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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 March 27, 2020

¨
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)
____________________________________________

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common stock, $0.001 par value
 
HLIT
 
NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
¨
Accelerated filer
ý
 
 
 
 
Non-accelerated filer
¨  
Smaller reporting company
¨
 
 
 
 
 
 
Emerging growth company 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of shares of the registrant’s Common Stock, $0.001 par value, outstanding on April 27, 2020 was 96,579,495.



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)
 
March 27, 2020
 
December 31, 2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
71,712

 
$
93,058

Accounts receivable, net
93,058

 
88,500

Inventories, net
34,854

 
29,042

Prepaid expenses and other current assets
32,001

 
40,762

Total current assets
231,625

 
251,362

Property and equipment, net
37,091

 
22,928

Operating lease right-of-use assets
26,281

 
27,491

Goodwill
238,614

 
239,780

Intangibles, net
2,789

 
4,461

Other long-term assets
39,875

 
41,305

Total assets
$
576,275

 
$
587,327

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Other debts and finance lease obligations, current
$
6,343

 
$
6,713

Accounts payable
45,159

 
40,933

Income taxes payable
419

 
1,226

Deferred revenue
48,719

 
37,117

Accrued and other current liabilities
52,080

 
62,535

        Convertible notes, short-term
44,008

 
43,375

Total current liabilities
196,728

 
191,899

Convertible notes, long-term
89,832

 
88,629

Other debts and finance lease obligations, long-term
10,048

 
10,511

Income taxes payable, long-term
180

 
178

Other non-current liabilities
41,388

 
41,254

Total liabilities
338,176

 
332,471

Commitments and contingencies (Note 17)

 

Convertible notes
1,777

 
2,410

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; 96,566 and 91,875 shares issued and outstanding at March 27, 2020 and December 31, 2019, respectively
97

 
92

Additional paid-in capital
2,336,459

 
2,327,359

Accumulated deficit
(2,093,894
)
 
(2,071,940
)
Accumulated other comprehensive loss
(6,340
)
 
(3,065
)
Total stockholders’ equity
236,322

 
252,446

Total liabilities and stockholders’ equity
$
576,275

 
$
587,327

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
 
March 27, 2020
 
March 29, 2019
Revenue:
 
 
 
Appliance and integration
$
47,752

 
$
52,365

SaaS and service
30,665

 
27,741

Total net revenue
78,417

 
80,106

Cost of revenue:
 
 
 
Appliance and integration
26,287

 
27,054

SaaS and service
15,392

 
11,203

Total cost of revenue
41,679

 
38,257

Total gross profit
36,738

 
41,849

Operating expenses:
 
 
 
Research and development
22,123

 
21,401

Selling, general and administrative
31,218

 
28,011

Amortization of intangibles
770

 
788

Restructuring and related charges
676

 
57

Total operating expenses
54,787

 
50,257

Loss from operations
(18,049
)
 
(8,408
)
Interest expense, net
(2,903
)
 
(2,906
)
Other expense, net
(273
)
 
(311
)
Loss before income taxes
(21,225
)
 
(11,625
)
Provision for (benefit from) income taxes
729

 
(319
)
Net loss
$
(21,954
)
 
$
(11,306
)
 
 
 
 
Net loss per share:
 
 
 
Basic and diluted
$
(0.23
)
 
$
(0.13
)
Shares used in per share calculation:
 
 
 
Basic and diluted
95,575

 
88,165

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
 
March 27, 2020
 
March 29, 2019
Net loss
$
(21,954
)
 
$
(11,306
)
Losses reclassified into earnings

 
157

Change in foreign currency translation adjustments
(3,119
)
 
(1,300
)
Other comprehensive loss before tax
(3,119
)
 
(1,143
)
Provision for income taxes
156

 
106

Other comprehensive loss, net of tax
(3,275
)
 
(1,249
)
Total comprehensive loss
$
(25,229
)
 
$
(12,555
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

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HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in thousands)

 
Three Months Ended March 27, 2020
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive Loss
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Balance at December 31, 2019
91,875

 
$
92

 
$
2,327,359

 
$
(2,071,940
)
 
$
(3,065
)
 
$
252,446

Net loss

 

 

 
(21,954
)
 

 
(21,954
)
Other comprehensive loss, net of tax

 

 

 

 
(3,275
)
 
(3,275
)
Issuance of common stock under option, stock award and purchase plans
2,278

 
3

 
2,168

 

 

 
2,171

Stock-based compensation

 

 
6,301

 

 

 
6,301

Exercise of warrant
2,413

 
2

 
(2
)
 

 

 

Reclassification from mezzanine equity to equity for 4.00% Convertible Senior Notes due in 2020

 

 
633

 

 

 
633

Balance at March 27, 2020
96,566

 
$
97

 
$
2,336,459

 
$
(2,093,894
)
 
$
(6,340
)
 
$
236,322

 
Three Months Ended March 29, 2019
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive Loss
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Balance at December 31, 2018
87,057

 
$
87

 
$
2,296,795

 
$
(2,067,416
)
 
$
(1,216
)
 
$
228,250

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

 

 

 
1,400

 

 
1,400

Balance at January 1, 2019
87,057

 
87

 
2,296,795

 
(2,066,016
)
 
(1,216
)
 
229,650

Net loss

 

 

 
(11,306
)
 

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

 

 

 

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

 
2

 
1,353

 

 

 
1,355

Stock-based compensation

 

 
2,111

 

 

 
2,111

Balance at March 29, 2019
88,784

 
$
89

 
$
2,300,259

 
$
(2,077,322
)
 
$
(2,465
)
 
$
220,561

(1) See Note 2, “Summary of Significant Accounting Policies - Recently Adopted Accounting Pronouncements” on Form 10-K for the year ended December 31, 2019 for more information on the adoption of Accounting Standard Update (“ASU”) No. 2018-07, Compensation-Stock Compensation (“Topic 718”): Improvements to Nonemployee Share-Based Payment Accounting issued by the Financial Accounting Standards Board.

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)
 
Three months ended
 
March 27, 2020
 
March 29, 2019
Cash flows from operating activities:
 
 
 
Net loss
$
(21,954
)
 
$
(11,306
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Amortization of intangibles
1,655

 
2,083

Depreciation
2,843

 
2,846

Stock-based compensation
6,259

 
2,113

Amortization of discount on convertible debt
1,835

 
1,605

Amortization of non-cash warrant
434

 
25

Restructuring, asset impairment and loss on retirement of fixed assets
8

 
103

Deferred income taxes, net
653

 
(538
)
Foreign currency adjustments
(2,066
)
 
(638
)
Provision for excess and obsolete inventories
234

 
254

Provision for doubtful accounts, returns and discounts
331

 
417

Other non-cash adjustments, net
113

 
287

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(5,068
)
 
22,351

Inventories
(6,281
)
 
(4,157
)
Prepaid expenses and other assets
10,579

 
1,417

Accounts payable
(242
)
 
(8,177
)
Deferred revenue
12,477

 
4,750

Income taxes payable
(768
)
 
(192
)
Accrued and other liabilities
(12,083
)
 
(9,027
)
Net cash provided by (used in) operating activities
(11,041
)
 
4,216

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(11,224
)
 
(1,674
)
Net cash used in investing activities
(11,224
)
 
(1,674
)
Cash flows from financing activities:
 
 
 
Payment of convertible debt issuance costs
(35
)
 

Proceeds from other debts and finance leases

 
160

Repayment of other debts and finance leases
(406
)
 
(97
)
Proceeds from common stock issued to employees
3,000

 
2,012

Payment of tax withholding obligations related to net share settlements of restricted stock units
(829
)
 
(657
)
Net cash provided by financing activities
1,730

 
1,418

Effect of exchange rate changes on cash, cash equivalents and restricted cash
(811
)
 
(33
)
Net increase (decrease) in cash, cash equivalents and restricted cash
(21,346
)
 
3,927

Cash, cash equivalents and restricted cash at beginning of period
93,058

 
65,989

Cash, cash equivalents and restricted cash at end of period
$
71,712

 
$
69,916

Supplemental disclosures of cash flow information:
 
 
 
Income tax payments, net
408

 
490

Interest payments, net
1,095

 
92

Supplemental schedule of non-cash investing and financing activities:
 
 
 
Capital expenditures incurred but not yet paid
7,620

 
91


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 (“SEC”) on March 2, 2020 (the “2019 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, 2020, 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, 2019 was derived from audited financial statements, and the unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the SEC for interim reporting. As permitted under those requirements, certain footnotes or other financial information that are normally required by generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company’s reported financial positions or results of operations may be materially different under changed conditions or when using different estimates and assumptions, particularly with respect to significant accounting policies. If estimates or assumptions differ from actual results, subsequent periods are adjusted to reflect more current information.
Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. The Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of May 4, 2020, the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change, as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.
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.

Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2 to its audited Consolidated Financial Statements included in the 2019 Form 10-K. There have been no significant changes to these policies during the three months ended March 27, 2020 other than those disclosed in Note 2, “Recent Accounting Pronouncements”.


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NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements

ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326)

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. 
The Company adopted this new standard in the first quarter of fiscal 2020, and the adoption did not have a material impact on its condensed consolidated financial statements.

ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350)

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 Company adopted this new standard in the first quarter of fiscal 2020, and the adoption did not have an impact on its condensed consolidated financial statements.

ASU 2018-13, Fair Value Measurement (Topic 820)

In August 2018, the FASB issued ASU 2018-13, which removes, modifies and adds to the disclosure requirements on fair value measurements in Topic 820. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date.
The Company adopted this new standard in the first quarter of fiscal 2020, and the adoption did not have a material impact on its condensed consolidated financial statements.

ASU 2019-08, Compensation—Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements—Share-Based Consideration Payable to a Customer

In November 2019, the FASB issued ASU 2019-08, Compensation - Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements - Share-Based Consideration Payable to a Customer, which clarifies guidance on measurement and classification of share-based payments to customers.
The Company adopted this new standard in the first quarter of fiscal 2020, and the adoption did not have a material impact on its condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

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

In January 2020, the FASB issued ASU No. 2020-01, to clarify certain interactions between the guidance to account for equity securities, the guidance to account for investments under the equity method of accounting, and the guidance to account for derivatives and hedging. The new ASU clarifies the application of measurement alternatives and the accounting for certain forward contracts and purchased options to acquire investments. The new ASU is effective for the Company for fiscal years ending after December 15, 2021, and early adoption is permitted. The Company is currently evaluating the impact of adopting the new ASU on its consolidated financial statements.

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

The Company’s revenue is classified into two categories in the Condensed Consolidated Statement of Operations, which are “Appliance and integration” and “SaaS and service.” The “Appliance and integration” revenue category includes hardware, licenses and professional services and is reflective of non-recurring revenue, while the “SaaS and service” category includes usage fees for the Company’s SaaS platform and support revenue stream from the Company’s appliance-based customers and reflects the Company’s recurring revenue stream.

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

The Company has revenue arrangements that include multiple performance obligations. The Company allocates the transaction price to all separate performance obligations based on the relative standalone selling prices (“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.

If the Company has not yet established a price because the good or service has not previously been sold on a standalone basis, SSP for such good and service in a contract with multiple performance obligations is determined by applying a residual approach whereby all other performance obligations within a contract are first allocated a portion of the transaction price based upon their respective SSP, using observable prices, with any residual amount of the transaction price allocated to the good or service for which the price has not yet been established.

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

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

Contract assets and deferred revenue consisted of the following (in thousands):
 
As of
 
March 27,
2020
 
December 31,
2019
Contract assets
$
5,806

 
$
13,969

Deferred revenue
55,854

 
43,450


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


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During the three months ended March 27, 2020 and March 29, 2019, the Company recognized revenue of $18.0 million and $21.2 million, respectively, that was included in the deferred revenue balance at the beginning of each fiscal year.

Practical Expedients and Exemptions. 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. These performance obligations primarily relate to the Company’s support and maintenance contracts which have a duration of one year or less and subscriptions services for which invoicing corresponds to the value of the Company’s performance completed to date.

In July 2019, Comcast elected enterprise license pricing for the Company’s CableOS software under certain existing commercial agreements between the Company and Comcast (the “CableOS software license agreement”), which also includes maintenance and support services, and material rights. As of March 27, 2020, the aggregate amount of the transaction price under this agreement allocated to the remaining performance obligations is $98.1 million, and the Company will recognize this revenue as the related performance obligations are delivered over the next three years to four years.

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

NOTE 4: LEASES
The components of lease expense are as follows (in thousands):
 
Three months ended
Three months ended
 
March 27, 2020
March 29, 2019
Operating lease cost
$
2,668

$
1,996

Variable lease cost
792

779

Total lease cost
$
3,460

$
2,775

Supplemental cash flow information related to leases are as follows (in thousands):
 
Three months ended
 
March 27, 2020
March 29, 2019
Cash paid for amounts included in the measurement of operating lease liabilities
$
2,421

$
2,130

ROU assets obtained in exchange for operating lease obligations
$
1,671

$


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NOTE 5: INVESTMENTS IN EQUITY SECURITIES
EDC

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

The Company determined that there were no indicators at March 27, 2020 that the EDC investment was impaired. The Company’s maximum exposure to loss from the EDC’s investment at March 27, 2020 was limited to its investment cost of $3.6 million, including $0.1 million of transaction costs.

NOTE 6: DERIVATIVES AND HEDGING ACTIVITIES
The Company uses forward contracts to manage exposures to foreign currency exchange rates. The Company’s primary objective in holding derivative instruments is to reduce the volatility of earnings and cash flows associated with fluctuations in foreign currency exchange rates and the Company does not use derivative instruments for trading purposes. The use of derivative instruments exposes the Company to credit risk to the extent that the counterparties may be unable to meet their contractual obligations. As such, the potential risk of loss with any one counterparty is closely monitored by the Company.
Derivatives Not Designated as Hedging Instruments (Balance Sheet Hedges)
The Company’s balance sheet hedges consist of foreign currency forward contracts that generally mature within three months, are carried at fair value, and are used to minimize the short-term impact of foreign currency exchange rate fluctuation on cash and certain trade and inter-company receivables and payables. Changes in the fair value of these foreign currency forward contracts are recognized in “Other expense, net” in the Condensed Consolidated Statement of Operations and are largely offset by the changes in the fair value of the assets or liabilities being hedged.
Losses on the non-designated derivative instruments recognized during the periods presented were as follows (in thousands):
 
 
 
Three months ended
 
Financial Statement Location
 
March 27, 2020
 
March 29, 2019
Derivatives not designated as hedging instruments:
 
 
 
 
 
Losses recognized in operations
Other expense, net
 
$
(912
)
 
$
(565
)
The U.S. dollar equivalents of all outstanding notional amounts of foreign currency forward contracts are summarized as follows (in thousands):

 
March 27, 2020
 
December 31, 2019
Derivatives not designated as hedging instruments:
 

 

Purchase
 
$
21,783

 
$
14,806

Sell
 
$
4,669

 
$
2,629

The locations and fair value amounts of the Company’s derivative instruments reported in its Condensed Consolidated Balance Sheets are as follows (in thousands):
 
 
 
 
Asset Derivatives
 
 
 
Derivative Liabilities
 
 
Balance Sheet Location
 
March 27, 2020
 
December 31, 2019
 
Balance Sheet Location
 
March 27, 2020
 
December 31, 2019
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
 
Prepaid expenses and other current assets
 
$

 
$
43

 
Accrued and other current liabilities
 
$
479

 
$
112

Total derivatives
 
 
 
$

 
$
43

 
 
 
$
479

 
$
112


Offsetting of Derivative Assets and Liabilities
The Company recognizes all derivative instruments on a gross basis in the Condensed Consolidated Balance Sheets. However, the arrangements with its counterparties allows for net settlement, which are designed to reduce credit risk by permitting net settlement with the same counterparty. As of March 27, 2020, information related to the offsetting arrangements was as follows (in thousands):
 
 
Gross Amounts of Derivatives
 
Gross Amounts of Derivatives Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts of Derivatives Presented in the Condensed Consolidated Balance Sheets
Derivative liabilities
 
$
479

 

 
$
479

In connection with foreign currency derivatives entered in Israel, the Company’s subsidiaries in Israel are required to maintain a compensating balance with their bank at the end of each month. The compensating balance arrangements do not legally restrict the use of cash. As of March 27, 2020, the total compensating balance maintained was $1.0 million.


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NOTE 7: FAIR VALUE MEASUREMENTS
The authoritative accounting guidance establishes a framework for measuring fair value and requires disclosure about the fair value measurements of assets and liabilities. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date. This guidance requires the Company to classify and disclose assets and liabilities measured at fair value on a recurring basis, as well as fair value measurements of assets and liabilities measured on a nonrecurring basis in periods subsequent to initial measurement, in a three-tier fair value hierarchy as described below.
Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The guidance describes three levels of inputs that may be used to measure fair value:
Level 1 — Observable inputs that reflect quoted prices for identical assets or liabilities in active markets.
Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The forward exchange contracts are classified as Level 2 because they are valued using quoted market prices and other observable data for similar instruments in an active market.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The following table sets forth the fair value of the Company’s financial assets and liabilities measured at fair value on a recurring basis based on the three-tier fair value hierarchy (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
As of March 27, 2020
 
 
 
 
 
 
 
Accrued and other current liabilities
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
479

 
$

 
$
479

Total liabilities measured and recorded at fair value
$

 
$
479

 
$

 
$
479

 
Level 1
 
Level 2
 
Level 3
 
Total
As of December 31, 2019
 
 
 
 
 
 
 
Prepaid and other current assets
 
 
 
 
 
 
 
Derivative assets
$

 
$
43

 
$

 
$
43

Total assets measured and recorded at fair value
$

 
$
43

 
$

 
$
43

Accrued and other current liabilities
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
112

 
$

 
$
112

Total liabilities measured and recorded at fair value
$

 
$
112

 
$

 
$
112


The Company’s liability for the acquired employee voluntary departure plan in France (the “French VDP”) was $0.3 million and $0.8 million as of March 27, 2020 and December 31, 2019, 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. Subsequently there is no recurring fair value remeasurement for this liability based on the applicable accounting guidance.

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

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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 4.00% Convertible Senior Notes due 2020 (the “2020 Notes”) was approximately $53.8 million and $66.8 million as of March 27, 2020 and December 31, 2019, respectively. The fair value of Company’s 2.00% Convertible Senior Notes due 2024 (the “2024 Notes” and, together with the 2020 Notes, the “Notes”) was approximately $114.6 million and $131.9 million as of March 27, 2020 and December 31, 2019, respectively. The Notes are classified as Level 2 valuations. The Company’s other debts assumed from the Thomson Video Networks (“TVN”) acquisition are classified within Level 2 because these borrowings are not actively traded and the majority of them have a variable interest rate structure based upon market rates currently available to the Company for debt with similar terms and maturities, therefore, the carrying value of these debts approximate its fair value. The other debts, excluding finance leases, outstanding as of March 27, 2020 and December 31, 2019 were in the aggregate of $16.4 million and $17.2 million, respectively. (See Note 11, “Convertible Notes, Other debts and Finance Leases” for additional information).
During the three months ended March 27, 2020, there were no nonrecurring fair value measurements of assets and liabilities subsequent to initial recognition.

NOTE 8: BALANCE SHEET COMPONENTS
The following tables provide details of selected balance sheet components (in thousands):
 
March 27, 2020

December 31, 2019
Accounts receivable, net:
 
 
 
Accounts receivable
$
95,719

 
$
91,513

Less: allowances for doubtful accounts and sales returns
(2,661
)
 
(3,013
)
     Total
$
93,058

 
$
88,500


 
March 27, 2020
 
December 31, 2019
Inventories, net:
 
 
 
Raw materials
$
4,881

 
$
4,179

Work-in-process
2,220

 
1,633

Finished goods
18,841

 
14,080

Service-related spares
8,912

 
9,150

Total
$
34,854

 
$
29,042


 
March 27, 2020

December 31, 2019
Prepaid expenses and other current assets:
 
 
 
  French R&D tax credits receivable(1)
7,163

 
7,343

  Contract assets(2)
5,806

 
13,969

Deferred cost of revenue
$
3,892

 
$
2,631

Prepaid maintenance, royalty, rent, and property taxes
3,653

 
1,594

  Capitalized sales commissions
1,168

 
1,309

Other
10,319

 
13,916

Total
$
32,001

 
$
40,762

(1) The Company’s French subsidiary participates in the French Crédit d’Impôt Recherche program (the “R&D tax credits”) which allows companies to monetize eligible research expenses. The R&D tax credits can be used to offset against income tax payable to the French government in each of the four years after being incurred, or if not utilized, are recoverable in cash. The amount of R&D tax credits recoverable are subject to audit by the French government. The R&D tax credits receivable at March 27, 2020 were approximately $23.5 million and are expected to be recoverable from 2020 through 2023.
(2) Contract assets reflect the satisfied performance obligations for which the Company does not yet have an unconditional right to consideration.

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March 27, 2020
 
December 31, 2019
Property and equipment, net:
 
 
 
   Machinery and equipment
$
77,213

 
$
75,229

   Capitalized software
34,395

 
34,190

   Construction in progress*
19,482

 
5,506

   Leasehold improvements
15,072

 
15,170

   Furniture and fixtures
6,004

 
6,036

      Property and equipment, gross
152,166

 
136,131

      Less: accumulated depreciation and amortization
(115,075
)
 
(113,203
)
         Total
$
37,091

 
$
22,928


*During fiscal 2019, the Company entered into a lease for a new facility which will become the Company’s new headquarters in 2020. The new lease commenced in May 2019, as the facility was made available to the Company for constructing leasehold improvements. Construction in progress includes $18.2 million for constructing leasehold improvements in the new headquarters facility.
 
March 27, 2020
 
December 31, 2019
Other long-term assets:
 
 
 
   French R&D tax credits receivable
$
16,303

 
$
15,899

   Deferred tax assets
10,222

 
10,575

   Equity investment
3,593

 
3,593

   Other
9,757

 
11,238

      Total
$
39,875

 
$
41,305


 
March 27, 2020
 
December 31, 2019
Accrued and other current liabilities:
 
 
 
   Accrued employee compensation and related expenses
$
16,175

 
$
19,454

   Operating lease liability (short-term)
8,583

 
8,881

   Customer deposits
3,805

 
3,557

   Accrued warranty
3,744

 
4,308

   Accrued royalty payments
2,384

 
2,642

   Accrued Avid litigation settlement, current
2,000

 
2,000

   Contingent inventory reserves
1,700

 
2,208

   Others
13,689

 
19,485

      Total
$
52,080

 
$
62,535


 
March 27, 2020
 
December 31, 2019
Other non-current liabilities:
 
 
 
Operating lease liability (long-term)
$
25,326

 
$
25,766

Deferred revenue (long-term)
7,135

 
6,333

Others
8,927

 
9,155

      Total
$
41,388

 
$
41,254



16


NOTE 9: GOODWILL AND IDENTIFIED INTANGIBLE ASSETS
Goodwill
Goodwill represents the cost in excess of the fair value of the net assets acquired in a business combination. Goodwill is tested for impairment at the reporting unit level on an annual basis and on an interim basis if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company determined that there was no impairment identified as of March 27, 2020.

The changes in the carrying amount of goodwill for the three months ended March 27, 2020 were as follows (in thousands):
 
Video
 
Cable Access
 
Total
Balance as of December 31, 2019
$
178,982

 
$
60,798

 
$
239,780

   Foreign currency translation adjustment, net
(1,110
)
 
(56
)
 
(1,166
)
Balance as of March 27, 2020
$
177,872

 
$
60,742

 
$
238,614


Intangible Assets, Net
The following is a summary of intangible assets, net (in thousands):
 
 
 
March 27, 2020
 
December 31, 2019
 
Weighted Average Remaining Life (Years)
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Developed core technology
0.3
 
$
31,707

 
$
(31,642
)
 
$
65

 
$
31,707

 
$
(30,757
)
 
$
950

Customer relationships/contracts
0.9
 
44,497

 
(41,773
)
 
2,724

 
44,577

 
(41,092
)
 
3,485

Trademarks and trade names
n/a
 
594

 
(594
)
 

 
609

 
(583
)
 
26

Maintenance agreements and related relationships
n/a
 
5,500

 
(5,500
)
 

 
5,500

 
(5,500
)
 

Order backlog
n/a
 
3,054

 
(3,054
)
 

 
3,085

 
(3,085
)
 

Total identifiable intangibles, net
 
 
$
85,352

 
$
(82,563
)
 
$
2,789

 
$
85,478

 
$
(81,017
)
 
$
4,461

Amortization expense for the identifiable purchased intangible assets for the three months ended March 27, 2020 and March 29, 2019 was allocated as follows (in thousands):
 
Three months ended
 
March 27,
2020
 
March 29,
2019
Included in cost of revenue
$
885

 
$
1,295

Included in operating expenses
770

 
788

Total amortization expense
$
1,655

 
$
2,083

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,
 
 
 
 
 
2020 (remaining nine months)
$
65

 
$
2,228

 
$
2,293

2021

 
496

 
496

Total future amortization expense
$
65

 
$
2,724

 
$
2,789


NOTE 10: RESTRUCTURING AND RELATED CHARGES

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

The Company accounts for its restructuring plans under the authoritative guidance for exit or disposal activities. The restructuring and related charges are included in “Cost of revenue” and “Operating expenses - Restructuring and related charges” in the Condensed Consolidated Statements of Operations. The following table summarizes the restructuring and related charges (in thousands):
 
Three months ended
 
March 27,
2020

March 29,
2019
Restructuring and related charges in:
 
 
 
Cost of revenue
$
(73
)
 
$
301

Operating expenses - Restructuring and related charges
676

 
57

Total restructuring and related charges
$
603

 
$
358


As of March 27, 2020 and December 31, 2019, the Company’s total restructuring liability was $3.1 million and $4.9 million, respectively, of which $1.9 million and $1.5 million, respectively, were reported as a component of “Accrued and other current liabilities”, and the remaining $1.2 million and $3.4 million, respectively, were reported as a component of “Other non-current liabilities” on the Company’s Condensed Consolidated Balance Sheets.

The following table summarizes the activities related to the Company’s restructuring plans during the three months ended March 27, 2020 (in thousands):

 
 
Excess facilities
 
Severance and benefits
 
French VDP
 
Others
 
Total
Balance at December 31, 2019
 
$
720

 
$
3,294

 
$
806

 
$
30

 
$
4,850

Charges for current period
 

 
563

 
40

 

 
603

Cash payments
 
(463
)
 
(1,252
)
 
(526
)
 

 
(2,241
)
Others
 

 
(80
)
 
(46
)
 

 
(126
)
Balance at March 27, 2020
 
$
257

 
$
2,525

 
$
274

 
$
30

 
$
3,086


NOTE 11: CONVERTIBLE NOTES, OTHER DEBTS AND FINANCE LEASES
2.00% Convertible Senior Notes due 2024
In September 2019, the Company issued $115.5 million of the 2024 Notes pursuant to an indenture (the “2024 Notes Indenture”), dated September 13, 2019, by and between the Company and U.S. Bank National Association, as trustee. The 2024 Notes bear interest at a rate of 2.00% per year, payable semiannually on March 1 and September 1 of each year. The 2024 Notes will mature on September 1, 2024, unless earlier repurchased by the Company, redeemed by the Company or converted pursuant to their terms.

The 2024 Notes are convertible into cash, shares of the Company’s common stock, par value $0.001 (“Common Stock”), or a combination thereof, at the Company’s election, at an initial conversion rate of 115.5001 shares of Common Stock per $1,000 principal amount of 2024 Notes (which is equivalent to an initial conversion price of approximately $8.66 per share). The conversion rate, and thus the effective conversion price, may be adjusted under certain circumstances, including in connection with conversions made following certain fundamental changes or a notice of redemption and under other circumstances, in each case, as set forth in the 2024 Notes Indenture.

The 2024 Notes will be convertible at certain times and upon the occurrence of certain events in the future, in each case, specified in the 2024 Notes Indenture. Further, on or after June 1, 2024, until the close of business on the scheduled trading day immediately preceding the maturity date, holders of the 2024 Notes may convert all or a portion of their 2024 Notes regardless of these conditions.

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In accordance with the accounting guidance on embedded conversion features, the conversion feature associated with the 2024 Notes was valued at $24.9 million and bifurcated from the host debt instrument and recorded in “Additional paid-in capital”. The resulting debt discount on the 2024 Notes is being amortized to interest expense at the effective interest rate over the contractual term of the 2024 Notes. The following table presents the components of the 2024 Notes as of March 27, 2020 and December 31, 2019 (in thousands, except for years and percentages):

 
March 27, 2020
 
December 31, 2019
Liability:
 
 
 
  Principal amount
$
115,500

 
$
115,500

  Less: Debt discount, net of amortization
(22,594
)
 
(23,652
)
  Less: Debt issuance costs, net of amortization
(3,074
)
 
(3,219
)
  Carrying amount
$
89,832

 
$
88,629

  Remaining amortization period (years)
4.4

 
4.7

  Effective interest rate on liability component
7.95
%
 
7.95
%

4.00% Convertible Senior Notes due 2020
In December 2015, the Company issued $128.25 million in aggregate principal amount of the 2020 Notes pursuant to an indenture (the “2020 Notes Indenture”), dated December 14, 2015, by and between the Company and U.S. Bank National Association, as trustee. The 2020 Notes bear interest at a rate of 4.00% per year, payable in cash on June 1 and December 1 of each year and the 2020 Notes will mature on December 1, 2020 unless earlier repurchased by the Company, redeemed by the Company or converted pursuant to their terms.
In September 2019, the Company used approximately $109.6 million of the net proceeds from the issuance of the 2024 Notes to repurchase $82.5 million aggregate principal of the 2020 Notes in privately negotiated transactions. The repurchase of the 2020 Notes was accounted for as a debt extinguishment, and the consideration transferred was allocated between the equity and liability components by determining the fair value of the conversion option immediately prior to the debt extinguishment and allocating that portion of the repurchase price to additional paid-in capital for $27.1 million, with the residual repurchase price allocated to the liability component, respectively. The partial repurchase of the 2020 Notes resulted in the recognition of a $5.7 million loss on debt extinguishment for the year ended December 31, 2019.

The 2020 Notes are convertible into cash, shares of the Common Stock, or a combination thereof, at the Company’s election, at an initial conversion rate of 173.9978 shares of Common Stock per $1,000 principal amount of 2020 Notes (which is equivalent to an initial conversion price of approximately $5.75 per share). The conversion rate, and thus the effective conversion price, may be adjusted under certain circumstances, including in connection with conversions made following certain fundamental changes and under other circumstances, in each case, as set forth in the 2020 Notes Indenture.
The 2020 Notes will be convertible at certain times and upon the occurrence of certain events in the future, in each case, specified in the 2020 Notes Indenture. Further, on or after September 1, 2020, until the close of business on the scheduled trading day immediately preceding the maturity date, holders of the 2020 Notes may convert all or a portion of their 2020 Notes regardless of these conditions.
In accordance with the accounting guidance on embedded conversion features, the conversion feature associated with the 2020 Notes was initially valued at $26.1 million and bifurcated from the host debt instrument and recorded in “Additional paid-in capital”. The resulting debt discount on the 2020 Notes is being amortized to interest expense at the effective interest rate over the contractual terms of the 2020 Notes. The following table presents the components of the 2020 Notes as of March 27, 2020 and December 31, 2019 (in thousands, except for years and percentages):

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March 27, 2020
 
December 31, 2019
Liability:
 
 
 
  Principal amount
$
45,785

 
$
45,785

  Less: Debt discount, net of amortization
(1,586
)
 
(2,151
)
  Less: Debt issuance costs, net of amortization
(191
)
 
(259
)
  Carrying amount
$
44,008

 
$
43,375

  Remaining amortization period (years)
0.7

 
0.9

  Effective interest rate on liability component
9.94
%
 
9.94
%
The 2020 Notes became convertible as of December 31, 2019, as the last reported sale price of the Common stock for at least 20 trading days during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter was greater than or equal to 130% of the conversion price of the 2020 Notes on each applicable trading day. As a result of the 2020 Notes becoming currently convertible for cash up to the principal amount of $45.8 million, the Company reclassified the unamortized debt discount for the 2020 Notes in the amount of $1.8 million from “Additional paid-in-capital” to convertible debt in the mezzanine equity section in the Condensed Consolidated Balance Sheet as of March 27, 2020.

The following table presents interest expense recognized for the 2020 Notes and the 2024 Notes (in thousands):
 
Three months ended
 
March 27, 2020
 
March 29, 2019
Contractual interest expense
$
1,035

 
$
1,283

Amortization of debt discount
1,623

 
1,433

Amortization of debt issuance costs
212

 
172

  Total interest expense recognized
$
2,870

 
$
2,888


Other Debts and Finance Leases

The Company has a variety of debt and credit facilities in France to satisfy the financing requirements of the operations of its French subsidiary. These arrangements are summarized in the table below (in thousands):
 
March 27, 2020
 
December 31, 2019
Financing from French government agencies related to various government incentive programs (1)
$
16,160

 
$
16,566

Term loans
174

 
587

Obligations under finance leases
57

 
71

  Total debt obligations
16,391

 
17,224

  Less: current portion
(6,343
)
 
(6,713
)
  Long-term portion
$
10,048

 
$
10,511

(1) As of March 27, 2020 and December 31, 2019, loans backed by French R&D tax credit receivables were $14.7 million and $15.1 million, respectively. As of March 27, 2020, the French Subsidiary had an aggregate of $23.5 million of R&D tax credit receivables from the French government from 2020 through 2023. See Note 8, “Balance Sheet Components” for additional information. These tax loans have a fixed rate of 0.6%, plus EURIBOR 1 month + 1.3% and mature between 2020 through 2022. The remaining loans of $1.5 million at March 27, 2020, primarily relate to financial support from French government agencies for R&D innovation projects at minimal interest rates, and these loans mature between 2020 through 2025.

Future minimum repayments

The table below presents the future minimum repayments of debts and finance lease obligations in France as of March 27, 2020 (in thousands):


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Years ending December 31,
Finance lease obligations
 
Other Debt obligations
2020 (remaining nine months)
$
35

 
$
6,212

2021
22

 
5,007

2022

 
4,750

2023

 
147

Thereafter

 
218

Total
$
57

 
$
16,334


Line of Credit
On December 19, 2019, the Company entered into a Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as lender. The Credit Agreement provides for a secured revolving loan facility in an aggregate principal amount of up to $25.0 million, based on a borrowing base of eligible accounts receivable and inventory, with a maturity date of October 31, 2020. The Company may use availability under the revolving loan facility for the issuance of letters of credit. The proceeds of the revolving loans may be used for general corporate purposes.

The revolving loans bear interest, at the Company’s election, at a floating rate per annum equal to either (1) 1.25% plus the greater of (i) 1 month LIBOR on any day plus 2.50% and (ii) the prime rate as reported in the Wall Street Journal from time to time or (2) 2.25% plus LIBOR for an interest period of one, two or three months. Interest on the revolving loans is payable monthly in arrears, in the case of prime rate loans, and at the end of the applicable interest period, in the case of LIBOR loans.

The Credit Agreement contains customary affirmative and negative covenants, including covenants limiting the ability of the Company, among other things, incur debt, grant liens, undergo certain fundamental changes, make investments, make certain restricted payments, dispose of assets, enter into transactions with affiliates, and enter into burdensome agreements, in each case, subject to limitations and exceptions set forth in the Credit Agreement. The Company is also required to maintain compliance with an adjusted quick ratio, a minimum EBITDA covenant (tested quarterly) and a minimum liquidity covenant, in each case, determined in accordance with the terms of the Credit Agreement. As of March 27, 2020, the Company was in compliance with the covenants under the Credit Agreement.

As of March 27, 2020, there was $0.3 million of outstanding letters of credit issued under the Credit Agreement. There were no revolving borrowings under the Credit Agreement as of March 27, 2020.

As of March 27, 2020, the Company has security for letters of credit which are unsecured in the amount of $2.2 million.

NOTE 12: EMPLOYEE BENEFIT PLANS AND STOCK-BASED COMPENSATION
Equity Award Plans
The Company’s stock benefit plans include the 2002 Employee Stock Purchase Plan (“ESPP”) and current active stock plans adopted in 1995 and 2002. See Note 13, “Employee Benefit Plans and Stock-based Compensation” of Notes to Consolidated Financial Statements in the 2019 Form 10-K for details pertaining to each plan.

As of March 27, 2020, there were 0.8 million and 3.7 million shares of common stock reserved for future grants under the Company’s ESPP and active stock plans, respectively.


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Stock Option Activities

The following table summarizes the Company’s stock option activities and related information during the three months ended March 27, 2020 (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, 2019
 
1,888

 
$
5.83

 
 
 
 
Exercised
 
(127
)
 
5.78

 
 
 
 
Canceled or expired
 
(203
)
 
5.78

 
 
 
 
Balance at March 27, 2020
 
1,558

 
5.84

 
1.9
 
$
1,319


 
 
 
 
 
 
 
 
Vested and expected to vest
 
1,558

 
5.84

 
1.9
 
$
1,319

Exercisable
 
1,558

 
5.84

 
1.9
 
$
1,319

The aggregate intrinsic value disclosed above represents the difference between the exercise price of the options and the fair value of the Company’s common stock. There were no employee stock options granted in the three months ended March 27, 2020.

There were no realized tax benefits attributable to stock options exercised in jurisdictions where this expense is deductible for tax purposes for the three months ended March 27, 2020 and March 29, 2019, respectively.

Restricted Stock Units (“RSUs”) Activities

The following table summarizes the Company’s RSUs activities and related information during the three months ended March 27, 2020 (in thousands, except per share amounts):
 
 
Restricted Stock Units Outstanding
 
 
Number
of
Shares
 
Weighted
Average Grant
Date Fair Value
Per Share
Balance at December 31, 2019
 
3,601

 
$
5.18

Granted
 
1,894

 
6.24

Vested
 
(1,790
)
 
5.48

Forfeited
 
(237
)
 
3.84

Balance at March 27, 2020
 
3,468

 
5.69

Performance- and Market-based awards
The Company settled 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 472,247 shares of PRSUs to certain employees for the three months ended March 27, 2020, all of which were fully vested at the time of grant for the purpose of settling amounts earned under the Company’s 2019 incentive bonus plans. The stock-based compensation recognized for these PRSUs was $3.0 million for the three months ended March 27, 2020. There were no PRSUs issued for purposes of settling amounts earned under the Company's incentive plans in the three months ended March 29, 2019.

In the first quarter of 2020, the Company granted 67,910 performance-based RSUs to certain key executives that are expected to vest by the end of fiscal 2020. The vesting condition for these PRSUs include achievement of certain financial operating goals. The stock-based compensation recognized for all PRSUs which vest according to achievement of certain financial operating goals for the three months ended March 27, 2020 was $0.4 million. The unrecognized stock-based compensation of the PRSUs as of March 27, 2020 was $0.8 million which includes $0.4 million of unrecognized expense from PRSUs granted in 2019. 40,000 shares of PRSUs granted in 2019 had vested as of March 27, 2020.

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In the first quarter of 2020, the Company granted 182,830 market-based RSUs (“MRSUs”) under the 1995 Stock Plan to a key executive that is expected to vest during a three-year period. The vesting condition for the MRSUs include performance of the Company’s total shareholder return (“TSR”) relative to the TSR of the NASDAQ Telecommunication Index. The aggregate grant-date fair value of these shares was estimated to be $1.1 million using a Monte-Carlo simulation valuation method. The stock-based compensation recognized for all MRSUs for the three months ended March 27, 2020 was $0.1 million. The unrecognized stock-based compensation of the MRSUs as of March 27, 2020 was $1.8 million which includes $0.7 million of unrecognized expense from MRSUs granted in 2019. None of these MRSUs had vested as of March 27, 2020.

French Retirement Benefit Plan
The Company assumed obligations under a defined benefit pension plan in connection with the acquisition of its French subsidiary in 2016. The plan is unfunded and there are no contributions required by laws or funding regulations, discretionary contributions or non-cash contributions expected to be made. The table below presents the components of net periodic benefit costs (in thousands):
 
Three months ended
 
March 27, 2020
 
March 29, 2019
Service cost
$
61

 
$
57

Interest cost
9

 
20

  Net periodic benefit cost
$
70

 
$
77

The present value of the Company’s pension obligation as of March 27, 2020 was $5.2 million, of which $0.1 million was reported as a component of “Accrued and other current liabilities” and $5.1 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, 2019 was $5.3 million.

401(k) Plan
The Company has a retirement/savings plan for its U.S. employees, which qualifies as a thrift plan under Section 401(k) of the Internal Revenue Code. This plan allows participants to contribute up to the applicable Internal Revenue Code limitations under the plan. The Company has made discretionary contributions to the plan of 25% of the first 4% contributed by eligible participants, up to a maximum contribution per participant of $1,000 per year. The contributions for the three months ended March 27, 2020 and March 29, 2019 were $109,000 and $122,000, respectively.

Stock-based Compensation
The following table summarizes stock-based compensation for all plans (in thousands):
 
Three months ended
 
March 27,
2020
 
March 29,
2019
Stock-based compensation in:
 
 
 
Cost of revenue
$
770

 
$
225

Research and development expense
1,738

 
616

Selling, general and administrative expense
3,751

 
1,272

Total stock-based compensation in operating expense
5,489

 
1,888

Total stock-based compensation
$
6,259

 
$
2,113

As of March 27, 2020, total unrecognized stock-based compensation cost related to unvested RSUs was $18.7 million and is expected to be recognized over a weighted-average period of approximately 2.17 years.
Valuation Assumptions
The Company estimates the fair value of employee stock options and stock purchase rights under the ESPP using a Black-Scholes option valuation model. The value of the stock purchase rights under the ESPP consists of: (1) the 15% discount on the purchase of the stock; (2) 85% of the fair value of the call option; and (3) 15% of the fair value of the put option. The call option and put option were valued using the Black-Scholes option pricing model.

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ESPP Purchase Period Ending
 
July 1,
2020
 
July 1,
2019
 
Expected term (years)
0.5

 
0.5

 
Volatility
50
%
 
43
%
 
Risk-free interest rate
1.6
%
 
2.5
%
 
Expected dividends
0.0
%
 
0.0
%
 
Estimated weighted average fair value per share at purchase date
$2.24
 
$1.31
 
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 13: INCOME TAXES
The Company reported the following operating results for the periods presented (in thousands):
 
Three months ended
 
March 27,
2020
 
March 29,
2019
Loss before income taxes
$
(21,225
)
 
$
(11,625
)
Provision for income taxes
729

 
(319
)
Effective income tax rate
(3.4
)%
 
2.7
%
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 one-time, discrete items that benefited or decremented the tax rates in the previous years.
The Company's effective income tax rate of (3.4)% for the three months ended March 27, 2020 was different from the U.S. federal statutory rate of 21%, primarily due to the full valuation allowance against U.S. federal, California and other states deferred tax assets, foreign withholding taxes and income taxes on earnings from operations in foreign tax jurisdictions.

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

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 2016 through 2019 tax years generally remain subject to examination by U.S. federal and most state tax authorities. In significant foreign jurisdictions, the 2014 through 2019 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

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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 June 7, 2019, the Ninth Circuit overturned the earlier Tax Court decision and ruled to include share-based compensation in the cost sharing pool. On July 22, 2019, Altera Corp. filed a petition for an en banc rehearing before the U.S. Court of Appeals for the Ninth Circuit, which was denied on November 12, 2019. Altera filed a petition for a writ of certiorari on February 10, 2020 asking the Supreme Court to review the Ninth Circuit Court of Appeals' decision, but it has not yet been granted. The Company has not changed its historical position of including share-based compensation in the cost base consistent with the Ninth Circuit’s ruling.

As of March 27, 2020, the total amount of gross unrecognized tax benefits, including interest and penalties, was approximately $17.0 million, of which $15.7 million would affect the Company’s effective tax rate if the benefits are eventually recognized, subject to valuation allowance considerations. The Company recognizes interest and penalties related to unrecognized tax positions in income tax expense. The net interest and penalty charges recorded as of March 27, 2020 were not material

On March 27, 2020, the “Coronavirus Aid, Relief, and Economic Security Act” was signed into law. The new legislation includes a number of income tax provisions applicable to individuals and businesses. The Company is required to recognize the effect of the tax law changes in the period of enactment for the three months ended March 27, 2020, such as the reclassification of the long term receivable of $0.5 million for the alternative minimum tax credit refund to short term receivable.

NOTE 14: NET LOSS PER SHARE
The following table sets forth the computation of the basic and diluted net loss per share (in thousands, except per share amounts):
 
Three months ended
 
March 27,
2020
 
March 29,
2019
Numerator:
 
 
 
Net loss
$
(21,954
)
 
$
(11,306
)
Denominator:
 
 
 
Weighted average number of common shares outstanding
 
 
 
Basic and diluted
95,575

 
88,165

Net loss per share:
 
 
 
Basic and diluted
$
(0.23
)
 
$
(0.13
)
Basic net loss per share was the same as diluted net loss per share for the three months ended March 27, 2020 and March 29, 2019, 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 and the anti-dilutive weighted shares that were excluded from the computation of basic and diluted net loss per share calculations (in thousands):
 
Three months ended
 
March 27,
2020
 
March 29,
2019
Stock options
1,796

 
2,941

RSUs
2,899

 
2,400

Stock purchase rights under the ESPP
443

 
489

Convertible Debt
1,169

 

Warrants (1)

 
1,954

   Total
6,307

 
7,784

(1) See Note 15, “Warrants” for additional information.


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The Company’s intent is to settle the principal amount of the 2020 Notes and the 2024 Notes in cash. The treasury stock method is used to calculate any potential dilutive effect of the conversion spread on diluted net income per share, if applicable.

The conversion spread of 7,962,609 shares 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 for the 2020 Notes.

The conversion spread of 13,337,182 shares 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 $8.66 per share for the 2024 Notes.

See Note 11, “Convertible Notes, Other Debts and Finance Leases” for additional information on the 2020 Notes and the 2024 Notes.

NOTE 15: WARRANTS

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

The Warrant shares were fully vested and exercisable as of July 1, 2019. On December 17, 2019, Comcast exercised the Warrant in its entirety, resulting in a net issuance of 3,217,547 shares. The Company delivered 804,387 shares to Comcast on December 20, 2019, with the remaining 2,413,160 shares delivered on January 10, 2020.

During the three months ended March 27, 2020 and March 29, 2019, the Company recorded $0.4 million and $25 thousand, respectively, as a reduction to net revenues in connection with amortization of the Warrant.

NOTE 16: SEGMENT INFORMATION
Operating segments are defined as components of an enterprise that 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 the Company 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 provides 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 Pay-TV service providers. The Cable Access segment provides cable access solutions and related services to cable operators globally.
The following table provides summary financial information by reportable segment (in thousands):

 
Three months ended
 
March 27, 2020
 
March 29, 2019
Video
 
 
 
Revenue
$
54,372

 
$
67,176

Gross profit
27,907

 
38,602

Operating income (loss)
(6,267
)
 
1,968

Cable Access
 
 
 
Revenue
$
24,045

 
$
12,930

Gross profit
10,414

 
5,068

Operating loss
(3,265
)
 
(5,822
)
Total
 
 
 
Revenue
$
78,417

 
$
80,106

Gross profit
38,321

 
43,670

Operating loss
$
(9,532
)
 
$
(3,854
)

A reconciliation of the Company’s consolidated segment operating loss to consolidated loss before income taxes is as follows (in thousands):
 
Three months ended
 
March 27, 2020

March 29, 2019
Total segment operating loss
$
(9,532
)
 
$
(3,854
)
Unallocated corporate expenses
(603
)
 
(358
)
Stock-based compensation
(6,259
)
 
(2,113
)
Amortization of intangibles
(1,655
)
 
(2,083
)
Loss from operations
(18,049
)
 
(8,408
)
Non-operating expense, net
(3,176
)
 
(3,217
)
Loss before income taxes
$
(21,225
)
 
$
(11,625
)

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

Geographic Information
 
Three months ended
 
March 27, 2020

March 29, 2019
Net Revenue (in thousands) (1)
 
 
 
United States
$
34,403

 
$
30,115

Other Countries
44,014

 
49,991

Total
$
78,417

 
$
80,106


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

Market Information
 
Three months ended
 
March 27, 2020
 
March 29, 2019
Market (in thousands)
 
 
 
Service Provider
$
43,759

 
$
44,212

Broadcast and Media
34,658

 
35,894

Total
$
78,417

 
$
80,106



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NOTE 17: COMMITMENTS AND CONTINGENCIES
Warranties
The Company accrues for estimated warranty costs at the time of product shipment. Management periodically reviews the estimated fair value of its warranty liability and records adjustments based on the terms of warranties provided to customers, historical and anticipated warranty claims experience, and estimates of the timing and cost of warranty claims. Activity for the Company’s warranty accrual, which is included in “Accrued and other current liabilities”, is summarized below (in thousands):
 
Three months ended
 
March 27,
2020
 
March 29,
2019
Balance at beginning of period
$
4,314

 
$
4,869

   Accrual for current period warranties
656

 
1,403

   Warranty costs incurred
(1,226
)
 
(1,685
)
Balance at end of period
$
3,744

 
$
4,587

Purchase Obligations
The Company relies on a limited number of contract manufacturers and suppliers to provide manufacturing services for a substantial majority of its products. The Company had approximately $55.3 million of non-cancelable commitments to purchase inventories and other commitments as of March 27, 2020.
Standby Letters of Credit and Guarantees
As of March 27, 2020 and December 31, 2019, the Company has outstanding bank guarantees and standby letters of credit in aggregate of $2.7 million, consisting of building leases and performance bonds issued to customers.
As of March 27, 2020 there were $0.3 million of outstanding letters of credit issued under the Credit Agreement. There were no revolving borrowings under the Credit Agreement as of March 27, 2020.

During 2017, one of the Company’s subsidiaries entered into a $2.0 million credit facility with a foreign bank for the purpose of issuing performance guarantees. The credit facility is secured by a $2.2 million guarantee issued by the Company. There were no amounts outstanding under this credit facility as of March 27, 2020 and December 31, 2019, respectively.

Indemnification

Harmonic is obligated to indemnify its officers and the members of its Board of Directors pursuant to its bylaws and contractual indemnity agreements. Harmonic also indemnifies some of its suppliers and most of its customers for specified intellectual property matters pursuant to certain contractual arrangements, subject to certain limitations. The scope of these indemnities varies, but, in some instances, includes indemnification for damages and expenses (including reasonable attorneys’ fees). There have been no amounts accrued in respect of these indemnification provisions through March 27, 2020.

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


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The terms “Harmonic,” “Company,” “we,” “us,” “its,” and “our,” as used in this Quarterly Report on Form 10-Q (this “Form 10-Q”), refer to Harmonic Inc. and its subsidiaries and its predecessors as a combined entity, except where the context requires otherwise.
Some of the statements contained in this Form 10-Q are forward-looking statements that involve risk and uncertainties. The statements contained in this Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements regarding our expectations, beliefs, intentions or strategies regarding the future. In some cases, you can identify forward-looking statements by terminology such as, “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “intends,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements regarding:
the impact of the COVID-19 pandemic, and related responses of businesses and governments to the pandemic, on our operations and personnel, on commercial activity in the markets in which we operate and worldwide and regional economies, and on our results of operations;
developing trends and demands in the markets we address, particularly emerging markets;
economic conditions, particularly in certain geographies, and in financial markets;
new and future products and services;
spending of our customers;
our strategic direction, future business plans and growth strategy;
industry and customer consolidation;
expected demand for and benefits of our products and services;
concentration of revenue sources;
expectations regarding our CableOS solutions;
expectations regarding the impact of the software license agreement with Comcast on our business;
potential future acquisitions and dispositions;
anticipated results of potential or actual litigation;
our competitive environment;
the impact of our restructuring plans;
the impact of governmental regulations, including with respect to tariffs and economic sanctions;
anticipated revenue and expenses, including the sources of such revenue and expenses;
expected impacts of changes in accounting rules;
expectations regarding the usability of our inventory and the risk that inventory will exceed forecasted demand;
expectations and estimates related to goodwill and intangible assets and their associated carrying value; and
use of cash, cash needs and ability to raise capital, including repaying our convertible notes.
These statements are subject to known and unknown risks, uncertainties and other factors, any of which may cause our actual results to differ materially from those implied by the forward-looking statements. Important factors that may cause actual results to differ from expectations include those discussed in “Risk Factors” beginning on page 40 of this Form 10-Q. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us on the date thereof, and we assume no obligation to update any such forward-looking statements.

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

We do business in three geographic regions: the Americas, EMEA and APAC and operate in two segments, Video and Cable Access. Our Video business sells video processing, production and playout solutions, and services worldwide to cable operators and satellite and telecommunications (“telco”) Pay-TV service providers, which we refer to collectively as “service providers,” as well as to broadcast and media companies, including streaming media companies. Our Video business infrastructure solutions are delivered either through shipment of our products, software licenses or as software-as-a-service (“SaaS”) subscriptions. Our Cable Access business sells cable access solutions and related services, including our CableOS software-based cable access solution, primarily to cable operators globally.
Historically, our revenue has been dependent upon capital spending in the cable, satellite, telco, broadcast and media industries, including streaming media. Our customers’ capital spending patterns are dependent on a variety of factors, including but not limited to: economic conditions in the U.S. and international markets, including the impacts of the COVID-19 pandemic; access to financing; annual budget cycles of each of the industries we serve; impact of industry consolidations; and customers suspending or reducing capital spending in anticipation of new products or new standards, new industry trends and/or technology shifts. If our product portfolio and product development plans do not position us well to capture an increased portion of the capital spending in the markets in which we compete, our revenue may decline. As we attempt to further diversify our customer base in these markets, we may need to continue to build alliances with other equipment manufacturers, content providers, resellers and system integrators, managed services providers and software developers; adapt our products for new applications; take orders at prices resulting in lower margins; and build internal expertise to handle the particular operational, payment, financing and/or contractual demands of our customers, which could result in higher operating costs for us.
The worldwide spread of COVID-19 has resulted in public health responses in affected regions, including travel bans and restrictions, social distancing requirements, and shelter-in-place orders, which have caused a global slowdown of economic activity and negatively impacted our business, operations and financial performance. In our Cable Access segment, COVID-19 led to delays in deployments as our customers operations were slowed to comply with appropriate safety precautions, and we expect some additional delays in deployments and a modest impact on design win velocity in the second quarter. In our Video segment, sales of video appliances and integration fell in March following the spread of COVID-19 as transactions or shipments were delayed and we were unable to complete certain field deployment projects as customer facilities closed. Sales in APAC were impacted the most due to the earlier spread of COVID-19, though we believe economies in APAC may begin to recover sooner than other regions and lead to increased demand for our products and services. We expect that the COVID-19 pandemic will continue to have a material impact on our results of operations.
We continue to monitor the impact of the COVID-19 pandemic and we have adopted several measures in response to COVID-19, including instructing employees to work from home, making adjustments to our expenses and cash flow to correlate with declines in revenues, and restricting non-essential business travel by our employees. The extent to which our operations will be impacted by the pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of the pandemic and actions by governments and businesses in response to the pandemic. As such, given the uncertainty around the duration and severity of the impact on market conditions and the business environment, we cannot reasonably estimate the full impacts of COVID-19 on our future results of operations. See “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q for additional information.
A majority of our revenue has been derived from relatively few customers, due in part to the consolidation of our service provider customers. Sales to our 10 largest customers during the three months ended March 27, 2020 accounted for 48% of our net revenue, compared to 41% for the corresponding period in 2019. Although we are attempting to broaden our customer base by penetrating new markets and further expanding internationally, we expect to see continuing industry consolidation and customer concentration. During the three months ended March 27, 2020, Comcast accounted for 17% and Vodafone accounted for 12% of our net revenue. During the three months ended March 29, 2019, no single customer accounted for more than 10% of our net revenue. The loss of any significant customer, any material reduction in orders by any significant customer, or our failure to qualify our new products with a significant customer could materially and adversely affect our operating results, financial condition and cash flows.
Our net revenue decreased $1.7 million, or 2%, in the three months ended March 27, 2020, compared to the corresponding period in 2019, primarily due to a decrease in Video segment revenue of $12.8 million, partially offset by an increase of $11.1 million in Cable Access segment revenue. Our Video business was impacted by the COVID-19 pandemic, as we experienced reduced appliance demand in March. Additionally, as anticipated, the ongoing transition from video appliances to SaaS also contributed to the year-over-year reduction in segment revenue. The increase in Cable Access segment revenue year-over-year is primarily due significant progress ramping CableOS over the past year.
Our Video segment customers continue to be cautious with investments in new technologies, such as next-generation IP architectures and Ultra HD. We believe a material and growing portion of the opportunities for our video business are linked to a migration by our customers to IP workflows and the distribution of linear and on-demand, OTT, and new mobile video services. We continue to steadily transition our video business away from legacy and customized computing hardware to more software-centric solutions and services, including OTT SaaS subscription offerings that enable video compression and processing through our VOS software platform running on standard off-the-shelf servers, data centers and in the cloud.
Our Cable Access strategy is to continue to deliver software-based cable access technologies, which we refer to as our CableOS solutions, to our cable operator customers. We believe our CableOS software-based cable access solutions are superior to hardware-based systems and deliver unprecedented scalability, agility and cost savings for our customers. Our CableOS solutions, which can be deployed based on a centralized, distributed Remote PHY or hybrid architecture, enable our customers to migrate to multi-gigabit broadband capacity and the fast deployment of DOCSIS 3.1 data, video and voice services. We believe our CableOS solutions resolve space and power constraints in cable operator facilities, eliminate dependence on hardware upgrade cycles and significantly reduce total cost of ownership, and will help us become a major player in the cable access market. In the meantime, we believe our Cable Access segment is gaining momentum in the marketplace as our customers have begun to adopt new virtualized DOCSIS 3.1 CMTS solutions and distributed access architectures. While we are in the early stages of field trials and deployments and may experience near-term challenges, we continue to make progress in the development of our CableOS solutions and in the growth of our CableOS business, with expanded commercial deployments, field trials, and customer engagements, though we expect this progress to slow in the near term as customers delay their spending activity in light of the global economic uncertainty due to COVID-19.
As the timing of our customers’ investment decisions can be uncertain, we have implemented restructuring plans to better align the Company’s resources and strategic goals. We continue to focus on expense controls on a company-wide basis. (See Note 10, “Restructuring and Related Charges” of the Notes to our Condensed Consolidated Financial Statements for additional information).
Our aggregate balance of cash and cash equivalents as of March 27, 2020 was $71.7 million. During the three months ended March 27, 2020, we used $11.0 million of cash from operating activities. In 2019, we refinanced a portion of our 4.00% Convertible Senior Notes due 2020 (the “2020 Notes”) by issuing 2.00% Convertible Senior Notes due 2024 (the “2024 Notes”). We also entered into a $25 million revolving loan facility with JPMorgan Chase Bank, N.A., in October 2019, which has not been used to withdraw any cash as of March 27, 2020. We expect that our current sources of liquidity will provide us adequate liquidity based on our current plan for the next twelve months.

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
Our unaudited condensed consolidated financial statements and the related notes included elsewhere in this report are prepared in accordance with U.S. GAAP. The preparation of these unaudited condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. We are not aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities as of May 4, 2020, the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change as new events occur and additional information is obtained.

Our critical accounting policies, judgments and estimates are disclosed in our 2019 Annual Report on Form 10-K, as filed with the SEC. There have been no significant changes to these policies during the three months ended March 27, 2020 other than those disclosed in Note 2 to the Condensed Consolidated Financial Statements in Item 1.

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


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RESULTS OF OPERATIONS

Net Revenue
The following table presents the breakdown of revenue by segment for the three months ended March 27, 2020 and March 29, 2019 (in thousands, except percentages):
 
Three months ended
 
 
 
 
March 27, 2020
 
March 29, 2019
 
Q1 FY20 vs Q1 FY19
Segment:
 
 
 
 
 
 
Video
$
54,372

 
$
67,176

 
$
(12,804
)
(19
)%
Cable Access
24,045

 
12,955

 
11,090

86
 %
Total segment revenue
78,417

 
80,131

 
(1,714
)
(2
)%
Amortization of warrants

 
(25
)
 
25

(100
)%
Total net revenue
$
78,417

 
$
80,106

 
$
(1,689
)
(2
)%
 
 
 
 
 


Segment revenue as a % of total segment revenue:
 
 
 
Video
69
%
 
84
%
 
 
 
Cable Access
31
%
 
16
%
 
 
 
The following table presents the breakdown of revenue by geographical region for the three months ended March 27, 2020 and March 29, 2019 (in thousands, except percentages):
 
Three months ended
 
 
 
 
March 27, 2020
 
March 29, 2019
 
Q1 FY20 vs Q1 FY19
Geography:
 
 
 
 
 
 
Americas
$
37,650

 
$
34,188

 
$
3,462

10
 %
EMEA
27,816

 
28,078

 
(262
)
(1
)%
APAC
12,951

 
17,840

 
(4,889
)
(27
)%
Total net revenue
$
78,417

 
$
80,106

 
$
(1,689
)
(2
)%
 
 
 
 
 
 
 
Regional revenue as a % of total net revenue:
 
 
 
Americas
48
%
 
43
%
 
 
 
EMEA
35
%
 
35
%
 
 
 
APAC
17
%
 
22
%
 
 
 
Our Video segment net revenue decreased 19% in the three months ended March 27, 2020, compared to the corresponding period in 2019, which was largely due to the impact from the COVID-19 pandemic, as we experienced reduced appliance demand in March. Additionally, as anticipated, the ongoing transition from video appliances to SaaS also contributed to the year-over-year reduction in segment revenue.
Our Cable Access segment net revenue increased 86% in the three months ended March 27, 2020, compared to the corresponding period in 2019. The increase in Cable Access segment revenue year-over-year is primarily due significant progress ramping CableOS over the past year.
Net revenue in the Americas increased 10% in the three months ended March 27, 2020, compared to the corresponding period in 2019, primarily due to the growing success of our CableOS solutions, which was offset by a decrease in revenue from other products and services.

EMEA net revenue decreased 1% in the three months ended March 27, 2020, compared to the corresponding period in 2019, primarily due to a decrease in Video appliance revenue as a result of the COVID-19 pandemic.

APAC net revenue decreased 27% in the three months ended March 27, 2020, compared to the corresponding period in 2019, primarily due to the impacts of the COVID-19 pandemic being felt throughout APAC earlier in the quarter resulting in a decrease in Video appliance revenue.

Gross Profit
The following table presents the gross profit and gross profit as a percentage of net revenue (“gross margin”) for the three months ended March 27, 2020 and March 29, 2019 (in thousands, except percentages):
 
Three months ended
 
 
 
 
March 27, 2020
 
March 29, 2019
 
Q1 FY20 vs Q1 FY19
Gross profit
$
36,738

 
$
41,849

 
$
(5,111
)
(12
)%
As a percentage of net revenue (“gross margin”)
46.8
%
 
52.2
%
 
(5.4
)%
 

Our gross margins are dependent upon, among other factors, the proportion of software sales, product mix, customer mix, product introduction costs, price reductions granted to customers and achievement of cost reductions.
Gross margin in the three months ended March 27, 2020 decreased 12% compared to the corresponding period in 2019 primarily due to the impact of COVID-19 resulting in lower contribution from high-margin appliance and integration services, and higher operating costs, particularly freight charges. The decrease in Video segment margins were partially offset by an improvement of Cable Access margins as a result of improved software mix.

Research and Development
The following table presents the research and development expenses and the expenses as a percentage of net revenue for the three months ended March 27, 2020 and March 29, 2019 (in thousands, except percentages):
 
Three months ended
 
 
 
 
March 27, 2020
 
March 29, 2019
 
Q1 FY20 vs Q1 FY19
Research and development
$
22,123

 
$
21,401

 
$
722

3
%
As a percentage of net revenue
28.2
%
 
26.7
%
 
 
 
Our research and development expenses consist primarily of employee salaries and related expenses, contractors and outside consultants, supplies and materials, equipment depreciation and facilities costs, all associated with the design and development of new products and enhancements of existing products.
Research and development expenses increased 3% in the three months ended March 27, 2020, compared to the corresponding period in 2019, primarily due to higher stock-based compensation expense related to performance-based RSUs, higher employee compensation costs due to headcount increases and higher outside consulting spending attributable to our Cable Access segment. This increase was partially offset by lower travel and entertainment expenses as a result of the COVID-19 pandemic.


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Selling, General and Administrative
The following table presents the selling, general and administrative expenses and the expenses as a percentage of net revenue for the three months ended March 27, 2020 and March 29, 2019 (in thousands, except percentages):
 
Three months ended
 
 
 
 
March 27, 2020
 
March 29, 2019
 
Q1 FY20 vs Q1 FY19
Selling, general and administrative
$
31,218

 
$
28,011

 
$
3,207

11
%
As a percentage of net revenue
39.8
%
 
35.0
%
 
 
 

Selling, general and administrative expenses increased 11% in the three months ended March 27, 2020, compared to the corresponding period in 2019, primarily due to higher stock-based compensation expense related to performance-based RSUs and higher outside services costs, offset by lower travel and entertainment expenses due to the COVID-19 pandemic.

Segment Operating Loss
The following table presents a breakdown of operating income (loss) by segment for the three months ended March 27, 2020 and March 29, 2019 (in thousands, except percentages):
 
Three months ended
 
 
 
 
March 27, 2020
 
March 29, 2019
 
Q1 FY20 vs Q1 FY19
Video
$
(6,267
)
 
$
1,968

 
$
(8,235
)
(418
)%
Cable Access
(3,265
)
 
(5,797
)
 
2,532

(44
)%
Total segment operating loss
$
(9,532
)
 
$
(3,829
)
 
$
(5,703
)
149
 %
 
 
 
 
 
 

Segment operating income (loss) as a % of segment revenue (“operating margin”):
Video
(11.5
)%
 
2.9
 %
 
(14.4
)%
 
Cable Access
(13.6
)%
 
(44.7
)%
 
31.1
 %
 
The operating margin for the Video segment in the three months ended March 27, 2020 decreased 14.4%, compared to the corresponding period in 2019 primarily due to the decrease in gross margins, partially offset by lower travel and entertainment expenses due to the COVID-19 pandemic.
The operating margin for the Cable Access segment increased 31.1% in the three months ended March 27, 2020, compared to the corresponding period in 2019, primarily due to significant progress ramping CableOS over the past year and improvement of Cable Access margins as a result of improved software mix.
The following table presents a reconciliation of total segment operating loss to consolidated loss before income taxes (in thousands):
 
Three months ended
 
March 27, 2020
 
March 29, 2019
Total segment operating loss
$
(9,532
)
 
$
(3,829
)
Amortization of warrants

 
(25
)
Unallocated corporate expenses
(603
)
 
(358
)
Stock-based compensation
(6,259
)
 
(2,113
)
Amortization of intangibles
(1,655
)
 
(2,083