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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 September 25, 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)
2590 Orchard Parkway
San Jose, CA 95131
(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 October 27, 2020 was 97,747,764.




TABLE OF CONTENTS
 

3


PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARMONIC INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except per share data)
 
September 25, 2020
 
December 31, 2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
70,817

 
$
93,058

Accounts receivable, net
81,353

 
88,500

Inventories, net
36,802

 
29,042

Prepaid expenses and other current assets
25,071

 
40,762

Total current assets
214,043

 
251,362

Property and equipment, net
41,915

 
22,928

Operating lease right-of-use assets
24,531

 
27,491

Goodwill
241,425

 
239,780

Intangibles, net
1,256

 
4,461

Other long-term assets
36,252

 
41,305

Total assets
$
559,422

 
$
587,327

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Other debts and finance lease obligations, current
$
11,402

 
$
6,713

Accounts payable
31,555

 
40,933

Income taxes payable
826

 
1,226

Deferred revenue
42,729

 
37,117

Accrued and other current liabilities
51,286

 
62,535

        Convertible notes, short-term
7,972

 
43,375

Total current liabilities
145,770

 
191,899

Convertible notes, long-term
128,018

 
88,629

Other debts and finance lease obligations, long-term
9,707

 
10,511

Income taxes payable, long-term
185

 
178

Other non-current liabilities
41,204

 
41,254

Total liabilities
324,884

 
332,471

Commitments and contingencies (Note 17)

 

Convertible notes
81

 
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; 97,732 and 91,875 shares issued and outstanding at September 25, 2020 and December 31, 2019, respectively
98

 
92

Additional paid-in capital
2,348,638

 
2,327,359

Accumulated deficit
(2,114,676
)
 
(2,071,940
)
Accumulated other comprehensive income (loss)
397

 
(3,065
)
Total stockholders’ equity
234,457

 
252,446

Total liabilities and stockholders’ equity
$
559,422

 
$
587,327

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

4



HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
 
Three months ended
 
Nine months ended
 
September 25, 2020
 
September 27, 2019
 
September 25, 2020
 
September 27, 2019
Revenue:
 
 
 
 
 
 
 
Appliance and integration
$
63,251

 
$
83,082

 
$
153,227

 
$
189,864

SaaS and service
31,641

 
32,643

 
94,076

 
90,832

Total net revenue
94,892

 
115,725

 
247,303

 
280,696

Cost of revenue:
 
 
 
 
 
 
 
Appliance and integration
32,082

 
26,812

 
81,153

 
83,178

SaaS and service
13,886

 
13,373

 
42,715

 
36,201

Total cost of revenue
45,968

 
40,185

 
123,868

 
119,379

Total gross profit
48,924

 
75,540

 
123,435

 
161,317

Operating expenses:
 
 
 
 
 
 
 
Research and development
20,206

 
20,197

 
61,827

 
62,911

Selling, general and administrative
28,773

 
31,148

 
86,996

 
88,478

Amortization of intangibles
752

 
785

 
2,264

 
2,357

Restructuring and related charges
814

 
861

 
1,572

 
1,194

Total operating expenses
50,545

 
52,991

 
152,659

 
154,940

Income (loss) from operations
(1,621
)
 
22,549

 
(29,224
)
 
6,377

Interest expense, net
(2,807
)
 
(3,000
)
 
(8,772
)
 
(8,862
)
Loss on debt extinguishment

 
(5,695
)
 
(834
)
 
(5,695
)
Other expense, net
(167
)
 
(1,594
)
 
(813
)
 
(2,333
)
Income (loss) before income taxes
(4,595
)
 
12,260

 
(39,643
)
 
(10,513
)
Provision for income taxes
786

 
603

 
3,093

 
981

Net income (loss)
$
(5,381
)
 
$
11,657

 
$
(42,736
)
 
$
(11,494
)
 
 
 
 
 
 
 
 
Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
(0.06
)
 
$
0.13

 
$
(0.44
)
 
$
(0.13
)
Diluted
$
(0.06
)
 
$
0.12

 
$
(0.44
)
 
$
(0.13
)
Shares used in per share calculation:
 
 
 
 
 
 
 
Basic
97,563

 
89,964

 
96,623

 
89,030

Diluted
97,563

 
97,596

 
96,623

 
89,030

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

5


HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, in thousands)
 
Three months ended
 
Nine months ended
 
September 25, 2020
 
September 27, 2019
 
September 25, 2020
 
September 27, 2019
Net income (loss)
$
(5,381
)
 
$
11,657

 
$
(42,736
)
 
$
(11,494
)
Losses reclassified into earnings

 

 

 
56

Change in foreign currency translation adjustments
3,518

 
(3,431
)
 
3,238

 
(3,874
)
Other comprehensive income (loss) before tax
3,518

 
(3,431
)
 
3,238

 
(3,818
)
Provision for (benefit from) income taxes
(255
)
 
284

 
(224
)
 
335

Other comprehensive income (loss), net of tax
3,773

 
(3,715
)
 
3,462

 
(4,153
)
Total comprehensive income (loss)
$
(1,608
)
 
$
7,942

 
$
(39,274
)
 
$
(15,647
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

6


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

 
Three Months Ended September 25, 2020
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive Income (Loss)
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Balance at June 26, 2020
96,863

 
$
97

 
$
2,342,856

 
$
(2,109,295
)
 
$
(3,376
)
 
$
230,282

Net loss

 

 

 
(5,381
)
 

 
(5,381
)
Other comprehensive income, net of tax

 

 

 

 
3,773

 
3,773

Issuance of common stock under option, stock award and purchase plans
869

 
1

 
1,891

 

 

 
1,892

Stock-based compensation

 

 
3,972

 

 

 
3,972

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

 

 
(81
)
 

 

 
(81
)
Balance at September 25, 2020
97,732

 
$
98

 
$
2,348,638

 
$
(2,114,676
)
 
$
397

 
$
234,457


 
Three Months Ended September 27, 2019
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive Loss
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Balance at June 28, 2019
89,074

 
$
89

 
$
2,302,798

 
$
(2,089,167
)
 
$
(1,654
)
 
$
212,066

Net income

 

 

 
11,657

 

 
11,657

Other comprehensive loss, net of tax

 

 

 

 
(3,715
)
 
(3,715
)
Issuance of common stock under option, stock award and purchase plans
1,241

 
1

 
2,975

 

 

 
2,976

Stock-based compensation

 

 
4,157

 

 

 
4,157

Issuance of warrant

 

 
16,142

 

 

 
16,142

Portion of repurchase price recorded in additional paid-in capital in connection with partial repurchase of 4.00% convertible notes due 2020

 

 
(27,111
)
 

 

 
(27,111
)
Conversion feature of 2.00% convertible notes due 2024

 

 
24,878

 

 

 
24,878

Balance at September 27, 2019
90,315

 
90

 
$
2,323,839

 
$
(2,077,510
)
 
$
(5,369
)
 
$
241,050




7


 
Nine Months Ended September 25, 2020
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive Income (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

 

 

 
(42,736
)
 
 
 
(42,736
)
Other comprehensive income, net of tax

 

 

 

 
3,462

 
3,462

Issuance of common stock under option, stock award and purchase plans
3,444

 
4

 
3,839

 

 

 
3,843

Stock-based compensation

 

 
13,768

 

 

 
13,768

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

 

 
2,329

 

 

 
2,329

Balance at September 25, 2020
97,732

 
$
98

 
$
2,348,638

 
$
(2,114,676
)
 
$
397

 
$
234,457

 
Nine Months Ended September 27, 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

 

 

 
(11,494
)
 

 
(11,494
)
Other comprehensive loss, net of tax

 

 

 

 
(4,153
)
 
(4,153
)
Issuance of common stock under option, stock award and purchase plans
3,258

 
3

 
4,292

 

 

 
4,295

Stock-based compensation

 

 
8,843

 

 

 
8,843

Issuance of warrant

 

 
16,142

 

 

 
16,142

Portion of repurchase price recorded in additional paid-in capital in connection with partial repurchase of 4.00% convertible notes due 2020

 

 
(27,111
)
 

 

 
(27,111
)
Conversion feature of 2.00% convertible notes due 2024

 

 
24,878

 

 

 
24,878

Balance at September 27, 2019
90,315

 
$
90

 
$
2,323,839

 
$
(2,077,510
)
 
$
(5,369
)
 
$
241,050

(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.



8


HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Nine months ended
 
September 25, 2020
 
September 27, 2019
Cash flows from operating activities:
 
 
 
Net loss
$
(42,736
)
 
$
(11,494
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Amortization of intangibles
3,214

 
6,242

Depreciation
8,683

 
8,480

Stock-based compensation
13,737

 
8,719

Amortization of discount on convertible and other debt
5,451

 
4,960

Amortization of non-cash warrant
1,307

 
13,137

Loss on debt extinguishment
834

 
5,695

Deferred income taxes, net
1,527

 
75

Foreign currency adjustments
2,537

 
(1,719
)
Provision for excess and obsolete inventories
1,390

 
704

Provision for doubtful accounts, returns and discounts
1,966

 
988

Other non-cash adjustments, net
177

 
1,235

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
5,436

 
(20,521
)
Inventories
(9,301
)
 
(4,170
)
Prepaid expenses and other assets
23,685

 
(5,703
)
Accounts payable
(11,047
)
 
(2,839
)
Deferred revenue
6,066

 
8,002

Income taxes payable
(384
)
 
(114
)
Accrued and other liabilities
(14,961
)
 
(10,536
)
Net cash provided by (used in) operating activities
(2,419
)
 
1,141

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(26,176
)
 
(4,973
)
Net cash used in investing activities
(26,176
)
 
(4,973
)
Cash flows from financing activities:
 
 
 
Proceeds from convertible debt

 
115,500

Payments of convertible debt
(25
)
 
(109,603
)
Payment of convertible debt issuance costs
(672
)
 
(3,465
)
Proceeds from other debts and finance leases
9,398

 
4,684

Repayment of other debts and finance leases
(6,342
)
 
(6,387
)
Proceeds from common stock issued to employees
5,227

 
5,573

Payment of tax withholding obligations related to net share settlements of restricted stock units
(1,384
)
 
(1,278
)
Net cash provided by financing activities
6,202

 
5,024

Effect of exchange rate changes on cash and cash equivalents
152

 
(486
)
Net increase (decrease) in cash and cash equivalents
(22,241
)
 
706

Cash and cash equivalents at beginning of period
93,058

 
65,989

Cash and cash equivalents at end of period
$
70,817

 
$
66,695

Supplemental disclosures of cash flow information:
 
 
 
Income tax payments (refunds), net
$
(426
)
 
$
980

Interest payments, net
$
3,216

 
$
3,432

Supplemental schedule of non-cash investing and financing activities:
 
 
 
Capital expenditures incurred but not yet paid
$
3,284

 
$
543

Issuance of warrant
$

 
$
16,142

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.

9


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 November 2, 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 nine months ended September 25, 2020 other than those disclosed in Note 2, “Recent Accounting Pronouncements”.


10


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 No. 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 No. 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 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments in an Entity’s Own Equity, which simplifies the accounting for convertible instruments and contracts on an entity’s own equity. Among other changes, ASU No. 2020-06 removes from U.S. GAAP the liability and equity separation model for convertible instruments with a cash conversion feature, and as a result, after adoption, entities will no longer separately present in equity an embedded conversion feature for such debt. Similarly, the embedded conversion feature will no longer be amortized into income as interest expense over the life of the instrument. Instead, entities will account for a convertible debt instrument wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC Topic 815, Derivatives and Hedging, or (2) a convertible debt instrument was issued at a substantial premium. Among other potential impacts, this change is expected to reduce reported interest expense, increase reported net income, and result in a reclassification of certain conversion feature balance sheet amounts from stockholders’ equity to liabilities as it relates to the Company’s convertible senior notes. Additionally, ASU No. 2020-06 requires the application of the if-converted method to calculate the impact of convertible

11


instruments on diluted earnings per share (EPS), which would result in an increase in diluted shares for purposes of calculating diluted EPS for the Company. The new ASU is effective for interim and annual periods beginning after December 15, 2021, with early adoption permitted after December 15, 2020. Adoption of the new ASU can either be on a modified retrospective or full retrospective basis. The Company is currently evaluating the timing, method of adoption and overall impact of this standard on its consolidated financial statements.
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.

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.


12


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
 
September 25,
2020
 
December 31,
2019
Contract assets
$
4,067

 
$
13,969

Deferred revenue
49,650

 
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.

During the three months ended September 25, 2020 and September 27, 2019, the Company recognized revenue of $5.7 million and $6.1 million, respectively, that was included in the deferred revenue balance at the beginning of each fiscal year. During the nine months ended September 25, 2020 and September 27, 2019, the Company recognized revenue of $32.4 million and $37.4 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 September 25, 2020, the aggregate amount of the transaction price under this agreement allocated to the remaining performance obligations is $85.5 million, and the Company will recognize this revenue as the related performance obligations are delivered over the next eleven quarters.

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
 
Nine months ended
 
September 25, 2020

September 27, 2019

September 25, 2020

September 27, 2019
Operating lease cost
$
1,873

 
$
2,641

 
$
6,556

 
$
6,868

Variable lease cost
681

 
837

 
2,183

 
2,360

Total lease cost
$
2,554

 
$
3,478

 
$
8,739

 
$
9,228

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

13


 
Three months ended
 
Nine months ended
 
September 25, 2020
 
September 27, 2019
 
September 25, 2020
 
September 27, 2019
Cash paid for amounts included in the measurement of operating lease liabilities
$
3,134

 
$
2,655

 
$
7,772

 
$
6,937

Right-of-use assets obtained in exchange for operating lease obligations
$
69

 
$

 
$
1,740

 
$
10,305


During the second quarter of fiscal 2019, the Company entered into a lease for a new headquarters facility. The new lease commenced in May 2019, as the facility was made available to the Company for constructing leasehold improvements. During the third quarter of 2020, the Company completed the construction of leasehold improvements for the new headquarters facility and exited the lease for the old headquarters.


14


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 September 25, 2020 that the EDC investment was impaired. The Company’s maximum exposure to loss from the EDC’s investment at September 25, 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.
Gains (losses) on the non-designated derivative instruments recognized during the periods presented were as follows (in thousands):
 
 
 
Three months ended
 
Nine months ended
 
Financial Statement Location
 
September 25, 2020
 
September 27, 2019
 
September 25, 2020
 
September 27, 2019
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Gains (losses) recognized in operations
Other expense, net
 
$
618

 
$
(1,357
)
 
$
285

 
$
(1,966
)

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

 
September 25, 2020
 
December 31, 2019
Derivatives not designated as hedging instruments:
 

 

Purchase
 
$
36,107

 
$
14,806

Sell
 
$

 
$
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
 
September 25, 2020
 
December 31, 2019
 
Balance Sheet Location
 
September 25, 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
 
$
273

 
$
112

Total derivatives
 
 
 
$

 
$
43

 
 
 
$
273

 
$
112



Offsetting of Derivative 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 September 25, 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
 
$
273

 

 
$
273


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 September 25, 2020, the total compensating balance maintained was $1.0 million.


15


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 September 25, 2020
 
 
 
 
 
 
 
Accrued and other current liabilities
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
273

 
$

 
$
273

Total liabilities measured and recorded at fair value
$

 
$
273

 
$

 
$
273

 
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 $0.1 million and $0.8 million as of September 25, 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.

16


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 $42.9 million as of September 25, 2020. The fair value of the Company’s 4.00% Convertible Senior Notes due 2020 (the “2020 Notes”) was approximately $8.7 million and $66.8 million as of September 25, 2020 and December 31, 2019, respectively. The fair value of Company’s 2.00% Convertible Senior Notes due 2024 (the “2024 Notes”) was approximately $105.8 million and $131.9 million as of September 25, 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 September 25, 2020 and December 31, 2019 were in the aggregate of $21.1 million and $17.2 million, respectively. (See Note 11, “Convertible Notes, Other debts and Finance Leases” for additional information).
During the nine months ended September 25, 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):
 
September 25, 2020

December 31, 2019
Accounts receivable, net:
 
 
 
Accounts receivable
$
84,240

 
$
91,513

Less: allowances for doubtful accounts and sales returns
(2,887
)
 
(3,013
)
     Total
$
81,353

 
$
88,500



 
September 25, 2020
 
December 31, 2019
Inventories, net:
 
 
 
Raw materials
$
4,791

 
$
4,179

Work-in-process
1,954

 
1,633

Finished goods
21,784

 
14,080

Service-related spares
8,273

 
9,150

Total
$