the three months ended March 29, 2019, the Company recorded a one-time benefit of approximately $0.8 million due to a valuation allowance release for one of its foreign subsidiaries. This release of valuation allowance was due to changes in forecasted taxable income resulting from the Company receiving a favorable tax ruling during the quarter.

The Company's effective income tax rate of (8.5)% for the three months ended March 30, 2018 was different from the U.S. federal statutory rate of 21%, primarily due to the Company’s geographical income mix and favorable tax rates associated with certain earnings from operations in lower-tax jurisdictions, the increase in the valuation allowance against U.S. federal, California and other state deferred tax assets, detriment from non-deductible stock-based compensation, and the net of various discrete tax adjustments. For the three months ended March 30, 2018, the discrete adjustments to the Company's tax expense were primarily withholding taxes and the accrual of interest on uncertain tax positions.

The Company files U.S. federal and state, and foreign income tax returns in jurisdictions with varying statutes of limitations during which such tax returns may be audited and adjusted by the relevant tax authorities. The 2015 through 2018 tax years generally remain subject to examination by U.S. federal and most state tax authorities. In addition, a subsidiary of the Company is under audit from 2013 to 2017 tax years by the Swiss tax authority. If, upon the conclusion of an audit, the ultimate determination of taxes owed in the jurisdictions under audit is for an amount in excess of the tax provision the Company has recorded in the applicable period, the Company’s overall tax expense, effective tax rate, operating results and cash flow could be materially and adversely impacted in the period of adjustment.

On July 27, 2015, the U.S. Tax Court issued an opinion in Altera Corp. v. Commissioner, 145 T.C. No.3 (2015) related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision was entered by the U.S. Tax Court on December 1, 2015 (the “2015 Decision”). On February 19, 2016, the U.S. Internal Revenue Service filed a notice of appeal in Altera Corp. v. Commissioner, 145 T.C. No. 3 (2015), to the Ninth Circuit Court of Appeals. The Ninth Circuit was to decide whether a regulation that mandates that stock-based compensation costs related to the intangible development activity of a qualified cost sharing arrangement (a “QCSA”) must be included in the joint cost pool of the QCSA (the “all costs rule”) is consistent with the arm’s length standard as set forth in Section 482 of the Internal Revenue Code. On July 24, 2018, the Ninth Circuit Court of Appeals issued an opinion in Altera Corp. v. Commissioner (the “Altera Opinion”) requiring related parties in an intercompany cost-sharing arrangement to share expenses related to share-based compensation. This opinion reversed the 2015 Decision of the United States Tax Court. The Ninth Circuit subsequently withdrew the opinion on August 7, 2018. Due to uncertainties surrounding the ultimate resolution of the 2015 Decision, the Company continues to share expenses related to share-based compensation despite the 2015 Decision.


25


As of March 29, 2019, the total amount of gross unrecognized tax benefits, including interest and penalties, was approximately $17.5 million, of which $16.2 million would affect the Company’s effective tax rate if the benefits are eventually recognized, subject to valuation allowance considerations. The Company recognizes interest and penalties related to unrecognized tax positions in income tax expense. The Company had $30 thousand of gross interest and penalties accrued as of March 29, 2019. The Company will continue to review its tax positions and provide for, or reverse, unrecognized tax benefits as issues arise. For the three months ended March 29, 2019, the Company released $0.4 million unrecognized tax benefits and the Company anticipates that unrecognized tax benefits will decrease up to approximately $0.3 million over the next 12 months due to settlements with tax authorities.

NOTE 14: NET LOSS PER SHARE
The following table sets forth the computation of the basic and diluted net loss per share (in thousands, except per share amounts):
 
Three months ended
 
March 29,
2019
 
March 30,
2018
Numerator:
 
 
 
Net loss
$
(11,306
)
 
$
(13,694
)
Denominator:
 
 
 
Weighted average number of common shares outstanding
 
 
 
Basic and diluted
88,165

 
83,912

Net loss per share:
 
 
 
Basic and diluted
$
(0.13
)
 
$
(0.16
)
Basic net loss per share was the same as diluted net loss per share for the three months ended March 29, 2019 and March 30, 2018, as the inclusion of potential common shares outstanding would have been anti-dilutive due to the Company’s net losses for the periods presented. The following table sets forth the potential weighted common shares outstanding that were excluded from the computation of basic and diluted net loss per share calculations (in thousands):
 
Three months ended
 
March 29,
2019
 
March 30,
2018
Stock options
2,941

 
3,705

RSUs
2,400

 
2,206

Stock purchase rights under the ESPP
489

 
836

Warrants (1)
1,954

 
782

   Total (2)
7,784

 
7,529

(1) On September 26, 2016, in connection with the execution of a product supply agreement pursuant to which an affiliate of Comcast Corporation (together with Comcast Corporation, “Comcast”) may, in its sole discretion, purchase from the Company licenses to certain of the Company’s software products, the Company granted Comcast a warrant to purchase shares of its common stock. (See Note 15, “Warrants” for additional information).

(2) Excluded from the table above are the Notes, which are convertible under certain conditions into an aggregate of 22,304,348 shares of common stock. (See Note 11, “Convertible Notes, Other Debts and Finance Leases” for additional information on the Notes). Since the Company’s intent is to settle the principal amount of the Notes in cash, the treasury stock method is being used to calculate any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread will have a dilutive impact on diluted net income per share when the Company’s average market price of its common stock for a given period exceeds the conversion price of $5.75 per share.

NOTE 15: WARRANTS

On September 26, 2016, the Company granted a warrant to purchase shares of common stock (the “Warrant”) to Comcast pursuant to which Comcast may, subject to certain vesting provisions, purchase up to 7,816,162 shares of the Company’s common stock subject to adjustment in accordance with the terms of the Warrant, for a per share exercise price of $4.76.

26


Comcast may exercise the Warrant for cash or on a net share basis. The Warrant expires on September 26, 2023 or the prior consummation of a change of control of the Company.

Comcast’s right to purchase 781,617 shares vested as of the Warrant issuance date as an incentive to enter into the software license product supply agreement. Comcast’s right to purchase 1,172,425 shares vested as of July 31, 2018 upon the acceptance and completion of field trials. Comcast’s right to purchase an additional 781,617 shares will vest upon Comcast’s election for enterprise license pricing for the Company’s CableOS software products. Such pricing would obligate Comcast to make certain total payments to the Company over the term of the product supply agreement.

Comcast’s rights to purchase additional shares in specified tranches vest when Comcast exceeds specified cumulative purchase amounts from the Company under the product supply agreement and, for certain tranches, such purchases are made within specified time periods.

The Warrant is considered an incentive for Comcast to purchase certain of the Company’s products. Therefore, the value of the vested Warrant is recorded as an asset, which is recognized as a reduction in the Company’s net revenues in proportion to the pertinent sales to Comcast. The Warrant is considered indexed to the Company’s common stock and classified as stockholders’ equity based on its terms. Accordingly, the vested Warrant amounts are included in “Additional paid-in capital”.
Prior to adoption of new accounting guidance on January 1, 2019, changes in fair value of the warrant shares were being marked to market until final vesting, and any adjustment as such was being recorded in revenue. The change in fair value together with vested warrant shares was being amortized to revenue using a ratio of revenue recognized from the customer in the period compared to total revenue expected from the customer. The value of the Warrant was recorded as a reduction in the Company’s net revenues to the extent such value did not exceed net revenues from pertinent sales to Comcast. In the first quarter of fiscal 2019, due to the adoption of Topic 718 as disclosed in Note 2, “Recent Accounting Pronouncements”, the fair value of unvested warrant shares is no longer required to be marked to market. As a result, the charge to revenue for warrant shares no longer includes the change in fair value of the warrant shares.

In fiscal 2018, the fair value of the Warrant was determined using the Black-Scholes option pricing model. The assumptions utilized in the Black-Scholes model included the risk-free interest rate, expected volatility, and expected life in years. The risk-free interest rate was based on the U.S. Treasury yield curve rates with maturity terms similar to the expected life of the Warrant. Expected volatility was determined utilizing historical volatility over a period of time equal to the expected life of the Warrant. Expected life was equal to the remaining contractual term of the Warrant. The dividend yield was assumed to be zero since the Company had not historically declared dividends and did not have any plans to declare dividends in the future.

During the three months ended March 29, 2019 and March 30, 2018, the Company recorded $25 thousand and $0.1 million, respectively, as a reduction to net revenues in connection with amortization of the Warrant.

NOTE 16: SEGMENT INFORMATION
Operating segments are defined as components of an enterprise that engages in business activities for which separate financial information is available and evaluated by the Company’s Chief Operating Decision Maker (the “CODM”), which for Harmonic is its Chief Executive Officer, in deciding how to allocate resources and assess performance. Based on our internal reporting structure, the Company consists of two operating segments: Video and Cable Access. The operating segments were determined based on the nature of the products offered. The Video segment sells video processing and production and playout solutions and services worldwide to broadcast and media companies, streaming new media companies, cable operators, and satellite and telecommunications (“telco”) Pay-TV service providers. The Cable Access segment sells cable access solutions and related services to cable operators globally.
The following table provides summary financial information by reportable segment (in thousands):

 
Three months ended
 
March 29, 2019
 
March 30, 2018
Video
 
 
 
Revenue
$
67,176

 
$
71,748

Gross profit
38,602

 
41,226

Operating income
1,968

 
1,995

Cable Access
 
 
 
Revenue
$
12,930

 
$
18,379

Gross profit
5,068

 
8,529

Operating loss
(5,822
)
 
(1,624
)
Total
 
 
 
Revenue
$
80,106

 
$
90,127

Gross profit
43,670

 
49,755

Operating income (loss)
(3,854
)
 
371


A reconciliation of the Company’s consolidated segment operating income (loss) to consolidated loss before income taxes is as follows (in thousands):
 
Three months ended
 
March 29, 2019
 
March 30, 2018
Total segment operating income (loss)
(3,854
)
 
371

Unallocated corporate expenses
(358
)
 
(1,842
)
Stock-based compensation
(2,113
)
 
(5,757
)
Amortization of intangibles
(2,083
)
 
(2,099
)
Loss from operations
(8,408
)
 
(9,327
)
Non-operating expense, net
(3,217
)
 
(3,289
)
Loss before income taxes
$
(11,625
)
 
$
(12,616
)

Unallocated Corporate Expenses
Together with amortization of intangibles and stock-based compensation, the Company does not allocate restructuring and related charges, TVN acquisition and integration-related costs, and certain other non-recurring charges to the operating income (loss) for each segment because management does not include this information in the measurement of the performance of the operating segments. A measure of assets by segment is not applicable as segment assets are not included in the discrete financial information provided to the CODM.

Geographic Information
 
Three months ended
 
March 29,
2019
 
March 30,
2018
Net Revenue (1)
 
 
 
United States
$
30,115

 
$
41,776

Other Countries
49,991

 
48,351

Total
$
80,106

 
$
90,127


(1)  Revenue is attributed to countries based on the location of the customer.

Market Information
 
Three months ended
 
March 29,
2019
 
March 30,
2018
Market
 
 
 
Service Provider
$
44,212

 
$
52,217

Broadcast and Media
35,894

 
37,910

Total
$
80,106

 
$
90,127



27


NOTE 17: COMMITMENTS AND CONTINGENCIES
Warranties
The Company accrues for estimated warranty costs at the time of product shipment. Management periodically reviews the estimated fair value of its warranty liability and records adjustments based on the terms of warranties provided to customers, historical and anticipated warranty claims experience, and estimates of the timing and cost of warranty claims. Activity for the Company’s warranty accrual, which is included in “Accrued and other current liabilities”, is summarized below (in thousands):
 
Three months ended
 
March 29,
2019
 
March 30,
2018
Balance at beginning of period
$
4,869

 
$
4,381

   Accrual for current period warranties
1,403

 
1,736

   Warranty costs incurred
(1,685
)
 
(1,595
)
Balance at end of period
$
4,587

 
$
4,522

Purchase Obligations
The Company relies on a limited number of contract manufacturers and suppliers to provide manufacturing services for a substantial majority of its products. The Company had approximately $45.0 million of non-cancelable commitments to purchase inventories and other commitments as of March 29, 2019.
Standby Letters of Credit and Guarantees
As of March 29, 2019 and December 31, 2018, the Company has outstanding bank guarantees and standby letters of credit in aggregate of $2.2 million and $2.3 million, respectively, consisting of building leases and performance bonds issued to customers.
During 2017, one of the Company’s subsidiaries entered into a $2.0 million credit facility with a foreign bank for the purpose of issuing performance guarantees. The credit facility is secured by a $2.2 million guarantee issued by the Company. There were no amounts outstanding under this credit facility as of March 29, 2019 and December 31, 2018, respectively.

Indemnification

Harmonic is obligated to indemnify its officers and the members of its Board of Directors (the “Board”) pursuant to its bylaws and contractual indemnity agreements. Harmonic also indemnifies some of its suppliers and most of its customers for specified intellectual property matters pursuant to certain contractual arrangements, subject to certain limitations. The scope of these indemnities varies, but, in some instances, includes indemnification for damages and expenses (including reasonable attorneys’ fees). There have been no amounts accrued in respect of these indemnification provisions through March 29, 2019.

Legal proceedings
In October 2011, Avid Technology, Inc. (“Avid”) filed a complaint in the United States District Court for the District of Delaware alleging that the Company’s MediaGrid product infringes two patents held by Avid. A jury trial on this complaint commenced on January 23, 2014 and, on February 4, 2014, the jury returned a unanimous verdict in favor of the Company, rejecting Avid’s infringement allegations in their entirety. In January 2015, Avid filed an appeal with respect to the jury’s verdict with the Federal Circuit. In January 2016, the Federal Circuit issued an order vacating the verdict of noninfringement and remanding the case to the trial court for a new trial on infringement.  

In June 2012, Avid served a subsequent complaint in the United States District Court for the District of Delaware alleging that the Company’s Spectrum product infringes one patent held by Avid. The complaint sought injunctive relief and unspecified damages. In September 2013, the U.S. Patent Trial and Appeal Board (“PTAB”) authorized an inter partes review to be instituted as to claims 1-16 of the patent asserted in this second complaint. In July 2014, the PTAB issued a decision finding claims 1-10 invalid and claims 11-16 not invalid. The Company filed an appeal with respect to the PTAB’s decision on claims 11-16 in September 2014, and the Federal Circuit affirmed the PTAB’s decision in April 2016.  

In July 2017, the court issued a scheduling order consolidating both cases and setting the trial date for November 6, 2017. 


28


On October 19, 2017, the parties agreed to settle the consolidated cases by entering into a settlement and patent portfolio cross-license agreement, and the cases were dismissed with prejudice. In connection with the agreement, the Company recorded a $6.0 million litigation settlement expense in “Selling, general and administrative expenses” in the Company’s 2017 Consolidated Statement of Operations. Of the associated $6.0 million liability, $2.5 million was paid in October 2017 and the remaining $1.5 million and $2.0 million will be paid in the second quarter of 2019 and the third quarter of 2020, respectively. 

From time to time, the Company is involved in lawsuits as well as subject to various legal proceedings, claims, threats of litigation, and investigations in the ordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial, employment, and other matters. The Company assesses potential liabilities in connection with each lawsuit and threatened lawsuits and accrues an estimated loss for these loss contingencies if both of the following conditions are met: information available prior to issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount of loss can be reasonably estimated. While certain matters to which the Company is a party specify the damages claimed, such claims may not represent reasonably probable losses. Given the inherent uncertainties of litigation, the ultimate outcome of these matters cannot be predicted at this time, nor can the amount of possible loss or range of loss, if any, be reasonably estimated.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The terms “Harmonic,” “Company,” “we,” “us,” “its,” and “our,” as used in this Quarterly Report on Form 10-Q (this “Form 10-Q”), refer to Harmonic Inc. and its subsidiaries and its predecessors as a combined entity, except where the context requires otherwise.
Some of the statements contained in this Form 10-Q are forward-looking statements that involve risk and uncertainties. The statements contained in this Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements regarding our expectations, beliefs, intentions or strategies regarding the future. In some cases, you can identify forward-looking statements by terminology such as, “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “intends,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements regarding:
developing trends and demands in the markets we address, particularly emerging markets;
economic conditions, particularly in certain geographies, and in financial markets;
new and future products and services;
spending of our customers;
our strategic direction, future business plans and growth strategy;
industry and customer consolidation;
expected demand for and benefits of our products and services;
concentration of revenue sources;
expectations regarding our CableOS solutions;
expectations regarding the impact of warrants issued to Comcast on our business;
potential future acquisitions and dispositions;
anticipated results of potential or actual litigation;
our competitive environment;
the impact of our restructuring plans;
the impact of governmental regulations, including with respect to tariffs and economic sanctions;
anticipated revenue and expenses, including the sources of such revenue and expenses;
expected impacts of changes in accounting rules;
expectations regarding the usability of our inventory and the risk that inventory will exceed forecasted demand;
expectations and estimates related to goodwill and intangible assets and their associated carrying value;
expectations regarding the applicability of tax provisions, including with respect to credits related to our acquisition of Thomson Video Networks (“TVN”); and
use of cash, cash needs and ability to raise capital, including repaying or refinancing our convertible notes.
These statements are subject to known and unknown risks, uncertainties and other factors, any of which may cause our actual results to differ materially from those implied by the forward-looking statements. Important factors that may cause actual results to differ from expectations include those discussed in “Risk Factors” beginning on page 42 of this Form 10-Q. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us on the date thereof, and we assume no obligation to update any such forward-looking statements.

29


OVERVIEW
We are a leading global provider of (i) versatile and high performance video delivery software, products, system solutions and services that enable our customers to efficiently create, prepare, store, playout and deliver a full range of high-quality broadcast and OTT video services to consumer devices, including televisions, personal computers, laptops, tablets and smart phones and (ii) cable access solutions that enable cable operators to more efficiently and effectively deploy high-speed internet, for data, voice and video services to consumers’ homes.
We had previously classified our total revenue in two categories, “Product” and “Service”. Beginning in the first quarter of fiscal 2019, to better reflect the nature of our business and sharpen the focus on our revenue priorities, we have updated our revenue categories to “Appliance and integration” and “SaaS and service”. The “Appliance and integration” revenue category includes hardware, licenses and professional services and is reflective of non-recurring revenue, while the “SaaS and service” category includes usage fees for our SaaS platform and support revenue stream from our appliance-based customers and reflects our recurring revenue stream.

We do business in three geographic regions: the Americas, EMEA and APAC and operate in two segments, Video and Cable Access. Our Video business sells video processing, production and playout solutions, and services worldwide to cable operators and satellite and telecommunications (“telco”) Pay-TV service providers, which we refer to collectively as “service providers,” as well as to broadcast and media companies, including streaming media companies. Our Video business infrastructure solutions are delivered either through shipment of our products, software licenses or as software-as-a-service (“SaaS”) subscriptions. Our Cable Access business sells cable access solutions and related services, including our CableOS software-based cable access solution, primarily to cable operators globally.
Historically, our revenue has been dependent upon capital spending in the cable, satellite, telco, broadcast and media industries, including streaming media. Our customers’ capital spending patterns are dependent on a variety of factors, including but not limited to: economic conditions in the U.S. and international markets; access to financing; annual budget cycles of each of the industries we serve; impact of industry consolidations; and customers suspending or reducing capital spending in anticipation of new products or new standards, new industry trends and/or technology shifts. If our product portfolio and product development plans do not position us well to capture an increased portion of the capital spending in the markets in which we compete, our revenue may decline. As we attempt to further diversify our customer base in these markets, we may need to continue to build alliances with other equipment manufacturers, content providers, resellers and system integrators, managed services providers and software developers; adapt our products for new applications; take orders at prices resulting in lower margins; and build internal expertise to handle the particular operational, payment, financing and/or contractual demands of our customers, which could result in higher operating costs for us.
A majority of our revenue has been derived from relatively few customers, due in part to the consolidation of our service provider customers. Sales to our 10 largest customers during the three months ended March 29, 2019 accounted for 39% of our net revenue, compared to 42% for the corresponding period in 2018. Although we are attempting to broaden our customer base by penetrating new markets and further expanding internationally, we expect to see continuing industry consolidation and customer concentration. During the three months ended March 29, 2019, no single customer accounted for more than 10% of our net revenue. During the three months ended March 30, 2018, Comcast accounted for 14% of our net revenue. The loss of any significant customer, any material reduction in orders by any significant customer, or our failure to qualify our new products with a significant customer could materially and adversely affect our operating results, financial condition and cash flows.
Our net revenue decreased $10.0 million, or 11%, in the three months ended March 29, 2019, compared to the corresponding period in 2018, primarily due to a decrease in revenue of $5.5 million and $4.5 million in our Cable Access segment and Video segment revenue, respectively. The decrease in our Cable Access segment revenue in the three months ended March 29, 2019 was primarily due to a shift in timing of CableOS related hardware shipments from the first quarter to later in the year and a decrease in sales of CableOS software and support services. The decrease in our Video segment revenue in the three months ended March 29, 2019 was primarily due to a shift in timing of certain bookings from the first quarter to later in the year, driven primarily by growing customer interest in our SaaS offerings and the increased time to close SaaS transactions relative to appliance-based product sales transactions.
Our Video segment customers continue to be cautious with investments in new technologies, such as next-generation IP architecture and Ultra HD. We believe a material and growing portion of the opportunities for our video business are linked to a migration by our customers to IP workflows and the distribution of linear and on-demand, OTT, and new mobile video services. We continue to steadily transition our video business away from legacy and customized computing hardware to more software-centric solutions and services, including OTT SaaS subscription offerings that enable video compression and processing through our VOS software platform running on standard off-the-shelf servers, in data centers and in the cloud.

30


Our Cable Access strategy is to continue to deliver software-based cable access technologies, which we refer to as our CableOS solutions, to our cable operator customers. We believe our CableOS software-based cable access solutions are superior to hardware-based systems and deliver unprecedented scalability, agility and cost savings for our customers. Our CableOS solutions, which can be deployed based on a centralized, distributed Remote PHY or hybrid architecture, enable our customers to migrate to multi-gigabit broadband capacity and the fast deployment of DOCSIS 3.1 data, video and voice services. We believe our CableOS solutions resolve space and power constraints in the headend and hub, eliminate dependence on hardware upgrade cycles and significantly reduce total cost of ownership, and will help us become a major player in the cable access market. In the meantime, we believe our Cable Access segment is gaining momentum in the marketplace as our customers have begun to adopt new virtualized DOCSIS 3.1 CMTS solutions and distributed access architectures. While we are in the early stages of field trials and deployments and may experience near-term challenges, we continue to make progress in the development of our CableOS solutions and in the growth of our CableOS business, with expanded commercial deployments, field trials, and customer engagements.

To support our Cable Access strategy and foster the further development and growth of this segment, in September 2016, we issued Comcast a Warrant to further incentivize Comcast to purchase our products and adopt our technologies, particularly our CableOS solutions. Pursuant to the Warrant, Comcast may, subject to certain vesting provisions, purchase up to 7,816,162 shares of our common stock, for a per share exercise price of $4.76. Because the Warrant is considered an incentive for Comcast to purchase certain of the Company’s products, the value of the Warrant is recorded as a reduction in the Company’s net revenues to the extent such value does not exceed net revenues from pertinent sales to Comcast. (See Note 15, “Warrants,” of the Notes to our Condensed Consolidated Financial Statements for additional information).
As the timing of our customers' investment decisions can be uncertain, we have implemented restructuring plans to better align the Company's resources and strategic goals. We continue to focus on expense controls on a company-wide basis. (See Note 10, “Restructuring and Related Charges” of the Notes to our Condensed Consolidated Financial Statements for additional information).
Our aggregate balance of cash and cash equivalents as of March 29, 2019 was $69.9 million. During the three months ended March 29, 2019, we generated $4.2 million of cash provided by operating activities. We also entered into a line of credit with Silicon Valley Bank in September 2017 which has not been used to withdraw any cash to date. We expect that our current sources of liquidity will provide us adequate liquidity based on our current plan for the next twelve months.

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
Our unaudited condensed consolidated financial statements and the related notes included elsewhere in this report are prepared in accordance with U.S. GAAP. The preparation of these unaudited condensed consolidated financial statements 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Our critical accounting policies, judgments and estimates are disclosed in our 2018 Annual Report on Form 10-K, as filed with the SEC. There have been no significant changes to these policies during the three months ended March 29, 2019 other than those disclosed in Note 2 to the Condensed Consolidated Financial Statements in Item 1.

ACCOUNTING PRONOUNCEMENTS
For a summary of recent accounting pronouncements applicable to our condensed consolidated financial statements, see Note 2 to the Condensed Consolidated Financial Statements in Item 1, which is incorporated herein by reference.


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RESULTS OF OPERATIONS
Net Revenue
The following table presents the breakdown of revenue by segment for the three months ended March 29, 2019 and March 30, 2018 (in thousands, except percentages):
 
Three months ended
 
 
 
 
March 29, 2019
 
March 30, 2018
 
Q1 FY19 vs Q1 FY18
Segment:
 
 
 
 
 
 
Video
$
67,176

 
$
71,748

 
$
(4,572
)
(6
)%
Cable Access
12,955

 
18,490

 
(5,535
)
(30
)%
Total segment revenue
80,131

 
90,238

 
(10,107
)
(11
)%
Amortization of warrants
(25
)
 
(111
)
 
86


Total net revenue
$
80,106

 
$
90,127

 
$
(10,021
)
(11
)%
 
 
 
 
 


Segment revenue as a % of total segment revenue:
 
 
 
Video
84
%
 
80
%
 
 
 
Cable Access
16
%
 
20
%
 
 
 
The following table presents the breakdown of revenue by geographical region for the three months ended March 29, 2019 and March 30, 2018 (in thousands, except percentages):
 
Three months ended
 
 
 
 
March 29, 2019
 
March 30, 2018
 
Q1 FY19 vs Q1 FY18
Geography:
 
 
 
 
 
 
Americas
$
34,188

 
$
48,856

 
$
(14,668
)
(30
)%
EMEA
28,078

 
23,202

 
4,876

21
 %
APAC
17,840

 
18,069

 
(229
)
(1
)%
Total net revenue
$
80,106

 
$
90,127

 
$
(10,021
)
(11
)%
 
 
 
 
 
 
 
Regional revenue as a % of total net revenue:
 
 
 
Americas
43
%
 
54
%
 
 
 
EMEA
35
%
 
26
%
 
 
 
APAC
22
%
 
20
%
 
 
 
Our Video segment net revenue decreased 6% in the three months ended March 29, 2019, compared to the corresponding period in 2018, primarily due to a shift in timing of certain bookings from the first quarter to later in the year, driven primarily by growing customer interest in SaaS offerings and the increased time to close SaaS transactions relative to appliance-based product sales transactions.
Our Cable Access segment net revenue decreased 30% in the three months ended March 29, 2019, compared to the corresponding period in 2018. The decrease was primarily due to a shift in timing of certain CableOS related hardware shipments from the first quarter to later in the year and a decrease in sales of CableOS software and support services.
Net revenue in the Americas decreased 30% in the three months ended March 29, 2019, compared to the corresponding period in 2018, primarily due to a decrease in our Cable Access segment revenue.

EMEA net revenue increased 21% in the three months ended March 29, 2019 compared to the corresponding period in 2018, primarily due to an increase in revenue in the Video segment.

APAC net revenue decreased 1% in the three months ended March 29, 2019, compared to the corresponding period in 2018, primarily due to a shift in timing of hardware sales from our Video segment.

Gross Profit
The following table presents the gross profit and gross profit as a percentage of net revenue (“gross margin”) for the three months ended March 29, 2019 and March 30, 2018 (in thousands, except percentages):
 
Three months ended
 
 
 
 
March 29, 2019
 
March 30, 2018
 
Q1 FY19 vs Q1 FY18
Gross profit
$
41,849

 
$
47,183

 
$
(5,334
)
(11
)%
As a percentage of net revenue (“gross margin”)
52.2
%
 
52.4
%
 
(0.2
)%
 

Our gross margins are dependent upon, among other factors, the proportion of software sales, product mix, customer mix, product introduction costs, price reductions granted to customers and achievement of cost reductions.
Despite a decrease in revenue, gross margin in the three months ended March 29, 2019 remained relatively flat compared to the corresponding period in 2018. This was due to consistently maintaining a higher composition of software in the overall product mix for the quarter.

Research and Development
The following table presents the research and development expenses and the expenses as a percentage of net revenue for the three months ended March 29, 2019 and March 30, 2018 (in thousands, except percentages):
 
Three months ended
 
 
 
 
March 29, 2019
 
March 30, 2018
 
Q1 FY19 vs Q1 FY18
Research and development
$
21,401

 
$
23,457

 
$
(2,056
)
(9
)%
As a percentage of net revenue
26.7
%
 
26.0
%
 
 
 
Our research and development expenses consist primarily of employee salaries and related expenses, contractors and outside consultants, supplies and materials, equipment depreciation and facilities costs, all associated with the design and development of new products and enhancements of existing products.
Research and development expenses decreased 9% in the three months ended March 29, 2019 compared to the corresponding period in 2018, primarily due to lower employee compensation costs due to headcount reductions primarily in our Video segment, our continuing transformation from a capital-intensive hardware development model to a predominantly software development model and lower stock-based compensation expense due to timing of certain grants.
 

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Selling, General and Administrative
The following table presents the selling, general and administrative expenses and the expenses as a percentage of net revenue for the three months ended March 29, 2019 and March 30, 2018 (in thousands, except percentages):
 
Three months ended
 
 
 
 
March 29, 2019
 
March 30, 2018