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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 June 29, 2018

¨
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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. (Check one): 
Large accelerated filer
¨
Accelerated filer
ý
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
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
The number of shares of the registrant’s Common Stock, $.001 par value, outstanding on July 27, 2018 was 86,031,433.


Table of Contents

TABLE OF CONTENTS
 
 
 
 
 
 
 

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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARMONIC INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except per share data)
 
June 29, 2018
 
December 31, 2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
54,098

 
$
57,024

Accounts receivable, net
82,635

 
69,844

Inventories
22,994

 
25,976

Prepaid expenses and other current assets
19,377

 
18,931

Total current assets
179,104

 
171,775

Property and equipment, net
25,631

 
29,265

Goodwill
241,176

 
242,827

Intangibles, net
17,010

 
21,279

Other long-term assets
42,863

 
42,913

Total assets
$
505,784

 
$
508,059

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Other debts and capital lease obligations, current
$
1,723

 
$
7,610

Accounts payable
28,992

 
33,112

Income taxes payable
560

 
233

Deferred revenue
56,278

 
52,429

Accrued and other current liabilities
51,221

 
48,705

Total current liabilities
138,774

 
142,089

Convertible notes, long-term
111,702

 
108,748

Other debts and capital lease obligations, long-term
14,318

 
15,336

Income taxes payable, long-term
1,086

 
917

Other non-current liabilities
19,169

 
22,626

Total liabilities
285,049

 
289,716

Commitments and contingencies (Note 15)

 

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; 85,439 and 82,554 shares issued and outstanding at June 29, 2018 and December 31, 2017, respectively
85

 
83

Additional paid-in capital
2,283,649

 
2,272,690

Accumulated deficit
(2,062,988
)
 
(2,057,812
)
Accumulated other comprehensive income (loss)
(11
)
 
3,382

Total stockholders’ equity
220,735

 
218,343

Total liabilities and stockholders’ equity
$
505,784

 
$
508,059

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

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HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
 
Three months ended
 
Six months ended
 
June 29, 2018
 
June 30, 2017
 
June 29, 2018
 
June 30, 2017
Revenue:
 
 
 
 
 
 
 
Product
$
60,599

 
$
50,190

 
$
115,973

 
$
100,594

Service
38,561

 
32,125

 
73,314

 
64,664

Total net revenue
99,160

 
82,315

 
189,287

 
165,258

Cost of revenue:
 
 
 
 
 
 
 
Product
31,251

 
32,005

 
57,860

 
58,107

Service
16,306

 
16,495

 
32,641

 
32,928

Total cost of revenue
47,557

 
48,500

 
90,501

 
91,035

Total gross profit
51,603

 
33,815

 
98,786

 
74,223

Operating expenses:
 
 
 
 
 
 
 
Research and development
21,542

 
27,055

 
44,999

 
51,937

Selling, general and administrative
27,988

 
32,625

 
59,151

 
67,256

Amortization of intangibles
800

 
780

 
1,604

 
1,554

Restructuring and related charges
631

 
777

 
1,717

 
2,056

Total operating expenses
50,961

 
61,237

 
107,471

 
122,803

Income (loss) from operations
642

 
(27,422
)
 
(8,685
)
 
(48,580
)
Interest expense, net
(2,863
)
 
(2,680
)
 
(5,620
)
 
(5,270
)
Other income (expense), net
199

 
(819
)
 
(333
)
 
(1,330
)
Loss before income taxes
(2,022
)
 
(30,921
)
 
(14,638
)
 
(55,180
)
Provision for income taxes
891

 
579

 
1,969

 
347

Net loss
$
(2,913
)
 
$
(31,500
)
 
$
(16,607
)
 
$
(55,527
)
 
 
 
 
 
 
 
 
Net loss per share:
 
 
 
 
 
 
 
Basic and diluted
$
(0.03
)
 
$
(0.39
)
 
$
(0.20
)
 
$
(0.69
)
Shares used in per share calculation:
 
 
 
 
 
 
 
Basic and diluted
85,304

 
80,590

 
84,616

 
80,203

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

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HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited, in thousands)
 
Three months ended
 
Six months ended
 
June 29, 2018
 
June 30, 2017
 
June 29, 2018
 
June 30, 2017
Net loss
$
(2,913
)
 
$
(31,500
)
 
$
(16,607
)
 
$
(55,527
)
Other comprehensive income (loss) before tax:
 
 
 
 
 
 
 
Change in unrealized loss on available-for-sale securities:
 
 
 
 
 
 
 
Unrealized loss arising during the period

 
(114
)
 

 
(613
)
Change in foreign currency translation adjustments
(4,758
)
 
3,994

 
(3,024
)
 
4,883

Other comprehensive income (loss) before tax
(4,758
)
 
3,880

 
(3,024
)
 
4,270

Less: Provision for income taxes
369

 

 
369

 
2

Other comprehensive income (loss), net of tax
(5,127
)
 
3,880

 
(3,393
)
 
4,268

Total comprehensive loss
$
(8,040
)
 
$
(27,620
)
 
$
(20,000
)
 
$
(51,259
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

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HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Six months ended
 
June 29, 2018
 
June 30, 2017
Cash flows from operating activities:
 
 
 
Net loss
$
(16,607
)
 
$
(55,527
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Amortization of intangibles
4,194

 
4,144

Depreciation
6,771

 
7,139

Stock-based compensation
8,769

 
7,387

Amortization of discount on convertible debt and issuance cost
2,954

 
2,676

Restructuring, asset impairment and loss on retirement of fixed assets
93

 
228

Amortization of non-cash warrant
395

 
416

Deferred income taxes, net
530

 
(38
)
Foreign currency adjustments
(1,042
)
 
1,131

Provision for excess and obsolete inventories
822

 
5,094

Allowance for doubtful accounts and returns
623

 
3,274

Other non-cash adjustments, net
64

 
189

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(13,572
)
 
23,479

Inventories
2,000

 
2,912

Prepaid expenses and other assets
1,897

 
5,933

Accounts payable
(4,187
)
 
1,434

Deferred revenue
9,378

 
1,308

Income taxes payable
503

 
228

Accrued and other liabilities
(337
)
 
(8,793
)
Net cash provided by operating activities
3,248

 
2,614

Cash flows from investing activities:
 
 
 
Proceeds from maturities of investments

 
3,106

Proceeds from sales of investments

 
3,792

Purchases of property and equipment
(3,181
)
 
(5,943
)
Net cash (used in) provided by investing activities
(3,181
)
 
955

Cash flows from financing activities:
 
 
 
Proceeds from other debts and capital leases

 
164

Repayment of other debts and capital leases
(6,176
)
 
(6,650
)
Proceeds from common stock issued to employees
2,366

 
2,117

Payment of tax withholding obligations related to net share settlements of restricted stock units
(54
)
 
(2,726
)
Net cash used in financing activities
(3,864
)
 
(7,095
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(588
)
 
935

Net decrease in cash, cash equivalents and restricted cash
(4,385
)
 
(2,591
)
Cash, cash equivalents and restricted cash at beginning of period
58,757

 
57,420

Cash, cash equivalents and restricted cash at end of period
$
54,372

 
$
54,829

 
 
 
 
Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets

 
 
 
Cash and cash equivalents
$
54,098

 
$
52,885

Restricted cash included in prepaid expenses and other current assets
274

 
802

Restricted cash included in other long-term assets

 
1,142

    Total cash, cash equivalents and restricted cash
$
54,372

 
$
54,829


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

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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 on March 5, 2018 (the “2017 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, 2018, 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, 2017 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 Securities and Exchange Commission (“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.
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.
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.
Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2 to its audited Consolidated Financial Statements included in the 2017 Form 10-K. There have been no significant changes to these policies during the six months ended June 29, 2018 other than those disclosed in Note 2, “Recently Adopted Accounting Pronouncements”.

NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements

ASC Topic 606, “Revenue from Contracts with Customers”

On January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers (“Topic 606”), using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for the reporting period beginning January 1, 2018 are presented under Topic 606, while prior period amounts are not restated and continue to be reported in accordance with our historic accounting under ASC 605, Revenue Recognition (“Topic 605”).

Under Topic 606, the Company began to recognize a contract asset for satisfied performance obligations that do not provide the Company with an unconditional right to consideration, which was restricted under the previous standard. In addition, the Company changed its revenue recognition for professional services from a completed contract method to a percentage of completion method.


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The cumulative effect of initially applying Topic 606 to the Company’s condensed consolidated balance sheet on January 1, 2018 was as follows (in thousands):
CONDENSED CONSOLIDATED BALANCE SHEETS
Balance as of December 31, 2017
 
Cumulative Impact from Adopting Topic 606
 
Balance as of January 1, 2018
ASSETS
 
 
 
 
 
Accounts receivable, net
$
69,844

 
$
1,781

 
$
71,625

Prepaid expenses and other current assets
18,931

 
3,578

 
22,509

Other long-term assets
42,913

 
773

 
43,686

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
Deferred revenue
$
52,429

 
$
(4,826
)
 
$
47,603

Other non-current liabilities
22,626

 
(473
)
 
22,153

Accumulated deficit
(2,057,812
)
 
11,431

 
(2,046,381
)

The impact from adopting Topic 606 on the Company’s condensed consolidated financial statements was as follows (in thousands):
 
Three months ended June 29, 2018
 
Six months ended June 29, 2018
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
As Reported
 
Previous Accounting Guidance
 
Impact from Adopting Topic 606
 
As Reported
 
Previous Accounting Guidance
 
Impact from Adopting Topic 606
Total net revenue
$
99,160

 
$
98,714

 
$
446

 
$
189,287

 
$
188,037

 
$
1,250

Total cost of revenue
47,557

 
47,316

 
241

 
90,501

 
90,141

 
360

Total gross profit
51,603

 
51,398

 
205

 
98,786

 
97,896

 
890

Operating expenses:
 
 
 
 


 
 
 
 
 
 
Selling, general and administrative
27,988

 
28,570

 
(582
)
 
59,151

 
59,541

 
(390
)
Income (loss) from operations
642

 
(145
)
 
787

 
(8,685
)
 
(9,965
)
 
1,280

Loss before income taxes
(2,022
)
 
(2,809
)
 
787

 
(14,638
)
 
(15,918
)
 
1,280

Net loss
(2,913
)
 
(3,700
)
 
787

 
(16,607
)
 
(17,887
)
 
1,280

 
As of June 29, 2018
CONDENSED CONSOLIDATED BALANCE SHEETS
As Reported
 
Previous Accounting Guidance
 
Impact from Adopting Topic 606
ASSETS
 
 
 
 
 
Accounts receivable, net
82,635

 
78,065

 
$
4,570

Prepaid expenses and other current assets
19,377

 
15,918

 
3,459

Other long-term assets
42,863

 
42,360

 
503

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
Deferred revenue
56,278

 
60,032

 
(3,754
)
Other non-current liabilities
19,169

 
19,594

 
(425
)
Accumulated deficit
(2,062,988
)
 
(2,075,699
)
 
12,711



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Revenue Recognition

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 media processing solutions.

Revenue from contracts with customers is recognized using the following five steps:

a) Identify the contract(s) with a customer;
b) Identify the performance obligations in the contract;
c) Determine the transaction price;
d) Allocate the transaction price to the performance obligations in the contract; and
e) Recognize revenue when (or as) the Company satisfies a performance obligation.

A contract contains a promise (or promises) to transfer goods or services to a customer. A performance obligation is a promise (or a group of promises) that is distinct. The transaction price is the amount of consideration a Company expects to be entitled from a customer in exchange for providing the goods or services.

The unit of account for revenue recognition is a performance obligation (a good or service). A contract may contain one or more performance obligations. Performance obligations are accounted for separately if they are distinct. A good or service is distinct if the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and the good or service is distinct in the context of the contract. Otherwise performance obligations will be combined with other promised goods or services until the Company identifies a bundle of goods or services that is distinct.

The transaction price is allocated to all the separate performance obligations in an arrangement. It reflects the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services, which may include an estimate of variable consideration to the extent that it is probable of not being subject to significant reversals in the future based on the Company’s experience with similar arrangements. The transaction price also reflects the impact of the time value of money if there is a significant financing component present in an arrangement. The transaction price excludes amounts collected on behalf of third parties, such as sales taxes.

Revenue is recognized when the Company satisfies each performance obligation by transferring control of the promised goods or services to the customer. Goods or services can transfer at a point in time or over time depending on the nature of the arrangement.

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. Our payment terms vary by the type and location of our 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, we require payment before the products or services are delivered to the customer. During the three and six months ended June 29, 2018, the Company recognized $24.1 million and $44.0 million of revenue, respectively, that were included in Deferred revenue at the beginning of each respective period.

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 are reported as a component of “Prepaid expenses and other current assets” on the Condensed Consolidated Balance Sheets. See Note 6, “Balance Sheet Components’ for additional information.

Shipping and handling costs are accounted for as a fulfillment cost and are recorded in cost of revenue in the Company’s Condensed Consolidated Statements of Operations.

Hardware and Software. Revenue from the sale of hardware and software products is recognized when the control is transferred. For most of the Company’s product sales (including sales to distributors and system integrators), the control is transferred at the time the product is shipped or delivery has occurred because the customer has significant risks and rewards of ownership of the asset and the Company has a present right to payment at that time. The Company’s agreements with the distributors and system integrators have terms which are generally consistent with the standard terms and conditions for the sale of the Company’s equipment to end users, and do not provide for product rotation or pricing allowances, as are typically

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found in agreements with stocking distributors. We offer trade-in rights which are specifically identified and accrued for at the end of the period through contra-revenue.

Arrangements with Multiple Performance Obligations. The Company has revenue arrangements that include multiple performance obligations. The Company allocates transaction price to all separate performance obligations based on their relative standalone selling prices (“SSP”). 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 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 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 offered 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.

Solution Sales. Solution sales for the design, manufacture, test, integration and installation of products, including equipment acquired from third parties to be integrated with Harmonic’s products, that are customized to meet the customer’s specifications are accounted for based on the percentage-of-completion basis, using the input method. Some of our arrangements may include acceptance provisions that require testing of the solution against specific performance criteria. The Company performs a detailed evaluation to determine whether the arrangement involves performance criteria based on our standard performance criteria. The Company has a long-standing history of entering into contractual arrangements to deliver the solution sales based on standard performance criteria. For this type of arrangement, we consider the customer acceptance clause not substantive and recognize product revenue when the customer takes possession on the product and recognize service on a percentage-of-completion basis. However, if the solution results in significant production, modification or customization, we consider the arrangement as a single performance obligation and recognize the revenue at a point in time, depending on the complexity of the solution and nature of acceptance.

Professional services. Revenue from professional services is recognized over time, on the percentage-of-completion basis using the input method.

Input method. The use of the input method requires the Company to make reasonably dependable estimates. We use the input method based on labor hours, where revenue is calculated based on the percentage of total hours incurred in relation to total estimated hours at completion of the contract. The input method is reasonable because the hours best reflect the Company’s efforts toward satisfying the performance obligation over time. As circumstances change over time, the Company updates its measure of progress to reflect any changes in the outcome of the performance obligation. Such changes to an entity’s measure of progress are accounted for as a change in accounting estimates.

Support and maintenance. Support and maintenance services are satisfied ratably over time as the customer simultaneously receives and consumes the benefits of the services. As a result, support and maintenance revenue is recognized on a straight line basis over the period of the contract.

Contract costs. The incremental costs of obtaining a contract are capitalized if the costs are expected to be recovered. Costs that are recognized as assets are amortized straight-line over the period as the related goods or services transfer to the customer. Costs incurred to fulfill a contract are capitalized if they are not covered by other relevant guidance, relate directly to a contract, will be used to satisfy future performance obligations, and are expected to be recovered.

The Company recorded a net decrease to the opening balance of accumulated deficit of $1.4 million as of January 1, 2018 for capitalizing contract costs due to the cumulative impact of adopting Topic 606 for sales commissions related to customer contracts with an amortization period in excess of one year. Anticipated contract renewals, amendments, and follow-on contracts with the same customer are considered when determining the period of amortization.

The net capitalized contract costs as of June 29, 2018 were $1.8 million, of which $1.3 million and $0.5 million were reported as components of “Prepaid expenses and other current assets” and “Other long-term assets” on the Condensed Consolidated Balance Sheets, respectively. The amortization of the capitalized contract costs during the three and six months ended June 29, 2018 was $0.3 million and $0.5 million, respectively.


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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.

Practical Expedients and Exemptions. Under Topic 606, incremental costs of obtaining a contract such as sales commissions are capitalized if they are expected to be recovered, and amortized on a straight-line basis. Expensing these costs as incurred is not permitted unless they qualify for a practical expedient. Other than capitalized costs of obtaining subscription contracts which are amortized regardless of the life of expected amortization period, the Company elected the practical expedient to expense the costs to obtain all other contracts as incurred, when the life of the expected amortization period is one year or less by using a portfolio approach.

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.

The Company elected the practical expedient that allows the Company to not assess a contract for a significant financing component if the period between the customer’s payment and the transfer of the goods or services is one year or less.

See Note 14, “Segment Information” for further disaggregated revenue information.

Other Recently Adopted Accounting Pronouncements

In January 2016, the Financial Accounting Standards Board (“FASB) issued Accounting Standards Updated (“ASU”) No. 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities, which requires equity investments to be measured at fair value with changes in fair value recognized in net income and simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. The Company adopted this new standard in the first quarter of fiscal 2018, and the adoption did not have a material impact on its condensed consolidated financial statements. See Note 3, “Investments in Equity Securities” for additional information.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires entities to present the aggregate changes in cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, the statement of cash flows will be required to present restricted cash and restricted cash equivalents as a part of the beginning and ending balances of cash and cash equivalents. The Company adopted this new standard in the first quarter of fiscal 2018 on a retrospective basis. The Company’s total restricted cash balance was $0.3 million and $1.7 million as of June 29, 2018 and December 31, 2017, respectively. The Company’s total restricted cash balance was $1.9 million and $1.8 million as of June 30, 2017 and December 31, 2016, respectively. These restricted cash balances are presented as a part of the ending and beginning balances of cash, cash equivalents and restricted cash on the Company’s Condensed Consolidated Statements of Cash Flows for the corresponding periods. See Note 6, “Balance Sheet Components” for additional information.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The objective of ASU 2017-01 is to clarify the definition of a business in order to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. The Company adopted this new standard in the first quarter of fiscal 2018, and the adoption had no impact on its condensed consolidated financial statements.

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Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to amend the existing accounting standard for lease accounting. Under this guidance, lessees and lessors should apply a “right-of-use” model in accounting for all leases (including subleases) and eliminate the concept of operating leases and off-balance sheet leases. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The new ASU will be effective for the Company beginning in the first quarter of fiscal 2019 and early adoption is permitted. The Company will be required to recognize the right-of-use assets and liabilities of operating leases upon adoption of the new guidance. The Company continues to evaluate the effect of adopting this guidance on its consolidated financial statements and related disclosures.

In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which amends ASC Topic 842 to provide another transition method, allowing a cumulative effect adjustment to the opening balance of retained earnings during the period of adoption.

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.

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 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 new ASU will be effective for the Company beginning in the first quarter of fiscal 2019 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.

NOTE 3: INVESTMENTS IN EQUITY SECURITIES
Vislink

In 2014, the Company acquired a 3.3% interest in Vislink plc (“Vislink”), a U.K. public company listed on the AIM exchange, for $3.3 million. On February 3, 2017, Vislink completed the disposal of its hardware division and changed its name to Pebble Beach Systems (“PBS”). The Company does not have significant influence over PBS’s operational and financial policies. The carrying value of the investment in PBS was fully written off as of December 31, 2017.

Beginning the first quarter of fiscal 2018, the Company adopted ASU No. 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities, which requires equity investments to be measured at fair value with changes in fair value recognized in net income. As a result of adopting this new standard, the Company started measuring the investment in PBS at fair value based on its quoted stock price on the AIM exchange. The Company recorded a gain on change in fair value of the investment in PBS to Other income (expense), net of $0.2 million and $0.2 million during both the three and six months ended June 29, 2018.


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Unconsolidated Variable Interest Entities (“VIE”)

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 June 29, 2018 that the EDC investment was impaired.

NOTE 4: 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 income (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
Six months ended
 
Financial Statement Location
 
June 29, 2018
 
June 30, 2017
June 29, 2018
 
June 30, 2017
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Losses recognized in income
Other income (expense), net
 
$
(1,268
)
 
$
(53
)
$
(1,382
)
 
$
(185
)
The U.S. dollar equivalents of all outstanding notional amounts of foreign currency forward contracts, including the Euro, British pound, Israeli shekel and Japanese yen, are summarized as follows (in thousands):

 
June 29, 2018
 
December 31, 2017
Derivatives not designated as hedging instruments:
 

 

Purchase
 
$
24,743

 
$
12,875

Sell
 
$
1,658

 
$
1,509


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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
 
June 29, 2018
 
December 31, 2017
 
Balance Sheet Location
 
June 29, 2018
 
December 31, 2017
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
 
Prepaid expenses and other current assets
 
$
14

 
$
33

 
Accrued and other current liabilities
 
$
298

 
$
4

Total derivatives
 
 
 
$
14

 
$
33

 
 
 
$
298

 
$
4

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 June 29, 2018, information related to the offsetting arrangements was as follows (in thousands):
 
 
 
 
 
 
 
 
Gross Amounts of Derivatives Not Offset in the Condensed Consolidated Balance Sheets
 
 
 
 
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
 
Financial Instrument
 
Net Amount
Derivative assets
 
$
14

 

 
$
14

 
$
(14
)
 
$

Derivative liabilities
 
$
298

 

 
$
298

 
$
(14
)
 
$
284

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 and as of June 29, 2018, the total compensating balance maintained was $1.0 million.


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Table of Contents

NOTE 5: 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 June 29, 2018
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$

 
$

 
$

 
$

Derivative assets

 
14

 

 
14

Other long-term assets
 
 
 
 
 
 
 
Long-term investment
178

 

 

 
178

Total assets measured and recorded at fair value
$
178

 
$
14

 
$

 
$
192

Accrued and other current liabilities
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
298

 
$

 
$
298

Total liabilities measured and recorded at fair value
$

 
$
298

 
$

 
$
298

 
Level 1
 
Level 2
 
Level 3
 
Total
As of December 31, 2017
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$
22

 
$

 
$

 
$
22

Prepaid expenses and other current assets
 
 
 
 
 
 
 
Derivative assets

 
33

 

 
33

Total assets measured and recorded at fair value
$
22

 
$
33

 
$

 
$
55

Accrued and other current liabilities
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
4

 
$

 
$
4

Total liabilities measured and recorded at fair value
$

 
$
4

 
$

 
$
4


The Company’s liability for the TVN VDP (as defined below) was $3.4 million and $5.1 million as of June 29, 2018 and December 31, 2017, 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. There has been no recurring fair value re-measurement for this liability subsequently based on the applicable accounting guidance. See Note 8, “Restructuring and related charges-TVN VDP,” for additional information on the Company’s TVN VDP liabilities.


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Table of Contents

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.
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 $133.6 million and $129.9 million as of June 29, 2018 and December 31, 2017, respectively, and represents a Level 2 valuation. The Company’s other debts assumed from the 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 capital leases, outstanding as of June 29, 2018 and December 31, 2017 were in the aggregate of $15.5 million and $21.8 million, respectively. (See Note 9, “Convertible Notes, Other debts and Capital Leases” for additional information).
During the six months ended June 29, 2018, there were no nonrecurring fair value measurements of assets and liabilities subsequent to initial recognition.

NOTE 6: BALANCE SHEET COMPONENTS
The following tables provide details of selected balance sheet components (in thousands):
 
June 29, 2018

December 31, 2017
Accounts receivable, net:
 
 
 
Accounts receivable
$
86,253

 
$
74,475

Less: allowances for doubtful accounts and sales returns
(3,618
)
 
(4,631
)
     Total
$
82,635

 
$
69,844


 
June 29, 2018

December 31, 2017
Prepaid expenses and other current assets:
 
 
 
Deferred cost of revenue
$
7,688

 
$
4,440

Prepaid maintenance, royalty, rent, property taxes and value added tax
3,753

 
3,867

  Contract assets(1)
2,704

 

  Capitalized commission
1,293

 

Restricted cash(2)
274

 
530

  French R&D tax credits receivable(3)
103

 
6,609

Other
3,562

 
3,485

Total
$
19,377

 
$
18,931

(1) Contract assets reflect the satisfied performance obligations for which the Company does not yet have an unconditional right to consideration.
(2) Amounts represent cash collateral security for certain bank guarantees. These restricted funds are invested in bank deposits and cannot be withdrawn from the Company’s accounts without the prior written consent of the applicable secured party.
(3) 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 June 29, 2018 were approximately $24.0 million and are expected to be recoverable from 2018 through 2022 with $0.1 million reported as a component of “Prepaid expenses and other current assets” and $23.9 million reported as a component of “Other long-term assets” on the Company’s Condensed Consolidated Balance Sheets.


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Table of Contents

 
June 29, 2018

December 31, 2017
Inventories:
 
 
 
Raw materials
$
1,973

 
$
2,881

Work-in-process
755

 
933

Finished goods
8,871

 
10,130

Service-related spares
11,395

 
12,032

Total
$
22,994

 
$
25,976


 
June 29, 2018
 
December 31, 2017
Property and equipment, net:
 
 
 
   Machinery and equipment
$
88,129

 
$
87,121

   Capitalized software
35,527

 
35,139

   Leasehold improvements
14,978

 
15,051

   Furniture and fixtures
6,499

 
6,534

      Property and equipment, gross
145,133

 
143,845

      Less: accumulated depreciation and amortization
(119,502
)
 
(114,580
)
         Total
$
25,631

 
$
29,265


 
June 29, 2018
 
December 31, 2017
Other long-term assets:
 
 
 
   R&D tax credits receivable
$
23,940

 
$
22,322

   Deferred tax assets
9,563

 
10,462

   Equity investment
3,771

 
3,593

   Others(1)
5,589

 
6,536

      Total
$
42,863

 
$
42,913

(1) As of December 31, 2017, the Company had approximately $1.2 million of restricted cash for the bank guarantee associated with the TVN French Subsidiary’s office building lease. The restriction was subsequently released and accordingly, the amount was reclassified to “Cash and cash equivalents” in the six months ended June 29, 2018.
 
June 29, 2018
 
December 31, 2017
Accrued and other current liabilities:
 
 
 
   Accrued employee compensation and related expenses
$
15,750

 
$
16,414

   Customer deposits
4,888

 
5,020

   Accrued warranty
4,647

 
4,381

   Contingent inventory reserves
3,700

 
3,806

   Accrued royalty payments
2,583

 
2,195

   Accrued TVN VDP, current(1)
2,446

 
3,186

   Accrued Avid litigation settlement, current
1,500

 

   Others
15,707

 
13,703

      Total
$
51,221

 
$
48,705


(1) See Note 8, “Restructuring and related charges-TVN VDP,” for additional information on the Company’s TVN VDP liabilities.






17


NOTE 7: 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 in the fiscal fourth quarter, or more frequently, if events or changes in circumstances indicate that the asset is more likely than not impaired. The Company performed its annual goodwill impairment review at the reporting unit level as of October 31, 2017, with no goodwill impairment indicated. There were no events or circumstances which triggered additional impairment reviews for the periods presented.

The changes in the carrying amount of goodwill by reportable segments for the six months ended June 29, 2018 were as follows (in thousands):
 
Video
 
Cable Access
 
Total
Balance as of December 31, 2017
$
182,012

 
$
60,815

 
$
242,827

   Foreign currency translation adjustment
(1,633
)
 
(18
)
 
(1,651
)
Balance as of June 29, 2018
$
180,379

 
$
60,797

 
$
241,176


Intangible Assets
The following is a summary of intangible assets (in thousands):
 
 
 
June 29, 2018
 
December 31, 2017
 
Weighted Average Remaining Life (Years)
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Developed core technology
1.7
 
$
31,707

 
$
(22,985
)
 
$
8,722

 
$
31,707

 
$
(20,396
)
 
$
11,311

Customer relationships/contracts
2.7
 
44,690

 
(36,664
)
 
8,026

 
44,819

 
(35,205
)
 
9,614

Trademarks and trade names
1.7
 
630

 
(368
)
 
262

 
654

 
(300
)
 
354

Maintenance agreements and related relationships
n/a
 
5,500

 
(5,500
)
 

 
5,500

 
(5,500
)
 

Order Backlog
n/a
 
3,128

 
(3,128
)
 

 
3,177

 
(3,177
)
 

Total identifiable intangibles
 
 
$
85,655

 
$
(68,645
)
 
$
17,010

 
$
85,857

 
$
(64,578
)
 
$
21,279


Amortization expense for the identifiable purchased intangible assets for the three and six months ended June 29, 2018 and June 30, 2017 was allocated as follows (in thousands):
 
Three months ended
Six months ended
 
June 29,
2018
 
June 30,
2017
June 29,
2018
 
June 30,
2017
Included in cost of revenue
$
1,295

 
$
1,295

$
2,590

 
$
2,590

Included in operating expenses
800

 
780

1,604

 
1,554

Total amortization expense
$
2,095

 
$
2,075

$
4,194

 
$
4,144


18


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,
 
 
 
 
 
2018 (remaining six months)
$
2,590

 
$
1,584

 
$
4,174

2019
5,180

 
3,167

 
8,347

2020
951

 
3,036

 
3,987

2021

 
502

 
502

Total future amortization expense
$
8,721

 
$
8,289

 
$
17,010


NOTE 8: RESTRUCTURING AND RELATED CHARGES
The Company has implemented several restructuring plans in the past few years. 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.
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
Six months ended
 
June 29,
2018

June 30,
2017
June 29,
2018
 
June 30,
2017
Restructuring and related charges in:
 
 
 
 
 
 
Cost of revenue
$
115

 
$
278

$
877

 
$
786

Operating expenses - Restructuring and related charges
631

 
777

1,717

 
2,056

Total restructuring and related charges
$
746

 
$
1,055

$
2,594

 
$
2,842

As of June 29, 2018 and December 31, 2017, the Company’s total restructuring liability was $6.1 million and $8.0 million, respectively, of which $3.5 million and $4.4 million, respectively, were reported as a component of “Accrued and other current liabilities”, and the remaining $2.6 million and $3.6 million, respectively, were reported as a component of “Other non-current liabilities” on the Company’s Condensed Consolidated Balance Sheets.

Harmonic 2018 Restructuring

In the first quarter of 2018, the Company approved and implemented a restructuring plan (the “Harmonic 2018 Restructuring Plan”). The restructuring activities under this plan primarily include worldwide workforce reductions of the Company. As of June 29, 2018, the Company recorded an aggregate amount of $1.8 million of restructuring and related charges for severance and employee benefits for 55 employees worldwide, primarily in the United States and across all functions. The Company made $1.7 million in payments for this plan in the six months ended June 29, 2018, with the remaining $0.1 million liability outstanding at June 29, 2018. The activities under this plan are expected to be completed in 2018.

Harmonic 2017 Restructuring

In the third quarter of 2017, the Company implemented a restructuring plan (the “Harmonic 2017 Restructuring Plan”) to better align its operating costs with the continued decline in its net revenues. In 2017, the Company recorded $2.5 million of restructuring and related charges under this plan, consisting of $2.1 million of employee severance and $0.4 million related to the closure of one of the Company’s offices in New York. The activities under this plan were completed in 2017. As of June 29, 2018, the remaining $0.2 million liability outstanding relates to the accrual for the New York excess facility, which will be paid out over the remainder of the New York leased property’s term through August 2020.


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Table of Contents

Harmonic 2016 Restructuring

In the first quarter of 2016, the Company implemented a restructuring plan (the “Harmonic 2016 Restructuring Plan”) to reduce operating costs by consolidating duplicative resources in connection with the acquisition of Thomson Video Networks (“TVN”). The planned activities included global workforce reductions, exiting certain operating facilities and disposing of excess areas, and an employee voluntary departure plan in France (the “TVN VDP”).     

In 2016, the Company recorded an aggregate of $20.0 million of restructuring and related charges under the Harmonic 2016 Restructuring Plan, of which $2.2 million was primarily related to the Company exiting from an excess facility at its U.S. headquarters and the remaining $17.8 million was related to severance and benefits for the termination of 118 employees worldwide, including 83 employees in France who participated in the TVN VDP. The restructuring and related charges under the Harmonic 2016 Restructuring Plan in 2016 were partially offset by approximately $2.0 million of gain from TVN pension curtailment.

TVN VDP

The Company recorded $0.5 million and $1.8 million of TVN VDP costs in the six months ended June 29, 2018 and June 30, 2017, respectively. The TVN VDP liability balance as of June 29, 2018 was $3.8 million, payable from 2018 through 2020.

Excess Facility in San Jose, California

In January 2016, the Company exited an excess facility at its U.S. headquarters in San Jose, California and recorded $1.4 million of facility exit costs. The fair value of this liability is based on a net present value model using a credit-adjusted risk-free rate. The liability will be paid out over the remainder of the leased properties’ term, which continues through August 2020. As of the cease-use date, the fair value of this restructuring liability totaled $2.5 million. Offsetting this charge was an adjustment for deferred rent liability relating to this space of $1.1 million. As a result of a change in the estimate of the sublease income, the restructuring liability was increased by $1.2 million as of December 31, 2017.

The following table summarizes the activity in the Company’s restructuring accrual related to the Harmonic 2016 Restructuring Plan during the six months ended June 29, 2018 (in thousands):
 
Excess facilities
 
TVN VDP (1)
 
Total
Balance at December 31, 2017
$
2,426

 
$
5,128

 
$
7,554

Adjustments to restructuring provisions
66

 
477

 
543

Cash payments
(502
)
 
(1,653
)
 
(2,155
)
Foreign exchange gain

 
(107
)
 
(107
)
Balance at June 29, 2018
1,990

 
3,845

 
5,835

Less: current portion (1)
(900
)
 
(2,446
)
 
(3,346
)
Long-term portion (1)
$
1,090

 
$
1,399

 
$
2,489


(1) The current portion and long-term portion of the restructuring liability are reported as components of “Accrued and other current liabilities” and “Other non-current liabilities”, respectively, on the Company’s Condensed Consolidated Balance Sheets.

NOTE 9: CONVERTIBLE NOTES, OTHER DEBTS AND CAPITAL LEASES
4.00% Convertible Senior Notes
In December 2015, the Company issued $128.25 million in aggregate principal amount of 4.0% unsecured convertible senior notes due December 1, 2020 (the “offering” or “Notes”, as applicable) through a private placement with a financial institution. The Notes do not contain any financial covenants and the Company can settle the Notes in cash, shares of common stock, or any combination thereof. The Notes can be converted under certain circumstances described below, based on an initial conversion rate of 173.9978 shares of common stock per $1,000 principal amount of Notes (which represents an initial conversion price of approximately $5.75  per share). Interest on the Notes is payable semiannually in arrears on June 1 and December 1 of each year.

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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 the offering in privately negotiated transactions. In addition, the Company incurred approximately $4.1 million in debt issuance costs, resulting in net proceeds to the Company of approximately $74.2 million, which was used to fund the acquisition of our France subsidiary, TVN.
Prior to September 1, 2020, holders of the Notes may convert the Notes at their option only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ending on April 1, 2016, 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 five 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. In addition, if specific corporate events occur prior to the maturity date, the conversion rate may be increased for a holder who elects to convert the Notes in connection with such a corporate event.
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 June 29, 2018 and December 31, 2017 (in thousands, except for years and percentages):
 
June 29, 2018
 
December 31, 2017
Liability:
 
 
 
  Principal amount
$
128,250

 
$
128,250

  Less: Debt discount, net of amortization
(14,767
)
 
(17,404
)
  Less: Debt issuance costs, net of amortization
(1,781
)
 
(2,098
)
  Carrying amount
$
111,702

 
$
108,748

  Remaining amortization period (years)
2.4

 
2.9

  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
Six months ended
 
June 29, 2018
 
June 30, 2017
June 29, 2018
 
June 30, 2017
Contractual interest expense
$
1,282

 
$
1,282

$
2,565

 
$
2,565

Amortization of debt discount
1,340

 
1,214

2,637

 
2,388

Amortization of debt issuance costs
161

 
146

317

 
288

  Total interest expense recognized
$
2,783

 
$
2,642

$
5,519

 
$
5,241



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Other Debts and Capital 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):
 
June 29, 2018
 
December 31, 2017
Financing from French government agencies related to various government incentive programs (1)
$
14,401

 
$
20,565

Term loans
1,081

 
1,282

Obligations under capital leases
559

 
1,099

  Total debt obligations
16,041

 
22,946

  Less: current portion
(1,723
)
 
(7,610
)
  Long-term portion
$
14,318

 
$
15,336

(1) As of June 29, 2018 and December 31, 2017, loans backed by French R&D tax credit receivables were $12.0 million and $17.7 million, respectively. As of June 29, 2018, the TVN French Subsidiary had an aggregate of $24.0 million of R&D tax credit receivables from the French government from 2018 through 2022. See Note 6, “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 2018 through 2020. The remaining loans of $2.4 million at June 29, 2018, primarily relate to financial support from French government agencies for R&D innovation projects at minimal interest rates, and these loans mature between 2018 through 2025.

Future minimum repayments

The table below presents the future minimum repayments of debts and capital lease obligations for TVN as of June 29, 2018 (in thousands):

Years ending December 31,
Capital lease obligations
 
Other Debt obligations
2018 (remaining six months)
$
395

 
$
864

2019
92

 
6,879

2020
49

 
6,687

2021
23

 
497

2022

 
457

Thereafter

 
98

Total
$
559

 
$
15,482


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.


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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 June 29, 2018, the Company was in compliance with the covenants under the Loan Agreement.

As of June 29, 2018, the Company committed $2.4 million towards security for letters of credit issued under the Loan Agreement. There were no other borrowings under the Loan Agreement as of June 29, 2018.

NOTE 10: 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 2017 Form 10-K for details pertaining to each plan.

The Company’s stockholders approved an amendment to the ESPP at the 2018 annual meeting of stockholders (the “2018 Annual Meeting”) to increase the number of shares of common stock reserved for issuance under the ESPP by 1,300,000 shares. The Company’s stockholders also approved an amendment to the 2002 Director Stock Plan at the 2018 Annual Meeting to increase the number of shares of common stock reserved for issuance thereunder by 400,000 shares. As of June 29, 2018, there were 5.3 million and 1.8 million shares of common stock reserved for future grants under the Company’s ESPP and active stock plans, respectively.

Stock Option Activities

The following table summarizes the Company’s stock option activities and related information during the six months ended June 29, 2018 (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, 2017
 
3,880

 
$
6.04

 
 
 
 
Granted
 

 

 
 
 
 
Exercised
 
(87
)
 
2.94

 
 
 
 
Forfeited
 
(35
)
 
4.76

 
 
 
 
Canceled or expired
 
(538
)
 
8.75

 
 
 
 
Balance at June 29, 2018
 
3,220

 
5.69

 
2.8
 
$
866.8

As of June 29, 2018
 
 
 
 
 
 
 
 
Vested and expected to vest
 
3,208

 
5.69

 
2.8
 
$
859.3

Exercisable
 
2,958

 
5.77

 
2.7
 
$
696.1

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 six months ended June 29, 2018.

There were no realized tax benefits attributable to stock options exercised in jurisdictions where this expense is deductible for tax purposes for the three and six months ended June 29, 2018 and June 30, 2017, respectively.


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Table of Contents

Restricted Stock Units (“RSUs”) Activities

The following table summarizes the Company’s RSUs activities and related information during the six months ended June 29, 2018 (in thousands, except per share amounts and terms):
 
 
Restricted Stock Units Outstanding
 
 
Number
of
Shares
 
Weighted
Average Grant
Date Fair Value
Per Share
Balance at December 31, 2017
 
2,904

 
5.09

Granted
 
3,293

 
3.74

Vested
 
(2,220
)
 
4.75

Forfeited
 
(183
)
 
5.09

Balance at June 29, 2018
 
3,794

 
4.12

Performance- and Market-based awards

Starting in 2015, the Company began to settle a portion of its incentive bonus payments to eligible employees by issuing performance-based RSU awards (“PRSUs”) from the 1995 Stock Plan. The Company granted 969,598 PRSUs to certain employees for the six months ended June 29, 2018, of which 869,598 shares of PRSUs were fully vested at the time of grant for purposes of settling amounts earned under the Company’s 2017 incentive bonus plans. The vesting of the remaining PRSUs will be based on the achievement of certain financial and non-financial operating goals of the Company. The stock-based compensation recognized for PRSUs was $0.1 million and $3.4 million for the three and six months ended June 29, 2018, respectively. The unrecognized stock-based compensation of PRSUs as of June 29, 2018 was $0.3 million.

In 2017, the Company granted 344,500 market-based RSUs (“MRSUs”) under the 1995 Stock Plan to its key executives and certain eligible employees that may vest during a three-year period as part of its long-term incentive program. In the second quarter of 2018, the Company granted 40,000 MRSUs that may vest during an eighteen-month period from the date of grant. The vesting conditions of these awards are based on the market value of the Company's common stock. The aggregate grant-date fair value of these shares was estimated to be $1.3 million using a Monte-Carlo simulation. The stock-based compensation recognized for MRSUs for the three and six months ended June 29, 2018 was $0.1 million and $0.2 million, respectively. The unrecognized stock-based compensation of the MRSUs as of June 29, 2018 was $0.1 million. No MRSUs had vested as of June 29, 2018.

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
 
Six months ended
 
June 29, 2018
 
June 30, 2017
 
June 29,
2018
 
June 30,
2017
Service cost
$
63

 
$
55

 
$
126

 
$
110

Interest cost
19

 
16

 
38

 
32

Recognized net actuarial loss

 
2

 

 
3

  Net periodic benefit cost
$
82

 
$
73

 
$
164

 
$
145

The present value of the Company’s pension obligation as of June 29, 2018 was $5.0 million, of which $0.1 million was reported as a component of “Accrued and other current liabilities” and $4.9 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, 2017 was $5.0 million.


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Table of Contents

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 six months ended June 29, 2018 and June 30, 2017 were $214,000 and $285,000, respectively.

Stock-based Compensation
The following table summarizes stock-based compensation for all plans (in thousands):
 
Three months ended
Six months ended
 
June 29,
2018
 
June 30,
2017
June 29,
2018
 
June 30,
2017
Stock-based compensation in:
 
 
 
 
 
 
Cost of revenue
$
448

 
$
700

$
963

 
$
1,145

Research and development expense
818

 
1,337

2,622

 
2,314

Selling, general and administrative expense
1,746

 
2,099

5,184

 
3,928

Total stock-based compensation in operating expense
2,564

 
3,436

7,806

 
6,242

Total stock-based compensation
$
3,012

 
$
4,136

$
8,769

 
$
7,387

As of June 29, 2018, total unrecognized stock-based compensation cost related to unvested stock options and RSUs was $13.3 million and is expected to be recognized over a weighted-average period of approximately 1.8 years.
Prior to January 1, 2017, stock-based compensation expense was recorded net of estimated forfeitures in the Company’s Condensed Consolidated Statements of Operations and, accordingly, was recorded for only those stock-based awards that the Company expected to vest. Upon the adoption of ASU 2016-09, “Improvements to Employee Share-Based payments” issued by FASB, effective January 1, 2017, the Company changed its accounting policy to account for forfeitures as they occur. The change was applied on a modified retrospective approach with a cumulative effect adjustment of $69,000 as of January 1, 2017 (which increased the accumulated deficit).

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Table of Contents

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. At the date of grant, the Company estimated the fair value of each stock option grant and stock purchase right granted under the ESPP using the following weighted average assumptions:
 
Stock Options
 
Three and six months ended
 
June 30,
2017
Expected term (years)
4.3
Volatility
43%
Risk-free interest rate
1.7%
Expected dividends
0.0%

 
ESPP Purchase Period Ending
 
July 2,
2018
 
July 3,
2017
Expected term (years)
0.5

 
0.5

Volatility
60
%
 
41
%
Risk-free interest rate
1.7
%
 
1.0
%
Expected dividends
0.0
%
 
0.0
%
Estimated weighted average fair value per share at purchase date
$1.34
 
$1.40
The expected term of the employee stock options represents the weighted-average period that the stock options are expected to remain outstanding. The computation of the expected term was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. 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.

NOTE 11: INCOME TAXES
The Company reported the following operating results for the periods presented (in thousands):
 
Three months ended
 
Six months ended
 
June 29,
2018
 
June 30,
2017
 
June 29,
2018
 
June 30,
2017
Loss before income taxes
$
(2,022
)
 
$
(30,921
)
 
$
(14,638
)
 
$
(55,180
)
Provision for income taxes
891

 
579

 
1,969

 
347

Effective income tax rate
(44.1
)%
 
(1.9
)%

(13.5
)%

(0.6
)%
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.


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Table of Contents

The Company's effective income tax rate of (13.5)% for the six months ended June 29, 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 six months ended June 29, 2018, the discrete adjustments to the Company's tax expense were primarily withholding taxes.

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 2014 through 2017 tax years generally remain subject to examination by U.S. federal and most state tax authorities. In significant foreign jurisdictions, the 2007 through 2017 tax years generally remain subject to examination by their respective tax authorities. 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. Due to uncertainties surrounding the ultimate resolution of the 2015 Decision, the Company continued to share expenses related to share-based compensation despite the 2015 Decision. Therefore, the Altera Opinion is not expected to have an impact on the Company’s consolidated financial statements.

The Company’s operations in Switzerland are subject to a reduced tax rate under the Switzerland tax holiday which requires various thresholds of investment and employment in Switzerland. The Company has met these various thresholds and the Switzerland tax holiday is effective through the end of 2018.

As of June 29, 2018, the total amount of gross unrecognized tax benefits, including interest and penalties, was approximately $17.9 million, of which $1.1 million would affect the Company’s effective tax rate if the benefits are eventually recognized. The remaining gross unrecognized tax benefit does not affect the Company’s effective tax rate as it relates to positions that would be settled with tax attributes such as net operating loss carryforward or tax credits previously subject to a valuation allowance. The Company recognizes interest and penalties related to unrecognized tax positions in income tax expense. The Company had $0.5 million of gross interest and penalties accrued as of June 29, 2018. The Company will continue to review its tax positions and provide for, or reverse, unrecognized tax benefits as issues arise. As of June 29, 2018, the Company released $1.5 million from a 2013-2015 audit settlement in Israel.

In March 2016, the FASB issued ASU 2016-09, an accounting standard update for the accounting of share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The new standard eliminated the requirement to report excess tax benefits and certain tax deficiencies related to share-based payment transactions as additional paid-in capital. It also removes the requirement to delay recognition of a windfall tax benefit until it reduces current taxes payable. Under the new guidance, the benefit will be recorded when it arises, subject to normal valuation allowance considerations. The Company adopted this new accounting standard beginning in the first quarter of fiscal 2017 using a modified-retrospective transition method and recorded a cumulative effect of $4.6 million of additional gross deferred tax assets associated with shared-based payments and an offsetting valuation allowance of the same amount, therefore resulting in no net impact to the Company’s beginning retained earnings.

In October 2016, the FASB issued ASU 2016-16, an accounting standard update which requires companies to recognize the income tax consequences of all intra-entity sales of assets other than inventory when they occur. As a result, a reporting entity would recognize the tax expense from the sale of the asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax assets that arise in the buyer’s jurisdiction would also be recognized at the time of the transfer. The Company early adopted this accounting standard update during the first quarter of fiscal 2017 on a modified retrospective approach and recorded a cumulative-effect adjustment of $1.4

27

Table of Contents

million as of January 1, 2017 (which reduced the accumulated deficit). Correspondingly, in the first quarter of fiscal 2017, the Company recognized an additional $1.1 million of net deferred tax assets, after netting with $2.1 million of valuation allowances, and wrote off the remaining $0.3 million of unamortized tax expenses deferred under the previous guidance to provision for income taxes in the first quarter of fiscal 2017.


NOTE 12: 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
Six months ended
 
June 29,
2018
 
June 30,
2017
June 29,
2018
 
June 30,
2017
Numerator:
 
 
 
 
 
 
Net loss
$
(2,913
)
 
$
(31,500
)
$
(16,607
)
 
$
(55,527
)
Denominator:
 
 
 
 
 
 
Weighted average number of common shares outstanding
 
 
 
 
 
 
Basic and diluted
85,304

 
80,590

84,616

 
80,203

Net loss per share:
 
 
 
 
 
 
Basic and diluted
$
(0.03
)
 
$
(0.39
)
$
(0.20
)
 
$
(0.69
)
Basic and diluted net loss per share were the same for the three and six months ended June 29, 2018 and June 30, 2017, 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
Six months ended
 
June 29,
2018
 
June 30,
2017
June 29,
2018
 
June 30,
2017
Stock options
3,234

 
4,614

3,469

 
4,753

RSUs
3,326

 
3,400

2,766

 
3,054

Stock purchase rights under the ESPP
541

 
578

689

 
385

Warrants (1)
782

 
782

782

 
782

   Total (2)
7,883

 
9,374

7,706

 
8,974

(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 13, “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 9, “Convertible Notes, Other Debts and Capital 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 13: WARRANTS

On September 26, 2016, the Company issued a 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. 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.


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Table of Contents

Comcast’s right to purchase 781,617 shares vested as of the issuance date as an incentive to enter into the software license product supply agreement. Comcast’s rights to purchase an additional 1,954,042 shares in specified tranches vest upon achievement of certain milestones that occur upon or prior to Comcast’s election for enterprise license pricing for certain of the Company’s software products. Such pricing would obligate Comcast to make certain total payments to the Company over the term of the product supply agreement. These tranches include the right to purchase 1,172,425 shares upon the acceptance and completion of field trials and 781,617 shares upon the election date, as defined in the Warrant.

Comcast’s rights to purchase an additional 1,172,425 shares in specified tranches vest when Comcast exceeds specified cumulative purchase amounts from the Company under the product supply agreement. Comcast’s rights to purchase the remaining shares vest in specified tranches at the earlier of Comcast’s enterprise license pricing election (if completed by a certain date) or achievement of specified cumulative purchase amounts from the Company.

Because the Warrant contains performance criteria which Comcast must achieve for the Warrant to vest, the final measurement date for the Warrant is the date on which the Warrant vests. Prior to the final measurement, when achievement of the performance criteria has been deemed probable, the estimated fair value of the Warrant is recorded as a reduction to net revenue based on the projected number of shares underlying the Warrant that are expected to vest, the proportion of purchases by Comcast and its affiliates within the period relative to the aggregate purchase levels required for the Warrant to vest and the then-current fair value of the Warrant. To the extent that projections change as to the number of shares underlying the Warrant that will vest and the fair market value of the Warrant changes, a cumulative catch-up adjustment is recorded in the period in which the estimates change.

The fair value of the Warrant is determined using the Black-Scholes option pricing model. The assumptions utilized in the Black-Scholes model include the risk-free interest rate, expected volatility, and expected life in years. The risk-free interest rate over the expected life is equal to the prevailing U.S. Treasury note rate over the same period. Expected volatility is determined utilizing historical volatility over a period of time equal to the expected life of the Warrant. Expected life is equal to the remaining contractual term of the Warrant. The dividend yield is assumed to be zero since the Company has not historically declared dividends and does not have any plans to declare dividends in the future.

During the three and six months ended June 29, 2018, the Company recorded $0.3 million and $0.4 million, respectively, as a reduction to net revenues in connection with amortization of warrants. During the six months ended June 30, 2017, the Company recorded reduction to net revenues of $0.4 million in connection with amortization of warrants. No such charges were recorded for the three months ended June 30, 2017. The remaining unamortized value of the related asset of $0.6 million and $1.0 million as of June 29, 2018 and December 31, 2017, respectively, was recorded as a component of “Prepaid expenses and other current assets” on the Company’s Consolidated Balance Sheet.

NOTE 14: SEGMENT INFORMATION
Operating segments are defined as components of an enterprise that engage 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.
 

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The following table provides summary financial information by reportable segment (in thousands):

 
Three months ended
Six months ended
 
June 29, 2018 (1)
 
June 30, 2017
June 29, 2018
 
June 30, 2017
Video
 
 
 
 
 
 
Revenue
$
79,208

 
$
73,379

$
150,956

 
$
147,721

Gross profit
43,558

 
37,720

84,784

 
78,493

Operating income (loss)
6,239

 
(8,947
)
8,234

 
(14,783
)
Cable Access
 
 
 


 


Revenue
$
20,236

 
$
8,936

$
38,726

 
$
17,537

Gross profit
10,187

 
1,699

18,827

 
3,909

Operating income (loss)
540

 
(7,411
)
(973
)
 
(13,491
)
Total
 
 
 
 
 
 
Revenue
$
99,444

 
$
82,315

$
189,682

 
$
165,258

Gross profit
53,745

 
39,419

103,611

 
82,402

Operating income (loss)
6,779

 
(16,358
)
7,261

 
(28,274
)

(1) The Company has historically employed an aggregate allocation methodology based on total revenues to attribute professional services revenue and sales expenses between its Video and Cable Access segments. Beginning in the fourth quarter of 2017, the Company has prospectively changed to a more precise attribution methodology as the activities of selling and supporting the CableOS solution have become increasingly distinct from those of Video solutions. The impact of making this change in the three and six months ended June 30, 2017 compared to the Company’s historical approach was an increase in operating loss of $2.1 million and $3.2 million, respectively, from the Video segment and a corresponding decrease in operating loss of the Cable Access segment. The Company believes that the updated allocation methodology will provide greater clarity regarding the operating metrics of the Video and Cable Access business segments.

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
Six months ended
 
June 29, 2018
 
June 30, 2017
June 29, 2018
 
June 30, 2017
Total segment operating income (loss)
$
6,779

 
$
(16,358
)
$
7,261

 
$
(28,274
)
Amortization of warrants
(284
)
 

(395
)
 

Unallocated corporate expenses
(746
)
 
(4,853
)
(2,588
)
 
(8,775
)
Stock-based compensation
(3,012
)
 
(4,136
)
(8,769
)
 
(7,387
)
Amortization of intangibles
(2,095
)
 
(2,075
)
(4,194
)
 
(4,144
)
Income (loss) from operations
642

 
(27,422
)
(8,685
)
 
(48,580
)
Non-operating expense, net
(2,664
)
 
(3,499
)
(5,953
)
 
(6,600
)
Loss before income taxes
$
(2,022
)
 
$
(30,921
)
$
(14,638
)
 
$
(55,180
)

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.


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NOTE 15: COMMITMENTS AND CONTINGENCIES
Leases
Future minimum lease payments under non-cancelable operating leases as of June 29, 2018 are as follows (in thousands):
Years ending December 31,
 
2018 (remaining six months)
$
6,505

2019
11,420

2020
8,379

2021
2,907

2022
2,431

Thereafter
10,758

Total
$
42,400

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
Six months ended
 
June 29,
2018
 
June 30,
2017
June 29,
2018
 
June 30,
2017
Balance at beginning of period
$
4,522

 
$
4,585

$
4,381

 
$
4,862

   Accrual for current period warranties
1,714

 
1,277

3,450

 
2,495

   Warranty costs incurred
(1,589
)
 
(1,720
)
(3,184
)
 
(3,215
)
Balance at end of period
$
4,647

 
$
4,142

$
4,647

 
$
4,142

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. Obligations to purchase inventory and other commitments are generally expected to be fulfilled within one year. The Company had approximately $38.7 million of non-cancelable commitments to purchase inventories and other commitments as of June 29, 2018.
Standby Letters of Credit and Guarantees
As of June 29, 2018, the Company has outstanding bank guarantees and standby letters of credit in aggregate of $3.1 million, consisting primarily of $1.3 million for a building lease for the TVN French Subsidiary and $0.8 million related to contract manufacturing, with the remainder mainly related to 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 June 29, 2018.

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 June 29, 2018.

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 our MediaGrid product infringes two patents held by Avid. A jury trial on this complaint commenced on

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January 23, 2014 and, on February 4, 2014, the jury returned a unanimous verdict in favor of us, 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 our 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. We 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. 

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 d