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Table of Contents
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 July 2, 2021

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)
_____________________________________________________
Delaware77-0201147
(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 classTrading Symbol(s)Name of each exchange on which registered
Common stock, $0.001 par valueHLITNASDAQ 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 Filerý
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 August 2, 2021 was 101,805,695.



Table of Contents
TABLE OF CONTENTS
 

3

Table of Contents
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARMONIC INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except per share data)
July 2, 2021December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents$115,177 $98,645 
Accounts receivable, net100,599 66,227 
Inventories43,031 35,031 
Prepaid expenses and other current assets42,314 38,132 
Total current assets301,121 238,035 
Property and equipment, net44,374 43,141 
Operating lease right-of-use assets30,175 27,556 
Other non-current assets33,322 39,117 
Goodwill242,248 243,674 
Total assets$651,240 $591,523 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$37,625 $23,543 
Deferred revenue68,392 54,294 
Other debts, current5,678 11,771 
Operating lease liabilities, current6,847 7,354 
Other current liabilities67,829 50,333 
Total current liabilities186,371 147,295 
Convertible debt, non-current132,575 129,507 
Other debts, non-current13,954 10,086 
Operating lease liabilities, non-current29,015 26,071 
Other non-current liabilities22,001 20,262 
Total liabilities383,916 333,221 
Commitments and contingencies (Note 10)
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; 101,794 and 98,204 shares issued and outstanding at July 2, 2021 and December 31, 2020, respectively
102 98 
Additional paid-in capital2,373,851 2,353,559 
Accumulated deficit(2,109,344)(2,101,211)
Accumulated other comprehensive income
2,715 5,856 
Total stockholders’ equity267,324 258,302 
Total liabilities and stockholders’ equity$651,240 $591,523 
The accompanying notes are an integral part of these condensed consolidated financial statements.
4

Table of Contents

HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
 Three Months EndedSix Months Ended
 July 2, 2021June 26, 2020July 2, 2021June 26, 2020
Revenue:
Appliance and integration$78,598 $42,224 $158,574 $89,976 
SaaS and service34,850 31,770 66,450 62,435 
Total net revenue113,448 73,994 225,024 152,411 
Cost of revenue:
Appliance and integration40,365 22,784 82,984 49,071 
SaaS and service12,578 13,437 26,390 28,829 
Total cost of revenue52,943 36,221 109,374 77,900 
Total gross profit60,505 37,773 115,650 74,511 
Operating expenses:
Research and development24,783 19,498 48,311 41,621 
Selling, general and administrative33,586 27,005 68,497 58,223 
Amortization of intangibles 742 507 1,512 
Restructuring and related charges 82 43 758 
Total operating expenses58,369 47,327 117,358 102,114 
Income (loss) from operations2,136 (9,554)(1,708)(27,603)
Interest expense, net(2,630)(3,062)(5,233)(5,965)
Loss on convertible debt extinguishment (834) (834)
Other income (expense), net(147)(373)872 (646)
Loss before income taxes(641)(13,823)(6,069)(35,048)
Provision for income taxes1,368 1,578 2,064 2,307 
Net loss$(2,009)$(15,401)$(8,133)$(37,355)
Net loss per share:
Basic and diluted$(0.02)$(0.16)$(0.08)$(0.39)
Shares used in per share calculation:
Basic and diluted101,218 96,727 100,539 96,255 
The accompanying notes are an integral part of these condensed consolidated financial statements.
5

Table of Contents
HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited, in thousands)
 Three Months EndedSix Months Ended
 July 2, 2021June 26, 2020July 2, 2021June 26, 2020
Net loss$(2,009)$(15,401)$(8,133)$(37,355)
Change in foreign currency translation adjustments783 2,839 (2,930)(280)
Other comprehensive income (loss) before tax783 2,839 (2,930)(280)
Provision for (benefit from) income taxes(57)(125)211 31 
Other comprehensive income (loss), net of tax840 2,964 (3,141)(311)
Total comprehensive loss$(1,169)$(12,437)$(11,274)$(37,666)
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Table of Contents
HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in thousands)
Three Months Ended July 2, 2021
Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive Income
Total
Stockholders’
Equity
SharesAmount
Balance at April 2, 2021100,993 $101 $2,365,129 $(2,107,335)$1,875 $259,770 
Net loss— — — (2,009)— (2,009)
Other comprehensive income, net of tax— — — — 840 840 
Issuance of common stock under stock option, award and purchase plans801 1 3,099 — — 3,100 
Stock-based compensation— — 4,059 — — 4,059 
Reclassification from mezzanine equity to equity for 2022 Notes— — 1,564 — — 1,564 
Balance at July 2, 2021101,794 $102 $2,373,851 $(2,109,344)$2,715 $267,324 
Three Months Ended June 26, 2020
 Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive Loss
Total
Stockholders’
Equity
 SharesAmount
Balance at March 27, 202096,566 $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 stock option, award and purchase plans297  (220)— — (220)
Stock-based compensation— — 3,495 — — 3,495 
Conversion feature of 2022 Notes— — 8,254 — — 8,254 
Conversion feature of exchanged portion of 2020 Notes— — (6,909)— — (6,909)
Reclassification from mezzanine equity to equity for 2020 Notes— — 1,777 — — 1,777 
Balance at June 26, 202096,863 $97 $2,342,856 $(2,109,295)$(3,376)$230,282 
Six Months Ended July 2, 2021
Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive Income
Total
Stockholders’
Equity
SharesAmount
Balance at December 31, 202098,204 $98 $2,353,559 $(2,101,211)$5,856 $258,302 
Net loss— — — (8,133)— (8,133)
Other comprehensive loss, net of tax— — — — (3,141)(3,141)
Issuance of common stock under stock option, award and purchase plans3,590 4 7,871 — — 7,875 
Stock-based compensation— — 12,421 — — 12,421 
Balance at July 2, 2021101,794 $102 $2,373,851 $(2,109,344)$2,715 $267,324 
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Table of Contents
Six Months Ended June 26, 2020
 Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive Loss
Total
Stockholders’
Equity
 SharesAmount
Balance at December 31, 201991,875 $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 stock option, award and purchase plans2,575 3 1,948 — — 1,951 
Stock-based compensation— — 9,796 — — 9,796 
Conversion feature of 2022 Notes— — 8,254 — — 8,254 
Conversion feature of exchanged portion of 2020 Notes— — (6,909)— — (6,909)
Exercise of warrant2,413 2 (2)— —  
Reclassification from mezzanine equity to equity for 2020 Notes— — 2,410 — — 2,410 
Balance at June 26, 202096,863 $97 $2,342,856 $(2,109,295)$(3,376)$230,282 
The accompanying notes are an integral part of these condensed consolidated financial statements.
8

Table of Contents
HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 Six Months Ended
 July 2, 2021June 26, 2020
Cash flows from operating activities:
Net loss$(8,133)$(37,355)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation6,164 5,535 
Amortization of intangibles507 2,462 
Stock-based compensation12,429 9,807 
Amortization of convertible debt discount3,093 3,785 
Amortization of warrant863 868 
Foreign currency remeasurement(1,897)(89)
Loss on convertible debt extinguishment 834 
Deferred income taxes981 1,116 
Provision for expected credit losses and returns2,230 662 
Provision for excess and obsolete inventories1,004 723 
Other adjustments111 207 
Changes in operating assets and liabilities:
Accounts receivable(36,709)13,024 
Inventories(8,825)(4,032)
Other assets882 19,182 
Accounts payable14,544 (14,963)
Deferred revenues15,553 11,241 
Other liabilities15,642 (12,117)
Net cash provided by operating activities18,439 890 
Cash flows from investing activities:
Purchases of property and equipment(7,685)(20,753)
Net cash used in investing activities(7,685)(20,753)
Cash flows from financing activities:
Payment of convertible debt (25)
Payment of convertible debt issuance costs (35)
Proceeds from other debts3,772 9,398 
Repayment of other debts(5,401)(6,342)
Proceeds from common stock issued to employees9,068 3,000 
Payment of tax withholding obligations related to net share settlements of restricted stock units(1,194)(1,049)
Net cash provided by financing activities6,245 4,947 
Effect of exchange rate changes on cash and cash equivalents(467)(398)
Net increase (decrease) in cash and cash equivalents16,532 (15,314)
Cash and cash equivalents at beginning of period98,645 93,058 
Cash and cash equivalents at end of period$115,177 $77,744 
Supplemental disclosures of cash flow information:
Income taxes, net of refunds$975 $809 
Interest payments$2,060 $2,037 
Supplemental schedule of non-cash investing and financing activities:
Capital expenditures incurred but not yet paid$1,140 $5,000 
Fair value of 2022 Notes used to settle 2020 Notes
$ $44,357 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Table of Contents
HARMONIC INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") and include the accounts of Harmonic Inc. and its controlled subsidiaries (collectively, “Harmonic” or the “Company”). Intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Company's financial position as of balance sheet dates and its operating results and cash flows for the interim periods presented. Operating results for the three and six months period ended July 2, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2021. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.
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.
The Company’s significant accounting policies are described in Note 2 to its audited Consolidated Financial Statements included in the 2020 Form 10-K. There have been no significant changes to these policies during the six months ended July 2, 2021.
NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS
In August 2020, the Financial Accounting Standards Board (“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. This ASU is effective for interim and annual periods beginning after December 15, 2021, with early adoption permitted after December 15, 2020 and can be adopted either on a modified retrospective or full retrospective basis. The Company is evaluating the impact, timing and method of adoption of this ASU. Upon adoption of this ASU, the Company expects to recombine the equity conversion component of its convertible notes, which was initially separated and recorded in equity, and remove the remaining debt discounts recorded for this previous separation. Adoption of this ASU will also result in the elimination of a portion of non-cash interest expense related to amortization of debt discount. Additionally, ASU No. 2020-06 requires the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share, which would result in an increase in the number of shares for calculating diluted earnings per share by approximately 19.9 million shares.
From time to time, new accounting pronouncements are issued by the FASB, or other standards setting bodies, that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes the impact of recently issued standards that are not yet effective will not have a material impact on its consolidated financial position, results of operations and cash flows upon adoption.
NOTE 3: CONTRACT ASSETS AND DEFERRED REVENUE
Contract Balances. 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). 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.
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Contract assets and deferred revenue consisted of the following:
As of
(in thousands)July 2, 2021December 31, 2020
Contract assets$13,920 $9,800 
Deferred revenue$78,950 $63,533 
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.
During the three months ended July 2, 2021 and June 26, 2020, the Company recognized revenue of $8.6 million and $8.7 million, respectively, that was included in the deferred revenue balance at the beginning of each fiscal year. During the six months ended July 2, 2021 and June 26, 2020, the Company recognized revenue of $39.2 million and $26.7 million, respectively, that was included in the deferred revenue balance at the beginning of each fiscal year.
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 July 2, 2021, the aggregate amount of the transaction price under this agreement allocated to the remaining performance obligations is $57.9 million, and the Company will recognize this revenue as the related performance obligations are delivered over the next 24 months.
Refer to Note 9, “Segment Information” for disaggregated revenue information.
NOTE 4: LEASES
The components of lease expense are as follows:
Three Months EndedSix Months Ended
(in thousands)July 2, 2021June 26, 2020July 2, 2021June 26, 2020
Operating lease cost$1,877 $2,015 $3,743 $4,683 
Variable lease cost518 710 1,027 1,502 
Total lease cost$2,395 $2,725 $4,770 $6,185 
Supplemental information related to leases are as follows:
Three Months EndedSix Months Ended
(in thousands)July 2, 2021June 26, 2020July 2, 2021June 26, 2020
Cash payments$1,919 $2,217 $3,757 $4,638 
Right-of-use assets obtained in exchange for operating lease obligations$5,476 $ $5,476 $1,671 
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NOTE 5: OTHER FINANCIAL STATEMENT INFORMATION
The following tables provide details of selected balance sheet components:
As of
(in thousands)July 2, 2021December 31, 2020
Accounts receivable, net:
Accounts receivable$103,734 $68,295 
Less: allowances for expected credit losses and sales returns(3,135)(2,068)
Total$100,599 $66,227 
As of
(in thousands)July 2, 2021December 31, 2020
Inventories:
Raw materials$5,718 $2,529 
Work-in-process2,974 1,689 
Finished goods25,869 22,777 
Service-related spares8,470 8,036 
Total$43,031 $35,031 
As of
(in thousands)July 2, 2021December 31, 2020
Prepaid expenses and other current assets:
Prepaid expenses$11,217 $11,453 
Contract assets13,920 9,800 
Other17,177 16,879 
Total$42,314 $38,132 
As of
(in thousands)July 2, 2021December 31, 2020
Property and equipment, net:
Machinery and equipment$75,084 $72,731 
Capitalized software38,122 37,141 
Leasehold improvements40,370 38,718 
Furniture and fixtures2,881 2,913 
Construction-in-progress2,927 2,209 
Property and equipment, gross159,384 153,712 
Less: accumulated depreciation and amortization(115,010)(110,571)
Total$44,374 $43,141 
As of
(in thousands)July 2, 2021December 31, 2020
Other current liabilities:
Accrued employee compensation and related expenses$20,010 $23,131 
Customers’ advances and deposits24,504 3,385 
Other23,315 23,817 
Total$67,829 $50,333 
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NOTE 6: CONVERTIBLE DEBT
4.375% Convertible Senior Notes due 2022 (the “2022 Notes”)
In June 2020, the Company issued the 2022 Notes with an aggregate principal amount of $37.7 million in a non-cash exchange for its 2020 Notes with an equal principal amount pursuant to an indenture, dated June 2, 2020 (the “2022 Notes Indenture”), by and between the Company and U.S. Bank National Association, as trustee. The 2022 Notes bear interest at a rate of 4.375% per year, payable in cash on June 1 and December 1 of each year. The 2022 Notes will mature on December 1, 2022, unless earlier repurchased or redeemed by the Company, or converted pursuant to their terms.
The 2022 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 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 as set forth in the 2022 Notes Indenture.
Prior to the close of business on the business day immediately preceding September 1, 2022, the 2022 Notes will be convertible only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ended on June 26, 2020 (and only during such fiscal quarter), if the last reported sale price of Common Stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of 2022 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of Common Stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. Commencing on September 1, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, the 2022 Notes will be convertible in multiples of $1,000 principal amount regardless of the foregoing circumstances.
As the 2022 Notes were issued in exchange for the 2020 Notes, which was accounted for as an extinguishment, the 2022 Notes were initially accounted for at fair value, which was estimated to be $44.4 million. In accordance with the accounting guidance on embedded conversion features, the conversion feature associated with the 2022 Notes was initially valued at $8.3 million and bifurcated from the host debt instrument and recorded in “Additional paid-in capital.” The remaining amount of $36.0 million, which represents the fair value of the liability component of the 2022 Notes, was recorded as the initial carrying value of the 2022 Notes. The initial debt discount on the 2022 Notes is $1.7 million, calculated as the difference between the stated principal amount of $37.7 million and the initial carrying value of the liability component of $36.0 million. The debt discount is being amortized to interest expense at the effective interest rate over the contractual term of the 2022 Notes.
The following table presents the components of the 2022 Notes:
As of
(in thousands, except for years and percentages)July 2, 2021December 31, 2020
Liability component:
Principal amount$37,707 $37,707 
Less: Debt discount, net of amortization(1,020)(1,357)
Less: Debt issuance costs, net of amortization(320)(425)
Carrying amount$36,367 $35,925 
Remaining debt discount amortization period (years)1.41.9
Effective interest rate on liability component6.95 %6.95 %
The following table presents interest expense recognized for the 2022 Notes:
Three Months EndedSix Months Ended
(in thousands)July 2, 2021June 26, 2020July 2, 2021June 26, 2020
Contractual interest expense$412 $128 $824 $128 
Amortization of debt discount171 49 337 49 
Amortization of debt issuance costs53 15 105 15 
Total interest expense recognized$636 $192 $1,266 $192 

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2.00% Convertible Senior Notes due 2024 (the “2024 Notes”)
In September 2019, the Company issued the 2024 Notes with an aggregate principal amount of $115.5 million 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 or 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.
Prior to the close of business on the business day immediately preceding June 1, 2024, the 2024 Notes will be convertible only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ended on December 31, 2019, and only during such fiscal quarter, if the last reported sale price of the Common Stock for at least 20 trading days (whether or not consecutive) in a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price for the 2024 Notes on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of 2024 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Common Stock and the conversion rate on each such trading day; (3) if the Company calls any or all of the 2024 Notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. On or after June 1, 2024, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the 2024 Notes may convert all or any portion of their 2024 Notes regardless of the foregoing conditions.
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
(in thousands, except for years and percentages)July 2, 2021December 31, 2020
Liability component:
Principal amount$115,500 $115,500 
Less: Debt discount, net of amortization(16,982)(19,294)
Less: Debt issuance costs, net of amortization(2,310)(2,624)
Carrying amount$96,208 $93,582 
Remaining debt discount amortization period (years)3.23.7
Effective interest rate on liability component7.95 %7.95 %
The following table presents interest expense recognized for the 2024 Notes:
Three Months EndedSix Months Ended
(in thousands)July 2, 2021June 26, 2020July 2, 2021June 26, 2020
Contractual interest expense$578 $578 $1,156 $1,156 
Amortization of debt discount1,166 1,077 2,312 2,134 
Amortization of debt issuance costs158 146 314 290 
Total interest expense recognized$1,902 $1,801 $3,782 $3,580 
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NOTE 7: FAIR VALUE MEASUREMENTS
The Company’s financial instruments not measured at fair value on a recurring basis were as follows:
July 2, 2021December 31, 2020
CarryingFair ValueCarryingFair Value
(in thousands)
ValueLevel 1Level 2Level 3ValueLevel 1Level 2Level 3
2022 Notes$36,367 $— $59,577 $— $35,925 $— $54,204 $— 
2024 Notes$96,208 $— $135,297 $— $93,582 $— $125,953 $— 
The fair value of the Company’s convertible notes is influenced by interest rates, the Company’s stock price and stock market volatility. The difference between the carrying value and the fair value is primarily due to the spread between the conversion price and the market value of the shares underlying the conversion as of each respective balance sheet date.
NOTE 8: EARNINGS PER SHARE
The diluted net loss per share was the same as basic net loss per share for the three and six months ended July 2, 2021 and June 26, 2020, as the inclusion of potential common shares outstanding would have been anti-dilutive due to the Company’s net losses for all periods presented. The following table sets forth the potential weighted common shares outstanding that were excluded from the diluted net loss per share computation:
 Three Months endedSix Months Ended
(in thousands)July 2, 2021June 26, 2020July 2, 2021June 26, 2020
Convertible debt1,645  1,720 584 
Stock options839 1,558 1,015 1,677 
Restricted stock units2,961 2,963 2,895 2,931 
Stock purchase rights under the ESPP404 581 372 512 
   Total5,849 5,102 6,002 5,704 
The Company applies the treasury stock method to determine the potential dilutive effect of its convertible debt on net earnings per share as a result of the Company's intent and stated policy to settle the principal amount of its convertible debt in cash. Under the treasury stock method, the Company’s convertible debt is excluded from the calculation of diluted earnings per share for the periods when its conversion price exceeds the average market price for the Company's common stock. Under the if-converted method, the Company’s convertible debt has potential dilutive effect of 19.9 million shares.
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NOTE 9: 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 the Company’s 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. A measure of assets by segment is not applicable as segment assets are not included in the discrete financial information provided to the CODM.
The following table provides summary financial information by reportable segment:
Three Months EndedSix Months Ended
(in thousands)July 2, 2021June 26, 2020July 2, 2021June 26, 2020
Video
Revenue$63,355 $47,453 $133,686 $101,825 
Gross profit37,571 26,024 76,345 53,931 
Operating income (loss)1,559 (4,237)5,331 (10,504)
Cable Access
Revenue$50,093 $26,541 $91,338 $50,586 
Gross profit23,538 12,128 40,946 22,542 
Operating income (loss)4,992 (878)6,288 (4,143)
Total
Revenue$113,448 $73,994 $225,024 $152,411 
Gross profit61,109 38,152 117,291 76,473 
Operating income (loss)$6,551 $(5,115)$11,619 $(14,647)
A reconciliation of the Company’s consolidated segment operating income (loss) to consolidated loss before income taxes:
Three Months EndedSix Months Ended
(in thousands)July 2, 2021June 26, 2020July 2, 2021June 26, 2020
Total consolidated segment operating income (loss)$6,551 $(5,115)$11,619 $(14,647)
Unallocated corporate expenses(1)
(382)(84)(389)(687)
Stock-based compensation(4,033)(3,548)(12,431)(9,807)
Amortization of intangibles (807)(507)(2,462)
Consolidated income (loss) from operations2,136 (9,554)(1,708)(27,603)
Non-operating expense, net(2,777)(4,269)(4,361)(7,445)
Loss before income taxes$(641)$(13,823)$(6,069)$(35,048)
(1) Together with amortization of intangibles and stock-based compensation, the Company does not allocate restructuring and related charges to the operating income (loss) for each segment because management does not include this information in the measurement of the performance of the operating segments.
Geographic Information
Three Months endedSix Months Ended
(in thousands)July 2, 2021June 26, 2020July 2, 2021June 26, 2020
Net revenue (1)
United States$61,294 $35,223 $128,389 $69,626 
Other countries52,154 38,771 96,635 82,785 
Total$113,448 $73,994 $225,024 $152,411 
(1)  Revenue is attributed to countries based on the location of the customer.
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NOTE 10: COMMITMENTS AND CONTINGENCIES
Indemnification
The Company is obligated to indemnify its officers and the members of its Board of Directors pursuant to its bylaws and contractual indemnity agreements. The Company 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 July 2, 2021.
Legal proceedings
From time to time, the Company is involved in lawsuits as well as subject to various legal proceedings, claims, threats of litigation, audits of royalty payments for licensed technology 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 and SaaS solutions;
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” in Item 1A of Part II 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 streaming 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 software-as-a-service (“SaaS”) platform and support revenue stream from our appliance-based customers and reflects our recurring revenue stream.
We conduct 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 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 certain deployments and new engagements with some cable operators. In our Video segment, sales of video appliances and integration fell 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 in the first half of 2020. In the second half of fiscal 2020 and the first half of 2021, we experienced an increase in sales activities, transactions and deployments in both business segments due to the loosening of certain COVID-19 restrictions, and customer adaptation to such restrictions. We expect that the COVID-19 pandemic may continue to have an impact on our results of operations. Refer to “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q for additional information.
We believe a material and growing portion of the opportunities for our Video business are linked to the industry and our customers (i) continuing to adopt streaming technologies to capture, process and deliver video content to consumers and, increasingly, utilizing public cloud solutions like our VOS®360 SaaS platform to do so; (ii) transforming existing broadcast infrastructure workflows into more flexible, efficient and cost-effective operations running in public clouds; and (iii) for those customers maintaining on-premise video delivery infrastructure, continuing to upgrade and replace aging equipment with next-generation software-based appliances that significantly reduce operational complexity. Our Video business strategy is focused on continuing to develop and deliver products, solutions and services to enable and support these trends.
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Our Cable Access strategy is focused on continuing to develop and 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, DAA 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. 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.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
Our unaudited condensed consolidated financial statements and