SEC Filing | Harmonic Inc.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________________________

Form 10-Q

_____________________________________________________

(Mark One)



☒	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended June 26, 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 July 27, 2020 was 97,429,109.

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TABLE OF CONTENTS



PART I

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)	4
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	41
ITEM 4. CONTROLS AND PROCEDURES	42

PART II
ITEM 1. LEGAL PROCEEDINGS	43
ITEM 1A. RISK FACTORS	44
ITEM 6. EXHIBITS	66
SIGNATURES	67

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PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HARMONIC INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except per share data)



	June 26, 2020			December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	77,744		$	93,058
Accounts receivable, net	74,781			88,500
Inventories, net	32,097			29,042
Prepaid expenses and other current assets	23,255			40,762
Total current assets	207,877			251,362
Property and equipment, net	41,341			22,928
Operating lease right-of-use assets	25,292			27,491
Goodwill	239,816			239,780
Intangibles, net	1,993			4,461
Other long-term assets	41,202			41,305
Total assets	$	557,521		$	587,327
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Other debts and finance lease obligations, current	$	6,323		$	6,713
Accounts payable	27,235			40,933
Income taxes payable	1,017			1,226
Deferred revenue	47,605			37,117
Accrued and other current liabilities	55,366			62,535
Convertible notes, short-term	7,855			43,375
Total current liabilities	145,401			191,899
Convertible notes, long-term	126,554			88,629
Other debts and finance lease obligations, long-term	13,994			10,511
Income taxes payable, long-term	182			178
Other non-current liabilities	41,108			41,254
Total liabilities	327,239			332,471
Commitments and contingencies (Note 17)
Convertible notes	—			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; 96,863 and 91,875 shares issued and outstanding at June 26, 2020 and December 31, 2019, respectively	97			92
Additional paid-in capital	2,342,856			2,327,359
Accumulated deficit	(2,109,295		)	(2,071,940		)
Accumulated other comprehensive loss	(3,376		)	(3,065		)
Total stockholders’ equity	230,282			252,446
Total liabilities and stockholders’ equity	$	557,521		$	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						Six months ended
	June 26, 2020			June 28, 2019			June 26, 2020			June 28, 2019
Revenue:
Appliance and integration	$	42,224		$	54,417		$	89,976		$	106,782
SaaS and service	31,770			30,448			62,435			58,189
Total net revenue	73,994			84,865			152,411			164,971
Cost of revenue:
Appliance and integration	22,784			29,312			49,071			56,366
SaaS and service	13,437			11,625			28,829			22,828
Total cost of revenue	36,221			40,937			77,900			79,194
Total gross profit	37,773			43,928			74,511			85,777
Operating expenses:
Research and development	19,498			21,313			41,621			42,714
Selling, general and administrative	27,005			29,319			58,223			57,330
Amortization of intangibles	742			784			1,512			1,572
Restructuring and related charges	82			276			758			333
Total operating expenses	47,327			51,692			102,114			101,949
Loss from operations	(9,554		)	(7,764		)	(27,603		)	(16,172		)
Interest expense, net	(3,062		)	(2,956		)	(5,965		)	(5,862		)
Loss on debt extinguishment	(834		)	—			(834		)	—
Other expense, net	(373		)	(428		)	(646		)	(739		)
Loss before income taxes	(13,823		)	(11,148		)	(35,048		)	(22,773		)
Provision for income taxes	1,578			697			2,307			378
Net loss	$	(15,401	)	$	(11,845	)	$	(37,355	)	$	(23,151	)

Net loss per share:
Basic and diluted	$	(0.16	)	$	(0.13	)	$	(0.39	)	$	(0.26	)
Shares used in per share calculation:
Basic and diluted	96,727			88,931			96,255			88,554

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

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HARMONIC INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited, in thousands)



	Three months ended						Six months ended
	June 26, 2020			June 28, 2019			June 26, 2020			June 28, 2019
Net loss	$	(15,401	)	$	(11,845	)	$	(37,355	)	$	(23,151	)
Losses (gains) reclassified into earnings	—			(101		)	—			56
Change in foreign currency translation adjustments	2,839			857			(280		)	(443		)
Other comprehensive income (loss) before tax	2,839			756			(280		)	(387		)
Provision for (benefit from) income taxes	(125		)	(55		)	31			51
Other comprehensive income (loss), net of tax	2,964			811			(311		)	(438		)
Total comprehensive loss	$	(12,437	)	$	(11,034	)	$	(37,666	)	$	(23,589	)

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 June 26, 2020
	Common Stock			Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	Shares	Amount		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
Balance at March 27, 2020	96,566	$	97	$	2,336,459		$	(2,093,894	)	$	(6,340	)	$	236,322
Net loss	—	—		—			(15,401		)	—			(15,401		)
Other comprehensive income, net of tax	—	—		—			—			2,964			2,964
Issuance of common stock under option, stock award and purchase plans	297	—		(220		)	—			—			(220		)
Stock-based compensation	—	—		3,495			—			—			3,495
Conversion feature of 4.375% Convertible Senior Notes due 2022	—	—		8,254			—			—			8,254
Portion of conversion feature of 4.00% Convertible Senior Notes due 2020 exchanged	—	—		(6,909		)	—			—			(6,909		)
Reclassification from mezzanine equity to equity for 4.00% Convertible Senior Notes due in 2020	—	—		1,777			—			—			1,777
Balance at June 26, 2020	96,863	$	97	$	2,342,856		$	(2,109,295	)	$	(3,376	)	$	230,282



	Three Months Ended June 28, 2019
	Common Stock			Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	Shares	Amount		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
Balance at March 29, 2019	88,784	$	89	$	2,300,259		$	(2,077,322	)	$	(2,465	)	$	220,561
Net loss	—	—		—			(11,845		)	—			(11,845		)
Other comprehensive income, net of tax	—	—		—			—			811			811
Issuance of common stock under option, stock award and purchase plans	290	—		(36		)	—			—			(36		)
Stock-based compensation	—	—		2,575			—			—			2,575
Balance at June 28, 2019	89,074	$	89	$	2,302,798		$	(2,089,167	)	$	(1,654	)	$	212,066

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	Six Months Ended June 26, 2020
	Common Stock			Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	Shares	Amount		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
Balance at December 31, 2019	91,875	$	92	$	2,327,359		$	(2,071,940	)	$	(3,065	)	$	252,446
Net loss	—	—		—			(37,355		)	—			(37,355		)
Other comprehensive loss, net of tax	—	—		—			—			(311		)	(311		)
Issuance of common stock under option, stock award and purchase plans	2,575	3		1,948			—			—			1,951
Stock-based compensation	—	—		9,796			—			—			9,796
Conversion feature of 4.375% Convertible Senior Notes due 2022	—	—		8,254			—			—			8,254
Portion of conversion feature of 4.00% Convertible Senior Notes due 2020 exchanged	—	—		(6,909		)	—			—			(6,909		)
Exercise of warrant	2,413	2		(2		)	—			—			—
Reclassification from mezzanine equity to equity for 4.00% Convertible Senior Notes due in 2020	—	—		2,410			—			—			2,410
Balance at June 26, 2020	96,863	$	97	$	2,342,856		$	(2,109,295	)	$	(3,376	)	$	230,282



	Six Months Ended June 28, 2019
	Common Stock			Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	Shares	Amount		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
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	—	—		—		(23,151		)	—			(23,151		)
Other comprehensive loss, net of tax	—	—		—		—			(438		)	(438		)
Issuance of common stock under option, stock award and purchase plans	2,017	2		1,317		—			—			1,319
Stock-based compensation	—	—		4,686		—			—			4,686
Balance at June 28, 2019	89,074	$	89	$	2,302,798	$	(2,089,167	)	$	(1,654	)	$	212,066

(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)



	Six months ended
	June 26, 2020			June 28, 2019
Cash flows from operating activities:
Net loss	$	(37,355	)	$	(23,151	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Amortization of intangibles	2,462			4,162
Depreciation	5,535			5,716
Stock-based compensation	9,807			4,623
Amortization of discount on convertible and other debt	3,785			3,262
Amortization of non-cash warrant	868			48
Loss on debt extinguishment	834			—
Deferred income taxes, net	1,116			(145		)
Provision for excess and obsolete inventories	723			384
Provision for doubtful accounts, returns and discounts	662			500
Other non-cash adjustments, net	118			79
Changes in operating assets and liabilities:
Accounts receivable	13,024			10,699
Inventories	(4,032		)	(2,440		)
Prepaid expenses and other assets	19,182			(1,526		)
Accounts payable	(14,963		)	(1,752		)
Deferred revenue	11,241			4,989
Income taxes payable	(181		)	(292		)
Accrued and other liabilities	(11,936		)	(9,802		)
Net cash provided by (used in) operating activities	890			(4,646		)
Cash flows from investing activities:
Purchases of property and equipment	(20,753		)	(2,939		)
Net cash used in investing activities	(20,753		)	(2,939		)
Cash flows from financing activities:
Payments of convertible debt	(25		)	—
Payment of convertible debt issuance costs	(35		)	—
Proceeds from other debts and finance leases	9,398			4,503
Repayment of other debts and finance leases	(6,342		)	(6,162		)
Proceeds from common stock issued to employees	3,000			2,147
Payment of tax withholding obligations related to net share settlements of restricted stock units	(1,049		)	(828		)
Net cash provided by (used in) financing activities	4,947			(340		)
Effect of exchange rate changes on cash and cash equivalents	(398		)	—
Net decrease in cash and cash equivalents	(15,314		)	(7,925		)
Cash and cash equivalents at beginning of period	93,058			65,989
Cash and cash equivalents at end of period	$	77,744		$	58,064
Supplemental disclosures of cash flow information:
Income tax payments, net	809			860
Interest payments, net	2,037			2,495
Supplemental schedule of non-cash investing and financing activities:
Capital expenditures incurred but not yet paid	5,000			78
Fair value of Convertible Senior Notes due 2022 used to settle Convertible Senior Notes due 2020	44,357			—

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 August 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 six months ended June 26, 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
	June 26, 2020		December 31, 2019
Contract assets	$	4,289	$	13,969
Deferred revenue	54,694		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 June 26, 2020 and June 28, 2019, the Company recognized revenue of $8.7 million and $10.1 million, respectively, that was included in the deferred revenue balance at the beginning of each fiscal year. During the six months ended June 26, 2020 and June 28, 2019, the Company recognized revenue of $26.7 million and $31.3 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 June 26, 2020, the aggregate amount of the transaction price under this agreement allocated to the remaining performance obligations is $92.6 million, and the Company will recognize this revenue as the related performance obligations are delivered over the next three 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				Six months ended
	June 26, 2020		June 28, 2019		June 26, 2020		June 28, 2019
Operating lease cost	$	2,015	$	2,231	$	4,683	$	4,227
Variable lease cost	710		744		1,502		1,523
Total lease cost	$	2,725	$	2,975	$	6,185	$	5,750

Supplemental cash flow information related to leases are as follows (in thousands):



	Three months ended				Six months ended
	June 26, 2020		June 28, 2019		June 26, 2020		June 28, 2019
Cash paid for amounts included in the measurement of operating lease liabilities	$	2,217	$	2,494	$	4,638	$	4,624
Right-of-use assets obtained in exchange for operating lease obligations	$	—	$	10,305	$	1,671	$	10,305

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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 June 26, 2020 that the EDC investment was impaired. The Company’s maximum exposure to loss from the EDC’s investment at June 26, 2020 and December 31, 2019 was limited to its investment cost of $3.6 million, including $0.1 million of transaction costs.

NOTE 6: DERIVATIVES AND HEDGING ACTIVITIES

The Company uses forward contracts to manage exposures to foreign currency exchange rates. The Company’s primary objective in holding derivative instruments is to reduce the volatility of earnings and cash flows associated with fluctuations in foreign currency exchange rates and the Company does not use derivative instruments for trading purposes. The use of derivative instruments exposes the Company to credit risk to the extent that the counterparties may be unable to meet their contractual obligations. As such, the potential risk of loss with any one counterparty is closely monitored by the Company.

Derivatives Not Designated as Hedging Instruments (Balance Sheet Hedges)

The Company’s balance sheet hedges consist of foreign currency forward contracts that generally mature within three months, are carried at fair value, and are used to minimize the short-term impact of foreign currency exchange rate fluctuation on cash and certain trade and inter-company receivables and payables. Changes in the fair value of these foreign currency forward contracts are recognized in “Other expense, net” in the Condensed Consolidated Statement of Operations and are largely offset by the changes in the fair value of the assets or liabilities being hedged.

Losses on the non-designated derivative instruments recognized during the periods presented were as follows (in thousands):



		Three months ended					Six months ended
	Financial Statement Location	June 26, 2020		June 28, 2019			June 26, 2020			June 28, 2019
Derivatives not designated as hedging instruments:
Gains (losses) recognized in operations	Other expense, net	$	579	$	(44	)	$	(333	)	$	(609	)

The U.S. dollar equivalents of all outstanding notional amounts of foreign currency forward contracts are summarized as follows (in thousands):



	June 26, 2020		December 31, 2019
Derivatives not designated as hedging instruments:
Purchase	$	24,415	$	14,806
Sell	$	1,451	$	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	June 26, 2020		December 31, 2019		Balance Sheet Location	June 26, 2020		December 31, 2019
Derivatives not designated as hedging instruments:
Foreign currency contracts	Prepaid expenses and other current assets	$	48	$	43	Accrued and other current liabilities	$	153	$	112
Total derivatives		$	48	$	43		$	153	$	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 June 26, 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 assets	$	48	—	$	48
Derivative liabilities	$	153	—	$	153

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 June 26, 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 June 26, 2020
Prepaid and other current assets
Derivative assets	$	—	$	48	$	—	$	48
Total assets measured and recorded at fair value	$	—	$	48	$	—	$	48
Accrued and other current liabilities
Derivative liabilities	$	—	$	153	$	—	$	153
Total liabilities measured and recorded at fair value	$	—	$	153	$	—	$	153
	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 $0.2 million and $0.8 million as of June 26, 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 4.375% Convertible Senior Notes due 2022, which were issued in June 2020 (the “2022 Notes”), was approximately $40.1 million as of June 26, 2020. The fair value of the Company’s 4.00% Convertible Senior Notes due 2020 (the “2020 Notes”) was approximately $8.0 million and $66.8 million as of June 26, 2020 and December 31, 2019, respectively. The fair value of Company’s 2.00% Convertible Senior Notes due 2024 (the “2024 Notes”) was approximately $102.9 million and $131.9 million as of June 26, 2020 and December 31, 2019, respectively. The 2020 Notes, 2022 Notes and 2024 Notes are classified as Level 2 valuations. The Company’s other debts, including debt 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 June 26, 2020 and December 31, 2019 were in the aggregate of $20.3 million and $17.2 million, respectively. (See Note 11, “Convertible Notes, Other debts and Finance Leases” for additional information).

During the six months ended June 26, 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):



	June 26, 2020			December 31, 2019
Accounts receivable, net:
Accounts receivable	$	77,163		$	91,513
Less: allowances for doubtful accounts and sales returns	(2,382		)	(3,013		)
Total	$	74,781		$	88,500



	June 26, 2020		December 31, 2019
Inventories, net:
Raw materials	$	3,776	$	4,179
Work-in-process	1,458		1,633
Finished goods	18,546		14,080
Service-related spares	8,317		9,150
Total	$	32,097	$	29,042



	June 26, 2020		December 31, 2019
Prepaid expenses and other current assets:
French R&D tax credits receivable⁽¹⁾	$	—	$	7,343
Contract assets⁽²⁾	4,289		13,969
Deferred cost of revenue	5,072		2,631
Prepaid maintenance, royalty, rent, and property taxes	3,153		1,594
Capitalized sales commissions	1,529		1,309
Other	9,212		13,916
Total	$	23,255	$	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 June 26, 2020 were approximately $17.8 million and are expected to be recoverable from 2021 through 2023. See “Other long-term assets”.

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(2) Contract assets reflect the satisfied performance obligations for which the Company does not yet have an unconditional right to consideration.



	June 26, 2020			December 31, 2019
Property and equipment, net:
Machinery and equipment	$	73,508		$	75,229
Capitalized software	35,027			34,190
Construction in progress*	25,549			5,506
Leasehold improvements	15,674			15,170
Furniture and fixtures	8,939			6,036
Property and equipment, gross	158,697			136,131
Less: accumulated depreciation and amortization	(117,356		)	(113,203		)
Total	$	41,341		$	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 $22.9 million for constructing leasehold improvements in the new headquarters facility.