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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 30, 2022

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  ☒    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  ☒    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 filerAccelerated Filer
Non-accelerated filerSmaller reporting company
Emerging growth company 


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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  
The number of shares of the registrant’s Common Stock, $0.001 par value, outstanding on October 31, 2022 was 105,436,413.



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TABLE OF CONTENTS
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

3

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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)
September 30, 2022December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents$105,280 $133,431 
Accounts receivable, net105,581 88,529 
Inventories99,024 71,195 
Prepaid expenses and other current assets26,798 29,972 
Total current assets336,683 323,127 
Property and equipment, net40,431 42,721 
Operating lease right-of-use assets25,258 30,968 
Other non-current assets61,625 56,657 
Goodwill233,874 240,213 
Total assets$697,871 $693,686 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Convertible debt, current$37,657 $36,824 
Other debts, current4,401 4,992 
Accounts payable60,892 64,429 
Deferred revenue58,023 57,226 
Operating lease liabilities, current6,591 7,346 
Other current liabilities54,378 53,644 
Total current liabilities221,942 224,461 
Convertible debt, non-current113,761 98,941 
Other debts, non-current10,095 12,989 
Operating lease liabilities, non-current24,132 29,120 
Other non-current liabilities27,320 31,379 
Total liabilities397,250 396,890 
Commitments and contingencies (Note 12)
Convertible debt (Note 7) 883 
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; 105,421 and 102,959 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively
105 103 
Additional paid-in capital2,375,529 2,387,039 
Accumulated deficit(2,052,700)(2,087,957)
Accumulated other comprehensive loss(22,313)(3,272)
Total stockholders’ equity300,621 295,913 
Total liabilities and stockholders’ equity$697,871 $693,686 
The accompanying notes are an integral part of these condensed consolidated financial statements.
4

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HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
 Three Months EndedNine Months Ended
 September 30, 2022October 1, 2021September 30, 2022October 1, 2021
Revenue:
Appliance and integration$116,441 $91,853 $351,293 $250,427 
SaaS and service39,297 34,468 109,330 100,918 
Total net revenue155,738 126,321 460,623 351,345 
Cost of revenue:
Appliance and integration64,932 47,326 193,655 130,310 
SaaS and service12,202 12,841 36,781 39,231 
Total cost of revenue77,134 60,167 230,436 169,541 
Total gross profit78,604 66,154 230,187 181,804 
Operating expenses:
Research and development30,466 26,552 89,219 74,863 
Selling, general and administrative36,379 34,231 109,790 102,728 
Amortization of intangibles   507 
Restructuring and related charges335  2,136 43 
Total operating expenses67,180 60,783 201,145 178,141 
Income from operations11,424 5,371 29,042 3,663 
Interest expense, net(1,284)(2,686)(4,111)(7,919)
Other income (expense), net(118)(213)4,218 659 
Income (loss) before income taxes10,022 2,472 29,149 (3,597)
Provision for income taxes1,282 942 7,098 3,006 
Net income (loss)$8,740 $1,530 $22,051 $(6,603)
Net income (loss) per share:
Basic$0.08 $0.01 $0.21 $(0.07)
Diluted$0.08 $0.01 $0.20 $(0.07)
Weighted average shares outstanding:
Basic105,228 102,099 104,617 101,057 
Diluted113,185 106,421 110,911 101,057 
The accompanying notes are an integral part of these condensed consolidated financial statements.
5

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HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, in thousands)
 Three Months EndedNine Months Ended
 September 30, 2022October 1, 2021September 30, 2022October 1, 2021
Net income (loss)$8,740 $1,530 $22,051 $(6,603)
Change in foreign currency translation adjustments(8,840)(2,372)(18,150)(5,302)
Other comprehensive loss before tax(8,840)(2,372)(18,150)(5,302)
Provision for income taxes523 128 891 339 
Other comprehensive loss, net of tax(9,363)(2,500)(19,041)(5,641)
Total comprehensive income (loss)$(623)$(970)$3,010 $(12,244)
The accompanying notes are an integral part of these condensed consolidated financial statements.
6

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HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in thousands)
Three Months Ended September 30, 2022
Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive Loss
Total
Stockholders’
Equity
SharesAmount
Balance at July 1, 2022105,061 $105 $2,371,001 $(2,061,320)$(12,950)$296,836 
Net income— — — 8,740 — 8,740 
Other comprehensive loss, net of tax— — — — (9,363)(9,363)
Issuance of common stock under stock option, award and purchase plans, net374 — (1,932)— — (1,932)
Repurchase of common stock(14)— — (120)— (120)
Stock-based compensation— — 6,460 — — 6,460 
Balance at September 30, 2022105,421 $105 $2,375,529 $(2,052,700)$(22,313)$300,621 
Three Months Ended October 1, 2021
 Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive Income
Total
Stockholders’
Equity
 SharesAmount
Balance at July 2, 2021101,794 $102 $2,373,851 $(2,109,344)$2,715 $267,324 
Net income— — — 1,530 — 1,530 
Other comprehensive loss, net of tax— — — — (2,500)(2,500)
Issuance of common stock under stock option, award and purchase plans, net755 1 1,907 — — 1,908 
Stock-based compensation— — 6,534 — — 6,534 
Reclassification from equity to mezzanine equity for 2022 Notes— — (1,115)— — (1,115)
Balance at October 1, 2021102,549 $103 $2,381,177 $(2,107,814)$215 $273,681 

Nine Months Ended September 30, 2022
Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive Loss
Total
Stockholders’
Equity
SharesAmount
Balance at December 31, 2021102,959 $103 $2,387,039 $(2,087,957)$(3,272)$295,913 
Cumulative effect of ASU 2020-06 adoption— — (32,249)18,339 — (13,910)
Balance at January 1, 2022102,959 103 2,354,790 (2,069,618)(3,272)282,003 
Net income— — — 22,051 — 22,051 
Other comprehensive loss, net of tax— — — — (19,041)(19,041)
Issuance of common stock under stock option, award and purchase plans, net3,033 3 1,112 — — 1,115 
Repurchase of common stock(571)(1)— (5,133)— (5,134)
Stock-based compensation— — 19,627 — — 19,627 
Balance at September 30, 2022105,421 $105 $2,375,529 $(2,052,700)$(22,313)$300,621 
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Nine Months Ended October 1, 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— — — (6,603)— (6,603)
Other comprehensive loss, net of tax— — — — (5,641)(5,641)
Issuance of common stock under stock option, award and purchase plans, net4,345 5 9,778 — — 9,783 
Stock-based compensation— — 18,955 — — 18,955 
Reclassification from equity to mezzanine equity for 2022 Notes— — (1,115)— — (1,115)
Balance at October 1, 2021102,549 $103 $2,381,177 $(2,107,814)$215 $273,681 
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)
 Nine Months Ended
 September 30, 2022October 1, 2021
Cash flows from operating activities:
Net income (loss)$22,051 $(6,603)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation9,225 9,395 
Amortization of intangibles 507 
Stock-based compensation19,621 18,863 
Amortization of convertible debt discount897 4,685 
Amortization of warrant1,298 1,302 
Foreign currency remeasurement(3,312)(3,435)
Deferred income taxes1,798 1,268 
Provision for expected credit losses and returns1,835 3,049 
Provision for excess and obsolete inventories4,521 1,849 
Gains on sale of investment in equity securities(4,370) 
Other adjustments419 215 
Changes in operating assets and liabilities:
Accounts receivable(22,115)(12,470)
Inventories(34,952)(18,783)
Other assets(10,371)2,614 
Accounts payable1,305 10,144 
Deferred revenues(955)9,978 
Other liabilities(770)11,078 
Net cash provided by (used in) operating activities(13,875)33,656 
Cash flows from investing activities:
Proceeds from sale of investment7,962  
Purchases of property and equipment(7,389)(10,570)
Net cash provided by (used in) investing activities573 (10,570)
Cash flows from financing activities:
Repurchase of common stock(5,133) 
Proceeds from other debts3,499 3,861 
Repayment of other debts(4,480)(6,070)
Proceeds from common stock issued to employees6,129 11,401 
Taxes paid related to net share settlement of equity awards(5,014)(1,619)
Net cash provided by (used in) financing activities(4,999)7,573 
Effect of exchange rate changes on cash and cash equivalents(9,850)(870)
Net increase (decrease) in cash and cash equivalents(28,151)29,789 
Cash and cash equivalents at beginning of period133,431 98,645 
Cash and cash equivalents at end of period$105,280 $128,434 
Supplemental schedule of non-cash investing activities:
Capital expenditures incurred but not yet paid$819 $1,055 
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
The condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information. 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 nine-month periods ended September 30, 2022 are not necessarily indicative of the results that may be expected for any subsequent quarter or for the fiscal year ending December 31, 2022. 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, 2021.
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 those 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 2021 Form 10-K. There have been no significant changes to these policies during the nine months ended September 30, 2022.
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. The Company adopted ASU 2020-06 effective on January 1, 2022, using the modified retrospective method. Among other changes, ASU 2020-06 removes from U.S. GAAP the liability and equity separation model for convertible instruments with a cash conversion feature. As a result, the Company no longer separately presents in equity an embedded conversion feature for such debt. Similarly, the embedded conversion feature is no longer amortized into income as interest expense over the life of the instrument. The cumulative effect of the ASU adoption was as follows:
Adjustments from
Balance atAdoption ofBalance at
(in thousands)December 31, 2021ASU 2020-06January 1, 2022
Liabilities
Convertible debt, current$36,824 $626 $37,450 
Convertible debt, non-current98,941 14,167 113,108 
Mezzanine equity
Convertible debt883 (883) 
Equity
Additional paid-capital2,387,039 (32,249)2,354,790 
Accumulated deficit(2,087,957)18,339 (2,069,618)
The impact of ASU adoption on the consolidated statement of operations for the three and nine months ended September 30, 2022 was to decrease net interest expense by $1.4 million and $4.2 million, respectively. This had the effect of increasing the basic and diluted net income per share for the three and nine months ended September 30, 2022 by approximately $0.01 and $0.04, respectively. The required use of if-converted method to calculate the impact of convertible notes on diluted earnings per share does not have a material impact. The Company is contractually required to settle the principal amount of 2022 Notes and 2024 Notes in cash. Accordingly, the dilutive effect of the Company's 2022 Notes and 2024 Notes will be limited to the conversion premium. The adoption of this ASU does not have any impact on the consolidated statement of cash flows.
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.
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NOTE 3: INVESTMENTS IN EQUITY SECURITIES
In May 2022, the Company sold its investment in Encoding.com, Inc. for total consideration of up to approximately $10.7 million. The Company received $7.8 million in May 2022 and recognized a gain of $4.2 million. The balance of the consideration of up to approximately $2.9 million will be payable to the Company within 18 months from the date of sale, subject to certain conditions and indemnity obligations, and will be recorded upon receipt by the Company.
NOTE 4: CONTRACT ASSETS AND DEFERRED REVENUE
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.
Contract assets and deferred revenue consisted of the following:
As of
(in thousands)September 30, 2022December 31, 2021
Contract assets$5,378 $8,101 
Deferred revenue$76,563 $78,167 
Contract assets and the non-current portion of Deferred revenue are reported as components of “Prepaid expenses and other current assets” and “Other non-current liabilities,” respectively, on the Condensed Consolidated Balance Sheets.
Revenue recognized during the three months ended September 30, 2022 and October 1, 2021, that was included in the deferred revenue balances at December 31, 2021 and 2020 was $7.9 million and $8.2 million, respectively. Revenue recognized during the nine months ended September 30, 2022 and October 1, 2021, that was included in the deferred revenue balances at December 31, 2021 and 2020, was $42.7 million and $47.3 million, respectively.
Remaining performance obligations represent contracted revenues that had not yet been recognized and future revenue recognition is expected. The aggregate balance of the Company’s remaining performance obligations as of September 30, 2022 was $504.3 million, of which approximately 81% is expected to be recognized as revenue over the next 12 months and the remainder thereafter.
Refer to Note 11, “Segment Information” for disaggregated revenue information.
NOTE 5: LEASES
The components of lease expense are as follows:
Three Months EndedNine Months Ended
(in thousands)September 30, 2022October 1, 2021September 30, 2022October 1, 2021
Operating lease cost$1,767 $1,911 $5,802 $5,654 
Variable lease cost50346713951494
Total lease cost$2,270 $2,378 $7,197 $7,148 
Supplemental information related to leases are as follows:
Three Months EndedNine Months Ended
(in thousands)September 30, 2022October 1, 2021September 30, 2022October 1, 2021
Cash paid for amounts included in the measurement of operating lease liabilities$1,925 $1,987 $5,803 $5,744 
Right-of-use assets obtained in exchange for operating lease obligations$ $194 $206 $5,670 
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NOTE 6: OTHER FINANCIAL STATEMENT INFORMATION
The following tables provide details of selected balance sheet components:
Accounts receivable, net:As of
(in thousands)September 30, 2022December 31, 2021
Accounts receivable$108,304 $91,382 
Less: allowances for expected credit losses and sales returns(2,723)(2,853)
Total$105,581 $88,529 
Inventories:As of
(in thousands)September 30, 2022December 31, 2021
Raw materials$35,456 $22,245 
Work-in-process3,181 3,993 
Finished goods53,689 37,545 
Service-related spares6,698 7,412 
Total$99,024 $71,195 
Prepaid expenses and other current assets:As of
(in thousands)September 30, 2022December 31, 2021
Prepaid expenses$5,648 $8,074 
Contract assets5,426 8,101 
Other current assets15,724 13,797 
Total$26,798 $29,972 
Property and equipment, net:As of
(in thousands)September 30, 2022December 31, 2021
Machinery and equipment$81,637 $78,461 
Capitalized software37,615 38,306 
Leasehold improvements40,048 40,658 
Furniture and fixtures2,876 2,820 
Construction-in-progress3,035 1,892 
Property and equipment, gross165,211 162,137 
Less: accumulated depreciation and amortization(124,780)(119,416)
Total$40,431 $42,721 
Other current liabilities:As of
(in thousands)September 30, 2022December 31, 2021
Accrued employee compensation and related expenses$21,521 $26,820 
Other32,857 26,824 
Total$54,378 $53,644 
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NOTE 7: 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 were initially 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 2022 Notes (which is equivalent to an initial conversion price of approximately $5.75 per share). Pursuant to the supplemental indenture entered into by the Company and the trustee during the fourth quarter of fiscal 2021, the Company made an irrevocable election to settle the principal amounts of the 2022 Notes solely with cash and may pay or deliver, as the case may be, any conversion value greater than the principal amount in cash, shares of common stock or a combination thereof, at the Company’s election. 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 were 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 are convertible in multiples of $1,000 principal amount regardless of the foregoing circumstances. As of September 30, 2022, the 2022 Notes were convertible and the net carrying amount of $37.6 million was classified as a current liability.
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 was $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 was being amortized, prior to adoption of ASU 2020-06, to interest expense at the effective interest rate over the contractual term of the 2022 Notes.
As discussed in the Note 2. “Recent Accounting Pronouncements”, effective January 1, 2022, the Company adopted ASU 2020-06 using the modified retrospective method and, as a result, accounted for the Convertible debt as a single liability measured at amortized cost.
The following table presents the components of the 2022 Notes:
As of
(in thousands, except for years and percentages)September 30, 2022December 31, 2021
Liability component:
Principal amount$37,707 $37,707 
Less: Debt discount, net of amortization (672)
Less: Debt issuance costs, net of amortization(50)(211)
Carrying amount$37,657 $36,824 
Remaining debt discount amortization period (years)n/a0.9
Effective interest rate on liability componentn/a6.95 %
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The following table presents interest expense recognized for the 2022 Notes:
Three Months EndedNine Months Ended
(in thousands)September 30, 2022October 1, 2021September 30, 2022October 1, 2021
Contractual interest expense$412 $412 $1,236 $1,236 
Amortization of debt discount 171  508 
Amortization of debt issuance costs69 54 207 159 
Total interest expense recognized$481 $637 $1,443 $1,903 
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 were initially 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). Pursuant to the supplemental indenture entered into by the Company and the trustee during the fourth quarter of fiscal 2021, the Company made an irrevocable election to settle the principal amounts of the 2024 Notes solely with cash and may pay or deliver, as the case may be, any conversion value greater than the principal amount in cash, shares of common stock or a combination thereof, at the Company’s election. The conversion rate, and thus the effective conversion price, may be adjusted under certain circumstances, including in connection with conversions made following certain fundamental changes or a notice of redemption and under other circumstances, in each case, as set forth in the 2024 Notes Indenture.
The 2024 Notes will be convertible at certain times and upon the occurrence of certain events in the future, in each case, specified in the 2024 Notes Indenture. Further, on or after June 1, 2024, until the close of business on the scheduled trading day immediately preceding the maturity date, holders of the 2024 Notes may convert all or a portion of their 2024 Notes regardless of these conditions.
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 was being amortized, prior to adoption of ASU 2020-06, to interest expense at the effective interest rate over the contractual term of the 2024 Notes.
As discussed in the Note 2. “Recent Accounting Pronouncements”, effective January 1, 2022, the Company adopted ASU 2020-06 using the modified retrospective method and, as a result, accounted for the Convertible debt as a single liability measured at amortized cost.
The following table presents the components of the 2024 Notes:
As of
(in thousands, except for years and percentages)September 30, 2022December 31, 2021
Liability component:
Principal amount$115,500 $115,500 
Less: Debt discount, net of amortization (14,576)
Less: Debt issuance costs, net of amortization(1,739)(1,983)
Carrying amount$113,761 $98,941 
Remaining debt discount amortization period (years)n/a2.7
Effective interest rate on liability componentn/a7.95 %
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The following table presents interest expense recognized for the 2024 Notes:
Three Months EndedNine Months Ended
(in thousands)September 30, 2022October 1, 2021September 30, 2022October 1, 2021
Contractual interest expense$578 $578 $1,734 $1,734 
Amortization of debt discount 1,193  3,505 
Amortization of debt issuance costs220 162 654 476 
Total interest expense recognized$798 $1,933 $2,388 $5,715 
NOTE 8: STOCKHOLDERS’ EQUITY
Share-based Compensation Plans
The following table sets forth the detailed allocation of the share-based compensation expense which was included in the Company’s Condensed Consolidated Statements of Operations:
 Three Months EndedNine Months Ended
(in thousands)September 30, 2022October 1, 2021September 30, 2022October 1, 2021
Cost of revenue$607 $545 $1,691 $1,840 
Research and development expense2,109 2,129 5,988 5,699 
Selling, general and administrative expense3,744 3,762 11,942 11,328 
Total$6,460 $6,436 $19,621 $18,867 
Restricted Stock Units:
(in thousands, except per share amounts)Number
of
Shares
Weighted Average
Grant-Date Fair Value
Per Share
Balance at December 31, 20213,878 $7.31 
Granted2,637 9.25
Vested(2,634)7.48
Forfeited(120)8.39
Balance at September 30, 20223,761 $8.63 
The Company’s stock benefit plans include the 2002 Employee Stock Purchase Plan (“ESPP”) and current active stock plans adopted in 1995 and 2002 (“1995 Stock Plan” and “2002 Director Plan”, respectively). Refer to Note 12, “Employee Benefit Plans” of Notes to Consolidated Financial Statements in the 2021 Form 10-K for details pertaining to each plan.
The Company’s stockholders approved an amendment to the ESPP at the 2022 annual meeting of stockholders (the “2022 Annual Meeting”) to increase the number of shares of common stock reserved for issuance under the ESPP by 1,000,000 shares. The Company’s stockholders also approved an amendment to the 1995 Stock Plan at the 2022 Annual Meeting to increase the number of shares of common stock reserved for issuance thereunder by 7,000,000 shares. As of September 30, 2022, an aggregate of 11,645,946 shares of common stock were reserved for issuance under the 1995 Stock Plan, of which 7,760,174 shares remained available for future grants. As of September 30, 2022, an aggregate of 706,377 shares of common stock were reserved for issuance under the 2002 Director Plan, of which 524,199 shares remained available for future grants.
Share Repurchase Program
On February 3, 2022, the Board of Directors authorized the Company to repurchase up to $100 million of the Company’s outstanding shares of common stock through February 2025. The Company is authorized to repurchase, from time-to-time, shares of its outstanding common stock through open market purchases and 10b5-1 trading plans, in accordance with applicable rules and regulations, at such time and such prices as management may decide. The program does not obligate the Company to repurchase any specific number of shares and may be discontinued at any time. The actual timing and amount of repurchases are subject to business and market conditions, corporate and regulatory requirements, stock price, acquisition opportunities and other factors.
During the nine months ended September 30, 2022, the company repurchased and retired approximately 0.6 million shares of the Company’s common stock for an aggregate amount of $5.1 million. As of September 30, 2022, approximately $94.9 million of the share repurchase authorization remained available for repurchases under this program.
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NOTE 9: FAIR VALUE MEASUREMENTS
The Company’s financial instruments not measured at fair value on a recurring basis were as follows:
September 30, 2022December 31, 2021
CarryingFair ValueCarryingFair Value
(in thousands)
ValueLevel 1Level 2Level 3ValueLevel 1Level 2Level 3
2022 Notes$37,657 $ $87,245 $ $36,824 $ $78,619 $ 
2024 Notes$113,761 $ $180,358 $ $98,941 $ $173,419 $ 
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 10: EARNINGS PER SHARE
The following table sets forth the computation of the basic and diluted net income (loss) per share:
 Three Months EndedNine Months Ended
(in thousands, except per share amounts)September 30, 2022October 1, 2021September 30, 2022October 1, 2021
Numerator:
Net income (loss)$8,740 $1,530 $22,051 $(6,603)
Denominator:
Weighted average number of shares outstanding:
Basic105,228 102,099 104,617 101,057 
2022 Notes3,078 2,356 2,718  
2024 Notes2,678 461 1,569  
Stock options218 311 238  
Restricted stock units1,920 1,185 1,725  
Stock purchase rights under the ESPP63 9 44  
Diluted113,185 106,421 110,911 101,057 
Net income (loss) per share:
Basic$0.08 $0.01 $0.21 $(0.07)
Diluted$0.08 $0.01 $0.20 $(0.07)
The diluted net loss per share was the same as basic net loss per share for the nine months ended October 1, 2021, as the inclusion of potential common shares outstanding would have been anti-dilutive due to the Company’s net losses for the period. The following table sets forth the potential weighted common shares outstanding and anti-dilutive weighted shares that were excluded from the computation of basic and diluted net income (loss) per share:
 Three Months EndedNine Months Ended
(in thousands)September 30, 2022October 1, 2021September 30, 2022October 1, 2021
2022 Notes   2,085