10-Q 1 hlit-20170331x10q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________
Form 10-Q
_____________________________________________________
(Mark One)
ý
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2017

¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File No. 000-25826
_____________________________________________________
HARMONIC INC.
(Exact name of registrant as specified in its charter)
_____________________________________________________
Delaware
77-0201147
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
4300 North First Street
San Jose, CA 95134
(408) 542-2500
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
____________________________________________
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer
¨
Accelerated filer
ý
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
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, $.001 par value, outstanding on May 2, 2017 was 80,531,096.



TABLE OF CONTENTS
 

2


PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARMONIC INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except per share data)
 
March 31, 2017
 
December 31, 2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
55,292

 
$
55,635

Short-term investments

 
6,923

Accounts receivable, net
69,771

 
86,765

Inventories
39,920

 
41,193

Prepaid expenses and other current assets
27,368

 
26,319

Total current assets
192,351

 
216,835

Property and equipment, net
31,733

 
32,164

Goodwill
237,911

 
237,279

Intangibles, net
27,208

 
29,231

Other long-term assets
41,496

 
38,560

Total assets
$
530,699

 
$
554,069

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Other debts and capital lease obligations, current
$
6,802

 
$
7,275

Accounts payable
22,340

 
28,892

Income taxes payable
1,153

 
1,166

Deferred revenue
59,072

 
52,414

Accrued and other current liabilities
52,062

 
55,150

Total current liabilities
141,429

 
144,897

Convertible notes, long-term
104,575

 
103,259

Other debts and capital lease obligations, long-term
13,767

 
13,915

Income taxes payable, long-term
2,961

 
2,926

Other non-current liabilities
16,559

 
18,431

Total liabilities
279,291

 
283,428

Commitments and contingencies (Note 18)

 

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; 80,503 and 78,456 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively
81

 
78

Additional paid-in capital
2,257,093

 
2,254,055

Accumulated deficit
(1,998,884
)
 
(1,976,222
)
Accumulated other comprehensive loss
(6,882
)
 
(7,270
)
Total stockholders’ equity
251,408

 
270,641

Total liabilities and stockholders’ equity
$
530,699

 
$
554,069

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

3



HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
 
Three months ended
 
March 31, 2017
 
April 1, 2016
Revenue:
 
 
 
Product
$
50,404

 
$
57,644

Services
32,539

 
24,188

Total net revenue
82,943

 
81,832

Cost of revenue:
 
 
 
Product
26,102

 
27,189

Services
16,433

 
13,989

Total cost of revenue
42,535

 
41,178

Total gross profit
40,408

 
40,654

Operating expenses:
 
 
 
Research and development
24,882

 
23,563

Selling, general and administrative
34,631

 
32,870

Amortization of intangibles
774

 
2,365

Restructuring and related charges
1,279

 
2,612

Total operating expenses
61,566

 
61,410

Loss from operations
(21,158
)
 
(20,756
)
Interest expense, net
(2,590
)
 
(2,421
)
Other expense, net
(511
)
 
(9
)
Loss on impairment of long-term investment

 
(1,476
)
Loss before income taxes
(24,259
)
 
(24,662
)
(Benefit from) provision for income taxes
(232
)
 
518

Net loss
$
(24,027
)
 
$
(25,180
)
 
 
 
 
Net loss per share:
 
 
 
Basic and diluted
$
(0.30
)
 
$
(0.33
)
Shares used in per share calculation:
 
 
 
Basic and diluted
79,810

 
76,996

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

4


HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited, in thousands)
 
Three months ended
 
March 31, 2017
 
April 1, 2016
Net loss
$
(24,027
)
 
$
(25,180
)
Other comprehensive income (loss) before tax:
 
 
 
Change in unrealized gain on cash flow hedges:
 
 
 
Unrealized gain arising during the period

 
323

Loss reclassified into earnings

 
78

 

 
401

Change in unrealized gains (losses) on available-for-sale securities:
 
 
 
Unrealized gains (losses) arising during the period
(499
)
 
79

Loss reclassified into earnings

 
1,476

 
(499
)
 
1,555

Change in foreign currency translation adjustments
889

 
1,934

Other comprehensive income before tax
390

 
3,890

Less: Provision for income taxes
2

 
18

Other comprehensive income, net of tax
388

 
3,872

Total comprehensive loss
$
(23,639
)
 
$
(21,308
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

5


HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Three months ended
 
March 31, 2017
 
April 1, 2016
Cash flows from operating activities:
 
 
 
Net loss
$
(24,027
)
 
$
(25,180
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Amortization of intangibles
2,069

 
2,783

Depreciation
3,599

 
3,317

Stock-based compensation
3,251

 
3,094

Amortization of discount on convertible debt
1,316

 
1,187

Restructuring, asset impairment and loss on retirement of fixed assets
187

 
1,675

Amortization of non-cash warrant
416

 

Loss on impairment of long-term investment

 
1,476

Provision for excess and obsolete inventories
387

 
418

Allowance for doubtful accounts and returns
2,700

 
739

Other non-cash adjustments, net
72

 

Changes in operating assets and liabilities, net of effects of acquisition:
 
 
 
Accounts receivable
14,388

 
(10,894
)
Inventories
942

 
(51
)
Prepaid expenses and other assets
(3,151
)
 
(6,078
)
Accounts payable
(6,687
)
 
(3,890
)
Deferred revenue
5,435

 
24,963

Income taxes payable
6

 
(13
)
Accrued and other liabilities
(3,999
)
 
1,046

Net cash used in operating activities
(3,096
)
 
(5,408
)
Cash flows from investing activities:
 
 
 
Acquisition of business, net of cash acquired

 
(69,532
)
Proceeds from maturities of investments
3,106

 
7,394

Proceeds from sales of investments
3,792

 

Purchases of property and equipment
(3,217
)
 
(2,664
)
Net cash provided by (used in) investing activities
3,681

 
(64,802
)
Cash flows from financing activities:
 
 
 
Payment of convertible debt issuance costs

 
(582
)
Proceeds from other debts and capital leases

 
262

Repayment of other debts and capital leases
(953
)
 
(114
)
Proceeds from common stock issued to employees
2,114

 
2,074

Payment of tax withholding obligations related to net share settlements of restricted stock units
(2,383
)
 
(955
)
Net cash (used in) provided by financing activities
(1,222
)
 
685

Effect of exchange rate changes on cash and cash equivalents
294

 
330

Net decrease in cash and cash equivalents
(343
)
 
(69,195
)
Cash and cash equivalents at beginning of period
55,635

 
126,190

Cash and cash equivalents at end of period
$
55,292

 
$
56,995


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

6


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 for a fair statement of 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 on March 3, 2017 (the “2016 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, 2017, 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 significant intercompany accounts and transactions have been eliminated in consolidation. The year-end condensed balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”).
On February 29, 2016, the Company completed the acquisition of Thomson Video Networks (“TVN”), see Note 3, “Business Acquisition” for details on the acquisition. TVN is now a part of the Company’s Video segment and its results of operations are included in the Company’s Condensed Consolidated Statements of Operations beginning March 1, 2016. During the fourth quarter of 2016, the Company completed the accounting for this business combination.

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. Actual results could differ from those estimates.
Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2 to its audited Consolidated Financial Statements included in the 2016 Form 10-K. There have been no significant changes to these policies during the three months ended March 31, 2017 other than those disclosed in Note 2, “Standards Implemented”.


NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS
New standards to be implemented
In May 2014, the Financial Accounting Standards Board (“FASB”) issued a new standard, Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, as amended, which will supersede nearly all existing revenue recognition guidance. Under ASU 2014-09, an entity is required to recognize revenue upon transfer of promised goods or services to customers in an amount that reflects the expected consideration received in exchange for those goods or services. ASU No. 2014-09 defines a five-step process in order to achieve this core principle, which may require the use of judgment and estimates, and also requires expanded qualitative and quantitative disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and estimates used.

The FASB has issued several amendments to the new standard, including clarification on accounting for licenses of intellectual property and identifying performance obligations. The amendments include ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606)-Principal versus Agent Considerations, which was issued in March 2016, and clarifies the implementation guidance for principal versus agent considerations in ASU 2014-09, and ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606)-Identifying Performance Obligations and Licensing, which was issued in April 2016, and amends the guidance in ASU No. 2014-09 related to identifying performance obligations and accounting for licenses of intellectual property.

7


The new standard permits adoption either by using (i) a full retrospective approach for all periods presented in the period of adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing certain additional disclosures. The new standard is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted for annual reporting periods beginning after December 15, 2016. The Company does not plan to early adopt, and accordingly, it will adopt the new standard effective January 1, 2018.

The Company currently plans to adopt using the modified retrospective approach. However, a decision regarding the adoption method has not been finalized at this time. The Company’s final determination will depend on a number of factors, such as the significance of the impact of the new standard on its financial results, system readiness, including that of software procured from third-party providers, and its ability to accumulate and analyze the information necessary to assess the impact on prior period financial statements, as necessary.

The Company is in the initial stages of its evaluation of the impact of the new standard on its accounting policies, processes, and system requirements. The Company has assigned internal resources in addition to the engagement of third party service providers to assist in the evaluation. Furthermore, the Company has made and will continue to make investments in systems to enable timely and accurate reporting under the new standard. While the Company continues to assess all potential impacts under the new standard, there is the potential for significant impacts to the timing of recognition of software licenses with undelivered features and professional services revenue related to service contracts with acceptance terms as well as contract acquisition costs, both with respect to the amounts that will be capitalized as well as the period of amortization.

Under current industry-specific software revenue recognition guidance, the Company has historically concluded that it did not have vendor-specific objective evidence (“VSOE”) of fair value of the undelivered features relating to delivered software licenses, and accordingly, it has deferred entire revenue for such software licenses until the delivery of features. Professional services included in arrangements with acceptances have also been recognized on receipt of acceptance. The new standard, which does not retain the concept of VSOE, requires an evaluation of whether the undelivered features are distinct performance obligations and, therefore, should be separately recognized when delivered compared to the timing of delivery of software license. Professional services will generally be recorded as services are provided. Depending on the outcome of the Company’s evaluation, the timing of when revenue is recognized could change for future features and professional services under the new standard.

As part of the Company’s preliminary evaluation, it has also considered the impact of the guidance in ASC 340-40, Other Assets and Deferred Costs; Contracts with Customers, and the interpretations of the FASB Transition Resource Group for Revenue Recognition (“TRG”) from their November 7, 2016 meeting with respect to capitalization and amortization of incremental costs of obtaining a contract. As a result of this new guidance, the Company preliminarily believes that it will capitalize certain costs of obtaining the contract, including additional sales commissions, as the new cost guidance, as interpreted by the TRG, requires the capitalization of all incremental costs that the Company incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained, provided it expects to recover the costs. Additionally, after the adoption of the new guidance, the Company preliminarily believes that the amortization period for the capitalized costs will be longer than the contract term, as the new cost guidance requires entities to determine whether the costs relate to specific anticipated contracts. Therefore, the Company believes that the period of benefit, as interpreted by the TRG, for deferred commission costs will likely be longer than the initial contract period. Under the Company’s current accounting policy, it expenses the commission costs immediately as incurred.

While the Company continues to assess the potential impacts of the new standard, including the areas described above, the Company does not know or cannot reasonably estimate quantitative information related to the impact of the new standard on its financial statements at this time.

In January 2016, the FASB issued an accounting standard update which requires equity investments to be measured at fair value with changes in fair value recognized in net income and simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. The accounting standard update also updates certain presentation and disclosure requirements. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2018 and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.
In February 2016, the FASB amended the existing accounting standard for lease accounting. Under this guidance, lessees and lessors should apply a “right-of-use” model in accounting for all leases (including subleases) and eliminate the concept of operating leases and off-balance sheet leases. This new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The new

8


standard will be effective for the Company beginning in the first quarter of fiscal 2019 and early adoption is permitted. The Company is currently evaluating the methods and impact of adopting this new leases standard on its consolidated financial statements.
In June 2016, the FASB issued new guidance that 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.  Additionally, credit losses on available-for-sale debt securities should be recorded through an allowance for credit losses limited to the amount by which fair value is below amortized cost. The new guidance will be effective for the Company beginning in the first quarter of fiscal 2019 and early adoption is permitted. The Company is currently evaluating the impact of adopting this new accounting guidance on its consolidated financial statements.

In August 2016, the FASB issued an accounting standard update that addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2018 and early adoption is permitted. The Company is currently evaluating the methods and impact of adopting the new accounting standard on its consolidated financial statements.

In November 2016, the FASB issued an accounting standard update which requires companies to include restricted cash and restricted cash equivalents in its cash and cash equivalent balances in the statement of cash flows. Transfers between cash, cash equivalents, restricted cash, and restricted cash equivalents are no longer presented in the statement of cash flows. The new guidance requires a reconciliation of the totals in the statement of cash flows to the related captions. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2018 and early adoption is permitted. The adoption of this new guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued an accounting standard update to simplify the test for goodwill impairment. It 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 now be the amount by which a reporting unit's carrying value exceeds its fair value. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2021 on a prospective basis, and early adoption is permitted. The Company is currently evaluating the impact of adopting this new accounting guidance on its consolidated financial statements.
In March 2017, the FASB issued a new accounting standard to improve the presentation of net periodic pension cost and net periodic post-retirement benefit cost. This new standard will be effective for the Company beginning in the first quarter of fiscal 2018 and early adoption is permitted. The Company is currently evaluating the impact of adopting this new accounting guidance on its consolidated financial statements.
Standards Implemented
In February 2015, the FASB issued an accounting standard update that changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The accounting standard update became effective for the Company beginning in the first quarter of fiscal 2017. The application of this accounting standard update did not have any impact on the Company's Consolidated Balance Sheet or Statement of Operations upon adoption.
In July 2015, the FASB issued an accounting standard update that requires inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company adopted this accounting standard update beginning in the first quarter of fiscal 2017 and the adoption did not have a material impact on its consolidated financial statements.
In March 2016, the FASB issued an accounting standard update to clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. The Company adopted this accounting standard update beginning in the first quarter of fiscal 2017 and the adoption did not have any impact on its consolidated financial statements

In March 2016, the FASB issued an accounting standard update for the accounting of share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The new standard eliminated the requirement to report excess tax benefits and certain tax deficiencies related to share-based payment transactions as additional paid-in capital. It also removes the requirement to delay recognition of a windfall tax benefit until it reduces current taxes payable. Under the new guidance, the benefit will be recorded when it arises, subject to normal valuation allowance considerations. The Company adopted this new accounting standard beginning in the first quarter of fiscal 2017 using a modified-retrospective transition method and recorded a cumulative effect of $4.6 million of additional gross deferred tax asset associated with shared-based payment and an offsetting valuation allowance of the same

9


amount, therefore resulting in no net impact to the Company’s beginning retained earnings. Prior to January 1, 2017, stock-based compensation expense was recorded net of estimated forfeitures in the Company’s condensed consolidated statements of operations and, accordingly, was recorded for only those stock-based awards that the Company expected to vest. Upon the adoption of this accounting standard update, effective January 1, 2017, the Company changed its accounting policy to account for forfeitures as they occur. The change was applied on a modified retrospective approach with a cumulative effect adjustment of $69,000 to retained earnings as of January 1, 2017 (which increased the accumulated deficit). The implementation of this accounting standard update has no impact to the Company’s condensed statement of cash flows because the Company does not have any excess tax benefits from share-based compensation because its tax provision is primarily under full valuation allowance. No prior periods were recast as a result of this change in accounting policy.
In October 2016, the FASB issued an accounting standard update which requires companies to recognize the income tax consequences of all intra-entity sales of assets other than inventory when they occur. As a result, a reporting entity would recognize the tax expense from the sale of the asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. The Company early adopted this accounting standard update during the first quarter of fiscal 2017 on a modified retrospective approach and recorded a cumulative-effect adjustment of $1.4 million to the retained earnings as of January 1, 2017 (which reduced the accumulated deficit). Correspondingly, in the first quarter of fiscal 2017, the Company recognized an additional $1.1 million of net deferred tax assets, after netting with $2.1 million of valuation allowance, and write off the remaining $0.3 million of unamortized tax expenses deferred under the previous guidance to provision for income taxes in the first quarter of fiscal 2017.


NOTE 3: BUSINESS ACQUISITION
On February 29, 2016, the Company, through its wholly-owned subsidiary Harmonic International AG, completed its acquisition of 100% of the share capital and voting rights of TVN, a global leader in advanced video compression solutions headquartered in Rennes, France, for a final purchase price of $82.5 million in cash. The Company believes that its acquisition of TVN has strengthened, and will continue to strengthen, the Company’s competitive position in the video infrastructure market as well as to enhance the depth and scale of the Company’s research and development and service and support capabilities in the video arena.

During the fourth quarter of 2016, the Company completed the accounting for this business combination. The final TVN purchase price has been allocated to tangible and intangible assets acquired and liabilities assumed on the basis of their respective estimated fair values on the acquisition date. The Company’s allocation of TVN purchase consideration is as follows (in thousands):

10


Assets:
 
  Cash and cash equivalents
$
6,843

  Accounts receivable, net
14,933

  Inventories
3,462

  Prepaid expenses and other current assets
2,412

  Property and equipment, net
9,942

  French R&D tax credit receivables (1)
26,421

  Other long-term assets
2,134

Total assets
$
66,147

Liabilities:
 
  Other debts and capital lease obligations, current
8,362

  Accounts payable
12,494

  Deferred revenue
2,504

  Accrued and other current liabilities
18,365

  Other debts and capital lease obligations, long-term
16,087

  Other non-current liabilities
6,467

  Deferred tax liabilities
2,126

Total liabilities
$
66,405

 
 
Goodwill
41,670

Intangibles
41,100

Total purchase consideration
$
82,512

(1) See Note 8, “Balance Sheet Components-Prepaid expenses and other current assets” for more information on French R&D tax credit receivables.

The following table presents details of the intangible assets acquired through this business combination (in thousands, except years):
 
Estimated Useful Life (in years)
 
Fair Value
Backlog
6 months
 
$
3,600

Developed technology
4 years
 
21,700

Customer relationships
5 years
 
15,200

Trade name
4 years
 
600

 
 
 
$
41,100


The goodwill is not expected to be deductible for income tax purposes but the intangibles assets acquired are expected to be deductible for income tax purposes in certain jurisdictions. Both goodwill and intangibles assets acquired are assigned to the Company’s video reporting unit.

Acquisition-and integration-related expenses

As a result of the TVN acquisition, during 2016, the Company incurred acquisition-and integration-related expenses totaling $16.9 million and another $2.2 million in the three months ended March 31, 2017. These costs consisted of acquisition-related costs which include outside legal, accounting and other professional services as well as integration-related costs which include incremental costs resulting from the TVN acquisition that are not expected to generate future benefits once the integration is fully consummated. These costs are expensed as incurred. The Company expects to continue to have some TVN integration-related costs in 2017, primarily outside legal and advisory fees relating to re-organization of TVN’s legal entities.

Acquisition- and integration-related expenses for the TVN acquisition are summarized in the table below (in thousands):

11


 
March 31, 2017
 
April 1, 2016
 
Acquisition-related
 
Integration-related
 
Acquisition-related
 
Integration-related
Product cost of revenue
$

 
$
342

 
$

 
$
58

Research and development

 
7

 

 
50

Selling, general and administrative

 
1,801

 
2,436

 
552

     Total acquisition- and integration-related expenses
$

 
$
2,150

 
$
2,436

 
$
660


Pro Forma Financial Information

The following unaudited pro forma summary presents consolidated information of the Company as if the acquisition of TVN had occurred on January 1, 2015, the beginning of the comparable prior annual period. The unaudited pro forma combined results are provided for illustrative purpose only and are not indicative of the Company’s actual consolidation results.

The pro forma adjustments primarily relate to the amortization of acquired intangibles and interest expense related to financing arrangements. In addition, the unaudited pro forma net loss for the three months ended April 1, 2016 was adjusted to exclude $3.1 million of acquisition- and integration- related expenses. These adjustments exclude the income tax impact.

 
Three months ended
 
April 1,
2016
 
(in millions, except per share amounts)
Net revenue
$
90.6

Net loss
(24.9
)
Net loss per share-basic and diluted
$
(0.32
)


NOTE 4: SHORT-TERM INVESTMENTS
As of March 31, 2017, the Company has no short-term investments. The following table summarizes the Company’s short-term investments as of December 31, 2016 (in thousands):
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
As of December 31, 2016
 
 
 
 
 
 
 
Corporate bonds
$
6,928

 
$

 
$
(5
)
 
$
6,923

Total short-term investments
$
6,928

 
$

 
$
(5
)
 
$
6,923

The following table summarizes the maturities of the Company’s short-term investments (in thousands):
 
 
December 31, 2016
Less than one year
 
$
6,923

Due in 1 - 2 years
 

   Total short-term investments
 
$
6,923

These available-for-sale investments are presented as “Current Assets” in the Condensed Consolidated Balance Sheets as they are available for current operations. Realized gains and losses from the sale of investments were not material for the three months ended March 31, 2017 and April 1, 2016.
The Company’s investments in equity securities of other privately and publicly held companies were $3.9 million and $4.4 million as of March 31, 2017 and December 31, 2016, respectively, and such investments were considered as long-term investments and

12


were included in “Other long-term assets” in the Condensed Consolidated Balance Sheet. (See Note 5, “Investments in Other Equity Securities” for additional information).


NOTE 5: INVESTMENTS IN OTHER EQUITY SECURITIES
From time to time, the Company may acquire certain equity investments for the promotion of business objectives and these investments are classified as long-term investments and included in “Other long-term assets” in the Condensed Consolidated Balance Sheet.

In 2014, the Company acquired a 3.3% interest in Vislink plc (“Vislink”), a U.K. public company listed on the AIM exchange in London, for $3.3 million. The investment in Vislink is being accounted for as a cost method investment as the Company does not have significant influence over the operational and financial policies of Vislink. Since the Vislink investment is also an available-for-sale security, its value is marked to market for the difference in fair value at period end. The carrying value of Vislink was $0.3 million and $0.8 million at March 31, 2017 and December 31, 2016, respectively. Vislink’s accumulated unrealized (loss) gain, net of taxes was $(0.2) million and $0.3 million at March 31, 2017 and December 31, 2016, respectively.

During late 2015 through 2016, Vislink’s stock price was below the Company’s cost basis for a prolonged period of time and based on the Company’s assessment, impairment charges of $1.5 million and $1.2 million for Vislink were recorded in the first and third quarter of 2016, respectively, reflecting the new reduced cost basis of the Vislink investment at September 30, 2016. As of December 31, 2016, Vislink’s stock price increased approximately 67% from the stock price as of September 30, 2016.

On February 3, 2017, Vislink (from thereon, referred to as Pebble Beach Systems) completed their disposal of its hardware division and changed its name to Pebble Beach Systems. On February 6, 2017, Pebble Beach Systems announced its financial results for fiscal 2016 which showed a significant increase in operating losses. As of March 31, 2017, Pebble Beach System’s stock price had declined 67% from the stock price as of December 31, 2016 and Pebble Beach System is currently seeking alternatives to maximize value for its shareholders, which could include a sale of the company. Since the decline in Vislink’s stock price from December 31, 2016 has been for less than three month, the Company determined that the decline in the fair value of Pebble Beach Systems’ investment is not considered permanent yet and as a result, the $0.5 million loss in Vislink’s investment in the first quarter of 2017 was recorded to other comprehensive loss. The Company’s remaining maximum exposure to loss from the Pebble Beach Systems’ investment at March 31, 2017 was limited to its reduced investment cost of $0.3 million.

The assessment as to the nature of a decline in fair value is based on, among other things, the length of time and the extent to which the market value has been less than the Company’s cost basis; the financial condition and near-term prospects of the investment; and the Company’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value.

Unconsolidated Variable Interest Entities (“VIE”)

In 2014, the Company acquired an 18.4% interest in Encoding.com, Inc. (“EDC”), a 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 variable interest entity but the Company determined that it is not the primary beneficiary of EDC. As a result, EDC is accounted for as a cost method investment.

The Company determined that there were no indicators existing at March 31, 2017 that would indicate that the EDC investment was impaired. The Company’s maximum exposure to loss from the EDC’s investment at March 31, 2017 was limited to its investment cost of $3.6 million.


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 expose 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 Designated as Hedging Instruments (Cash Flow Hedges)

13


The Company’s cash flow hedges consisted of foreign currency forward contracts to hedge forecasted operating expenses and service costs related to employee salaries and benefits denominated in Israeli shekels (“ILS”) for its subsidiaries in Israel. These ILS forward contracts mature generally within 12 months. There were no outstanding foreign currency forward contracts under cash flow hedges at March 31, 2017 or December 31, 2016.
Derivatives Not Designated as Hedging Instruments (Balance Sheet Hedges)
The Company’s balance sheet hedges consist of foreign currency forward contracts, mature generally within three months, are carried at fair value and they 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.
The locations and amounts of designated and non-designated derivative instruments’ gains and losses reported in the Company’s Accumulated Other Comprehensive Loss and Condensed Consolidated Statements of Operations were as follows (in thousands):
 
 
 
 
Three months ended
 
 
Financial Statement Location
 
March 31, 2017
 
April 1, 2016
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Loss in AOCI on derivatives (effective portion)
 
AOCI
 
$

 
$
(323
)
Loss reclassified from AOCI into income (effective portion)
 
Cost of Revenue
 
$

 
$
(10
)
 
 
Operating Expense
 

 
(68
)
 
 
  Total
 
$

 
$
(78
)
Losses recognized in income on derivatives (ineffectiveness portion and amount excluded from effectiveness testing)
 
Other expense, net
 
$

 
$
(27
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Loss recognized in income
 
Other expense, net
 
$
(132
)
 
$
(284
)
The U.S. dollar equivalents of all outstanding notional amounts of foreign currency forward contracts are summarized as follows (in thousands):

 
March 31, 2017
 
December 31, 2016
Derivatives not designated as hedging instruments:
 

 

Purchase
 
$
9,577

 
$
4,056

Sell
 
$
11,771

 
$
11,157

The locations and fair value amounts of the Company’s derivative instruments reported in its Condensed Consolidated Balance Sheets are as follows (in thousands):
 
 
 
 
Asset Derivatives
 
 
 
Derivative Liabilities
 
 
Balance Sheet Location
 
March 31, 2017
 
December 31, 2016
 
Balance Sheet Location
 
March 31, 2017
 
December 31, 2016
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
 
Prepaid expenses and other current assets
 
$
137

 
$
54

 
Accrued Liabilities
 
$
48

 
$
40

Total derivatives
 
 
 
$
137

 
$
54

 
 
 
$
48

 
$
40

Offsetting of Derivative Assets and Liabilities
The Company recognizes all derivative instruments on a gross basis in the Condensed Consolidated Balance Sheets. However, the arrangements with its counterparties allows for net settlement, which are designed to reduce credit risk by permitting net

14


settlement with the same counterparty. As of March 31, 2017, information related to the offsetting arrangements was as follows (in thousands):
 
 
 
 
 
 
 
 
Gross Amounts of Derivatives Not Offset in the Condensed Consolidated Balance Sheets
 
 
 
 
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
 
Financial Instrument
 
Cash Collateral Pledged
 
Net Amount
Derivative Assets
 
$
137

 

 
$
137

 
$
(8
)
 

 
$
129

Derivative Liabilities
 
$
48

 

 
$
48

 
$
(8
)
 

 
$
40

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 and as of March 31, 2017, the total compensating balance maintained was $2.5 million.


NOTE 7: FAIR VALUE MEASUREMENTS
The applicable accounting guidance establishes a framework for measuring fair value and requires disclosure about the fair value measurements of assets and liabilities. 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.
The guidance defines fair value 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.
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 Company primarily uses broker quotes for valuation of its short-term investments. 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 carrying value of the Company’s financial instruments, including cash equivalents, restricted cash, accounts receivable, accounts payable and accrued and other current liabilities, approximate fair value due to their short maturities.
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 estimated fair value of the Company’s convertible notes based on a market approach was approximately $161.2 million and $143.5 million as of March 31, 2017 and December 31, 2016, respectively, and represents a Level 2 valuation. The Company’s other debts and capital leases assumed from the 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. Additionally, the Company considers the carrying amount of its capital lease obligations to approximate their fair value because the weighted average interest rate used to formulate the carrying amounts approximates current market rates. The other debts and capital leases outstanding as of March 31, 2017 were $20.6 million in the aggregate. (See Note 11, “Convertible Notes, Other debts and Capital Leases” for additional information).

15


The Company’s liability for the TVN voluntary departure plan (“TVN VDP”) as of March 31, 2017 of $7.2 million is classified within Level 3 because discount rates which are unobservable in the market were being used to measure the fair value of this liability. (See Note 10, “Restructuring and related Charges-TVN VDP” for additional information). The fair value of the TVN defined pension benefit plan liability of $4.4 million as of March 31, 2017 is disclosed in Note 12, “Employee Benefit Plans and Stock-based Compensation-TVN Retirement Benefit Plan.”
During the three months ended March 31, 2017, there were no nonrecurring fair value measurements of assets and liabilities subsequent to initial recognition.
The following table sets forth the fair value of the Company’s financial assets and liabilities measured at fair value on a recurring basis based on the three-tier fair value hierarchy (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
As of March 31, 2017
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$
5,244

 
$

 
$

 
$
5,244

Prepaids and other current assets
 
 
 
 
 
 
 
Derivative assets

 
137

 

 
137

Other assets
 
 
 
 
 
 
 
Long-term investment
306

 

 

 
306

Total assets measured and recorded at fair value
$
5,550

 
$
137

 
$

 
$
5,687

Accrued and other current liabilities
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
48

 
$

 
$
48

        Accrued TVN VDP, current portion

 

 
4,245

 
4,245

Other non-current liabilities
 
 
 
 
 
 
 
        Accrued TVN VDP, long-term portion

 

 
2,986

 
2,986

Total liabilities measured and recorded at fair value
$

 
$
48

 
$
7,231

 
$
7,279

 
Level 1
 
Level 2
 
Level 3
 
Total
As of December 31, 2016
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$
8,301

 
$

 
$

 
$
8,301

Corporate bonds

 
6,923

 

 
6,923

Prepaids and other current assets
 
 
 
 
 
 
 
Derivative assets

 
54

 

 
54

Other assets
 
 
 
 
 
 
 
Long-term investment
809

 

 

 
809

Total assets measured and recorded at fair value
$
9,110

 
$
6,977

 
$

 
$
16,087

Accrued and other current liabilities
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
40

 
$

 
$
40

        Accrued TVN VDP, current portion

 

 
6,597

 
6,597

Other non-current liabilities
 
 
 
 
 
 
 
        Accrued TVN VDP, long-term portion

 

 
3,053

 
3,053

Total liabilities measured and recorded at fair value
$

 
$
40

 
$
9,650

 
$
9,690


16


NOTE 8: BALANCE SHEET COMPONENTS
The following tables provide details of selected balance sheet components (in thousands):
 
March 31, 2017

December 31, 2016
Accounts receivable, net:
 
 
 
Accounts receivable
$
77,179

 
$
91,596

Less: allowances for doubtful accounts, returns and discounts
(7,408
)
 
(4,831
)
     Total
$
69,771

 
$
86,765


 
March 31, 2017

December 31, 2016
Prepaid expenses and other current assets:
 
 
 
Deferred cost of revenue
$
6,161

 
$
6,856

French R&D tax credits receivable(1)
5,990

 
5,895

Prepaid maintenance, royalty, rent, property taxes and value added tax
6,657

 
5,526

Prepaid customer incentive(2)
746

 
1,162

Restricted cash(3)
768

 
731

Other
7,046

 
6,149

Total
$
27,368

 
$
26,319


(1) The Company’s acquired TVN subsidiary in France (the “TVN French Subsidiary”) participates in the French Crédit d’Impôt Recherche (“CIR”) program (the “R&D tax credits”) which allows companies to monetize eligible research expenses. The R&D tax credits can be used to offset against income tax payable to the French government in each of the four years after being incurred, or if not utilized, are recoverable in cash. The amount of R&D tax credits recoverable are subject to audit by the French government. The R&D tax credit receivables at March 31, 2017 were approximately $27.5 million and are expected to be recoverable from 2017 through 2020 with $6.0 million reported under “Prepaid and other Current Assets” and $21.5 million reported under “Other Long-term Assets” on the Company’s Condensed Consolidated Balance Sheets.
(2) On September 26, 2016, the Company issued a warrant to purchase shares of its common stock (the “Warrant”) to Comcast pursuant to which Comcast may, subject to certain vesting provisions, purchase up to 7,816,162 shares of the Company’s common stock subject to adjustment in accordance with the terms of the Warrant, for a per share exercise price of $4.76. The portion of the Warrant which vested on September 26, 2016 had a value of approximately $1.6 million and is deemed a customer incentive paid upfront and cumulatively, $0.9 million of this prepaid incentive has been recorded as a reduction to the Company’s net revenues from Comcast. The remaining $0.7 million of this prepaid incentive is reported as an asset under “Prepaid expenses and other current assets” on the Company’s Condensed Consolidated Balance Sheet as of March 31, 2017. The Company considers this asset to be recoverable based on the expectation of Comcast’s future purchase of the pertinent products. The asset will be assessed for impairment if no longer deemed recoverable.
(3) The restricted cash balances are held as cash collateral security for certain bank guarantees. These restricted funds are invested in bank deposits and cannot be withdrawn from the Company’s accounts without the prior written consent of the applicable secured party. Additionally, as of March 31, 2017, the Company recorded approximately $1.1 million of restricted cash for the bank guarantee associated with the TVN French Subsidiary’s office building lease. This amount is reported under “Other Long-term Assets” on the Company’s Condensed Consolidated Balance Sheets.
 
March 31, 2017

December 31, 2016
Inventories:
 
 
 
Raw materials
$
10,501

 
$
9,889

Work-in-process
2,856

 
2,318

Finished goods
14,682

 
17,776

Service-related spares
11,881

 
11,210

Total
$
39,920

 
$
41,193



17


 
March 31, 2017
 
December 31, 2016
Accrued Liabilities:
 
 
 
   Accrued employee compensation and related expenses
$
17,965

 
$
19,377

   Accrued TVN VDP, current (1)
4,245

 
6,597

   Accrued warranty
4,585

 
4,862

   Customer deposits
4,926

 
4,537

   Contingent inventory reserves
2,171

 
2,210

   Accrued royalty payments
1,891

 
1,912

   Others
16,279

 
15,655

      Total
$
52,062

 
$
55,150


(1) See Note 10, “Restructuring and related charges-TVN VDP,” for additional information on the Company’s TVN VDP liabilities.


NOTE 9: GOODWILL AND IDENTIFIED INTANGIBLE ASSETS
Goodwill
Goodwill represents the difference between the purchase price and the estimated fair value of the identifiable assets acquired and liabilities assumed. Goodwill is allocated among and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment. The Company has two reporting units, Video and Cable Edge. The Company tests for goodwill impairment at the reporting unit level on an annual basis, or more frequently, if events or changes in circumstances indicate that the asset is more likely than not impaired. The Company’s annual goodwill impairment test is performed in the fiscal fourth quarter, with a testing date at the end of October.

During 2016, the Company recorded goodwill of $41.7 million for the TVN acquisition. Goodwill from the TVN acquisition is assigned to the Video reporting unit.

The changes in the carrying amount of goodwill by reportable segments for the three months ended March 31, 2017 were as follows (in thousands):
 
Video
 
Cable Edge
 
Total
Balance as of December 31, 2016
$
176,519

 
$
60,760

 
$
237,279

   Foreign currency translation adjustment
625

 
7

 
632

Balance as of March 31, 2017
$
177,144

 
$
60,767

 
$
237,911

Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows and determining appropriate discount rates, growth rates, an appropriate control premium and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit which could trigger impairment. If the Company’s assumptions and related estimates change in the future, or if the Company’s reporting structure changes or other events and circumstances change (e.g. such as a sustained decrease in the Company’s stock price), the Company may be required to record impairment charges in future periods. Any impairment charges that the Company may take in the future could be material to its results of operations and financial condition.
The Company performed its annual goodwill impairment review at October 31, 2016. Based on the impairment test performed, management concluded that goodwill was not impaired as the Video and Cable Edge reporting units had estimated fair values in excess of their carrying value by approximately 67% and 123%, respectively.
The Company has not recorded any impairment charges related to goodwill for any prior periods.

Intangible Assets
The following is a summary of intangible assets (in thousands):

18


 
 
 
March 31, 2017
 
December 31, 2016
 
Weighted Average Remaining Life (Years)
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Developed core technology
2.9
 
$
31,708

 
$
(16,512
)
 
$
15,196

 
$
31,707

 
$
(15,216
)
 
$
16,491

Customer relationships/contracts
3.9
 
44,433

 
(32,845
)
 
11,588

 
44,384

 
(32,098
)
 
12,286

Trademarks and trade names
2.9
 
582

 
(158
)
 
424

 
573

 
(119
)
 
454

Maintenance agreements and related relationships
N/A
 
5,500

 
(5,500
)
 

 
5,500

 
(5,500
)
 

Order Backlog
N/A
 
3,011

 
(3,011
)
 

 
3,011

 
(3,011
)
 

Total identifiable intangibles
 
 
$
85,234

 
$
(58,026
)
 
$
27,208

 
$
85,175

 
$
(55,944
)
 
$
29,231


Amortization expense for the identifiable purchased intangible assets for the three months ended March 31, 2017 and April 1, 2016 was allocated as follows (in thousands):
 
Three months ended
 
March 31,
2017
 
April 1,
2016
Included in cost of revenue
$
1,295

 
$
418

Included in operating expenses
774

 
2,365

Total amortization expense
$
2,069

 
$
2,783

The estimated future amortization expense of purchased intangible assets with definite lives is as follows (in thousands):
 
Cost of Revenue
 
Operating
Expenses
 
Total
Year ended December 31,
 
 
 
 
 
2017 (remaining nine months)
$
3,885

 
$
2,328

 
$
6,213

2018
5,180

 
3,104

 
8,284

2019
5,180

 
3,104

 
8,284

2020
951

 
2,983

 
3,934

2021

 
493

 
493

Total future amortization expense
$
15,196

 
$
12,012

 
$
27,208


NOTE 10: RESTRUCTURING AND RELATED CHARGES
The Company implemented several restructuring plans in the past few years. The goal of these plans was to bring operational expenses to appropriate levels relative to its net revenues, while simultaneously implementing extensive company-wide expense control programs.
The Company accounts for its restructuring plans under the authoritative guidance for exit or disposal activities. The restructuring and related charges are included in “Product cost of revenue” and “Operating expenses-restructuring and related charges” in the Condensed Consolidated Statements of Operations. The following table summarizes the restructuring and related charges (in thousands):

19


 
Three months ended
 
March 31,
2017

April 1,
2016
Restructuring and related charges in:
 
 
 
Product cost of revenue
$
508

 
$
(29
)
Operating expenses-Restructuring and related charges
1,279

 
2,612

Total restructuring and related charges
$
1,787

 
$
2,583

Harmonic 2016 Restructuring
In the first quarter of 2016, the Company implemented a new restructuring plan (the “Harmonic 2016 Restructuring Plan”) to streamline the corporate organization, thereby reducing operating costs by consolidating duplicative resources in connection with the acquisition of TVN. The planned activities have primarily resulted, and will primarily result, in cash expenditures related to severance and related benefits and exiting certain operating facilities and disposing of excess assets. In the second quarter of 2016, the Company also initiated the TVN VDP in France to streamline the organization of the TVN French Subsidiary.

In 2016, the Company recorded an aggregate of $20.0 million of restructuring and related charges under the Harmonic 2016 Restructuring Plan, of which $2.2 million was primarily related to the Company exiting from an excess facility at its U.S. headquarters and the remaining $17.8 million was related to severance and benefits for the termination of 118 employees worldwide, including 83 employees in France who participated in the TVN VDP. (See details of TVN VDP described below). Additionally, the restructuring and related charges under the Harmonic 2016 Restructuring Plan in 2016 were partially offset by approximately $2.0 million of gain from TVN pension curtailment. For the employees who participated in the TVN VDP, their pension benefit is funded by the TVN VDP and, as a result, the TVN defined benefit pension plan was remeasured at December 31, 2016, which resulted in a non-cash curtailment gain. This gain was recorded as an offset to restructuring and related costs in 2016.
The Company also incurred $16.9 million of TVN acquisition- and integration-related expenses in 2016 and another $2.2 million in the three months ended March 31, 2017. The Company expects to continue to have some TVN integration-related costs in 2017, primarily outside legal and advisory fees relating to the re-organization of TVN’s legal entities. (See Note 3, “Business Acquisition,” for additional information on TVN acquisition-and integration-related expenses).
In the three months ended March 31, 2017, the Company recorded $1.8 million of restructuring and related charges under the Harmonic 2016 Restructuring Plan, consisting of $1.1 million TVN VDP charges as well as $0.7 million of severance and benefits for the termination of seven employees worldwide.

TVN VDP

During 2016, the Company consulted and worked with the works council for the TVN French Subsidiary and applicable union representatives to establish a voluntary departure plan to enable French employees of TVN to voluntarily terminate with certain benefits. A total of 83 employees applied for the TVN VDP and were duly approved by the Company in the fourth quarter of 2016. The total TVN VDP costs, including severance, certain benefits and taxes, as well as administration costs, is estimated at approximately $15.3 million, in aggregate, at the inception of the plan and will be paid over a period of four years, based on the TVN VDP terms agreed with each employee. The total final payout to the employees may be different from the initial estimates depending on the final social charges imputed on each employee’s total income and benefits received. The Company does not expect the final payout to be materially different from the initial estimates. The fair value of the total TVN VDP liability at inception is estimated to be approximately $14.8 million.
The Company accounts for these special termination benefits in accordance with ASC 712, “Compensation - Nonretirement Postemployment Benefits,” which requires that the special termination benefits be recognized as a liability and a loss beginning when an employee accepts the offer of voluntary termination and the amount can be reasonably estimated. Where an employee is required to work beyond a minimum statutory notice period, the cost of the special termination benefit is recognized as an expense over the employee’s remaining service period. Where the employee is not required to work beyond a minimum statutory notice period, the cost of the special termination benefit is recognized upon the date the employee accepts the offer of voluntary termination, provided that the amount of the benefit can be estimated. Out of the 83 employees who applied for TVN VDP, 11 of them are required to work beyond the minimum statutory notice period into 2017. Based on the application of the accounting guidance, the Company recorded a charge of $13.1 million and $1.1 million for TVN VDP costs in fourth quarter of 2016 and the first quarter of 2017, respectively. Cumulatively, the Company had paid $7.1 million of TVN VDP costs and the TVN VDP liability balance at March 31, 2017 was $7.2 million.

20


The table below shows the estimated future payments for TVN VDP as of March 31, 2017 (in thousands):
Years ending December 31,
 
2017 (remaining nine months)
$
3,426

2018
3,023

2019
1,494

2020
692

Total
$
8,635

Excess Facility in San Jose, California

In January 2016, the Company exited an excess facility at its U.S. headquarters in San Jose, California and recorded $1.4 million in facility exit costs. The Company accounts for facility exit costs in accordance with ASC 420, “Exit or Disposal Cost Obligations”, which requires that a liability for such costs be recognized and measured initially at fair value on the cease-use date based on remaining lease rentals, adjusted for the effects of any prepaid or deferred items recognized, reduced by the estimated sublease rentals that could be reasonably obtained even if it is not the intent to sublease. The fair value of these liabilities is based on a net present value model using a credit-adjusted risk-free rate. The liability will be paid out over the remainder of the leased properties’ terms, which continue through August 2020. Actual sublease terms may differ from the estimates originally made by the Company. Any future changes in the estimates or in the actual sublease income could require future adjustments to the liabilities, which would impact net income in the period the adjustment is recorded. As of the cease-use date, the fair value of this restructuring liability totaled $2.5 million. Offsetting these charges was an adjustment for deferred rent liability relating to this space of $1.1 million. In December 2016, as a result of a change in estimated sublease income, the restructuring liability was increased by $0.6 million.

The following table summarizes the activity in the Company’s restructuring accrual related to the Harmonic 2016 Restructuring Plan during the three months ended March 31, 2017 (in thousands):
 
Excess facilities
 
VDP (1)
 
Severance and benefits (2)
 
Total
Balance at December 31, 2016
$
2,375

 
$
9,650

 
$
1,519

 
$
13,544

Charges for 2016 Harmonic Restructuring Plan
25

 
1,077

 
630

 
1,732

Adjustments to restructuring provisions

 

 
55

 
55

Cash payments
(433
)
 
(3,627
)
 
(1,664
)
 
(5,724
)
Foreign exchange gain

 
131

 
14

 
145

Balance at March 31, 2017
1,967

 
7,231

 
554

 
9,752

Less: current portion (3)
(978
)
 
(4,245
)
 
(554
)
 
(5,777
)
Long-term portion (3)
$
989

 
$
2,986

 
$

 
$
3,975


(1) See discussion of the TVN VDP above for future estimated payments through 2020.
(2) The Company anticipates that the remaining severance and benefits accrual at March 31, 2017 will be fully paid in 2017.
(3) The current portion and long-term portion of the restructuring liability are reported under “Accrued and other current liabilities” and “Other non-current liabilities”, respectively, on the Company’s Condensed Consolidated Balance Sheets.

NOTE 11: CONVERTIBLE NOTES, OTHER DEBTS AND CAPITAL LEASES
4.00% Convertible Senior Notes
In December 2015, the Company issued $128.25 million aggregate principal amount of 4.0% unsecured convertible senior notes due December 1, 2020 (the “offering” or “Notes”, as applicable) through a private placement with a financial institution. The Notes do not contain any financial covenants and the Company can settle the Notes in cash, shares of common stock, or any combination thereof. The Notes can be converted under certain circumstances described below, based on an initial conversion rate of 173.9978 shares of common stock per $1,000 principal amount of Notes (which represents an initial conversion price of approximately $5.75 per share). The Notes do not contain any financial covenants. Interest on the Notes is payable semiannually in arrears on June 1 and December 1 of each year.

21


Concurrent with the closing of the offering, the Company used $49.9 million of the net proceeds to repurchase 11.1 million shares of the Company’s common stock from purchasers of the offering in privately negotiated transactions. In addition, the Company incurred approximately $4.1 million debt issuance cost resulting in a net proceeds to the Company of approximately $74.2 million which was used to fund the TVN acquisition.
Prior to September 1, 2020, holders of the Notes may convert the Notes at their option only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ending on April 1, 2016, if the last reported sale price of the Company’s 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 of the 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 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. Commencing on September 1, 2020 until the close of business on the second scheduled trading day immediately preceding the maturity date, the Notes will be convertible in multiples of $1,000 principal amount regardless of the foregoing circumstances.
If a fundamental change occurs, holders of the Notes may require the Company to purchase all or any portion of their Notes for cash at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, if specific corporate events occur prior to the maturity date, the conversion rate may be increased for a holder who elects to convert the Notes in connection with such a corporate event.
In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the initial proceeds of the Notes as a whole. The difference between the initial proceeds of the Notes and the liability component (the “debt discount”) of $26.9 million is amortized to interest expense using the effective interest method over the term of the Notes. The equity component of the Notes is included in additional paid-in capital in the Condensed Consolidated Balance Sheets and is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the transaction costs related to the issuance of the Notes, the Company allocated the total amount of $4.1 million to the liability and equity components using the same proportions as the proceeds from the Notes. Transaction costs attributable to the liability component were $3.2 million and were recorded as a direct deduction from the carrying amount of the debt liability in long-term liability in the Condensed Consolidated Balance Sheets and are being amortized to interest expense in the Condensed Consolidated Statements of Operations using the effective interest method over the term of the Notes. Transaction costs attributable to the equity component were $0.9 million and were netted with the equity component of the Notes in additional paid-in capital in the Condensed Consolidated Balance Sheets.
The following table presents the components of the Notes as of March 31, 2017 and December 31, 2016 (in thousands, except for years and percentages):
 
March 31, 2017
 
December 31, 2016
Liability:
 
 
 
  Principal amount
$
128,250

 
$
128,250

  Less: Debt discount, net of amortization
(21,128
)
 
(22,302
)
  Less: Debt issuance costs, net of amortization
(2,547
)
 
(2,689
)
  Carrying amount
$
104,575

 
$
103,259

  Remaining amortization period (years)
3.7

 
3.9

  Effective interest rate on liability component
9.94
%
 
9.94
%
 
 
 
 
Equity:
 
 
 
  Value of conversion option
$
26,925

 
$
26,925

  Less: Equity issuance costs
(863
)
 
(863
)
  Carrying amount
$
26,062

 
$
26,062

The following table presents interest expense recognized for the Notes (in thousands):

22



 
Three months ended
 
March 31, 2017
 
April 1, 2016
Contractual interest expense
$
1,283

 
$
1,283

Amortization of debt discount
1,174

 
1,059

Amortization of debt issuance costs
142

 
128

  Total interest expense recognized
$
2,599

 
$
2,470


Other Debts and Capital Leases

In connection with the TVN acquisition, the Company assumed a variety of debt and credit facilities in France to satisfy the financing requirements of TVN operations. These arrangements are summarized in the table below (in thousands):
 
March 31, 2017
 
December 31, 2016
Financing from French government agencies related to various government incentive programs (1)
$
17,586

 
$
17,930

Term loans (2)
1,353

 
1,400

Secured borrowings (3)

 

Obligations under capital leases
1,630

 
1,860

  Total debt obligations
20,569

 
21,190

  Less: current portion
(6,802
)
 
(7,275
)
  Long-term portion
$
13,767

 
$
13,915

(1) As of March 31, 2017, the Company’s TVN French Subsidiary had an aggregate of $17.6 million of loans due to various financing programs of French government agencies, $14.9 million of which is related to loans backed by R&D tax credit receivables. As of March 31, 2017, the TVN French Subsidiary had an aggregate of $27.5 million of R&D tax credit receivables from the French government from 2017 through 2020. (See Note 8, “Balance Sheet Components-Prepaid expenses and other current assets,” for more information). These tax loans have a fixed rate of 0.6%, plus EURIBOR 1 month + 1.3% and mature between 2017 through 2019. The remaining loans of $2.7 million at March 31, 2017 primarily relates to financial support from French government agencies for R&D innovation projects at minimal interest rates and these loans mature between 2020 through 2023.

(2) One of the term loans with a certain financial institution contains annual covenants that require the TVN French Subsidiary to maintain a minimum working capital balance and various other financial covenants and restrictions that limit the French Subsidiary’s ability to incur additional indebtedness. The annual covenant is based on French statutory year-end results and the TVN French Subsidiary failed the 2016 covenant test primarily due to the Company’s plan to integrate TVN’s operations into other subsidiaries for tax planning and logistics purposes. In early 2017, the Company informed the financial institution of the 2016 covenant test results and was told by the financial institution to continue with the original payment schedule. The Company reported the entire loan balance with this financial institution under “Other debts and capital lease obligations, current” in the Condensed Consolidated Balance Sheets. The loan balance was approximately $0.4 million at both March 31, 2017 and December 31, 2016.

(3) The TVN French Subsidiary obtained advances under a credit line with BPI France against a pool of eligible receivables with recourse. The maximum advance under this credit line for receivables is €2 million (approximately $2.1 million as converted using the exchange rate at March 31, 2017), less applicable fees, and €200,000 (approximately $0.2 million as converted using the exchange rate at March 31, 2017) of cash is pledged for this program. This credit line was renewed in July 2016 for an additional year with no material change to the terms of the credit agreement. There was no balance outstanding to BPI France as of March 31, 2017.
Future minimum repayments

The table below shows the future minimum repayments of debts and capital lease obligations as of March 31, 2017 (in thousands):


23


Years ending December 31,
Capital lease obligations
 
Other Debt obligations
2017 (remaining nine months)
$
726

 
$
5,704

2018
814

 
5,504

2019
65

 
6,356

2020
25

 
563

2021

 
459

Thereafter

 
353

Total
$
1,630

 
$
18,939



NOTE 12: EMPLOYEE BENEFIT PLANS AND STOCK-BASED COMPENSATION
Equity Award Plans
The Company’s stock benefit plans include the employee stock purchase plan and current active stock plans adopted in 1995 and 2002 as well as one stock plan in connection with an acquisition in 2010. See Note 13, “Employee Benefit Plans and Stock-based Compensation” of Notes to Consolidated Financial Statements in the 2016 Form 10-K for details pertaining to each plan.
The following table summarizes the Company’s stock option, restricted stock units (“RSUs”), performance-based stock awards (“PRSUs”) and market-based awards activities during the three months ended March 31, 2017 (in thousands, except per share amounts):
 
 
 
Stock Options Outstanding
 
RSUs Outstanding*
 
Shares
Available for
Grant
 
Number
of
Shares
 
Weighted
Average
Exercise Price
 
Number
of
Units
 
Weighted
Average
Grant
Date Fair
Value
Balance at December 31, 2016
3,912

 
5,019

 
$
6.01

 
3,864

 
$
4.26

Authorized

 

 

 

 

Granted
(3,181
)
 
30

 
5.10

 
2,100

 
5.49

Options exercised

 
(81
)
 
3.00

 

 

Shares released

 

 

 
(1,672
)
 
3.93

Forfeited
748

 
(287
)
 
6.41

 
(308
)
 
4.24

Balance at March 31, 2017
1,479

 
4,681

 
$
6.04

 
3,984

 
$
5.05

* The preceding table includes PRSUs and market-based award activities during the three months ended March 31, 2017.
Performance-based awards (PRSUs)
In August 2016, the Company granted 898,533 shares of PRSUs to fund a portion of its 2016 incentive bonus payment obligations to its key executives and other eligible employees. From March 2017 through April 2017, the Company granted another 582,806 PRSUs to fund its first half 2017 incentive bonus payment obligations. The vesting of the PRSUs is based on the achievement of certain financial and non-financial operating goals of the Company and occurs within three to six months from the grant date. Each quarterly period, the Company estimates the probability of the achievement of these performance goals and recognizes any related stock-based compensation expense. If such performance goals are not probable of achieving, no compensation expense is recognized.
Market-based awards

In March 2017, the Company granted 319,500 RSUs to its key executives and certain eligible employees that would vest over a three-year period as part of its long-term incentive program. The vesting conditions of these awards are tied to the market value of the Company's common stock. The fair value of these shares was estimated using a Monte-Carlo simulation.


24


The following table summarizes information about stock options outstanding as of March 31, 2017 (in thousands, except per share amounts and terms):
 
Number
of
Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic
Value
Vested and expected to vest
4,681

 
$
6.04

 
3.9
 
$
3,200

Exercisable
3,350

 
6.38

 
3.2
 
1,446

The intrinsic value of options vested and expected to vest and exercisable as of March 31, 2017 is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of March 31, 2017. The intrinsic value of options exercised is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of the exercise date. The intrinsic value of options exercised during the three months ended March 31, 2017 was $0.2 million. The intrinsic value of options exercised during the three months ended April 1, 2016 was minimal.

The following table summarizes information about RSUs and PRSUs outstanding as of March 31, 2017 (in thousands, except term):
 
Number of
Shares
Underlying
Restricted
Stock
Units
 
Weighted
Average
Remaining
Vesting
Period
(Years)
 
Aggregate
Fair
Value
Vested and expected to vest
3,573

 
1.1
 
$
21,260

The fair value of RSUs and PRSUs vested and expected to vest as of March 31, 2017 is calculated based on the fair value of the Company’s common stock as of March 31, 2017.
Employee Stock Purchase Plan (“ESPP”)
As of March 31, 2017, the number of shares of common stock available for issuance under the ESPP was 193,295. In the event that there are insufficient shares in the plan to fully fund the issuance, the available shares will be allocated across all participants based on their contributions relative to the total contributions received for the offering period.
Retirement Benefit Plan
As part of the TVN acquisition the Company assumed obligations under defined benefit pension plan. The plan is unfunded and there are no contributions to the plan required by any laws or funding regulations, discretionary contributions or non-cash contributions expected to be made. The table below shows the components of net periodic benefit costs (in thousands):
 
Three months ended
 
March 31, 2017
 
April 1, 2016
Service cost
$
55

 
$
23

Interest cost
16

 
10

Recognized net actuarial loss
1

 

  Net periodic benefit cost included in operating loss
$
72

 
$
33

The present value of the Company’s pension obligation as of March 31, 2017 was $4.4 million, of which $35,000 was reported under “Accrued and other liabilities” and $4.4 million was reported under “Other non-current liabilities” on the Company’s Condensed Consolidated Balance Sheets. The present value of the Company’s pension obligation as of December 31, 2016 was $4.3 million.

401(k) Plan
The Company has a retirement/savings plan for its U.S. employees which qualifies as a thrift plan under Section 401(k) of the Internal Revenue Code. This plan allows participants to contribute up to the applicable Internal Revenue Code limitations under the plan. The Company has made discretionary contributions to the plan of 25% of the first 4% contributed by eligible

25


participants, up to a maximum contribution per participant of $1,000 per year. The contributions for the three months ended March 31, 2017 and April 1, 2016 were $141,000 and $130,000, respectively.

Stock-based Compensation
The following table summarizes stock-based compensation expense for all plans (in thousands):
 
Three months ended
 
March 31,
2017
 
April 1,
2016
Stock-based compensation in:
 
 
 
Cost of revenue
$
445

 
$
227

Research and development expense
977

 
969

Selling, general and administrative expense
1,829

 
1,898

Total stock-based compensation in operating expense
2,806

 
2,867

Total stock-based compensation
$
3,251

 
$
3,094

As of March 31, 2017, the Company had approximately $21.8 million of unrecognized stock-based compensation expense related to unvested stock options and awards that are expected to be recognized over a weighted-average period of approximately 1.6 years.
Valuation Assumptions
The Company estimates the fair value of employee stock options and stock purchase rights under the ESPP using a Black-Scholes option valuation model. The value of the stock purchase rights under the ESPP consists of: (1) the 15% discount on the purchase of the stock; (2) 85% of the fair value of the call option; and (3) 15% of the fair value of the put option. The call option and put option were valued using the Black-Scholes option pricing model. At the date of grant, the Company estimated the fair value of each stock option grant and stock purchase right granted under the ESPP using the following weighted average assumptions:
 
Employee Stock Options
 
Three months ended
 
March 31,
2017
 
April 1,
2016
Expected term (years)
4.30

 
4.30

Volatility
42
%
 
36
%
Risk-free interest rate
1.8
%
 
1.4
%
Expected dividends
0.0
%
 
0.0
%

 
ESPP Purchase Period Ending
 
July 3,
2017
 
June 30,
2016
Expected term (years)
0.50

 
0.5

Volatility
63
%
 
52
%
Risk-free interest rate
0.8
%
 
0.5
%
Expected dividends
0.0
%
 
0.0
%
Estimated weighted average fair value per share at purchase date
$1.71
 
$1.17
The expected term of the employee stock options represents the weighted-average period that the stock options are expected to remain outstanding. The computation of expected term was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. The expected term of the stock purchase rights under the ESPP represents the period of time from the beginning of the offering period to the purchase date. The Company uses its historical volatility for a period equivalent to the expected term of the options to estimate the expected volatility. The risk-free interest rate that the Company uses in the Black-Scholes option valuation model is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term. The

26


Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model.
Prior to January 1, 2017, stock-based compensation expense was recorded net of estimated forfeitures in the Company’s condensed consolidated statements of operations and, accordingly, was recorded for only those stock-based awards that the Company expected to vest. Upon the adoption of the accounting standard update (ASU 2016-09, “Improvements to Employee Share-Based payments”) issued by FASB, effective January 1, 2017, the Company changed its accounting policy to account for forfeitures as they occur. The change was applied on a modified retrospective approach with a cumulative effect adjustment of $69,000 to retained earnings as of January 1, 2017 (which increased the accumulated deficit).
The Company estimated the fair value of the market-based awards granted in March 2017 on the date of grant using a Monte Carlo simulation with the following assumptions: volatility 46.7%, risk-free interest rate 1.57% and dividend yield of 0%.
Total compensation cost recognized related to these market-based awards was approximately $47,000 for the three months ended March 31, 2017. As of March 31, 2017, $1.2 million of total unrecognized compensation cost related to these awards is expected to be recognized over a weighted-average period of approximately 1.06 years.

The weighted-average fair value per share of options granted was $1.85 and $0.97 for the three months ended March 31, 2017 and April 1, 2016, respectively. The fair value of all stock options vested during the three months ended March 31, 2017 and April 1, 2016 was $0.7 million and $0.9 million, respectively.

There were no realized tax benefits attributable to stock options exercised in jurisdictions where this expense is deductible for tax purposes for the three months ended March 31, 2017 and April 1, 2016, respectively.

The aggregate fair value of RSUs and PRSUs issued during the three months ended March 31, 2017 and April 1, 2016 was $9.6 million and $6.6 million, respectively.


NOTE 13: INCOME TAXES
The Company reported the following operating results for the periods presented (in thousands):
 
Three months ended
 
March 31,
2017
 
April 1,
2016
Loss before income taxes
$
(24,259
)
 
$
(24,662
)
(Benefit from) provision for income taxes
(232
)
 
518

Effective income tax rate
1.0
%
 
(2.1
)%
The Company operates in multiple jurisdictions and its profits are taxed pursuant to the tax laws of these jurisdictions. The Company’s effective income tax rate may be affected by changes in, or interpretations of tax laws and tax agreements in any given jurisdiction, utilization of net operating loss and tax credit carry forwards, changes in geographical mix of income and expense, and changes in management’s assessment of matters such as the ability to realize deferred tax assets. The Company’s effective tax rate varies from year to year primarily due to the absence of several onetime, discrete items that benefited or decremented the tax rates in the previous years.
The Company’s effective income tax rate of 1.0% for the three months ended March 31, 2017 was different from the U.S. federal statutory rate of 35%, primarily due to the Company’s geographical income mix and favorable tax rates associated with certain earnings from operations in lower-tax jurisdictions, partially offset by the increase in the valuation allowance against U.S. federal, California and other state deferred tax assets and detriment from non-deductible stock-based compensation. In addition, the Company was able to recognize a one-time tax benefit of approximately $1.2 million as a result of the merger of the Company’s two subsidiaries in Israel. The merger was approved by the Israeli government during the three months ended March 31, 2017.
The Company's effective income tax rate of (2.1)% for the three months ended April 1, 2016 was different from the U.S. federal statutory rate of 35%, primarily due to favorable tax rates associated with certain earnings from operations in lower-tax jurisdictions, and the tax benefit from the realization of certain deferred tax assets as a result of the TVN acquisition, partially offset by the increase in the valuation allowance against U.S. federal, California and other state deferred tax assets, detriment from non-deductible stock-based compensation, non-deductible amortization of foreign intangibles, and the net of various discrete tax adjustments. For three months ended April 1, 2016, the discrete adjustments to the Company's tax expense were

27


primarily the accrual of interest on uncertain tax positions and withholding taxes. In addition, the impairment charge of the Vislink investment in the three months ended April 1, 2016 received no tax benefit. (See Note 5, “Investments in Other Equity Securities” for additional information on Vislink).
The Company files U.S. federal and state, and foreign income tax returns in jurisdictions with varying statutes of limitations during which such tax returns may be audited and adjusted by the relevant tax authorities. The 2013 through 2016 tax years generally remain subject to examination by U.S. federal and most state tax authorities. In significant foreign jurisdictions, the 2007 through 2016 tax years generally remain subject to examination by their respective tax authorities. In 2016, the U.S. Internal Revenue Service concluded its examination of the Company’s income tax return for the tax year 2012, which commenced in August 2015. In addition, a subsidiary of the Company was under audit for the 2012 and 2013 tax years, which commenced in 2015, by the Israel tax authority and concluded with no adjustment. If, upon the conclusion of an audit, the ultimate determination of taxes owed in the jurisdictions under audit is for an amount in excess of the tax provision the Company has recorded in the applicable period, the Company’s overall tax expense, effective tax rate, operating results and cash flow could be materially and adversely impacted in the period of adjustment.
On July 27, 2015, the U.S. Tax Court issued an opinion in Altera Corp. v. Commissioner, 145 T.C. No.3 (2015) related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision was entered by the U.S. Tax Court on December 1, 2015. On February 19, 2016, the U.S. Internal Revenue Service filed a notice of appeal in Altera Corp. v. Commissioner, 145 T.C. No. 3 (2015), to the Ninth Circuit Court of Appeal. The Ninth Circuit will decide whether a regulation that mandates that stock-based compensation costs related to the intangible development activity of a qualified cost sharing arrangement (a “QCSA”) must be included in the joint cost pool of the QCSA (the “all costs rule”) is consistent with the arm’s length standard as set forth in Section 482 of the Internal Revenue Code. The Company concluded that no adjustment to the consolidated financial statements as of December 31, 2016 is appropriate at this time due to the uncertainties with respect to the ultimate resolution of this case.
The Company’s operations in Switzerland are subject to a reduced tax rate under the Switzerland tax holiday which requires various thresholds of investment and employment in Switzerland. The Company has met these various thresholds and the Switzerland tax holiday is effective through the end of 2018.
As of March 31, 2017, the total amount of gross unrecognized tax benefits, including interest and penalties, was approximately$19.9 million, of which $3.0 million would affect the Company’s effective tax rate if the benefits are eventually recognized. The remaining gross unrecognized tax benefit does not affect the Company’s effective tax rate as it relates to positions that would be settled with tax attributes such as net operating loss carryforward or tax credits previously subject to a valuation allowance. The Company recognizes interest and penalties related to unrecognized tax positions in income tax expense. The Company had $0.5 million of gross interest and penalties accrued as of March 31, 2017. The Company will continue to review its tax positions and provide for, or reverse, unrecognized tax benefits as issues arise. As of March 31, 2017, the Company anticipates that the balance of gross unrecognized tax benefits will remain substantially unchanged over the next 12 months.

In March 2016, the FASB issued an accounting standard update for the accounting of share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The new standard eliminated the requirement to report excess tax benefits and certain tax deficiencies related to share-based payment transactions as additional paid-in capital. It also removes the requirement to delay recognition of a windfall tax benefit until it reduces current taxes payable. Under the new guidance, the benefit will be recorded when it arises, subject to normal valuation allowance considerations. The Company adopted this new accounting standard beginning in the first quarter of fiscal 2017 using a modified-retrospective transition method and recorded a cumulative effect of $4.6 million of additional gross deferred tax asset associated with shared-based payment and an offsetting valuation allowance of the same amount, therefore resulting in no net impact to the Company’s beginning retained earnings.

In October 2016, the FASB issued an accounting standard update which requires companies to recognize the income tax consequences of all intra-entity sales of assets other than inventory when they occur. As a result, a reporting entity would recognize the tax expense from the sale of the asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. The Company early adopted this accounting standard update during the first quarter of fiscal 2017 on a modified retrospective approach and recorded a cumulative-effect adjustment of $1.4 million to the retained earnings as of January 1, 2017 (which reduced the accumulated deficit). Correspondingly, in the first quarter of fiscal 2017, the Company recognized an additional $1.1 million of net deferred tax assets, after netting with $2.1 million of valuation allowance, and write off the remaining $0.3 million of unamortized tax expenses deferred under the previous guidance to provision for income taxes in the first quarter of fiscal 2017.


28


NOTE 14: NET LOSS PER SHARE
The following table sets forth the computation of the basic and diluted net loss per share (in thousands, except per share amounts):
 
Three months ended
 
March 31,
2017
 
April 1,
2016
Numerator:
 
 
 
Net loss
$
(24,027
)
 
$
(25,180
)
Denominator:
 
 
 
Weighted average number of common shares outstanding
 
 
 
Basic and diluted
79,810

 
76,996

Net loss per share:
 
 
 
Basic and diluted
$
(0.30
)
 
$
(0.33
)
The diluted net loss per share is the same as basic net loss per share for the three months ended March 31, 2017 and April 1, 2016 because potential common shares are only considered when their effect would be dilutive. The following table sets forth the potential weighted common shares outstanding that were excluded from the computation of basic and diluted net loss per share calculations (in thousands):
 
Three months ended
 
March 31,
2017
 
April 1,
2016
Stock options
4,892

 
5,548

RSUs
2,707

 
1,772

Stock purchase rights under the ESPP
193

 
59

Warrants (1)
782

 

   Total
8,574

 
7,379

(1) On September 26, 2016, in connection with the execution of a product supply agreement pursuant to which an affiliate of Comcast Corporation (together with Comcast Corporation, “Comcast”) may, in its sole discretion, purchase from the Company licenses to certain of the Company’s software products, the Company granted Comcast a warrant to purchase shares of its common stock. (See Note 15, “Warrants” for additional information).

Also excluded from the table above are the Notes, which are convertible under certain conditions into an aggregate of 22,304,348 shares of common stock. (See Note 11, “Convertible Notes, Other Debts and Capital Leases” for additional information on the Notes). Since the Company’s intent is to settle the principal amount of the Notes in cash, the treasury stock method is being used to calculate any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread will have a dilutive impact on diluted net income per share when the Company’s average market price of its common stock for a given period exceeds the conversion price of $5.75 per share.


NOTE 15: WARRANTS

On September 26, 2016, the Company issued Warrant to Comcast pursuant to which Comcast may, subject to certain vesting provisions, purchase up to 7,816,162 shares of the Company’s common stock subject to adjustment in accordance with the terms of the Warrant, for a per share exercise price of
$4.76. Comcast may exercise the Warrant for cash or on a net share basis. The Warrant expires on September 26, 2023 or the prior consummation of a change of control of the Company.

Comcast’s right to purchase 781,617 shares was vested as of the issuance date as an incentive to enter into the software license product supply agreement. Comcast’s rights to purchase an additional 1,954,042 shares vest upon achievement of milestones that occur upon or prior to Comcast’s election for enterprise license pricing for certain of the Company’s software products. Such pricing would obligate Comcast to make certain total payments to the Company over the term of the product supply agreement. These rights are expected to vest in 2018. Comcast’s rights to purchase an additional 1,172,425 shares vest when

29


Comcast exceeds specified cumulative purchase amounts from the Company under the product supply agreement. Comcast’s rights to purchase the remaining 3,908,081 shares vest in specified tranches at the earlier of Comcast’s enterprise license pricing election (if completed by a certain date) or achievement of specified cumulative purchase amounts from the Company.

The $1.6 million value of the vested portion of the Warrant has been determined using the Black-Scholes option valuation model using the following assumptions: expected term of 7 years, volatility of 42%, risk-free interest rate of 1.4%, and expected dividends of 0.0%. The Warrant is considered indexed to the Company’s common stock and classified as stockholders’ equity based on its terms. Accordingly, the vested Warrant amount was included in “Additional paid-in capital” on the Company’s Condensed Consolidated Balance Sheet and will not be remeasured in the future periods.

The Warrant is considered an incentive for Comcast to purchase certain of the Company’s products. Therefore the value of the Warrant will be recorded as a reduction in the Company’s net revenues to the extent such value does not exceed net revenues from pertinent sales to Comcast. The portion of the Warrant which vested on September 26, 2016 had a value of approximately $1.6 million and is deemed a customer incentive paid upfront and cumulatively, $0.9 million of this prepaid incentive has been recorded as a reduction to the Company’s net revenues from Comcast. The remaining $0.7 million of this prepaid incentive is reported as an asset under “Prepaid expenses and other current assets” on the Company’s Condensed Consolidated Balance Sheet as of March 31, 2017. The Company considers this asset to be recoverable based on the expectation of Comcast’s future purchase of the pertinent products. The asset will be assessed for impairment if no longer deemed recoverable.


NOTE 16: STOCKHOLDERS’ EQUITY
Accumulated Other Comprehensive Income (Loss) (“AOCI”)
The components of AOCI, on an after-tax basis where applicable, were as follows (in thousands):
 
Foreign Currency Translation Adjustments
 
Unrealized Gains (Losses) on Available-for-Sale Investments
 
Actuarial Loss
 
Total
Balance as of December 31, 2016
$
(7,267
)
 
$
276

 
$
(279
)
 
$
(7,270
)
Other comprehensive income (loss) before reclassifications
889

 
(499
)
 

 
390

Provision for income taxes

 
(2
)
 

 
(2
)
Balance as of March 31, 2017
$
(6,378
)
 
$
(225
)
 
$
(279
)
 
$
(6,882
)
The effects of amounts reclassified from AOCI into the Condensed Consolidated Statement of Operations were as follows (in thousands):
 
Three months ended
 
March 31, 2017
 
April 1, 2016
Losses on cash flow hedges from foreign currency contracts:
 
 
 
  Cost of revenue
$

 
$
(10
)
  Operating expenses

 
(68
)
    Total reclassifications from AOCI
$

 
$
(78
)
As of March 31, 2017, there was no AOCI balance and no reclassifications from AOCI, as there were no cash flow hedge contracts outstanding at March 31, 2017 and December 31, 2016.
Common Stock Repurchases
There were no stock repurchases during the year ended December 31, 2016. Our stock repurchase program expired on
December 31, 2016. Further stock repurchases would require authorization from the Board.



30


NOTE 17: 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 Harmonic is its Chief Executive Officer, in deciding how to allocate resources and assess performance. Based on our internal reporting structure, the Company consists of two operating segments: Video and Cable Edge. The operating segments were determined based on the nature of the products offered. The Video segment sells 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 (telco) Pay-TV service providers. The Cable Edge segment sells cable edge solutions and related services to cable operators globally.
On February 29, 2016, the Company completed its acquisition of 100% of the outstanding equity of TVN and assigned TVN to its Video operating segment.

The Company does not allocate amortization of intangibles, stock-based compensation, restructuring and related charges, TVN acquisition- and integration-related costs, and certain other non-recurring charges to the operating income for each segment because management does not include this information in the measurement of the performance of the operating segments. A measure of assets by segment is not applicable as segment assets are not included in the discrete financial information provided to the CODM.
The following tables provide summary financial information by reportable segment (in thousands):


 
Three months ended
 
March 31, 2017
 
April 1, 2016
Net revenue:


 


  Video
$
74,342

 
$
65,008

  Cable Edge
8,601

 
16,824

Total consolidated net revenue
$
82,943

 
$
81,832

 


 


Operating loss:


 


  Video
$
(5,836
)
 
$
(7,347
)
  Cable Edge
(6,080
)
 
(1,853
)
Total segment operating loss
(11,916
)
 
(9,200
)
Unallocated corporate expenses
(3,922
)
 
(5,679
)
Stock-based compensation
(3,251
)
 
(3,094
)
Amortization of intangibles
(2,069
)
 
(2,783
)
Loss from operations
(21,158
)
 
(20,756
)
Non-operating expense, net
(3,101
)
 
(3,906
)
Loss before income taxes
$
(24,259
)
 
$
(24,662
)


NOTE 18: COMMITMENTS AND CONTINGENCIES
Leases
Future minimum lease payments under non-cancelable operating leases as of March 31, 2017 are as follows (in thousands):

31


Years ending December 31,
 
2017 (remaining nine months)
$
9,899

2018
12,624

2019
10,817

2020
7,474

2021
2,067

Thereafter
8,054

Total
$
50,935

Warranties
The Company accrues for estimated warranty costs at the time of product shipment. Management periodically reviews the estimated fair value of its warranty liability and records adjustments based on the terms of warranties provided to customers, historical and anticipated warranty claims experience, and estimates of the timing and cost of warranty claims. Activity for the Company’s warranty accrual, which is included in accrued and other current liabilities, is summarized below (in thousands):
 
Three months ended
 
March 31,
2017
 
April 1,
2016
Balance at beginning of period
$
4,862

 
$
3,913

   Balance assumed from TVN acquisition

 
1,012

   Accrual for current period warranties
1,218

 
1,259

   Warranty costs incurred
(1,495
)
 
(1,218
)
Balance at end of period
$
4,585

 
$
4,966

Purchase Obligations
The Company relies on a limited number of contract manufacturers and suppliers to provide manufacturing services for a substantial majority of its products. Obligations to purchase inventory and other commitments are generally expected to be fulfilled within one year. The Company had approximately $27.3 million of non-cancelable commitment to purchase inventories and other commitments as of March 31, 2017.
Standby Letters of Credit and Guarantees
The Company’s financial guarantees consisted of standby letters of credit and bank guarantees. As of March 31, 2017, the Company had $0.7 million of standby letters of credit outstanding primarily related to its credit card facility in Switzerland and, to a lesser extent, performance bond and state requirements imposed on employers. In addition, the Company had $2.0 million of bank guarantees outstanding as of March 31, 2017, of which $1.3 million was related to a building lease for the TVN French Subsidiary, $0.4 million was related to the building leases in Israel, and the remaining amount was mostly related to performance bonds issued to customers of the TVN French Subsidiary.
Indemnification
Harmonic is obligated to indemnify its officers and the members of its Board of Directors (the Board) pursuant to its bylaws and contractual indemnity agreements. Harmonic also indemnifies some of its suppliers and most of its customers for specified intellectual property matters pursuant to certain contractual arrangements, subject to certain limitations. The scope of these indemnities varies, but, in some instances, includes indemnification for damages and expenses (including reasonable attorneys’ fees). There have been no amounts accrued in respect of these indemnification provisions through March 31, 2017.

Legal proceedings
From time to time, the Company is involved in lawsuits as well as subject to various legal proceedings, claims, threats of litigation, and investigations in the ordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial, employment, and other matters. The Company assesses potential liabilities in connection with each lawsuit and threatened lawsuits and accrues an estimated loss for these loss contingencies if both of the following conditions are met: information available prior to issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount of loss can be reasonably estimated. While certain matters to which the Company is a party specify the damages claimed, such claims may not represent reasonably

32


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.
In October 2011, Avid Technology, Inc. (“Avid”) filed a complaint in the United States District Court for the District of Delaware alleging that Harmonic’s Media Grid product infringes two patents held by Avid. A jury trial on this complaint commenced on January 23, 2014 and, on February 4, 2014, the jury returned a unanimous verdict in favor of the Company, rejecting Avid’s infringement allegations in their entirety. On May 23, 2014, Avid filed a post-trial motion asking the court to set aside the jury’s verdict, and the judge issued an order on December 17, 2014, denying the motion. On January 5, 2015, Avid filed an appeal with respect to the jury’s verdict with the Federal Circuit, which was docketed on January 9, 2015, as Case No. 2015-1246. Avid filed its opening brief with respect to this appeal on March 24, 2015, the Company filed its response brief on May 7, 2015, and Avid filed its reply brief on June 16, 2015. Oral arguments were held on December 11, 2015. On January 29, 2016, the Federal Circuit issued an order vacating the verdict of noninfringement and remanding the case to the trial court for a new trial on infringement. On February 26, 2016, Harmonic filed a request for rehearing and rehearing en banc at the Federal Circuit. On March 31, 2016, the Federal Circuit denied the request for rehearing and rehearing en banc and a mandate issued on April 8, 2016. The court conducted a supplemental claim construction hearing on May 27, 2016 and issued a claim construction order on June 29, 2016. On June 17, 2016, Harmonic filed requests for ex parte reexaminations for the ’808 and ’309 patents with the United States Patent and Trademark Office (“USPTO”).  The USPTO ordered reexamination of both the ’309 and ’808 patents in August 2016. A status conference was held with the District Court on February 23, 2017. On April 10, 2017, the USPTO issued a final office action rejecting the challenged claims of the ’309 patent and affirming all claims of the ’808 patent.
In June 2012, Avid served a subsequent complaint in the United States District Court for the District of Delaware alleging that the Company’s Spectrum product infringes one patent held by Avid. The complaint seeks injunctive relief and unspecified damages. In September 2013, the U.S. Patent Trial and Appeal Board (“PTAB”) authorized an inter partes review to be instituted as to claims 1-16 of the patent asserted in this second complaint. A hearing before the PTAB was conducted on May 20, 2014. On July 10, 2014, the PTAB issued a decision finding claims 1-10 invalid and claims 11-16 not invalid. The Company filed an appeal with respect to the PTAB’s decision on claims 11-16 on September 11, 2014. The appeal was docketed with the Federal Circuit on October 22, 2014, as Case No. 2015-1072, and the Company filed its opening brief with respect to this appeal on January 29, 2015. Avid and PTAB each filed a response brief on April 27, 2015, and the Company filed a reply brief on May 28, 2015. Oral arguments were held on October 8, 2015. The Federal Circuit issued an order on March 1, 2016, affirming the PTAB’s decision and a mandate issued on April 7, 2016. On July 25, 2016, the court issued a scheduling order for the case and set the trial date for November 6, 2017.
The Company is unable to predict the outcome of these lawsuits and therefore is unable to estimate an amount or range of any reasonably possible losses resulting from them. An unfavorable outcome on any litigation matter could require that the Company pay substantial damages, or, in connection with any intellectual property infringement claims, could require that the Company pay ongoing royalty payments or could prevent the Company from selling certain of its products. As a result, a settlement of, or an unfavorable outcome on, any of the matters referenced above or other litigation matters could have a material adverse effect on the Company’s business, operating results, financial condition and cash flows.


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:
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;

33


capital 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;
seasonality of revenue and concentration of revenue sources;
expectations regarding the impact of our TVN acquisition;
expectations regarding the change in TVN’s business model;
expectations regarding the impact of the Warrant issued to Comcast on our business;
potential future acquisitions and dispositions;
anticipated results of potential or actual litigation;
our competitive environment;
the impact of governmental regulation;
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;
use of cash, cash needs and ability to raise capital; and
the condition of our cash investments.
These statements are subject to known and unknown risks, uncertainties and other factors, any of which may cause our actual results to differ materially from those implied by the forward-looking statements. Important factors that may cause actual results to differ from expectations include those discussed in “Risk Factors” beginning on page 47 of this Form 10-Q. All forward-looking statements included in this 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.

OVERVIEW
We design, manufacture and sell versatile and high performance video infrastructure products and system solutions that enable our customers to efficiently create, prepare and deliver a full range of video and broadband services to consumer devices, including televisions, personal computers, laptops, tablets and smart phones.

We do business in three geographic regions: the Americas, EMEA, and APAC and operate in two segments, Video and Cable Edge. Our Video business sells video processing and 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,” and to broadcast and media companies, including streaming new media companies. Our Cable Edge business sells cable access solutions and related services, primarily to cable operators globally.

On February 29, 2016, through our wholly-owned subsidiary Harmonic International AG, we completed our acquisition of 100% of the share capital and voting rights of TVN for $82.5 million in cash. TVN, a global leader in advanced video compression solutions, is headquartered in Rennes, France. The TVN acquisition was primarily funded with cash proceeds from the issuance of the Notes in December 2015.

TVN is now a part of our Video segment and its results of operations are included in our Condensed Consolidated Statements of Operations beginning March 1, 2016. The acquisition of TVN is intended to strengthen our competitive position in the video infrastructure market as well as to enhance the depth and scale of our research and development and service and support capabilities in the video arena. We believe that the combined product portfolios, research and development teams and global sales and service personnel of Harmonic and TVN will allow us to accelerate innovation for our customers while leveraging

34


greater scale to drive operational efficiencies. (See Note 3, “Business Acquisition,” of the notes to our Condensed Consolidated Financial Statements for additional information on the acquisition).

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; 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. Implementation issues with our products or those of other vendors have caused in the past, and may cause in the future, delays in project completion for our customers and delay our recognition of revenue.
A majority of our revenue has been derived from relatively few customers, due in part to the consolidation of our service provider customers. Sales to our 10 largest customers during the three months ended March 31, 2017 accounted for approximately 26% of our net revenue, compared to 40% for the corresponding period in 2016. Although we are attempting to broaden our customer base by penetrating new markets and further expanding internationally, we expect to see continuing industry consolidation and customer concentration. In the three months ended March 31, 2017, no customer accounted for more than 10% of our net revenue. In the three months ended April 1, 2016, Time Warner Cable accounted for more than 13% of our net revenue. No other customers accounted for more than 10% of our net revenue in those periods in 2017 and 2016. The loss of any significant customer, any material reduction in orders by any significant customer, or our failure to qualify our new products with a significant customer could materially and adversely affect our operating results, financial condition and cash flows.
Our net revenue increased $1.1 million, or 1%, in the three months ended March 31, 2017, compared to the corresponding period in 2016, primarily due to a $9.3 million increase in our Video segment revenue, offset in part by a $8.2 million decrease in our Cable Edge segment revenue. The increase in our Video segment revenue was primarily due to the acquisition of TVN and the decrease in our Cable Edge segment revenue was principally related to a technology transition in the industry from legacy EdgeQAM consumption used to deliver broadcast Pay-TV services to a new architecture that is capable of delivering converged video and IP data services.
Our Video segment customers continue to be cautious with investments in new technologies, such as next-generation IP architecture and Ultra HD. We believe a material and growing portion of the opportunities for our video business are linked to a migration by our customers to IP workflows and the distribution of linear and on-demand, over-the-top, and new mobile video services. We believe we are well positioned to address these opportunities as we continue to steadily transition our video business away from legacy and customized computing hardware to more software-centric solutions, enabling video compression and processing through our VOS software platform running on standard off-the-shelf servers, data centers and in the cloud.
Our Cable Edge strategy is to become a major player in the approximately $2 billion CCAP market by delivering innovative new DOCSIS 3.1 CMTS technology, which we refer to as CableOS. In the meantime, our Cable Edge segment is experiencing weaker demand as some of our customers have decreased spending on current Cable Edge products as they prepare to make investments in new converged data and video DOCSIS 3.1 CMTS solutions. While these trends present near-term challenges for us, we believe we have made significant progress on the development of our DOCSIS 3.1 CMTS solutions and we began addressing this market opportunity with our first CableOS shipments in the fourth quarter of 2016.
To support our Cable Edge strategy and foster the further development and growth of this segment, in September 2016, we issued Comcast the Warrant to further incentivize them to purchase our products and adopt our technologies, particularly our CableOS software-based CCAP systems. Pursuant to the Warrant, Comcast may, subject to certain vesting provisions, purchase up to 7,816,162 shares of our common stock, for a per share exercise price of $4.76. Comcast’s right to purchase 781,617 shares under the Warrant was vested as of the issuance date as an incentive to enter into the software license product supply agreement with us. Comcast’s rights to purchase an additional 1,954,042 shares vest upon achievement of milestones that occur upon or prior to Comcast’s election for enterprise license pricing for certain of our software products. Such pricing would obligate Comcast to make certain total payments to us over the term of the product supply agreement. Comcast’s rights to purchase an additional 1,172,425 shares vest when Comcast exceeds specified cumulative purchase amounts from us under the product supply agreement. Comcast’s rights to purchase the remaining 3,908,081 shares vest in specified tranches at the earlier

35


of Comcast’s enterprise license pricing election (if completed by a certain date) or achievement of specified cumulative purchase amounts from us. Because the Warrant is considered an incentive for Comcast to purchase certain of the Company’s products, the value of the Warrant is recorded as a reduction in the Company’s net revenues to the extent such value does not exceed net revenues from pertinent sales to Comcast. (See Note 15, “Warrants,” of the Notes to our Condensed Consolidated Financial Statements for additional information).
As a result of the continued uncertainty regarding the timing of our customers’ investment decisions, we implemented restructuring plans to bring our operating expenses more in line with net revenues, while simultaneously implementing an extensive Company-wide expense control program. (See Note 10, “Restructuring and Related Charges” of the Notes to our Consolidated Financial Statements for additional information).
Our quarterly revenue has been, and may continue to be, affected by seasonal buying patterns. Typically, revenue in the first quarter of the year is seasonally lower than other quarters, as our customers often are still finalizing their annual budget and capital spending projections for the year. Further, we often recognize a substantial portion of our quarterly revenues in the last month of each quarter. We establish our expenditure levels for product development and other operating expenses based on projected revenue levels for a specified period, and expenses are relatively fixed in the short term. Accordingly, even small variations in timing of revenue, particularly from large individual transactions, can cause significant fluctuations in operating results in a particular quarter.


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

Our critical accounting policies, judgements and estimates are disclosed in in our 2016 Annual Report on Form 10-K, as filed with the SEC.


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


RESULTS OF OPERATIONS
Net Revenue
The following table presents the breakdown of revenue by segment for the three months ended March 31, 2017 and April 1, 2016 (in thousands, except percentages):
 
Three months ended
 
 
 
 
March 31, 2017
 
April 1, 2016
 
Q1 FY17 vs Q1 FY16
Segment:
 
 
 
 
 
 
Video
$
74,342

 
$
65,008

 
$
9,334

14
 %
Cable Edge
8,601

 
16,824

 
(8,223
)
(49
)%
Total net revenue
$
82,943

 
$
81,832

 
$
1,111

1
 %
 
 
 
 
 
 
 
Segment revenue as a % of total net revenue:
 
 
 
Video
90
%
 
79
%
 
 
 
Cable Edge
10
%
 
21
%
 
 
 
The following table presents the breakdown of revenue by geographical region for the three months ended March 31, 2017 and April 1, 2016 (in thousands, except percentages):

36


 
Three months ended
 
 
 
 
March 31, 2017
 
April 1, 2016
 
Q1 FY17 vs Q1 FY16
Geography:
 
 
 
 
 
 
Americas
$
37,906

 
$
48,977

 
$
(11,071
)
(23
)%
EMEA
25,439

 
19,855

 
5,584

28
 %
APAC
19,598

 
13,000

 
6,598

51
 %
Total net revenue
$
82,943

 
$
81,832

 
$
1,111

1
 %