QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 2019
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-33486
INFINERA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
77-0560433
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
140 Caspian Court Sunnyvale, CA
94089
(Address of principal executive offices)
(Zip Code)
(408) 572-5200
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
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 x 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 x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
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 x
Securities registered pursuant to Section 12(b) of the Act:
Common shares, par value $0.001 per share
INFN
The Nasdaq Global Select Market
(Title of each class)
(Trading symbol)
(Name of exchange on which registered)
As of May 4, 2019, 177,780,904 shares of the registrant’s Common Stock, $0.001 par value, were issued and outstanding.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Basis of Presentation and Significant Accounting Policies
Basis of Presentation
Infinera Corporation (the “Company”) prepared its interim condensed consolidated financial statements that accompany these notes in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”), consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2018.
The Company has made certain estimates, assumptions and judgments that can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Significant estimates, assumptions and judgments made by management include revenue recognition, stock-based compensation, employee benefit and pension plans, inventory valuation, accrued warranty, operating lease liabilities, business combinations, fair value measurement of investments and accounting for income taxes. Other less significant estimates, assumptions and judgments made by management include allowances for sales returns, allowances for doubtful accounts, useful life of intangible assets, and property, plant and equipment. Management believes that the estimates and judgments upon which they rely are reasonable based upon information available to them at the time that these estimates and judgments are made. To the extent there are material differences between these estimates and actual results, the Company’s condensed consolidated financial statements will be affected.
The interim financial information is unaudited, but reflects all adjustments that are, in management’s opinion, necessary to provide a fair presentation of results for the interim periods presented. All adjustments are of a normal recurring nature. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.
This interim information should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2018.
The Company reclassified certain amounts reported in previous periods to conform to the current presentation. Effective in the fourth quarter of 2018, the Company elected to present amortization of intangible assets and acquisition and integration costs as separate line items within cost of revenue and operating expenses. As a result, the costs previously reflected in cost of revenue and operating expenses were reclassified to amortization of intangible assets and acquisition and integration costs within total cost of revenue and total operating expenses. Prior period amounts have been revised to conform to the current period presentation. This change in presentation does not affect the Company's total cost of revenue or total operating expenses.
9
The following table shows reclassified amounts to conform to the current period's presentation:
Three Months Ended
March 31, 2018
Previously Reported
Change in Presentation Reclassification
Current Presentation
Cost of revenue:
Cost of product
$
107,665
$
(5,341
)
$
102,324
Cost of services
12,831
—
12,831
Amortization of intangible assets(1)
—
5,341
5,341
Restructuring and related
17
—
17
Total
$
120,513
$
—
$
120,513
Operating expenses:
Research and development
$
58,681
$
—
$
58,681
Sales and marketing
30,492
(1,607
)
28,885
General and administrative
17,836
—
17,836
Amortization of intangible assets(1)
—
1,607
1,607
Restructuring and related
(163
)
—
(163
)
Total
$
106,846
$
—
$
106,846
(1)
These lines were not previously reported in the consolidated statements of operations.
To date, a few of the Company’s customers have accounted for a significant portion of its revenue. For the three months ended March 30, 2019, one customer accounted for 11% of the Company's total revenue and for the corresponding period in 2018, two customers individually accounted for 29% and 11% of the Company's total revenue.
There have been no material changes in the Company’s significant accounting policies for the three months ended March 30, 2019 as compared to those disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2018, with the exception of the Company's lease accounting policy. Effective December 30, 2018, the Company adopted Accounting Standards Update 2016-02, “Leases (Topic 842)” ("Topic 842"). See Note 3, “Leases” to the Notes to Condensed Consolidated Financial Statements for discussion on the impact of the adoption of these standards on the Company's policy for leases.
2.
Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
In August 2018, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2018-15, “Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”). The update provides guidance for determining if a cloud computing arrangement is within the scope of internal-use software guidance, and would require capitalization of certain implementation costs. The Company adopted ASU 2018-15 in the first quarter of 2019. The Company's adoption of ASU 2018-15 did not have a significant impact on its consolidated financial statements.
In June 2018, the FASB issued Accounting Standards Update No. 2018-07, “Improvements to Non-employee Share-Based Payment Accounting” (“ASU 2018-07”), which simplifies the accounting for share-based payments granted to non-employees for goods and services. Under ASU 2018-07, certain guidance on such payments to non-employees is aligned with the requirements for share-based payments granted to employees. The Company's adoption of ASU 2017-09 during its first quarter of 2019 did not have a significant impact on its consolidated financial statements.
In February 2016, the FASB issued Topic 842, which amends the existing accounting standards for leases. The new standard requires lessees to record a right-of-use asset and a corresponding lease liability on the balance sheet (with the exception of short-term leases). For lessees, leases will continue to be classified as either operating or financing in the income statement. The Company adopted Topic 842 in the first quarter of 2019 utilizing the modified retrospective transition method through a cumulative-effect adjustment at the beginning of the first quarter
10
of 2019. The Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to carryforward its historical lease classification, assessment on whether a contract was or contains a lease, and initial direct costs for leases that existed prior to December 30, 2018. The Company also elected to combine its lease and non-lease components and not recognize right-of-use (“ROU”) assets and lease liabilities for leases with an initial term of 12 months or less. The Company did not elect to apply the hindsight practical expedient when determining lease term and assessing impairment of ROU assets.
Accounting Pronouncements Not Yet Effective
In August 2018, the FASB issued Accounting Standards Update No. 2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU 2018-14”). The update eliminates, adds, and modifies certain disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. ASU 2018-14 is effective for the Company in its first quarter of 2020, with early adoption permitted. The Company is currently evaluating the impact the adoption of ASU 2018-14 will have on its consolidated financial statements.
In August 2018, the FASB issued Accounting Standards Update No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). The update eliminates, adds, and modifies certain disclosure requirements for fair value measurements. ASU 2018-13 is effective for the Company in its first quarter of 2020 and early adoption is permitted of the entire standard or only the provisions that eliminate or modify disclosure requirements. The Company is currently evaluating the impact the adoption of ASU 2018-13 will have on its consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, “Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). The guidance eliminates Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. ASU 2017-04 will be effective for the Company's annual or any interim goodwill impairment tests in its first quarter of fiscal 2020.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which requires measurement and recognition of expected credit losses for financial assets held. This guidance is effective for the Company in its first quarter of fiscal 2020 and early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on its consolidated financial statements.
3.
Leases
Effective December 30, 2018, the Company adopted Topic 842 using the alternative modified transition method, which requires a cumulative-effect adjustment, if any, to the opening balance of retained earnings to be recognized on the date of adoption with prior periods not restated.
The Company leases facilities under non-cancelable operating lease agreements. These leases have varying terms that range from one to 10 years and contain leasehold improvement incentives, rent holidays and escalation clauses. In addition, some of these leases have renewal options for up to five years.
The Company determines if an arrangement contains a lease at inception. Operating leases are included in operating lease ROU assets, accrued expenses and operating lease liabilities on the Company's consolidated balance sheets. The Company does not have any finance leases.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Variable lease payments are expensed as incurred and are not included within the ROU asset and lease liability calculation. Variable lease payments primarily include reimbursements of costs incurred by lessors for common area maintenance and utilities. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is
11
recognized on a straight-line basis over the lease term. The Company rents or subleases certain real estate under agreements that are classified as operating leases.
Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company does not account for lease components (e.g., fixed payments including rent) separately from the non-lease components (e.g., common-area maintenance costs).
Adoption of Topic 842
The primary impact for the Company was the balance sheet recognition of operating lease ROU asset and operating lease liabilities. In addition, the Company's financing lease obligations that historically did not qualify for sale leaseback accounting under ASC 840-40, “Leases - Sale-Leaseback Transactions” (“ASC 840-40”) now meet the criteria for sale under Topic 842 and are recorded as operating leases. As a result, the Company reclassified financing liabilities of $198.3 million from accrued expenses and long-term financing lease obligations and assets of $174.6 million from property, plant and equipment, net, to $23.8 million accumulated deficit adjustment reflecting the cumulative effect of an accounting change related to the sale-leasebacks.
The following table summarizes the impacts of adopting Topic 842 on the Company's condensed consolidated balance sheet as of December 29, 2018 (in thousands):
As Reported Balance as of December 29, 2018
Adjustments due to Topic 842
As Adjusted Balance as of December 29, 2018
Assets
Property, plant and equipment, net
$
342,820
$
(174,386
)
$
168,434
Operating lease right-of-use assets
$
—
$
78,855
$
78,855
Other non-current assets
$
14,849
$
(4,884
)
$
9,965
Liabilities
Accrued expenses and other current liabilities
$
131,891
$
(7,343
)
$
124,548
Long-term financing lease obligation
$
193,538
$
(193,538
)
$
—
Other long-term liabilities
$
68,082
$
(4,907
)
$
63,175
Operating lease liabilities - short-term
$
—
$
19,209
$
19,209
Operating lease liabilities - long-term
$
—
$
62,467
$
62,467
Equity
Accumulated deficit
$
956,970
$
(23,697
)
$
933,273
The Company has operating leases for real estate and automobiles. During the three months ended March 30, 2019, operating lease expense was approximately $16.2 million (including $10.2 million of accelerated rent expense due to restructuring resulting in abandonment of lease facilities). Variable lease cost, short-term lease cost and sublease income were immaterial during the three months ended March 30, 2019.
The following table presents maturity of lease liabilities under our non-cancelable operating leases as of March 30, 2019 (in thousands):
Remainder of 2019
$
18,190
2020
21,047
2021
13,663
2022
11,409
2023
8,984
Thereafter
29,033
Total lease payments(1)
$
102,326
Less: interest(2)
24,137
Present value of lease liabilities
$
78,189
12
(1)
Operating lease payments exclude $3.2 million of legally binding minimum lease payments for leases signed but not yet commenced.
(2)
Calculated using the interest rate for each lease.
The following table presents supplemental information for the three months ended March 30, 2019 (in thousands, except for weighted average):
Weighted average remaining lease term
5.1 years
Weighted average discount rate
8.6
%
Cash paid for amounts included in the measurement of lease liabilities
$
6,471
Operating cash flow from operating leases
$
6,471
Leased assets obtained in exchange for new operating lease liabilities
$
1,666
In addition, the Company has operating leases for office space that had not commenced as of March 30, 2019. The legally binding minimum lease payments for these leases is $3.2 million. The term of these leases is three years.
ASC 840-40 Disclosures
The following table presents future minimum lease payments related to the non-cancelable portion of operating leases as of December 29, 2018 (in thousands):
2019
2020
2021
2022
2023
Thereafter
Total
Operating lease payments
$
18,352
$
14,047
$
7,888
$
5,926
$
4,905
$
18,303
$
69,421
Financing Lease Obligations
The Company evaluated two sale-leaseback transactions that were executed by Coriant in the past and assumed by the Company in the Acquisition (as defined in Note 7, "Business Combination" to the Notes to Condensed Consolidated Financial Statements). It was determined that these transactions did not qualify for sale-leaseback accounting under ASC 840-40.
The Company leases a facility (land and all attached real property) in Naperville, Illinois that was sold to a third party and subsequently leased back. This was determined to be a failed sale-leaseback due to a $31.5 million imposition reimbursement payment to be made over 10 years, which was linked to the total building income generated each year. As a result of purchase accounting, the financing lease obligation was recorded at the present value of the remaining lease payments and expected value of the facility at the end of the occupancy period. The financing lease obligation will continue to be amortized over the remaining period of the lease term. The assets will continue to be depreciated over their remaining useful lives under ASC 840-40.
Additionally, the Company leases a facility (land and all attached real property) in Finland, which was sold to a third party and subsequently leased back. The lease was determined to be a failed sale-leaseback due to the deposit being considered a form of collateral. The amount of the deposit was equal to one year of rental payments, whereas typical deposits are approximately two to three months of rental payments. As a result of purchase accounting, the financing lease obligation was recorded at the present value of the remaining lease payments and expected value of the facility at the end of the occupancy period. The financing lease obligation will continue to be amortized over the remaining period of the lease term under ASC 840-40. The assets will continue to be depreciated over their remaining useful lives.
In the first quarter of 2019, in conjunction with the adoption of the new lease accounting standard, the transactions qualified for sale-leaseback accounting under Topic 842, as control of the underlying assets was transferred to the lessor. As such, the balances of fixed assets, accrued expenses and other long-term liabilities as of the transition date related to the Naperville, Illinois and Finland leases were reclassified to accumulated deficit as a cumulative effect of an accounting change.
13
4. Revenue Recognition
Capitalization of Costs to Obtain a Contract
The ending balance of the Company’s capitalized costs to obtain a contract as of March 30, 2019 and December 29, 2018 were $0.3 million and $0.4 million, respectively. The Company's amortization expense was not material for the three months ended March 30, 2019 and March 31, 2018.
Disaggregation of Revenue
The following table presents the Company's revenue disaggregated by revenue source (in thousands):
Three Months Ended
March 30, 2019
March 31, 2018
Product
$
223,007
$
171,629
Services
69,700
31,052
Total revenue
$
292,707
$
202,681
The Company sells its products directly to customers who are predominantly service providers and to channel partners that sell on its behalf. The following tables present the Company's revenue disaggregated by geography, based on the shipping address of the customer and by sales channel (in thousands):
Three Months Ended
March 30, 2019
March 31, 2018
United States
$
132,522
$
129,025
Other Americas
15,132
5,215
Europe, Middle East and Africa
98,992
59,199
Asia Pacific
46,061
9,242
Total revenue
$
292,707
$
202,681
Three Months Ended
March 30, 2019
March 31, 2018
Direct
$
248,196
$
188,462
Indirect
44,511
14,219
Total revenue
$
292,707
$
202,681
Contract Balances
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers (in thousands):
March 30, 2019
December 29, 2018
Accounts receivable, net
$
267,117
$
317,115
Contract assets
$
18,837
$
24,981
Deferred revenue
$
126,071
$
120,302
Revenue recognized for the three months ended March 30, 2019 that was included in the deferred revenue balance at the beginning of the reporting period was $36.8 million. Changes in the contract asset and liability balances during the three months ended March 30, 2019 were not materially impacted by other factors.
14
Transaction Price Allocated to the Remaining Performance Obligation
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially satisfied) at the end of the reporting period (in thousands):
Remainder of 2019
2020
2021
2022
2023
Thereafter
Total
Revenue expected to be recognized in the future as of March 30, 2019
$
335,418
$
78,284
$
28,268
$
5,436
$
3,041
$
1,148
$
451,595
5. Fair Value Measurements
Pursuant to the accounting guidance for fair value measurements and its subsequent updates, fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
Valuation techniques used by the Company are based upon observable and unobservable inputs. Observable or market inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions about market participant assumptions based on the best information available. Observable inputs are the preferred source of values. These two types of inputs create the following fair value hierarchy:
Level 1
–
Quoted prices in active markets for identical assets or liabilities.
Level 2
–
Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3
–
Prices or valuations that require management inputs that are both significant to the fair value measurement and unobservable.
The Company measures its cash equivalents, foreign currency exchange forward contracts and marketable debt securities at fair value and classifies its investments in accordance with the fair value hierarchy. The Company’s money market funds and U.S. treasuries are classified within Level 1 of the fair value hierarchy and are valued based on quoted prices in active markets for identical securities.
The Company classifies its certificates of deposit, commercial paper, U.S. agency notes, corporate bonds and foreign currency exchange forward contracts within Level 2 of the fair value hierarchy as follows:
Certificates of Deposit
The Company reviews market pricing and other observable market inputs for the same or similar securities obtained from a number of industry standard data providers. In the event that a transaction is observed for the same or similar security in the marketplace, the price on that transaction reflects the market price and fair value on that day. In the absence of any observable market transactions for a particular security, the fair market value at period end would be equal to the par value. These inputs represent quoted prices for similar assets or these inputs have been derived from observable market data.
Commercial Paper
The Company reviews market pricing and other observable market inputs for the same or similar securities obtained from a number of industry standard data providers. In the event that a transaction is observed for the same or similar security in the marketplace, the price on that transaction reflects the market price and fair value on that day and then follows a revised accretion schedule to determine the fair market value at period end. In the absence of any observable market transactions for a particular security, the fair market value at period end is derived by accreting from the last observable market price. These inputs represent quoted prices for similar assets or these inputs have been derived from observable market data accreted mathematically to par.
The Company reviews trading activity and pricing for its U.S. agency notes as of the measurement date. When sufficient quoted pricing for identical securities is not available, the Company uses market pricing and other observable market inputs for similar securities obtained from a number of industry standard data providers. These inputs represent quoted prices for similar assets in active markets or these inputs have been derived from observable market data.
Corporate Bonds
The Company reviews trading activity and pricing for each of the corporate bond securities in its portfolio as of the measurement date and determines if pricing data of sufficient frequency and volume in an active market exists in order to support Level 1 classification of these securities. If sufficient quoted pricing for identical securities is not available, the Company obtains market pricing and other observable market inputs for similar securities from a number of industry standard data providers. In instances where multiple prices exist for similar securities, these prices are used as inputs into a distribution-curve to determine the fair market value at period end.
Foreign Currency Exchange Forward Contracts
As discussed in Note 6, “Derivative Instruments” to the Notes to Condensed Consolidated Financial Statements, the Company mainly holds non-speculative foreign exchange forward contracts to hedge certain foreign currency exchange exposures. The Company estimates the fair values of derivatives based on quoted market prices or pricing models using current market rates. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit risk, foreign exchange rates, and forward and spot prices for currencies.
The following tables represent the Company’s fair value hierarchy for its assets and liabilities measured at fair value on a recurring basis (in thousands):
As of March 30, 2019
As of December 29, 2018
Fair Value Measured Using
Fair Value Measured Using
Level 1
Level 2
Total
Level 1
Level 2
Total
Assets
Money market funds
$
904
$
—
$
904
$
10,347
$
—
$
10,347
Corporate bonds
—
16,022
16,022
—
23,512
23,512
U.S. agency notes
—
—
—
—
2,999
2,999
U.S. treasuries
—
—
—
23,987
—
23,987
Total assets
$
904
$
16,022
$
16,926
$
34,334
$
26,511
$
60,845
Liabilities
Foreign currency exchange forward contracts
$
—
$
(30
)
$
(30
)
$
—
$
(91
)
$
(91
)
During the three months ended March 30, 2019, there were no transfers of assets or liabilities between Level 1 and Level 2 of the fair value hierarchy. As of March 30, 2019 and December 29, 2018, none of the Company’s existing securities were classified as Level 3 securities.
The Company classifies certain facilities-related charges within Level 3 of the fair value hierarchy and applies fair value accounting on a nonrecurring basis when impairment indicators exist or upon the existence of observable fair values. The fair values are classified as Level 3 measurements due to the significance of unobservable inputs. These analyses require management to make assumptions and estimates regarding industry and economic factors, future operating results and discount rates.
In the fourth quarter of 2017, the Company implemented a plan to restructure its worldwide operations (the “2017 Restructuring Plan”). As a result of the 2017 Restructuring Plan, the Company calculated the fair value of its facilities-related charges of $7.3 million, based on estimated future discounted cash flows and unobservable inputs, which included the amount and timing of estimated sublease rental receipts that the Company could reasonably obtain over the remaining lease term and the discount rate. During the first half of 2018, the Company revised the estimates to its facilities-related accruals. See Note 10, “Restructuring and Related Costs” to the Notes to Condensed Consolidated Financial Statements for more information.
Cash, Cash Equivalents and Investments
Cash, cash equivalents and investments were as follows (in thousands):
March 30, 2019
Adjusted
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Cash
$
166,355
$
—
$
—
$
166,355
Money market funds
904
—
—
904
Total cash and cash equivalents
$
167,259
$
—
$
—
$
167,259
Corporate bonds
16,048
—
(26
)
16,022
Total short-term investments
$
16,048
$
—
$
(26
)
$
16,022
Total cash, cash equivalents and investments
$
183,307
$
—
$
(26
)
$
183,281
December 29, 2018
Adjusted
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Cash
$
168,620
$
—
$
—
$
168,620
Money market funds
10,347
—
—
10,347
U.S. treasuries
23,986
1
—
23,987
Total cash and cash equivalents
$
202,953
$
1
$
—
$
202,954
Corporate bonds
23,603
—
(91
)
23,512
U.S. agency notes
3,000
—
(1
)
2,999
Total short-term investments
$
26,603
$
—
$
(92
)
$
26,511
Total cash, cash equivalents and investments
$
229,556
$
1
$
(92
)
$
229,465
As of March 30, 2019, the Company’s available-for-sale investments have contractual maturity terms of up to 6 months. Gross realized gains and losses on investments were insignificant in all periods. The specific identification method is used to account for gains and losses on available-for-sale investments.
As of March 30, 2019, the Company had $183.3 million of cash, cash equivalents and short-term investments, including $70.2 million of cash and cash equivalents held by its foreign subsidiaries. The Company's cash in foreign locations is used for operational and investing activities in those locations, and the Company does not currently have the need or the intent to repatriate those funds to the United States.
6. Derivative Instruments
Foreign Currency Exchange Forward Contracts
The Company transacts business in various foreign currencies and has international sales, cost of sales, and expenses denominated in foreign currencies, and carries foreign-currency-denominated monetary assets and liabilities, subjecting the Company to foreign currency risk. The Company’s primary foreign currency risk management objective is to protect the U.S. dollar value of future cash flows and minimize the volatility of reported earnings. The Company utilizes foreign currency exchange forward contracts, primarily short term in nature.
17
The Company periodically enters into foreign currency exchange forward contracts to manage its exposure to fluctuation in foreign exchange rates that arise from its euro and British pound denominated receivables and restricted cash balances. Gains and losses on these contracts are intended to offset the impact of foreign exchange rate fluctuations on the underlying foreign currency denominated accounts receivables and restricted cash, and therefore, do not subject the Company to material balance sheet risk.
The Company also enters into foreign currency exchange forward contracts to reduce the volatility of cash flows primarily related to forecasted revenues and expenses denominated in euros, British pound and Swedish kronor (“SEK”). The contracts are settled at maturity and at rates agreed to at inception of the contracts. The gains and losses on these foreign currency derivatives are recorded to the consolidated statement of operations line item, in the current period, to which the item that is being economically hedged is recorded.
For the three months ended March 30, 2019 and March 31, 2018, the before-tax effect of the foreign currency exchange forward contracts was a net gain of $0.7 million and a loss $0.6 million, respectively. In each of these periods, the impact of the gross gains and losses was offset by foreign exchange rate fluctuations on the underlying foreign currency denominated amounts.
As of March 30, 2019, the Company did not designate foreign currency exchange forward contracts as hedges for accounting purposes and accordingly, changes in the fair value are recorded in the accompanying condensed consolidated statements of operations. These contracts were entered into with one high-quality institution and the Company consistently monitors the creditworthiness of the counterparties.
The fair value of derivative instruments not designated as hedging instruments in the Company’s condensed consolidated balance sheets was as follows (in thousands):
As of March 30, 2019
As of December 29, 2018
Gross Notional(1)
Other Accrued Liabilities
Gross Notional(1)
Other Accrued Liabilities
Foreign currency exchange forward contracts
Related to euro denominated receivables
$
41,242
$
(30
)
$
40,068
$
(52
)
Related to British pound denominated receivables
$
—
—
$
6,412
(38
)
Related to euro denominated restricted cash
$
236
—
$
240
(1
)
$
(30
)
$
(91
)
(1)
Represents the face amounts of forward contracts that were outstanding as of the end of the period noted.
Accounts Receivable Factoring
The Company sells certain designated trade account receivables based on factoring arrangements to a large international banking institution. Pursuant to the terms of the arrangements, the Company accounts for these transactions in accordance with ASC 860, “Transfers and Servicing.” The Company's factor purchases trade accounts receivables on a non-recourse basis and without any further obligations. Trade accounts receivables balances sold are removed from the consolidated balance sheets and cash received are reflected as cash provided by operating activities in the consolidated statements of cash flow. The difference between the fair value of the Company's trade receivables and the proceeds received is recorded as interest expense in the Company's condensed consolidated statements of operations, and for the three months ended March 30, 2019, the Company's recognized factoring related interest expense was approximately $0.2 million. The gross amount of trade accounts receivables sold for the three months ended March 30, 2019, totaled approximately $24.4 million. The Company did not enter into any factoring arrangements during the three months ended March 31, 2018.
18
7. Business Combination
On October 1, 2018 (the “Acquisition Date”), the Company completed the acquisition of all the outstanding limited liability company interests of Telecom Holding Parent LLC (“Coriant”), a Delaware limited liability company (the “Acquisition”). The Acquisition positions the Company as one of the largest providers of vertically integrated transport networking solutions in the world, enhances the Company's ability to serve a global customer base and accelerates delivery of the innovative solutions its customers demand. This Acquisition also positions the Company to expand the breadth of customer applications it can address, including metro aggregation and switching, disaggregated transport and routing, and software-enabled multi-layer network management and control. The Acquisition was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, “Business Combinations” and consisted of the following (in thousands):
Cash(1)
$
154,192
Equity consideration(2)
129,628
Total
$
283,820
(1)
Cash consideration of $154.2 million includes $10.0 million that the Company held in escrow as of December 29, 2018.
(2)
Based on the closing price of the Company's common stock of $6.18 on October 1, 2018, the $129.6 million equity consideration represents the fair value of approximately 21 million shares of the Company's common stock issued to Coriant shareholders in accordance with the Purchase Agreement.
The Company financed the cash portion of the purchase price of the Acquisition with the net proceeds from its offering of $402.5 million in aggregate principal amount of its 2.125% convertible senior notes due September 1, 2024 (the “2024 Notes”). See Note 13, “Debt” to the Notes to Condensed Consolidated Financial Statements for more information regarding the 2024 Notes.
The Company allocated the fair value of the purchase price of the Acquisition to the tangible and intangible assets acquired as well as liabilities assumed, based on their estimated fair values. The excess of the purchase price over the fair values of these identifiable assets and liabilities was recorded as goodwill.
The Company prepared an initial determination of the fair value of assets acquired and liabilities assumed as of the Acquisition Date using preliminary information. In accordance with Accounting Standards Codification 805, "Business Combinations," during the measurement period an acquirer retrospectively adjusts the provisional amounts recognized at the Acquisition Date to reflect information obtained about facts and circumstances that existed as of the Acquisition Date that, if known, would have affected the measurement of the amounts recognized as of the Acquisition Date. Accordingly, the Company has recognized measurement period adjustments made during the first quarter of 2019 to the fair value of certain assets acquired and liabilities assumed as a result of additional information obtained. None of the adjustments had a material impact on the Company's financial results.
19
The following table summarizes the Company’s preliminary allocation of the purchase consideration based on the fair value of assets acquired and liabilities assumed at the Acquisition Date (in thousands):
Amounts
Recognized as of Acquisition Date
Measurement Period Adjustments
Total
Cash and cash equivalents
$
15,549
$
—
$
15,549
Restricted cash
25,743
—
25,743
Accounts receivable
170,466
—
170,466
Inventory
96,067
—
96,067
Property, plant and equipment, net
217,991
—
217,991
Other assets
39,145
—
39,145
Intangible assets, net
200,700
—
200,700
Goodwill
48,235
503
48,738
Financing lease obligation
(194,700
)
—
(194,700
)
Deferred revenue
(43,502
)
211
(43,291
)
Other liabilities
(291,874
)
(714
)
(292,588
)
Total net assets
$
283,820
$
—
$
283,820
The Company expects to finalize the allocation of the purchase consideration as soon as practicable, pending finalization of income taxes and any other adjustments related to acquired assets or liabilities, but no later than 12 months from the Acquisition Date.
The following table presents details of the identifiable assets acquired at the Acquisition Date (in thousands, except estimated useful life):
Fair Value
Estimated Useful Life
(In Years)
Customer relationships and backlog
$
111,400
8
Developed technology
70,550
5
In-process technology
17,750
n/a
Trade name
1,000
1
Total
$
200,700
Goodwill generated from this business combination is primarily attributable to the synergies from combining the operations of Coriant with that of the Company, which resulted in strengthening the Company's ability to serve a global customer base and accelerate delivery of product solutions. The goodwill recorded in the Acquisition is not expected to be deductible for income tax purposes.
8. Goodwill and Intangible Assets
Goodwill
Goodwill is recorded when the purchase price of an acquisition exceeds the fair value of the net tangible and identified intangible assets acquired.
The following table presents details of the Company’s goodwill during the three months ended March 30, 2019 (in thousands):
Balance as of December 29, 2018
$
227,231
Adjustment to goodwill acquired
503
Foreign currency translation adjustments
(6,217
)
Balance as of March 30, 2019
$
221,517
20
The gross carrying amount of goodwill may change due to the effects of foreign currency fluctuations as a portion of these assets are denominated in foreign currency. To date, the Company has zero accumulated impairment loss on goodwill.
Intangible Assets
The following tables present details of the Company’s intangible assets as of March 30, 2019 and December 29, 2018 (in thousands, except for weighted average):
March 30, 2019
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Weighted Average Remaining Useful Life (In Years)
Intangible assets with finite lives:
Trade names
$
1,000
$
(500
)
$
500
NMF*
Customer relationships
156,486
(48,453
)
108,033
3.5
Developed technology
163,024
(73,343
)
89,681
1.6
Total intangible assets with finite lives
$
320,510
$
(122,296
)
$
198,214
5.1
In-process technology
17,750
—
17,750
Total intangible assets
$
338,260
$
(122,296
)
$
215,964
December 29, 2018
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Weighted Average Remaining Useful Life (In Years)
Intangible assets with finite lives:
Trade names
$
1,000
$
(250
)
$
750
NMF*
Customer relationships
158,110
(42,478
)
115,632
3.5
Developed technology
166,355
(67,368
)
98,987
1.7
Total intangible assets with finite lives
$
325,465
$
(110,096
)
$
215,369
5.2
In-process technology
17,750
—
17,750
Total intangible assets
$
343,215
$
(110,096
)
$
233,119
*NMF = Not meaningful
The gross carrying amount of intangible assets and the related amortization expense of intangible assets may change due to the effects of foreign currency fluctuations as a portion of these assets are denominated in foreign currency. Amortization expense was $15.3 million for the three months ended March 30, 2019 and was $6.9 million for the corresponding period in 2018.
Intangible assets are carried at cost less accumulated amortization. Amortization expenses are recorded to the appropriate cost and expense categories.
The following table summarizes the Company’s estimated future amortization expense of intangible assets with finite lives as of March 30, 2019 (in thousands):
Fiscal Years
Total
Remainder of 2019
2020
2021
2022
2023
2024 and Thereafter
Total future amortization expense
$
198,214
$
44,554
$
42,096
$
29,558
$
27,031
$
21,131
$
33,844
9. Balance Sheet Details
Restricted Cash
The Company’s restricted cash balance is primarily comprised of certificates of deposit and money market funds, of which the majority is not insured by the Federal Deposit Insurance Corporation. These amounts primarily
collateralize the Company’s issuances of standby letters of credit and bank guarantees. Additionally, the Company's restricted cash balance includes amounts pledged as collateral on its derivative instruments.
The following table provides details of selected balance sheet items (in thousands):
March 30 2019
December 29 2018
Inventory
Raw materials
$
82,528
$
74,435
Work in process
63,004
57,232
Finished goods
186,963
180,221
Total inventory
$
332,495
$
311,888
Property, plant and equipment, net
Computer hardware
$
16,556
$
15,633
Computer software(1)
35,752
40,923
Laboratory and manufacturing equipment
305,866
304,889
Land and building
12,352
187,184
Furniture and fixtures
2,601
2,587
Leasehold and building improvements
44,956
46,038
Construction in progress
38,579
32,997
Subtotal
$
456,662
$
630,251
Less accumulated depreciation and amortization
(295,516
)
(287,431
)
Total property, plant and equipment, net
$
161,146
$
342,820
Accrued expenses and other current liabilities
Loss contingency related to non-cancelable purchase commitments
$
26,458
$
26,042
Professional and other consulting fees
9,046
10,442
Taxes payable
19,643
23,249
Accrued rebate and customer prepay liability
14,453
14,301
Restructuring accrual
30,977
13,097
Acquisition related funds in escrow
—
10,000
Short-term financing lease obligation
—
4,718
Short-term operating lease liability
18,240
—
Other accrued expenses and other current liabilities
22,270
30,042
Total accrued expenses
$
141,087
$
131,891
(1)
Included in computer software at March 30, 2019 and December 29, 2018 were $14.6 million and $13.1 million, respectively, related to enterprise resource planning (“ERP”) systems that the Company implemented. The unamortized ERP costs at March 30, 2019 and December 29, 2018 were $4.8 million and $3.9 million, respectively.
10. Restructuring and Related Costs
In December of 2018, the Company implemented a restructuring initiative (the “2018 Restructuring Plan”) as part of a comprehensive review of the Company's operations and ongoing integration activities in order to optimize resources for future growth, improve efficiencies and address redundancies following the Acquisition. As part of the 2018 Restructuring Plan, the Company hopes to reduce expenses, streamline the organization, and eliminate fixed costs to align more closely with its needs going forward. The Company expects to incur additional restructuring during 2019 as it progresses with the 2018 Restructuring Plan. The Company expects to substantially complete activities under the 2018 Restructuring Plan by the end of 2019.
In the fourth quarter of 2017, the Company implemented the 2017 Restructuring Plan in order to reduce expenses and establish a more cost-effective structure that better aligns the Company's operations with its long-term strategies.
The following table presents restructuring and other related costs included in cost of revenue and operating expenses in the accompanying consolidated statements of operations under the 2018 Restructuring Plan, Coriant's previous restructuring and reorganization plans, and the 2017 Restructuring Plan (in thousands):
Three Months Ended
March 30, 2019
Cost of
Revenue
Operating Expenses
Severance and related expenses
$
20,698
$
5,850
Accelerated amortization of lease assets due to cease use
—
11,338
Asset impairment
768
—
Total
$
21,466
$
17,188
Three Months Ended
March 31, 2018
Cost of
Revenue
Operating Expenses
Severance and related expenses
$
17
$
945
Facilities
—
(1,084
)
Asset impairment
—
(24
)
Total
$
17
$
(163
)
Restructuring liabilities are reported within accrued expenses, operating lease liabilities and other long-term liabilities in the accompanying condensed consolidated balance sheets (in thousands):
December 29, 2018
Charges
Cash
Non-cash Settlements and Other
March 30, 2019
Severance and related expenses
$
19,842
$
26,548
$
(6,203
)
$
(1,356
)
$
38,831
Accelerated amortization of lease assets due to cease use
11,338
(11,338
)
—
Facilities
4,266
—
—
(4,266
)
—
Asset impairment
243
768
(140
)
(768
)
103
Total
$
24,351
$
38,654
$
(6,343
)
$
(17,728
)
$
38,934
As of March 30, 2019, the Company's restructuring liability was comprised of $38.8 million severance and related expenses, primarily due to the planned closure of the Company's Berlin, Germany manufacturing facility, which is being transitioned to a third-party manufacturer. The Company has committed funding from a third party to cover the costs associated with the planned closure of this facility.
11. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss includes certain changes in equity that are excluded from net loss. The following table sets forth the changes in accumulated other comprehensive income (loss) by component for the three months ended March 30, 2019 (in thousands):
Unrealized Loss on Other Available-for-Sale Securities
Foreign Currency Translation
Accumulated Tax Effect
Actuarial Gain (Loss) on Pension
Total
Balance at December 29, 2018
$
(91
)
$
(18,932
)
$
(964
)
$
(5,313
)
$
(25,300
)
Net current-period other comprehensive income (loss)
Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed using net loss and the weighted average number of common shares outstanding plus potentially dilutive common shares outstanding during the period. Potentially dilutive common shares include the assumed exercise of outstanding stock options, assumed release of outstanding restricted stock units (“RSUs”) and performance stock units (“PSUs”), and assumed issuance of common stock under the Company's Employee Stock Purchase Plan (“ESPP”) using the treasury stock method. Potentially dilutive common shares also include the assumed conversion of the 2024 Notes from the conversion spread (as further discussed in Note 13, “Debt” to the Notes to Condensed Consolidated Financial Statements). The Company would include the dilutive effects of the 2024 Notes in the calculation of diluted net income per common share if the average market price is above the conversion price. Upon conversion of the 2024 Notes, it is the Company’s intention to pay cash equal to the lesser of the aggregate principal amount or the conversion value of the 2024 Notes being converted, therefore, only the conversion spread relating to the 2024 Notes would be included in the Company’s diluted earnings per share calculation unless their effect is anti-dilutive. The Company includes the common shares underlying PSUs in the calculation of diluted net income per common share only when they become contingently issuable.
The following table sets forth the computation of net loss per common share – basic and diluted (in thousands, except per share amounts):
Three Months Ended
March 30, 2019
March 31, 2018
Net loss
$
(121,601
)
$
(26,280
)
Weighted average common shares outstanding - basic and diluted
176,406
150,333
Net loss per common share - basic and diluted
$
(0.69
)
$
(0.17
)
The Company incurred net losses during the three months ended March 30, 2019 and March 31, 2018, and as a result, potential common shares from stock options, RSUs, PSUs and the assumed release of outstanding shares under the ESPP were not included in the diluted shares used to calculate net loss per share, as their inclusion would have been anti-dilutive. Additionally, due to the net loss position during these periods, the Company excluded the potential shares issuable upon conversion of the 2024 Notes and the $150.0 million in aggregate principal amount of its 1.75% convertible senior notes due June 1, 2018 (the “2018 Notes”) in the calculation of diluted earnings per share as their inclusion would have been anti-dilutive.
The following sets forth the potentially dilutive shares excluded from the computation of the diluted net loss per share because their effect was anti-dilutive (in thousands):
In March 2019, the Company mortgaged a property it owns. The Company received proceeds of $8.7 million in connection with the loan. The loan carries a fixed interest rate of 5.25% and is repayable in 59 equal monthly installments of approximately $0.1 million each with the remaining unpaid principal balance plus accrued unpaid interest due five years from the date of the loan. Payments commenced in April 2019. As of March 30, 2019, no payments had been made and the entire balance of $8.7 million remained outstanding, of which $0.4 million was included in accrued expenses and other current liabilities and $8.3 million was included in long-term debt.
2.125% Convertible Senior Notes due September 1, 2024
In September 2018, the Company issued the 2024 Notes due on September 1, 2024, unless earlier repurchased, redeemed or converted. The 2024 Notes are governed by a base indenture dated as of September 11, 2018 and a first supplemental indenture dated as of September 11, 2018 (together, the “Indenture”), between the Company and U.S. Bank National Association, as trustee. The 2024 Notes are unsecured, and the Indenture does not contain any financial covenants or any restrictions on the payment of dividends, the incurrence of senior debt or other indebtedness, or the issuance or repurchase of the Company's other securities by the Company.
Interest is payable semi-annually in arrears on March 1 and September 1 of each year, which commenced on March 1, 2019. The net proceeds to the Company were approximately $391.4 million, of which approximately $48.9 million was used to pay the cost of the capped call transactions with certain financial institutions (“Capped Calls”). The Company also used a portion of the remaining net proceeds to fund the cash portion of the purchase price of the Acquisition, including fees and expenses relating thereto, and intends to use the remaining net proceeds for general corporate purposes.
The Capped Calls have an initial strike price of $9.87 per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2024 Notes. The Capped Calls have initial cap prices of $15.19 per share, subject to certain adjustments. The Capped Calls cover, subject to anti-dilution adjustments, 40.8 million shares of common stock. The capped call transactions are expected generally to reduce or offset potential dilution to the Company's common stock upon any conversion of the 2024 Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted 2024 Notes, as the case may be, with such reduction and/or offset subject to a cap. The Capped Calls expire on various dates between July 5, 2024 and August 29, 2024. The Capped Calls were recorded as a reduction of the Company’s stockholders’ equity in the accompanying condensed consolidated balance sheets.
Upon conversion, it is the Company’s intention to pay cash equal to the lesser of the aggregate principal amount or the conversion value of the 2024 Notes. For any remaining conversion obligation, the Company intends to pay or deliver, as the case may be, either cash, shares of its common stock, or a combination of cash and shares of its common stock, at the Company’s election. The initial conversion rate is 101.2812 shares of common stock per $1,000 principal amount of 2024 Notes, subject to anti-dilution adjustments, which is equivalent to a conversion price of approximately $9.87 per share of common stock.
Throughout the term of the 2024 Notes, the conversion rate may be adjusted upon the occurrence of certain events, including for any cash dividends. Holders of the 2024 Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a 2024 Note. Accrued but unpaid interest will be deemed to be paid in full upon conversion rather than canceled, extinguished or forfeited. Prior to June 1, 2024, holders may convert their 2024 Notes under the following circumstances:
•
during any fiscal quarter commencing after the fiscal quarter ended on December 29, 2018 (and only during such fiscal quarter) if the last reported sale price of the 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 on each applicable trading day;
•
during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of 2024 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;
if the Company calls the 2024 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date;
•
upon the occurrence of specified corporate events described under the Indenture, such as a consolidation, merger or binding share exchange; or
•
at any time on or after June 1, 2024 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2024 Notes at any time, regardless of the foregoing circumstances.
If the Company undergoes a fundamental change as defined in the Indenture governing the 2024 Notes, holders may require the Company to repurchase for cash all or any portion of their 2024 Notes at a repurchase price equal to 100% of the principal amount of the 2024 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, upon the occurrence of a “make-whole fundamental change” (as defined in the Indenture), the Company may, in certain circumstances, be required to increase the conversion rate by a number of additional shares for a holder that elects to convert its 2024 Notes in connection with such make-whole fundamental change.
The net carrying amounts of the debt obligation were as follows (in thousands):
March 30, 2019
December 29, 2018
Principal
$
402,500
$
402,500
Unamortized discount (1)
(123,023
)
(127,264
)
Unamortized issuance cost (1)
(8,030
)
(8,307
)
Net carrying amount
$
271,447
$
266,929
(1)
Unamortized debt conversion discount and issuance costs will be amortized over the remaining life of the 2024 Notes, which is approximately 66 months.
As of March 30, 2019, the carrying amount of the equity component of the 2024 Notes was $128.7 million.
In accounting for the issuance of the 2024 Notes, the Company separated the 2024 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the 2024 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense over the term of the 2024 Notes.
The Company allocated the total issuance costs incurred to the liability and equity components of the 2024 Notes based on their relative values. Issuance costs attributable to the liability component were recorded as a reduction to the liability portion of the 2024 Notes and will be amortized as interest expense over the term of the 2024 Notes. The issuance costs attributable to the equity component were netted with the equity component in stockholders’ equity.
The Company recorded a deferred tax liability of $30.9 million in connection with the issuance of the 2024 Notes, and a corresponding reduction in valuation allowance. The impact of both was recorded to stockholders' equity.
The Company determined that the embedded conversion option in the 2024 Notes does not require separate accounting treatment as a derivative instrument because it is both indexed to the Company’s own stock and would be classified in stockholders’ equity if freestanding.
The following table sets forth total interest expense recognized related to the 2024 Notes (in thousands):
Three Months Ended
March 30, 2019
Contractual interest expense
$
2,138
Amortization of debt issuance costs
277
Amortization of debt discount
4,241
Total interest expense
$
6,656
For the three months ended March 30, 2019, the debt discount and debt issuance costs were amortized, using an annual effective interest rate of 10.07%, to interest expense over the term of the 2024 Notes.
As of March 30, 2019, the fair value of the 2024 Notes was $318.0 million. The fair value was determined based on the quoted bid price of the 2024 Notes in an over-the-counter market on March 29, 2019. The 2024 Notes are classified as Level 2 of the fair value hierarchy.
Based on the closing price of the Company’s common stock of $4.34 on March 29, 2019 (last trading day of the fiscal quarter), the if-converted value of the 2024 Notes did not exceed their principal amount.
1.75% Convertible Senior Notes due June 1, 2018
In May 2013, the Company issued the 2018 Notes, which matured on June 1, 2018. Upon maturity of the 2018 Notes, the Company repaid in full all $150.0 million in aggregate principal amount and the final coupon interest of $1.3 million.
The following table sets forth total interest expense recognized related to the 2018 Notes (in thousands):
Three Months Ended
March 31, 2018
Contractual interest expense
$
656
Amortization of debt issuance costs
239
Amortization of debt discount
2,779
Total interest expense
$
3,674
The coupon rate was 1.75%. For the three months ended March 31, 2018, the debt discount and debt issuance costs were amortized, using an annual effective interest rate of 10.23%, to interest expense over the term of the 2018 Notes.
14. Stockholders’ Equity
Stock-based Compensation Plans
The Company has stock-based compensation plans pursuant to which the Company has granted stock options, RSUs and PSUs. The Company also has an ESPP for all eligible employees.
In February 2016, the Company's board of directors adopted the 2016 Equity Incentive Plan (“2016 Plan”) and the Company's stockholders approved the 2016 Plan in May 2016. As of March 30, 2019, the Company has reserved a total of 15.4 million shares of common stock for issuance of stock options, RSUs and PSUs to employees, non-employees, consultants and members of the Company's board of directors, pursuant to the 2016 Plan, plus any shares subject to awards granted under the Company’s 2007 Equity Incentive Plan (the “2007 Plan”) that, after the effective date of the 2016 Plan, expire, are forfeited or otherwise terminate without having been exercised in full to the extent such awards were exercisable, and shares issued pursuant to awards granted under the 2007 Plan that, after the effective date of the 2016 Plan, are forfeited to or repurchased by the Company due to failure to vest. The 2016 Plan has a maximum term of 10 years from the date of adoption, or it can be earlier terminated by the Company's board of directors. The 2007 Plan was canceled; however, it continues to govern outstanding grants under the 2007 Plan.
The following tables summarize the Company’s equity award activity and related information (in thousands, except per share data):
Number of Stock
Options
Weighted Average
Exercise
Price
Per Share
Aggregate
Intrinsic
Value
Outstanding at December 29, 2018
1,115
$
8.09
$
—
Stock options granted
—
$
—
Stock options exercised
—
$
—
$
—
Stock options canceled
(145
)
$
7.05
Outstanding at March 30, 2019
970
$
8.24
$
—
Exercisable at March 30, 2019
970
$
8.24
$
—
Number of
Restricted
Stock Units
Weighted
Average
Grant Date
Fair Value
Per Share
Aggregate
Intrinsic
Value
Outstanding at December 29, 2018
6,746
$
10.83
$
26,446
RSUs granted
6,236
$
4.33
RSUs released
(139
)
$
11.20
$
669
RSUs canceled
(370
)
$
11.15
Outstanding at March 30, 2019
12,473
$
7.56
$
54,132
Number of
Performance
Stock Units
Weighted
Average
Grant Date
Fair Value
Per Share
Aggregate
Intrinsic
Value
Outstanding at December 29, 2018
1,129
$
16.10
$
4,425
PSUs granted
1,650
$
4.15
PSUs released
—
$
—
$
—
PSUs canceled
(180
)
$
16.50
Outstanding at March 30, 2019
2,599
$
8.15
$
11,280
Expected to vest at March 30, 2019
1,666
$
7,230
The aggregate intrinsic value of unexercised stock options is calculated as the difference between the closing price of the Company’s common stock of $4.34 at March 29, 2019 (the last trading day of the fiscal quarter) and the exercise prices of the underlying stock options. The aggregate intrinsic value of the stock options that have been exercised is calculated as the difference between the fair market value of the common stock at the date of exercise and the exercise price of the underlying stock options.
The aggregate intrinsic value of unreleased RSUs and unreleased PSUs is calculated using the closing price of the Company's common stock of $4.34 at March 29, 2019 (the last trading day of the fiscal quarter). The aggregate intrinsic value of RSUs and PSUs released is calculated using the fair market value of the common stock at the date of release.
The following table presents total stock-based compensation cost for instruments granted but not yet amortized, net of estimated forfeitures, of the Company’s equity compensation plans as of March 30, 2019. These costs are expected to be amortized on a straight-line basis over the following weighted-average periods (in thousands, except for weighted average period):
The Company did not grant any stock options during the three months ended March 30, 2019. Amortization of stock-based compensation related to stock options in the three months ended March 30, 2019 and the corresponding period in 2018 was insignificant.
Employee Stock Purchase Plan
The fair value of the shares was estimated at the date of grant using the following assumptions (expense amounts in thousands):
Three Months Ended
Employee Stock Purchase Plan
March 30, 2019
March 31, 2018
Volatility
72%
62%
Risk-free interest rate
2.48%
1.90%
Expected life
0.5 years
0.5 years
Estimated fair value
$1.77
$3.13
Total stock-based compensation expense
$1,316
$1,555
Restricted Stock Units
During the three months ended March 30, 2019, the Company granted RSUs to employees and members of the Company's board of directors representing the right to receive 6.2 million shares of the Company’s common stock. All RSUs awarded are subject to each individual's continued service to the Company through each applicable vesting date. The Company accounted for the fair value of the RSUs using the closing market price of the Company’s common stock on the date of grant. Amortization of stock-based compensation related to RSUs in the three months ended March 30, 2019 and the corresponding period of 2018 was approximately $6.0 million and $7.4 million, respectively.
Performance Stock Units
Pursuant to the 2007 Plan and the 2016 Plan, the Company has granted PSUs to certain of the Company’s executive officers, senior management and other employees. All PSUs awarded are subject to each individual's continued service to the Company through each applicable vesting date and if the performance metrics are not met within the time limits specified in the award agreements, the PSUs will be canceled.
PSUs granted to the Company’s executive officers and senior management under the 2007 Plan during 2016 are based on the total stockholder return (“TSR”) of the Company's common stock price as compared to the TSR of the S&P North American Technology Multimedia Networking Index (“SPGIIPTR”) over the span of one year, two years and three years. The number of shares to be issued upon vesting of these PSUs range from zero to two times the target number of PSUs granted depending on the Company’s performance against the SPGIIPTR.
PSUs granted to the Company’s executive officers and senior management under the 2016 Plan during 2017 and the first half of 2018 are based on the TSR of the Company's common stock price relative to the TSR of the individual companies listed in the SPGIIPTR over the span of one year, two years and three years. The number of shar