2023 Annual Report
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
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(Mark One)
☒
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2023
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 000-25826
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HARMONIC INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
77-0201147
(I.R.S. Employer
Identification No.)
2590 Orchard Parkway
San Jose, CA 95131
(408) 542-2500
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to section 12(b) of the Act:
Title of each class
Common Stock, par value $0.001 per share
Trading Symbol
HLIT
Name of each exchange on which registered
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post
such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or
an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
☒
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Accelerated filer
Smaller reporting company
☐
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared
or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in
the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation
received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Based on the reported closing sale price of the Common Stock on The NASDAQ Global Select Market on June 30, 2023, the aggregate market value
of the voting Common Stock held by non-affiliates of the registrant was approximately $1,259.4 million. Shares of Common Stock held by each executive
officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of February 12, 2024, there were 111,908,849 shares of the Registrant’s Common Stock, $0.001 par value, outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant’s 2024 Annual Meeting of Stockholders (which will be filed with the Securities and Exchange
Commission within 120 days of the end of the fiscal year ended December 31, 2023) are incorporated by reference in Part III of this Annual Report on
Form 10-K.
HARMONIC INC.
FORM 10-K
TABLE OF CONTENTS
PART I
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 1C.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
ITEM 9C.
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
CYBER SECURITY
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURE
PART II
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
[RESERVED]
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
CONTROLS AND PROCEDURES
OTHER INFORMATION
DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
PART III
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTANT FEES AND SERVICES
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
FORM 10-K SUMMARY
PART IV
ITEM 15.
ITEM 16.
SIGNATURES
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1
Forward Looking Statements
Some of the statements contained in this Annual Report on Form 10-K are forward-looking statements that involve risk and uncertainties. The
statements contained in this Annual Report on Form 10-K that are not purely historical are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), 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,” “could,” “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:
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developing trends and demands in the markets we address, particularly emerging markets;
• macroeconomic conditions, including inflation, rising interest rates, volatility and uncertainty in the banking and financial services sector, supply
chain disruptions, volatile capital markets and foreign currency fluctuations, particularly in certain geographies, and in financial markets;
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the impact of geopolitical events, including the Hamas-Israel and Russia-Ukraine conflicts, and tensions between China and Taiwan and China
and the U.S., on our business and the markets in which we operate;
new and future products and services;
spending of our customers;
our strategic direction, future business plans and growth strategy, including our plans with respect to the Video Business;
industry and customer consolidation;
expected demand for and benefits of our products and services;
concentration of revenue sources;
expectations regarding our Broadband and Video solutions;
potential future acquisitions and dispositions;
anticipated results of potential or actual litigation;
our competitive environment;
the impact of our restructuring plans;
the impact of governmental regulations, including with respect to tariffs and economic sanctions;
anticipated revenue and expenses, including the sources of such revenue and expenses;
expected impacts of changes in accounting rules;
expectations regarding the usability of our inventory and the risk that inventory will exceed forecasted demand;
expectations and estimates related to goodwill and its associated carrying value; and
use of cash, cash needs and ability to raise capital, including repaying our convertible notes or repurchasing our common stock.
These statements are subject to known and unknown risks, uncertainties and other factors, any of which may cause our actual results to differ
materially from those implied by the forward-looking statements. Important factors that may cause actual results to differ from expectations include those
discussed in “Risk Factors” in this Annual Report on Form 10-K. All forward-looking statements included in this Annual Report on Form 10-K are based
on information available to us on the date thereof, and we assume no obligation to update any such forward-looking statements. The terms “Harmonic,”
“Company,” “we,” “us,” “its,” and “our,” as used in this Annual Report on Form 10-K, refer to Harmonic Inc. and its subsidiaries and its predecessors as a
combined entity, except where the context requires otherwise.
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Risk Factor Summary
Our business is subject to significant risks and uncertainties that make an investment in us speculative and risky. Below we summarize what we
believe are the principal risk factors but these risks are not the only ones we face, and you should carefully review and consider the full discussion of our
risk factors in the section titled “Risk Factors,” together with the other information in this Annual Report on Form 10-K. If any of the following risks
actually occurs (or if any of those listed elsewhere in this Annual Report on Form 10-K occur), our business, reputation, financial condition, results of
operations, revenue, and future prospects could be seriously harmed. In that event, the market price of our common stock could decline, and you could lose
part or all of your investment. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become
important factors that adversely affect our business.
• We depend on cable, satellite and telco and broadcast and media industry spending for our revenue and any material decrease or delay in
spending in any of these industries would negatively impact our operating results, financial condition and cash flows;
•
The loss of one or more of our key customers, a failure to continue diversifying our customer base, or a decrease in the number of larger
transactions could harm our business and our operating results;
• We need to develop and introduce new and enhanced products and solutions in a timely manner to meet the needs of our customers and to remain
competitive;
•
The markets in which we operate are intensely competitive;
• Our future growth depends on a number of video and broadband industry trends;
• Our software-based broadband product initiatives expose us to certain technology transition risks that may adversely impact our operating results,
financial condition and cash flows;
• Our operating results are likely to fluctuate significantly and, as a result, may fail to meet or exceed the expectations of securities analysts or
investors, causing our stock price to decline;
• We purchase several key components, subassemblies and modules used in the manufacture or integration of our products from sole or limited
sources, and we rely on contract manufacturers and other subcontractors;
• We face risks associated with having outsourced engineering resources located in Ukraine; and
• We rely on resellers, value-added resellers and systems integrators for a significant portion of our revenue, and disruptions to, or our failure to
develop and manage our relationships with these customers or the processes and procedures that support them could adversely affect our
business.
3
Item 1.
BUSINESS
PART I
We are a leading global provider of (i) broadband access solutions that enable broadband operators to more efficiently and effectively deploy high-
speed internet for data, voice and video services for their customers and (ii) versatile and high performance video delivery software, products, system
solutions and services that enable our customers to efficiently create, prepare, store, playout and deliver a full range of high-quality broadcast and
streaming video services to consumer devices, including televisions, personal computers, laptops, tablets and smart phones.
We operate in two segments, Broadband and Video. Our Broadband business provides broadband access solutions and related services, including our
cOS software-based broadband access solution, to broadband operators globally. Our Video business provides video processing and production and playout
solutions and services worldwide to broadband operators and satellite and telco Pay-TV service providers, which we refer to collectively as “service
providers,” and to broadcast and media companies, including streaming media companies. Our Video business infrastructure solutions are delivered either
through shipment of our products, software licenses or as software-as-a-service (“SaaS”) subscriptions.
Across our two business segments, we derived approximately 74% of our revenue from the Americas in 2023. The Europe, Middle East and Africa
(EMEA) and Asia Pacific (APAC) regions accounted for 21% and 5% of our 2023 revenue, respectively.
Harmonic was initially incorporated in California in June 1988 and was reincorporated in Delaware in May 1995. Our principal executive offices are
currently located at 2590 Orchard Parkway, San Jose, California 95131. Our telephone number is (408) 542-2500. Our Internet website is
http://www.harmonicinc.com. Other than the information expressly set forth in this Annual Report on Form 10-K, the information contained or referred to
on our website is not part of this report.
Industry Overview and Market Trends
Broadband Business
Industry Challenges
Broadband operators continue to face challenges from the rapid growth of demand for broadband bandwidth in their networks, driven primarily by:
• more users with more connected devices and applications;
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bundled digital video, voice and high-speed data services; and
bandwidth-intensive VOD and streaming video services, and interactive cloud applications.
In addition, the operation of network infrastructure is space, power and personnel intensive. Hardware-centric networks can also be expensive to
update or replace. To remain competitive, especially in the face of heightened competition from non-cable service providers, such as telcos, to deliver
gigabit data rates, broadband operators need to significantly upgrade existing equipment and network technologies.
Technology Trends
• DOCSIS. We believe the cable industry will continue to deploy the DOCSIS 3.1 standard, which enables high bandwidth data transfer over
existing broadband infrastructure, and we expect increasing adoption and deployment of the next-generation DOCSIS 4.0 standard, which has
begun in certain markets.
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Virtualization. We believe broadband operators will continue to move toward more software-driven architectures, which is central to our
Broadband business and product strategy. Virtualized software solutions that are decoupled from underlying hardware and run on commercial-
off-the-shelf (COTS) servers and/or cloud-native architectures allow for significantly increased efficiencies, upgradability, configuration
flexibility, service agility and scalability not feasible with hardware-centric approaches. We believe a software-based broadband access
solution can significantly reduce broadband operator facility costs, especially costs related to physical space and power consumption, and
increase operational efficiency, and that the deployment of these systems will be an important step in broadband operators’ transition to all-IP
networks.
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• Distributed Access Architecture. In addition to centralized broadband access solutions, we believe interest in distributed access solutions
continues to accelerate, particularly in competitive gigabit service markets where broadband operators are competing with fiber-to-the-home
(FTTH) services and are extending fiber networks deeper into their access networks. A distributed access architecture (DAA) coupled with a
software-based broadband access solution running on COTS servers at a headend, and the distribution of DAA nodes closer to end users,
alleviates the power and space requirements of centralized systems at headend sites due to the fact that the radio frequency (RF) processing is
distributed into the field outside of the headend. We believe this distributed architecture will enable service providers to efficiently scale to
support data and IP video growth.
• Multiple Access. cOS is a software-based solution that runs on COTS servers connected to distributed access nodes. Traditionally, the
distributed access nodes deliver service to the subscribers over RF signals with DOCSIS. With cOS, FTTH services over passive optical
networks (PON) can be supported with software running on cOS servers and with remote optical line termination (OLT) modules plugged into
the DAA nodes. The result is that the cOS solution can support delivering both DOCSIS and PON services to different subscribers, which we
believe is another key differentiating competitive advantage for Harmonic. As fiber is pulled deeper into the network, broadband operators
will have the infrastructure and technology to deliver both traditional cable services and FTTH.
Our Broadband business strategy is focused on providing our customers with software-based solutions, on a centralized, distributed access or hybrid
architecture, to enable and support these technology and industry trends.
Video Business
We believe our customers must continue to employ innovative technologies and services to address key trends in the dynamic video industry.
• Demand for Streaming Services. In the highly competitive video industry, there is strong demand for video content to be captured, processed
and streamed to millions of subscribers at scale, and with personalized service features and characteristics. We believe video streaming is, and
will continue to be, the most significant trend affecting the video industry for the foreseeable future.
• Demand for Targeted Advertising. Streaming technology makes it possible for streaming platforms to insert personalized targeted
advertisements into video streams to consumers. This capability is highly sought after by advertisers and results in significantly higher
advertising revenue for video streaming service providers. With streaming viewership continuing to grow rapidly, we believe targeted ad
insertion will become a foundational pillar of the video industry in the coming years.
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Streaming of Live Events. In contrast to the constraints of traditional linear broadcast channels, there is effectively no limit to the number of
live events that can be streamed or the audience reach of streamed events. Consequently, we believe the number of live events globally that
will be streamed to consumers, especially live sporting events, will continue to grow for the foreseeable future.
• Demand for High Quality Video. High quality video for both traditional broadcast television and streaming continues to be an important factor
for consumers. Compression technologies such as High Efficiency Video Compression (HEVC) or advances in H.264/AVC codecs, as well as
increasing requirements for HDR encoding, will continue to remain a high priority for both broadcast and streaming providers.
• Decline in Broadcast Viewing. Broadcast television viewership will continue to decline as the growth in streaming accelerates. We believe this
transition will cause traditional Pay-TV service providers and broadcasters to focus their investments on (i) providing streaming services and
(ii) reducing the operational complexities and cost of broadcast television.
In response to these trends, our customers are:
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expanding their streaming offerings with video-on-demand (VOD) programming, live events and/or linear TV bundles to reach a larger and
more global audience;
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utilizing streaming technologies to expand monetization opportunities with personalized and targeted ad insertion;
continuing to enhance and differentiate their content offerings, consolidate to achieve greater economies of scale and subscriber concentration,
and acquire other companies to expand their content libraries and capabilities to develop original content; and
improving the efficiency and utilization of legacy infrastructure to minimize operational and staffing needs and costs by migrating services to
public cloud SaaS or upgrading on-premise equipment with the latest generation of highly dense and functionally rich technologies.
Our Video business strategy is focused on providing our customers with software-based appliances and SaaS platforms to enable and support these
trends.
Our Video Markets
Broadcast and Media Companies
• Network broadcasters, programmers and content owners continue to invest in new and enhanced direct-to-consumer streaming platforms, as
well as upgrade and improve the efficiencies of their traditional broadcast television services. We believe these companies will utilize new
technologies, including public cloud infrastructure and SaaS platforms, to expand their streaming offerings, reach wider audiences, and
increase monetization opportunities through personalized advertising, and, in parallel, reduce the complexity and cost of running and
operating their traditional broadcast services.
Streaming
• We believe media companies of all sizes will invest heavily in streaming services for the foreseeable future, whether for linear TV, live events
or a range of VOD offerings, and that these offerings will be enhanced to include personal and targeted advertisements to increase
monetization potential. We believe many of these streaming offerings will be launched by new entrants into the space, in addition to those
launched by traditional media companies who have a history and brand in broadcast television.
Service Providers
• Wireline Operators. Cable and telco operators continue to focus on various initiatives to improve and differentiate their service offerings from
competing service providers, including bundled digital video, voice and high-speed data services; expansion of streaming service offerings to
include linear TV, live events and VOD; upgraded consumer-facing applications; and capacity enhancement of high-speed data services.
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Satellite Operators. Satellite operators around the world have established digital television services that serve tens of millions of subscribers,
with the ability to provide tens of thousands of linear channels. We expect satellite operators to increase their investments in their streaming
offerings to meet rapidly changing consumption habits and, in parallel, strive to optimize their traditional broadcast operations.
Video Infrastructure Technology Trends
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Acceleration of Streaming Services. We believe the industry will continue to adopt streaming technologies at an accelerating pace to deliver
video content to consumers and, increasingly, utilize public clouds to do so.
Transformation of Broadcast Infrastructure. We believe the industry will continue to seek to transform existing broadcast infrastructure
workflows into more flexible and efficient operations, in order to reduce operational and investment costs. We believe that, in order to
maximize cost savings, a material portion of these operations will migrate to public clouds in the coming years, while some customers will
upgrade and replace their aging on-premise equipment with next-generation software-based appliances that significantly reduce operational
complexity.
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Our Products and Solutions
Broadband Products and Solutions
Software-Based Broadband Access Solution. As demand continues to rapidly grow for high-speed broadband services such as streaming, VOD, time-
shift TV and cloud DVR, we believe we can help broadband operators take advantage of this opportunity with our cOS software-based broadband access
solution, an end-to-end solution consisting of virtualized cloud-native software elements that orchestrate and connect with a variety of Harmonic and third-
party indoor and outdoor hardware devices. We believe our cOS solution delivers unprecedented scalability, agility and cost savings, and enables our
customers to migrate to multi-gigabit broadband capacity and the fast deployment of DOCSIS and FTTx data, video and voice services. We believe our
solution resolves space and power constraints in broadband operator facilities, significantly reduces dependence on hardware upgrade cycles, and reduces
total cost of ownership. Our cOS solution can be deployed based on a centralized, distributed access or hybrid architecture.
cOS Central Cloud Services. Our cOS Central Cloud Services is a value-add subscription service for cOS customers that bundles three elements: (i)
24x7 technical support, (ii) a dedicated customer success team focused on customer satisfaction and retention, and (iii) a cOS Central SaaS that enhances
and simplifies the deployment, monitoring, operation and maintenance of the cOS solution with advanced analytics, management and engagement tools.
Video Processing and Delivery Solutions
We offer two categories of solutions - a broad range of software-based video appliances and SaaS platforms - to deliver broadcast and streaming
services and capabilities in the media market.
Software-based Appliances. Our video processing appliances, which include network management and application software and hardware products,
provide our customers with the ability to acquire a variety of signals from different sources and in different protocols in order to deliver a variety of real-
time and stored content to their subscribers for viewing on a broad range of devices. Our appliance product families include:
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Encoders. Our high-performance encoders compress video, audio and data channels to low bit rates while maintaining high video quality. Our
latest software-based XOS encoders can deliver video in multiple formats, including standard, HD and Ultra HD, and in any video
compression standard, including MPEG-2, MPEG-4 AVC and HEVC. This capability allows the encoders to converge workflows targeted for
all forms of video delivery, whether broadcast or streaming.
Video Servers. Our Spectrum family of video server systems are used by broadcast and media companies to create play-to-air television
channels. Our customers typically use these video server products to record incoming content from either live feeds or from tapes, encoding
that content in real-time into standard media files that are then stored in the server’s file system until the content is needed for playback as part
of a scheduled playlist.
• High-density stream processing. We offer high-density, real-time stream processing systems capable of high-performance, high-throughput
video processing for mission-critical IP video delivery applications, including multiplexing, scrambling, splicing and blackout source
switching.
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Edge processors. Our family of Edge processing platforms allows service providers to acquire content delivered via satellite, IP or terrestrial
networks for distribution to their subscribers. These products are used by broadcasters to decode signals backhauled from live news and
sporting events in contribution applications, as well as by content owners looking to distribute their content in a controlled manner to a large
base of affiliates.
SaaS platforms. Our VOS360 SaaS platforms provide both streaming and channel origination and distribution services in a public cloud environment
that is fully managed and operated by our 24/7 DevOps teams. Our SaaS solutions enable the packaging and delivery of high-quality streaming services,
including live streaming, VOD, catch-up TV, start-over TV, network-DVR and cloud-DVR services through HTTP streaming to any device, along with
dynamic and personal ad insertion. In addition, our VOS360 SaaS platforms enable the transformation of traditional broadcast video workflows into cloud-
based workflows, resulting in more efficient and leaner operations for our customers. We continue to see an increasing number of customers seeking to
leverage the inherent commercial, operational and infrastructure flexibility offered by our VOS360 SaaS platforms. We also provide an on-premise SaaS
offering with our VOS cloud-native software solution for customers seeking to deploy a cloud-like architecture in a private data center.
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Technical Support and Professional Services
We provide maintenance and support services to most of our customers under service level agreements that are generally renewed on an annual basis.
We also provide consulting, implementation and integration services to our customers worldwide. We draw upon our expertise in broadcast television,
communications networking, compression technology and broadband access technologies to design, integrate and install complete solutions for our
customers, including integration with third-party products and services. We offer a broad range of services, including SaaS-related support and deployment,
program management, technical design and planning, building and site preparation, integration and equipment installation, end-to-end system testing and
comprehensive training.
Customers
We sell our products to a variety of cable, satellite and telco, and broadcast and media companies. Set forth below is a representative list of our
significant end user and integrator/reseller customers, listed alphabetically, based, in part, on revenue during 2023.
United States
Apple Inc
Cable One Inc
Charter Communications
Comcast
Cox Communications
DirecTV
Dish Network
Heartland Video Systems
SES
Sinclair Broadcast Group
International
America Movil
Comcast
Deutsche Telekom
Eurasiatrans B&PE
Groupe Canal
Millicom International
Normann Engineering
NYL Eletronica
Tele2 Sverige AB
Vodafone
Sales to our 10 largest customers in 2023, 2022 and 2021 accounted for approximately 66%, 67% and 58% of our net revenue, respectively. Although
we continue to seek to broaden our customer base by penetrating new markets and further expanding internationally, we expect to see continuing industry
consolidation and customer concentration.
During 2023, 2022 and 2021, Comcast accounted for 44%, 39% and 26% of our net revenue, respectively. The loss of any significant customer, or
any material reduction in orders from any significant customer, or our failure to qualify our new products with any significant customer could materially
and adversely affect our operating results, financial condition and cash flows. In addition, we are involved in most quarters in one or more relatively large
individual transactions. A decrease in the number of relatively larger individual transactions in which we are involved in any quarter could adversely affect
our operating results for that quarter.
Sales and Marketing
In the United States and internationally, we sell our products through our own direct sales force, as well as through independent resellers and systems
integrators. Our direct sales team is organized by business segment, and geographically and by major customers and markets to support customer
requirements. Our principal sales offices outside of the United States are located in Europe and Asia, and we have support staff in Switzerland and France
to support our international customers and operations. Our international resellers are generally responsible for importing our products and providing certain
installation, technical support and other services to customers in their territory after receiving training from us.
Our direct sales force and resellers for each business segment are supported by highly trained technical staff, which includes application engineers
who work closely with our customers to develop technical proposals and design systems to optimize system performance and economic benefits for our
customers. Our technical support teams provide a customized set of services, as required, for ongoing maintenance, support-on-demand and training for our
customers and resellers, both in our facilities and on-site.
Our product management organization for each business segment develops strategies for product lines and markets and, in conjunction with our sales
force, identifies the evolving technical and application needs of customers so that our product development resources can be most effectively and
efficiently deployed to meet anticipated product requirements. Each product management organization is also responsible for setting price levels, demand
forecasting and general support of the sales force, particularly at major accounts.
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Our corporate marketing organization is responsible for building awareness of the Harmonic brand in our markets and driving engagement with our
strategies, solutions and products. The group develops all of our corporate messaging and manages all customer and industry communication channels,
including public relations, web and social media, events and trade shows, as well as demand generation marketing campaigns in conjunction with our sales
force.
Manufacturing and Suppliers
We rely on third-party contract manufacturers to assemble our products and the subassemblies and modules for our products. In 2003, we entered into
an agreement with Plexus Services Corp. (“Plexus”) to act as our primary contract manufacturer. Plexus accounts for the majority of the products we
purchase from our contract manufacturers. This agreement has automatic annual renewals, unless prior notice for nonrenewal is given, and has been
automatically renewed for a term expiring in October 2024. We do not generally maintain long-term agreements with any of our contract manufacturers.
Many components, subassemblies and modules necessary for the manufacture or integration of our products are obtained from a sole supplier or a
limited group of suppliers. While we expend considerable efforts to qualify additional component sources, consolidation of suppliers in the industry and the
small number of viable alternatives have limited the results of these efforts. We do not generally maintain long-term agreements with any of our suppliers.
Intellectual Property
As of December 31, 2023, we held 133 issued U.S. patents and 47 issued foreign patents and had 39 patent applications pending. Our issued patents
are scheduled to expire between 2024 and 2041. Although we attempt to protect our intellectual property rights through patents, trademarks, copyrights,
licensing arrangements, maintaining certain technology as trade secrets and other measures, we cannot assure you that any patent, trademark, copyright or
other intellectual property rights owned by us will not be invalidated, circumvented or challenged, that such intellectual property rights will provide
competitive advantages to us, or that any of our pending or future patent applications will be issued with the claims, or the scope of the claims, sought by
us, if at all. We cannot assure you that others will not develop technologies that are similar or superior to our technology, duplicate our technology or design
around the patents that we own. In addition, effective patent, copyright and trade secret protection may be unavailable or limited in which we do business
or may do business in the future.
We enter into confidentiality or license agreements with our employees, consultants, vendors and customers as needed, and generally limit access to,
and distribution of, our proprietary information. However, no assurances can be given that these actions will prevent misappropriation of our technology. In
addition, if necessary, we are prepared to take legal action, in the future, to enforce our patents and other intellectual property rights, to protect our trade
secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Any such litigation
could result in substantial costs and diversion of resources, including management time, and could negatively affect our business, operating results,
financial position and cash flows.
In order to successfully develop and market our products, we may be required to enter into technology development or licensing agreements with
third parties. Although many companies are often willing to enter into such technology development or licensing agreements, we cannot assure you that
such agreements can be negotiated on reasonable terms or at all. The failure to enter into technology development or licensing agreements, when necessary,
could limit our ability to develop and market new products and could harm our business.
Backlog
We schedule production of our products and solutions based upon our backlog, open contracts, informal commitments from customers and sales
projections. Our backlog consists of unfilled firm purchase orders and contracts by our customers which have not been completed. Approximately 51% of
our backlog and deferred revenue is projected to be converted to revenue within a rolling one-year period. As of December 31, 2023 and 2022, we had
backlog, including deferred revenue, of $653.2 million and $457.1 million, respectively. Delivery schedules on such orders may be deferred or canceled for
a number of reasons, including reductions in spending by our customers or changes in specific customer requirements. In addition, due to annual budget
cycles at many of our customers, the amount of our backlog at any given time is not necessarily indicative of actual revenues for any succeeding period.
9
Competition
The markets in which our Video and Broadband businesses operate are extremely competitive and have been characterized by rapid technological
change and declining average selling prices in the past. The principal competitive factors in these markets include product performance, functionality and
features, reliability, pricing, breadth of product offerings, brand recognition and awareness, sales and distribution capabilities, technical operations, support
and services, and customer relationships with our customers. We believe that we compete favorably in each of these categories.
Our competitors in our Broadband business include a number of suppliers of networking and communications equipment and solutions to broadband
service providers.
Our competitors in our Video appliance business are primarily comprised of providers of video delivery and video processing and compression
products and solutions, broadcast equipment and solutions providers, and certain network infrastructure providers. Our competitors in our Video SaaS
business include companies that offer video delivery and processing SaaS solutions, SaaS video streaming platform providers, and certain public cloud
service providers.
Research and Development
We have historically devoted a significant amount of our resources to research and development. Research and development expenses in 2023, 2022
and 2021 were approximately $126.3 million, $120.3 million and $102.2 million, respectively. Research and development expenses as a percentage of
revenue in 2023, 2022 and 2021 were approximately 21%, 19% and 20%, respectively. Our internal research and development activities are conducted
primarily in the United States (California, Oregon and New Jersey), France, Israel and Hong Kong. In addition, a portion of our research and development
is conducted through third-party partners with engineering resources in Ukraine and India.
Our research and development program is primarily focused on developing new products and solutions, and adding new features and other
improvements to existing products and solutions. With respect to our Broadband business segment, our major research and development efforts are focused
on broadband access solutions for both video and data, particularly the ongoing development of our centralized, distributed and hybrid cOS software-based
broadband access solutions and converging fiber and DOCSIS capabilities on our cOS solution platform. For our Video business segment, our current
research and development efforts are focused on enhancing our streaming capabilities, expanding our targeted advertising technologies, and improving the
efficiency and flexibility of broadcast workflows for our traditional appliances and within our SaaS platform.
Our success in designing, developing, manufacturing and selling new or enhanced products and solutions will depend on a variety of factors,
including the identification of market demand for new products and solutions, product selection, timely product design and development, product
performance, effective manufacturing and assembly processes, and sales and marketing. Because of the complexity inherent in such research and
development efforts, we cannot assure you that we will successfully develop new products and solutions, or that new products and solutions developed by
us will achieve market acceptance. Our failure to successfully develop and introduce new products and solutions would materially and adversely affect our
business, operating results, financial condition and cash flows.
Human Capital Resources
As of December 31, 2023, we employed a total of 1,359 full time employees, including 570 in research and development, 238 in sales, 267 in service
and support, 81 in operations, 67 in marketing (corporate and product) and 136 in a general and administrative capacity. Of those employees, 450 were
located in the United States and Canada, and 909 employees were located outside of North America in 22 countries in Central and South America, the
Middle East and Africa, Europe and the Asia Pacific region. From time to time, we also employ a number of temporary employees and consultants on a
contract basis. Our employees in each of France and Spain are represented by labor unions and an employee works council. None of our other employees
are represented by a labor union with respect to their employment with us. We have not experienced any work stoppages, and we consider our relations
with our employees to be good.
Competition for qualified personnel in the technology space is intense, and we believe that our future success largely depends upon our continued
ability to attract, develop and retain highly skilled individuals across the globe. We believe we offer competitive compensation (including salary, incentive
bonus and equity awards) and comprehensive benefits packages in each of our locations around the globe. We aim to create an environment in which our
employees can develop and grow, and be recognized for their achievements. We offer training, development and on-demand learning programs to support
continuous learning and cultivate talent throughout the company, and promote opportunities for internal mobility and recruitment across functions and
geographies. We offer rewards and recognition programs, including spot awards to recognize employee contributions, patent incentive awards, and various
functional recognition awards. We regularly conduct employee surveys to gauge employee engagement and satisfaction, and we use the views expressed in
the surveys to influence our people strategy and policies.
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As a global company, much of our success is rooted in the diversity of our teams and our commitment to inclusion, where all employees are respected
regardless of gender, race, color, national origin, ancestry, citizenship, religion, age, physical or mental disability, medical condition, genetic information,
pregnancy, sexual orientation, gender identity or gender expression, veteran status, or marital status. We are focused on understanding our diversity, equity
and inclusion (DEI) opportunities and executing on a strategy to support further progress. We support regional employee-led groups that promote and drive
various volunteering initiatives aimed at assisting underrepresented and disadvantaged populations in the communities where we operate, as well as internal
awareness and educational campaigns on DEI-related topics. We continue to focus on building a pipeline for talent to create more opportunities for
workplace gender and other diversity and to support greater representation within the company.
Available Information
Our website is located at www.harmonicinc.com, and our investor relations website is located at investor.harmonicinc.com. Copies of the Company’s
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge on our investor relations website as soon as reasonably practicable after
we file such material electronically with or furnish it to the Securities and Exchange Commission (the SEC). The SEC also maintains a website that
contains our SEC filings at www.sec.gov.
We announce material information to the public about us, our products and services and other matters through a variety of means, including filings
with the SEC, press releases, public conference calls, webcasts, and our investor relations web site (investor.harmonicinc.com) in order to achieve broad,
non-exclusionary distribution of information to the public and for complying with our disclosure obligations under Regulation FD. Except as expressly set
forth in this Annual Report on Form 10-K, the contents of our web site are not incorporated by reference into, or otherwise to be regarded as part of, this
report or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.
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Item 1A.
RISK FACTORS
Risks Related to Our Business and Our Industry
We depend on cable, satellite and telco, and broadcast and media industry spending for our revenue and any material decrease or delay in spending in
any of these industries would negatively impact our operating results, financial condition and cash flows.
Our revenue has been derived from worldwide sales to service providers and broadcast and media companies, and streaming media companies. We
expect that these markets will provide our revenue for the foreseeable future. Demand for our products and solutions will depend on the magnitude and
timing of spending by customers in each of these markets for the purpose of creating, expanding or upgrading their systems. These spending patterns are
dependent on a variety of factors, including:
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the impact of general economic conditions, actual and projected, including inflation, rising interest rates, lower consumer confidence,
volatile capital markets, supply chain disruptions, uncertainty and volatility in the financial services sector and the impact of the Hamas-
Israel and Russia-Ukraine conflicts, and government and business responses thereto, on the global economy and regional economies;
access to financing;
annual budget cycles of customers in each of the industries we serve;
the impact of industry consolidation;
customers suspending, reducing or shifting spending due to: (i) new video or broadband industry standards; (ii) industry trends and
technology shifts, such as virtualization and cloud-based solutions, and (iii) new products and solutions, such as products and services
based on our VOS software platform or our cOS (formerly CableOS) software-based broadband access solutions;
delayed or reduced near-term spending as customers transition away from video appliance solutions and adopt new business and
operating models enabled by software and cloud-based solutions, including SaaS unified video processing solutions;
federal, state, local and foreign government regulation of broadband, telco, television broadcasting and streaming media;
overall demand for communication services and consumer acceptance of new video and data technologies and services;
competitive pressures, including pricing pressures;
the impact of fluctuations in currency exchange rates, such as the strengthening of the U.S. dollar; and
discretionary end-user customer spending patterns.
In the past, specific factors contributing to reduced spending have included:
• weak or uncertain economic and financial conditions in the United States or one or more international markets;
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uncertainty related to development of industry technology;
delays in evaluations of new services, new standards and systems architectures by certain customers;
emphasis by certain of our customers on generating revenue from existing subscribers or end-customers, rather than from new
subscribers or end-customers, through construction, expansion or upgrades;
a reduction in the amount of capital available to finance projects of our customers and potential customers;
proposed and completed business combinations and divestitures by our customers and the length of regulatory review of each;
completion of a new system or significant expansion or upgrade to a system; and
bankruptcies and financial restructuring of major customers.
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In the past, adverse economic conditions in one or more of the geographies in which we offer our products have adversely affected our customers’
spending in those geographies and, as a result, our business. During challenging economic times, such as those caused by the Hamas-Israel and Russia-
Ukraine conflicts, inflation, currency devaluation, and bank insolvencies and related uncertainty and volatility in the financial services sector and in tight
credit markets, many customers have delayed and reduced and may continue to delay or reduce capital expenditures. This has resulted and could continue
to result in reductions in revenue from our products, longer sales cycles, difficulties in collection of accounts receivable, slower adoption of new
technologies and increased price competition. If global economic and market conditions, or economic conditions in the United States, Europe or other key
markets, remain uncertain or deteriorate, we could experience a material and adverse effect on our business, results of operations, financial condition and
cash flows. Additionally, since most of our international revenue is denominated in U.S. dollars, global economic and market conditions may impact
currency exchange rates and cause our products to become relatively more expensive to customers in a particular country or region, which could lead to
delayed or reduced spending in those countries or regions, thereby negatively impacting our business and financial condition.
In addition, industry consolidation has in the past constrained, and may in the future constrain or delay, spending by our customers. Further, if our
product portfolio and product development plans do not position us well to capture an increased portion of the spending of customers in the markets on
which we focus, our revenue may decline.
As a result of these various factors and potential issues related to customer spending, we may not be able to maintain or increase our revenue in the
future, and our operating results, financial condition and cash flows could be materially and adversely affected.
The loss of one or more of our key customers, a failure to continue diversifying our customer base, or a decrease in the number of larger transactions
could harm our business and our operating results.
Historically, a significant portion of our revenue has been derived from relatively few customers, due in part to the consolidation of media customers.
Sales to our top 10 customers in the fiscal years ended December 31, 2023, 2022 and 2021 accounted for approximately 66%, 67% and 58% of our net
revenue, respectively. Although we continue to seek to broaden our customer base by penetrating new markets and further expanding internationally, we
expect to see continuing industry consolidation and customer concentration.
During the fiscal years ended December 31, 2023, 2022 and 2021, Comcast accounted for 44%, 39% and 26% of our net revenue respectively.
Further consolidation in the cable industry could lead to additional revenue concentration for us. The loss of any significant customer, or any material
reduction in orders from any other significant customer, or our failure to qualify our new products with any significant customer could materially and
adversely affect, either long term or in a particular quarter, our operating results, financial condition and cash flows. If Comcast or other significant
Broadband customers deploy our solutions slower or at a scale that is lower than we anticipate, our operating results, financial condition and cash flows
could be materially and adversely effected.
In addition, in most quarters, we are involved in one or more relatively large individual transactions. A decrease in the number of the relatively larger
individual transactions in which we are involved in any quarter could materially and adversely affect our operating results for that quarter.
As a result of these and other factors, we may be unable to increase our revenues from some or all of the markets we address, or to do so profitably,
and any failure to increase revenues and profits from these customers could materially and adversely affect our operating results, financial condition and
cash flows.
We need to develop and introduce new and enhanced products and solutions in a timely manner to meet the needs of our customers and to remain
competitive.
All of the markets we address are characterized by continuing technological advancement, changes in customer requirements and evolving industry
standards. To compete successfully, we must continually design, develop, manufacture and sell new or enhanced products and solutions that provide
increasingly higher levels of performance and reliability and meet our customers’ changing needs. However, we may not be successful in those efforts if,
among other things, our products and solutions:
• are not cost effective;
• are not brought to market in a timely manner;
• are not in accordance with evolving industry standards;
• fail to meet market acceptance or customer requirements; or
• are ahead of the needs of their markets.
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If new standards or some of our new products are adopted later than we predict or not adopted at all, or if adoption occurs earlier than we are able to
deliver the applicable products or functionality, we risk spending significant research and development time and dollars on products or features that may
never achieve market acceptance or that miss the customer demand window and thus do not produce the revenue that a timely introduction would have
likely produced.
If we fail to develop and market new and enhanced products and solutions on a timely basis, our operating results, financial condition and cash flows
could be materially and adversely affected.
The markets in which we operate are intensely competitive.
The markets for our products are extremely competitive and have been characterized by rapid technological change and declining average sales prices
in the past.
Our competitors in our Broadband business include a number of suppliers of networking and communications equipment and solutions to broadband
service providers. Our competitors in our Video appliance business are primarily comprised of providers of video delivery and video processing and
compression products and solutions, broadcast equipment and solutions providers, and certain network infrastructure providers. Our competitors in our
Video SaaS business include companies that offer video delivery and processing SaaS solutions, SaaS video streaming platform providers, and certain
public cloud service providers.
A number of our principal business competitors in both of our business segments are substantially larger and/or may have access to greater financial,
technical, marketing or other resources than we have. Consolidation in the Video industry has led to the acquisition of a number of our historic competitors
over the last several years by private equity firms and by Amazon Web Services. With respect to our Broadband business, certain competitors are
substantially larger than us.
In addition, some of our larger competitors may have more long-standing and established relationships with certain domestic and foreign customers.
Many of these large enterprises are in a better position to withstand any significant reduction in spending by customers in our markets and may be better
able to navigate periods of market uncertainty, such as the uncertainty caused by the Hamas-Israel and Russia-Ukraine conflicts, bank insolvency and
related uncertainty and volatility in the financial services sector and inflation. They often have broader product lines and market focus, and may not be as
susceptible to downturns in a particular market. These competitors may also be able to bundle their products together to meet the needs of a particular
customer, and may be capable of delivering more complete solutions than we are able to provide. To the extent large enterprises that currently do not
compete directly with us choose to enter our markets by acquisition or otherwise, competition would likely intensify.
Further, some of our competitors have offered, and in the future may offer, their products at lower prices than we offer for our competing products or
on more attractive financing or payment terms, which has in the past caused, and may in the future cause, us to lose sales opportunities and the resulting
revenue or to reduce our prices in response to that competition. Also, some competitors that are smaller than us have engaged in, and may continue to
engage in, aggressive price competition in order to gain customer traction and market share. Reductions in prices for any of our products could materially
and adversely affect our operating margins and revenue.
Additionally, certain customers and potential customers have developed, and may continue to develop, their own solutions that may cause such
customers or potential customers to not consider our product offerings or to displace our installed products with their own solutions. The growing
availability of open source codecs and related software, as well as new server chipsets that incorporate encoding technology, has, in certain respects,
lowered the barriers to entry for the video processing industry. The development of solutions by potential and existing customers and the reduction of the
barriers to entry to enter the video processing industry could result in increased competition and adversely affect our results of operations and business.
If any of our competitors’ products or technologies were to become the industry standard, our business could be seriously harmed. If our competitors
are successful in bringing their products to market earlier than us, or if these products are more technologically capable than ours, our revenue could be
materially and adversely affected.
Our future growth depends on a number of video and broadband industry trends.
Technology, industry and regulatory trends and requirements may affect the growth of our business. These trends and requirements include the
following:
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convergence, whereby network operators bundle video, voice and data services to consumers, including mobile delivery options;
continued strong consumer demand for streaming video services;
continued adoption of public cloud SaaS platforms to stream video content to consumers, as well as for broadcast infrastructure
workflows;
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continued growth in targeted advertising as a key revenue source for video streaming service providers;
the pace of adoption and deployment of high-bandwidth technology, such as DOCSIS 3.x, DOCSIS 4.0, next generation LTE and FTTP;
the use of digital video by businesses, governments and educational institutions globally;
efforts by regulators and governments in the United States and internationally to encourage the adoption of broadband and digital
technologies, including 5G broadband networks, as well as to regulate broadband access and delivery;
the need to develop partnerships with other companies involved in video infrastructure workflow and broadband services;
the extent and nature of regulatory attitudes towards issues such as network neutrality, competition between operators, access by third
parties to networks of other operators, local franchising requirements for telcos to offer video, and other new services, such as mobile
video; and
the outcome of disputes and negotiations between content owners and service providers regarding rights of service providers to store and
distribute recorded broadcast content, which outcomes may drive adoption of one technology over another in some cases.
If we fail to recognize and respond to these trends, by timely developing products, features and services required by these trends, we are likely to lose
revenue opportunities and our operating results, financial condition and cash flows could be materially and adversely affected.
Our software-based broadband access product initiatives expose us to certain technology transition risks that may adversely impact our operating
results, financial condition and cash flows.
We believe our cOS software-based broadband access solutions, supporting centralized, DAA or hybrid configurations, will significantly reduce
broadband operator headend costs and increase operational efficiency, and are an important step in operators’ transition to all-IP networks. If we are
unsuccessful in continuing to innovate, develop, and deploy our broadband access solutions in a timely manner, or are otherwise delayed in making our
solutions available to our customers, our business may be adversely impacted, particularly if our competitors develop and market similar or superior
products and solutions.
We believe our software-based broadband access solutions will continue to replace and make obsolete current CMTS solutions, which is a market our
products have historically not addressed, as well as cable edge-QAM products. If demand for our software-based broadband access solutions is weaker than
expected, our near and long-term operating results, financial condition and cash flows could be adversely impacted. Moreover, if competitors adapt new
broadband industry technology standards into competing broadband access solutions faster than we do, or promulgate a new or competitive architecture for
next-generation broadband access solutions that renders our cOS solution obsolete, our business may be adversely impacted.
The sales cycle for our cOS solutions tends to be long. For broadband operators, upgrading or expanding network infrastructure is complex and
expensive, and investing in a cOS solution is a significant strategic decision that may require considerable time to evaluate, test and qualify. Potential
customers need to ensure our cOS solution will interoperate with the various components of its existing network infrastructure, including third-party
equipment, servers and software. In addition, since we are a relatively new entrant into the CMTS market, we need to demonstrate significant performance,
functionality and/or cost advantages with our cOS solutions that outweigh customer switching costs. If sales cycles are significantly longer than anticipated
or we are otherwise unsuccessful in growing our cOS sales, our operating results, financial condition and cash flows could be materially and adversely
affected.
Our operating results are likely to fluctuate significantly and, as a result, may fail to meet or exceed the expectations of securities analysts or investors,
causing our stock price to decline.
Our operating results have fluctuated in the past and are likely to continue to fluctuate in the future, on an annual and a quarterly basis, as a result of
several factors, many of which are outside of our control. Some of the factors that may cause these fluctuations include:
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the level and timing of spending of our customers in the United States, Europe and in other markets;
economic and financial conditions specific to each of the cable, satellite and telco, and broadcast and media industries, as well as general
economic and financial market conditions, including the Hamas-Israel and Russia-Ukraine conflicts, tensions between China and Taiwan
and China and the United States, bank insolvency and related uncertainty and volatility in the financial services sector, inflation and
government and business responses thereto as well as related supply chain and labor shortage issues;
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changes in market acceptance of and demand for our products or our customers’ services or products;
the timing and amount of orders, especially from large individual transactions and transactions with our significant customers;
the mix of our products sold and the effect it has on gross margins;
the timing of revenue recognition, including revenue recognition on sales arrangements and from transactions with significant service and
support components, which may span several quarters;
our transition to a SaaS subscription model for our Video business, which may cause near-term declines in revenue in our Video segment
since, unlike Video appliance sales, SaaS revenue is recognized over the applicable subscription term based on service usage;
the timing of completion of our customers’ projects;
the length of each customer product upgrade cycle and the volume of purchases during the cycle;
competitive market conditions, including pricing actions by our competitors;
the level and mix of our domestic and international revenue;
new product introductions by our competitors or by us;
uncertainty in the European Union due to unrest or violence in Ukraine that the ongoing military conflict with the Russian Federation has
caused, which could adversely affect our results, financial condition and prospects;
uncertainty in the Middle East due to the latest developments in the conflict between Hamas and Israel, which could also adversely affect
our results, financial condition and prospects;
changes in domestic and international regulatory environments affecting our business;
the evaluation of new services, new standards and system architectures by our customers;
the cost and timely availability to us of components, subassemblies and modules;
the mix of our customer base, by industry and size, and sales channels;
changes in our operating and extraordinary expenses;
the timing of acquisitions and dispositions by us and the financial impact of such transactions;
impairment of our goodwill;
the impact of litigation, such as related litigation expenses and settlement costs;
• write-downs of inventory and investments;
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changes in our effective federal tax rate, including as a result of changes in our valuation allowance against our deferred tax assets, and
changes in our effective state tax rates, including as a result of apportionment;
changes to tax rules related to the deferral of foreign earnings and compliance with foreign tax rules;
the impact of applicable accounting guidance on accounting for uncertainty in income taxes that requires us to establish reserves for
uncertain tax positions and accrue potential tax penalties and interest; and
the impact of applicable accounting guidance on business combinations that requires us to record charges for certain acquisition related
costs and expenses and generally to expense restructuring costs associated with a business combination subsequent to the acquisition
date.
The timing of deployment of our products by our customers can be subject to a number of other risks, including the availability of skilled engineering
and technical personnel, and the availability of third-party equipment and services. For our Video business, deployment risks may also include our
customers’ ability to negotiate and enter into rights agreements with video content owners that provide our customers with the right to deliver certain video
content, and our customers’ need for local franchise and licensing approvals.
We often recognize a substantial portion of our quarterly revenue in the last month of the 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 the timing of revenue, particularly from relatively large individual transactions, can cause significant fluctuations in
operating results in a particular quarter.
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As a result of these factors and other factors, our operating results in one or more future periods may fail to meet or exceed the expectations of
securities analysts or investors. In that event, the trading price of our common stock would likely decline.
We purchase several key components, subassemblies and modules used in the manufacture or integration of our products from sole or limited sources,
and we rely on contract manufacturers and other subcontractors.
Our reliance on sole or limited suppliers, particularly foreign suppliers, and our reliance on contractors for manufacturing and installation of our
products, involves several risks, including a potential inability to obtain an adequate supply of required components, subassemblies or modules; reduced
control over costs, quality and timely delivery of components, subassemblies or modules; supplier discontinuation of components, subassemblies or
modules we require; and timely installation of products. In addition, our financial results may be impacted by tariffs imposed by the United States on goods
from other countries and tariffs imposed by other countries on U.S. goods. If any such tariffs are imposed on products or components that we import,
including those obtained from a sole supplier or a limited group of suppliers, we could experience reduced revenues or may have to raise our prices, either
of which could have an adverse effect on our business, financial condition and operating results.
These risks could be heightened during a substantial economic slowdown because our suppliers and subcontractors are more likely to experience
adverse changes in their financial condition and operations during such a period. Further, these risks could materially and adversely affect our business if
one of our sole sources, or a sole source of one of our suppliers or contract manufacturers, is adversely affected by a natural disaster or the outbreak of
disease, epidemics and other pandemics. These risks could also be heightened by geopolitical factors. For example, a number of the components we use in
our products are sourced through Taiwan. Deterioration of relations between Taiwan and China and the United States, the resulting actions taken by any of
these parties, and other factors affecting the political or economic conditions of Taiwan in the future, could adversely impact our supply chain, international
sales and operations. While we expend resources to qualify additional component sources, consolidation of suppliers and the small number of viable
alternatives have limited the results of these efforts. Managing our supplier and contractor relationships is particularly difficult during time periods in which
we introduce new products and during time periods in which demand for our products is increasing, especially if demand increases more quickly than we
expect.
Plexus Services Corp. (“Plexus”), which manufactures our products at its facilities in Malaysia, currently serves as our primary contract manufacturer,
and currently accounts for a majority, by dollar amount, of the products that we purchase from our contract manufacturers. From time to time we assess our
relationship with our contract manufacturers, and we do not generally maintain long-term agreements with any of our suppliers or contract manufacturers.
Our agreement with Plexus has automatic annual renewals, unless prior notice is given by either party, and has been automatically renewed for a term
expiring in October 2024.
Difficulties in managing relationships with any of our current contract manufacturers, particularly Plexus, that manufacture our products off-shore, or
any of our suppliers of key components, subassemblies and modules used in our products, could impede our ability to meet our customers’ requirements
and adversely affect our operating results. An inability to obtain adequate and timely deliveries of our products or any components or materials used in our
products, or the inability of any of our contract manufacturers to scale their production to meet demand, or any other circumstance that would require us to
seek alternative sources of supply, would negatively affect our ability to ship our products on a timely basis, which could damage relationships with current
and prospective customers and harm our business and materially and adversely affect our revenue and other operating results. Furthermore, if we fail to
meet customers’ supply expectations, our revenue would be adversely affected and we may lose sales opportunities, both short and long term, which could
materially and adversely affect our business and our operating results, financial condition and cash flows. Increases, from time to time, in demand on our
suppliers and subcontractors from our customers or from other parties have, on occasion, caused delays in the availability of certain components and
products. In response, we may increase our inventories of certain components and products and expedite shipments of our products when necessary. These
actions could increase our costs and could also increase our risk of holding obsolete or excess inventory, which, despite our use of a demand order
fulfillment model, could materially and adversely affect our business, operating results, financial condition and cash flows.
Operational Risks
We rely on resellers, value-added resellers and systems integrators for a significant portion of our Video business revenue, and disruptions to, or our
failure to develop and manage our relationships with these customers or the processes and procedures that support them could adversely affect our
business.
We generate a significant percentage of our revenue, particularly in our Video business, through sales to resellers, value-added resellers (“VARs”) and
systems integrators that assist us with fulfillment or installation obligations. We expect that these sales will continue to generate a significant percentage of
our revenue in the future. Accordingly, our future success is highly dependent upon establishing and maintaining successful relationships with a variety of
channel partners.
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We generally have no long-term contracts or minimum purchase commitments with any of our resellers, VAR or system integrator customers, and our
contracts with these parties do not prohibit them from purchasing or offering products or services that compete with ours. Our competitors may provide
incentives to any of our resellers, VAR or systems integrator customers to favor their products or, in effect, to prevent or reduce sales of our products. Any
of our resellers, VAR or systems integrator customers may independently choose not to purchase or offer our products. Many of our resellers, and some of
our VARs and system integrators are small, are based in a variety of international locations, and may have relatively unsophisticated processes and limited
financial resources to conduct their business. Any significant disruption of our sales to these customers, including as a result of the inability or
unwillingness of these customers to continue purchasing our products, or their failure to properly manage their business with respect to the purchase of, and
payment for, our products, or their ability to comply with our policies and procedures as well as applicable laws, could materially and adversely affect our
business, operating results, financial condition and cash flows. In addition, our failure to continue to establish or maintain successful relationships with
reseller, VAR and systems integrator customers could likewise materially and adversely affect our business, operating results, financial condition and cash
flows.
We face risks associated with having outsourced engineering resources located in Ukraine.
We outsource a portion of our research and development and product support activities to our third-party partner, GlobalLogic, a Hitachi group
company. Through GlobalLogic, we have a significant number of engineering resources located in Kyiv, Ukraine that are dedicated to our Broadband and
Video business segments. Political, social and economic instability and unrest or violence in Ukraine from the ongoing military conflict with the Russian
Federation have caused, and may continue to cause, disruptions to the business and operations of GlobalLogic, which could slow or delay the development
work our outsourced engineering teams are undertaking for us. Any escalation of political tensions, military activity, instability, unrest or conflict could
limit or prevent our employees from traveling to, from, or within Ukraine to direct and coordinate our outsourced engineering teams, or cause us to shift all
or portions of the development work occurring in Ukraine, and/or cause GlobalLogic to relocate personnel to other locations or countries pursuant to its
business continuity plans. Any resulting delays could negatively impact our product development efforts, operating results and our business. In addition,
increased costs associated with managing or relocating our outsourced engineering teams in Ukraine, or engaging with alternative engineering resources
outside of Ukraine, could negatively impact our operating results and financial condition.
We may not be able to effectively manage our operations.
As of December 31, 2023, we had 974 employees in our international operations, representing approximately 72% of our worldwide workforce. Our
ability to manage our business effectively in the future, including with respect to any future growth, our operation as both a hardware and increasingly
software- and SaaS-centric business, the integration of any acquisition efforts, and the breadth of our international operations, will require us to train,
motivate and manage our employees successfully, to attract and integrate new employees into our overall operations, to retain key employees and to
continue to improve and evolve our operational, financial and management systems. There can be no assurance that we will be successful in any of these
efforts, and our failure to effectively manage our operations could have a material and adverse effect on our business, operating results, cash flows and
financial condition.
We face risks associated with having facilities and employees located in Israel.
As of December 31, 2023, we maintained facilities in Israel with a total of 255 employees, or approximately 19% of our worldwide workforce. Our
employees in Israel engage in a number of activities, for both our Broadband and Video business segments, including research and development, product
development, product management, supply chain management for certain product lines and sales activities.
As such, we are directly affected by the political, economic and military conditions affecting Israel, such as the ongoing Hamas-Israel conflict. Any
significant conflict involving Israel could have a direct effect on our business, in the form of physical damage or injury, restrictions from traveling or
reluctance to travel to from or within Israel by our Israeli and other employees or those of our subcontractors, or the loss of Israeli employees to active
military duty. Most of our employees in Israel are currently obligated to perform annual reserve duty in the Israel Defense Forces, and approximately 14%
of those employees were called for active military duty in 2023. Approximately 10% of our employees in Israel have been called for military duty in
connection with the Hamas-Israel conflict and in the event that more of our employees are called to active duty, certain of our research and development,
product development and other activities may be significantly delayed and adversely affected. Further, the interruption or curtailment of trade between
Israel and its trading partners, as a result of terrorist attacks or hostilities, conflicts between Israel and any other Middle Eastern country or organization, or
any other cause, could significantly harm our business. Additionally, current or future tensions or conflicts in the Middle East, such as the ongoing Hamas-
Israel conflict, could materially and adversely affect our business, operating results, financial condition and cash flows.
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In order to manage our growth, we must be successful in addressing management succession issues and attracting and retaining qualified personnel.
Our future success will depend, to a significant extent, on the ability of our management to operate effectively, both individually and as a group. We
must successfully manage transition and replacement issues that may result from the departure or retirement of members of our executive management. For
example, our former Chief Financial Officer announced his decision to resign in March 2023 and we appointed our current Chief Financial Officer in May
2023. Any significant leadership change or senior management transition involves inherent risks and any failure to ensure timely and suitable replacements
and smooth transition could hinder our strategic planning, business execution, and future performance. We cannot provide assurances that any current or
future changes of management personnel in the future will not cause disruption to operations or customer relationships or a decline in our operating results.
We are also dependent on our ability to retain and motivate our existing highly qualified personnel, in addition to attracting new highly qualified
personnel. Competition for qualified management, technical and other personnel is often intense, particularly in Silicon Valley, Israel and Hong Kong
where we have significant research and development activities, and we may not be successful in attracting and retaining such personnel. Competitors and
others have in the past attempted, and are likely in the future to attempt, to recruit our employees. While our employees are required to sign standard
agreements concerning confidentiality, non-solicitation and ownership of inventions, other than in Israel, we generally do not have non-competition
agreements with our personnel. The loss of the services of any of our key personnel, the inability to attract or retain highly qualified personnel in the future
or delays in hiring such personnel, particularly senior management and engineers and other technical personnel, could negatively affect our business and
operating results. Furthermore, a certain portion of our personnel in the United States is comprised of foreign nationals whose ability to work for us
depends on obtaining the necessary visas. Our ability to hire and retain foreign nationals in the United States, and their ability to remain and work in the
United States, is affected by various laws and regulations, including limitations on the availability of visas. Changes in U.S. laws or regulations affecting
the availability of visas have, and may continue to adversely affect, our ability to hire or retain key personnel and as a result may impair our operations.
Our products include third-party technology and intellectual property, and our inability to acquire new technologies or use third-party technology in
the future could harm our business.
In order to successfully develop and market certain of our planned products, we may be required to enter into technology development or licensing
agreements with third parties. Although companies with technology useful to us are often willing to enter into technology development or licensing
agreements with respect to such technology, we cannot provide assurances that such agreements may be negotiated on commercially reasonable terms, or at
all. The failure to enter, or a delay in entering, into such technology development or licensing agreements, when necessary or desirable, could limit our
ability to develop and market new products and could materially and adversely affect our business.
We incorporate certain third-party technologies, including software programs, into our products, and, as noted, intend to utilize additional third-party
technologies in the future. In addition, the technologies that we license may not operate properly or as specified, and we may not be able to secure
alternatives in a timely manner, either of which could harm our business. We could face delays in product releases until alternative technology can be
identified, licensed or developed, and integrated into our products, if we are able to do so at all. These delays, or a failure to secure or develop adequate
technology, could materially and adversely affect our business, operating results, financial condition and cash flows.
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Cybersecurity incidents, including data security breaches or computer viruses, could harm our business by disrupting our business operations,
compromising our products and services, damaging our reputation or exposing us to liability.
Cyber criminals and hackers may attempt to penetrate our network security, or the network security of third parties we work with, including our third-
party vendors, service providers, manufacturers, solution providers, partners and consultants, misappropriate our proprietary information or cause business
interruptions, or access or misappropriate other sensitive data. Because the techniques used by such computer programmers to access or sabotage networks
change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate
preventative measures. In the past, we and relevant third parties have faced compromises to our network security, though no prior incidents we have
identified to date have materially affected our business, results of operations or financial condition. Companies are facing additional attacks as workforces
have become more distributed as a result of remote and hybrid working arrangements. Additionally, geopolitical events such as the Hamas-Israel and
Russia-Ukraine conflicts may increase the cybersecurity risks we and the third parties we work with face. Our business operations utilize and rely upon
numerous third-party vendors, service providers, manufacturers, solution providers, partners and consultants, and any failure of such third parties’
cybersecurity measures could materially and adversely affect or disrupt our business. While we have invested in and continue to update our network
security and cybersecurity infrastructure and systems, if our cybersecurity systems, or the cybersecurity systems of relevant third parties, fail to protect
against unauthorized access, sophisticated cyber-attacks, phishing schemes, ransomware and other malicious code, data protection breaches, computer
viruses, denial-of-service attacks, or disruptions from unauthorized tampering or human error, our ability to conduct our business effectively could be
damaged in a number of ways, including:
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our intellectual property and other proprietary data, or financial assets, could be stolen;
our ability to manage and conduct our business operations could be seriously disrupted;
defects and security vulnerabilities could be introduced into our product, software and SaaS offerings, thereby damaging the reputation
and perceived reliability and security of our products; and
confidential or otherwise sensitive information, including personal data of our customers, employees and business partners, could be
compromised and lead to unauthorized, unlawful, or accidental access to, or acquisition, use, corruption, loss, destruction, unavailability,
alteration or dissemination of, or damage to, such information.
Should any of the above events occur, or be perceived to have occurred, our reputation, competitive position and business could be significantly
harmed, and we could be subject to claims, demands and litigation from customers, third parties, and other individuals and groups, and investigations or
other proceedings by governmental authorities, and may be subject to fines, penalties, damages, and other liabilities. Additionally, we could incur
significant costs in order to upgrade our cybersecurity systems and remediate damages and otherwise respond to the incident. Consequently, our business,
operating results, financial condition and cash flows could be materially and adversely affected.
We may not have applicable or otherwise adequate insurance to protect us from, or adequately mitigate, liabilities or damages resulting from security
breaches or incidents. The successful assertion of one or more large claims against us that exceeds any available insurance coverage that we might have, or
results in changes to insurance policies (including premium increases or the imposition of large deductible or co-insurance requirements), could have an
adverse effect on our business. In addition, we cannot be sure that insurance coverage will be available on acceptable terms or that insurers will not deny
coverage as to any future claim.
Our operating results could be adversely affected by natural disasters affecting us or impacting our third-party manufacturers, suppliers, resellers or
customers.
Our corporate headquarters is located in California, which is prone to earthquakes. In addition, climate change is contributing to an increase in erratic
weather patterns globally and intensifying the impact of certain types of catastrophes, such as floods, wildfires and droughts. We have employees,
consultants and contractors located in regions and countries around the world. In the event that any of our business, sales or research and development
centers or offices in the United States or internationally are adversely affected by an earthquake, flood, wildfire or by any other natural disaster, we may
sustain damage to our operations and properties, which could cause a sustained interruption or loss of affected operations, and cause us to suffer significant
financial losses.
We rely on third-party contract manufacturers for the production of our products. Any significant disruption in the business or operations of such
manufacturers or of their or our suppliers could adversely impact our business. Our principal contract manufacturers and several of their and our suppliers
and our resellers have operations in locations that are subject to natural disasters, such as severe weather, tsunamis, floods, fires and earthquakes, which
could disrupt their operations and, in turn, our operations.
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In addition, if there is a natural disaster in any of the locations in which our significant customers are located, we face the risk that our customers may
incur losses or sustained business interruption, or both, which may materially impair their ability to continue their purchase of products from us.
Accordingly, natural disaster in one of the geographies in which we, or our third-party manufacturers, their or our suppliers or our customers, operate could
have a material and adverse effect on our business, operating results, cash flows and financial condition.
Financial, Transactional and Tax Risks
We may need additional capital in the future and may not be able to secure adequate funds at all or on terms acceptable to us.
We engage in the design, development and manufacture and sale of a variety of video and broadband products and system solutions, which has
required, and will continue to require, significant research and development expenditures.
We are monitoring and managing our cash position in light of ongoing market conditions due to the volatility and uncertainty in the banking and
financial services sector, the Hamas-Israel and Russia-Ukraine conflicts, and related macroeconomic conditions. We believe that our existing cash of
approximately $84.3 million at December 31, 2023 will satisfy our cash requirements for at least the next 12 months. However, we may need to raise
additional funds to take advantage of presently unanticipated strategic opportunities, satisfy our other cash requirements from time to time, or strengthen
our financial position. Our ability to raise funds may be adversely affected by a number of factors, including factors beyond our control, such as weakness
in the economic conditions in markets in which we sell our products, bank failures and continued uncertainty in financial, capital and credit markets. There
can be no assurance that equity or debt financing will be available to us on reasonable terms, if at all, when and if it is needed.
We may raise additional financing through public or private equity or convertible debt offerings, debt financings, or corporate partnership or licensing
arrangements. To the extent we raise additional capital by issuing equity securities or convertible debt, our stockholders may experience dilution, and any
new equity or convertible debt securities we issue could have rights, preferences, and privileges superior to holders of our common stock. Further, volatility
in equity capital markets may adversely affect market prices of our common stock. This may materially and adversely affect our ability to raise additional
capital through public or private equity offerings. To the extent that we raise additional funds through collaboration and licensing arrangements, it may be
necessary to relinquish some rights to our technologies or products, or grant licenses on terms that are not favorable to us. Our current debt agreements and
any debt financing that we secure in the future require or may require us to pledge assets or enter into covenants that could restrict our operations or our
ability to incur further indebtedness and the interest on such debt may adversely affect our operating results. Further, rising interest rates and tightening
credit markets may reduce our access to debt financing, which may adversely affect our future business plans and expected growth, and would increase the
cost of long-term fixed rate and short-term variable rate borrowings, which could reduce our earnings.
If adequate capital is not available, or is not available on reasonable terms, when needed, we may not be able to take advantage of acquisitions or
other market opportunities, to timely develop new products, or to otherwise respond to competitive pressures.
Our Credit Agreement imposes operating and financial restrictions on us.
On December 21, 2023, we entered into a Credit Agreement, among the Company, certain subsidiaries of the Company from time to time party
thereto, the lenders party thereto from time to time and Citibank, N.A., as administrative agent (the “Credit Agreement”). The obligations under the Credit
Agreement and the other loan documents are required to be guaranteed by certain of our material subsidiaries, and secured by substantially all of the assets
of the Company and such subsidiary guarantors. The Credit Agreement provides for a $120.0 million secured revolving loan facility (the “Revolving
Facility”), with a $10.0 million sublimit for the issuance of letters of credit, and a $40.0 million secured delayed draw term loan facility (the “Term
Facility”). The proceeds of the loans under the Revolving Facility may be used for general corporate purposes. To the extent drawn, the proceeds of the
loans under the Term Facility must be used to repurchase, redeem, acquire or otherwise settle our Notes (as defined below). We may borrow term loans in
up to three drawings through September 1, 2024, on which date any undrawn commitments under the Term Facility expire. As of December 31, 2023, there
were no borrowings and approximately $0.2 million of letters of credit outstanding under the Credit Agreement.
Our Credit Agreement contains covenants that limit our ability and the ability of our subsidiaries to, subject to certain limitations and exceptions:
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grant liens;
incur debt;
• make acquisitions and other investments;
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undergo certain fundamental changes;
dispose of assets;
• make certain restricted payments;
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enter into transactions with affiliates; and
enter into burdensome agreements.
Further, the Credit Agreement contains financial covenants that require compliance with a maximum consolidated net leverage ratio and minimum
fixed charge coverage ratio, in each case, determined in accordance with the terms of the Credit Agreement. These covenants may adversely affect our
ability to finance our operations, meet or otherwise address our capital needs, pursue business opportunities or react to market conditions, or otherwise
restrict our activities or business plans. In addition, our obligations to repay principal and interest on our indebtedness could make us vulnerable to
economic or market downturns.
A breach of any of these covenants could result in an event of default under the Credit Agreement. As of December 31, 2023, we were in compliance
with all covenants under the Credit Agreement; however, if an event of default occurs, the lenders may terminate their commitments and accelerate our
obligations under the Credit Agreement. Any such acceleration could result in an event of default under the Notes (as defined below). We might not be able
to repay our debt or borrow sufficient funds to refinance it on terms that are acceptable to us.
Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including our 2.00% Convertible
Senior Notes due in 2024 (the “Notes”) and any amounts borrowed under our Credit Agreement, or to make cash payments in connection with any
conversion of the Notes or in connection with any repurchase of Notes upon the occurrence of a fundamental change before the maturity date at a
repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest thereon, as set forth in the
indenture governing the Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our
control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital
expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or
obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness, including the Notes, will
depend on our ability to borrow under the terms of the Credit Agreement, the capital markets and our financial condition at such time. We may not be able
to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations, including the
Notes and any outstanding loans under the Credit Agreement.
In addition, our ability to repurchase the Notes or to pay cash upon conversions of the Notes or at their maturity may be limited by law, regulatory
authority, or agreements governing our future indebtedness. Our failure to repurchase the Notes at a time when the repurchase is required by the indenture
governing the Notes or to pay cash upon conversions of the Notes or at their maturity as required by the indenture governing the Notes would constitute a
default under the indenture. A default, or the occurrence of a fundamental change or change of control, as applicable, under the indenture governing the
Notes, could also lead to a potential default under agreements governing our future indebtedness. Moreover, the occurrence of a fundamental change or
change of control, as applicable, under the indenture governing the Notes could itself constitute an event of default under any such indenture. If the
repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, or if we are unable to borrow under our Credit
Agreement to refinance the Notes, we may not have sufficient funds to repay the indebtedness and repurchase the Notes or make cash payments upon
conversions thereof.
Despite our current debt levels, we may still incur substantially more debt or take other actions which would intensify the risks discussed above.
Despite our current consolidated debt levels, we and our subsidiaries may be able to incur substantial additional debt in the future, subject to the
restrictions contained in our debt instruments, some of which may be secured debt. We are not restricted under the terms of the indenture governing the
Notes from incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions that are not limited by the
terms of the indenture governing the Notes that could have the effect of diminishing our ability to make payments on our debt (including the Notes) when
due. In addition, our Credit Agreement permits us to incur certain additional indebtedness and grant certain liens on our assets, subject to limitations and
requirements as set forth in the Credit Agreement, that could intensify the risks discussed above.
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Conversions of the Notes in connection with our delivery of the Notice of Redemption (as defined below) may adversely affect our financial condition
and operating results.
On January 30, 2024, we issued a notice (the “Notice of Redemption”) to redeem all of the outstanding principal of the Notes pursuant to the terms of
the indenture governing the Notes at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus accrued and unpaid
interest to, but excluding, April 18, 2024 (the “Redemption Date”). As a result of our delivery of the Notice of Redemption, holders of the Notes called for
redemption will be entitled under the indenture governing the Notes to convert their Notes at their option at any time prior to the close of business on April
16, 2024 in accordance with such indenture at a conversion rate of 118.0550 shares (inclusive of Additional Shares, as defined in such indenture) of our
common stock per $1,000 principal amount of the Notes converted. We have elected under the terms of the indenture governing the Notes to settle any
conversions of Notes by paying cash equal to the principal portion of the Notes converted and deliver any conversion value greater than the principal
amount shares of common stock . Accordingly, if one or more holders elect to convert their Notes, we will be required to settle the principal portion of our
conversion obligation through the payment of cash, which could adversely affect our liquidity.
We have made, and may continue to make, acquisitions, and any acquisition could disrupt our operations, cause dilution to our stockholders and
materially and adversely affect our business, operating results, cash flows and financial condition.
As part of our business strategy, from time to time we have acquired, and we may continue to acquire, businesses, technologies, assets and product
lines that we believe complement or expand our existing business. Acquisitions involve numerous risks, including the following:
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unanticipated costs or delays associated with an acquisition;
difficulties in the assimilation and integration of acquired operations, technologies and/or products;
potential disruption of our business and the diversion of management’s attention from the regular operations of the business during the
acquisition process;
the challenges of managing a larger and more geographically widespread operation and product portfolio after the closing of the
acquisition;
potential adverse effects on new and existing business relationships with suppliers, contract manufacturers, resellers, partners and
customers;
compliance with regulatory requirements, such as local employment regulations and organized labor requirements;
risks associated with entering markets in which we may have no or limited prior experience;
the potential loss of key employees of acquired businesses and our own business as a result of integration;
difficulties in bringing acquired products and businesses into compliance with applicable legal requirements in jurisdictions in which we
operate and sell products;
impact of known potential liabilities or unknown liabilities, including litigation and infringement claims, associated with companies we
acquire;
substantial charges for acquisition costs or for the amortization of certain purchased intangible assets, deferred stock compensation or
similar items;
substantial impairments to goodwill or intangible assets in the event that an acquisition proves to be less valuable than the price we paid
for it;
difficulties in establishing and maintaining uniform financial and other standards, controls, procedures and policies;
delays in realizing, or failure to realize, the anticipated benefits of an acquisition; and
the possibility that any acquisition may be viewed negatively by our customers or investors or the financial markets.
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Competition within our industry for acquisitions of businesses, technologies, assets and product lines has been, and is likely to continue to be, intense.
As such, even if we are able to identify an acquisition that we would like to consummate, we may not be able to complete the acquisition on commercially
reasonable terms or because the target chooses to be acquired by another company. Furthermore, in the event that we are able to identify and consummate
any future acquisitions, we may, in each of those acquisitions:
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issue equity securities which would dilute current stockholders’ percentage ownership;
incur substantial debt to finance the acquisition or assume substantial debt in the acquisition;
incur significant acquisition-related expenses;
assume substantial liabilities, contingent or otherwise; or
expend significant cash.
These financing activities or expenditures could materially and adversely affect our operating results, cash flows and financial condition or the price
of our common stock. Alternatively, due to difficulties in the capital or credit markets that may exists at the time, we may be unable to secure capital
necessary to complete an acquisition on reasonable terms, or at all. Moreover, even if we were to obtain benefits from acquisitions in the form of increased
revenue and earnings per share, there may be a delay between the time the expenses associated with an acquisition are incurred and the time we recognize
such benefits.
As of December 31, 2023, we had approximately $239.2 million of goodwill recorded on our balance sheet associated with prior acquisitions. In the
event we determine that our goodwill is impaired, we would be required to write down all or a portion of such goodwill, which could result in a material
non-cash charge to our results of operations in the period in which such write-down occurs.
If we are unable to successfully address one or more of these risks, our business, operating results, financial condition and cash flows could be
materially and adversely affected.
We may sell one or more of our product lines, from time to time, as a result of our evaluation of our products and markets, and any such divestiture
could adversely affect our continuing business and our expenses, revenues, results of operation, cash flows and financial position.
We periodically evaluate our various product lines and may, as a result, consider the divestiture of one or more of those product lines. Such
evaluations, like the current strategic review process for our Video business, may disrupt our business by causing distractions to management, shifts in
strategy, decreased employee morale and productivity, and increased turnover. We have sold product lines in the past, and any prior or future divestiture
could adversely affect our continuing business and expenses, revenues, results of operations, cash flows and financial position.
Divestitures of product lines have inherent risks, including the expense of selling the product line, the possibility that any anticipated sale will not
occur, delays in closing any sale, the risk of lower-than-expected proceeds from the sale of the divested business, unexpected costs associated with the
separation of the business to be sold from the seller’s information technology and other operating systems, and potential post-closing claims for
indemnification or breach of transition services obligations of the seller. Expected cost savings, which are offset by revenue losses from divested
businesses, may also be difficult to achieve or maximize due to the seller’s fixed cost structure, and a seller may experience varying success in reducing
fixed costs or transferring liabilities previously associated with the divested business.
The nature of our business requires the application of complex revenue and expense recognition rules and the current legislative and regulatory
environment affecting generally accepted accounting principles is uncertain. Significant changes in current principles could affect our financial
statements going forward and changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations
and harm our operating results.
United States generally accepted accounting principles (“U.S. GAAP”) are subject to interpretation by the Financial Standards Accounting Board
(“FASB”), the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. We are also subject to evolving rules and
regulations of the countries in which we do business. Changes to accounting standards or interpretations thereof may result in different accounting
principles under U.S. GAAP that have a significant effect on our reported financial results and require us to incur costs and expenses in order to comply
with the updated standards or interpretations.
In addition, we have in the past and may in the future need to modify our customer contracts, accounting systems and processes when we adopt future
or proposed changes in accounting principles. The cost and effect of these changes may negatively impact our results of operations during the periods of
transition.
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Fluctuations in our future effective tax rates could affect our future operating results, financial condition and cash flows.
We are required to periodically review our deferred tax assets and determine whether, based on available evidence, a valuation allowance is necessary.
The realization of our deferred tax assets, which are predominantly in the United States, is dependent upon the generation of sufficient U.S. and foreign
taxable income in the future to offset these assets. Based on our evaluation, we recorded a net decrease in valuation allowance of $63.9 million and a net
increase of $10.8 million in 2023 and 2022, respectively, against the net deferred tax assets. In 2023, there was a full release of the valuation allowance
against U.S. Federal and certain state deferred tax assets due to improved historical earnings and projected earnings. There was no valuation allowance
release in 2022. Changes in the amount of the valuation allowance in the U.S. and in foreign jurisdictions could result in a material non-cash expense or
benefit in the period in which the valuation allowance is adjusted, and our results of operations could be materially affected.
The calculation of tax liabilities involves dealing with uncertainties in the application of complex global tax regulations. We recognize potential
liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes
will be due. In the event we determine that it is appropriate to create a reserve or increase an existing reserve for any such potential liabilities, the amount of
the additional reserve will be charged as an expense in the period in which it is determined. If payment of these amounts ultimately proves to be
unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer
necessary. If the estimate of tax liabilities proves to be less than the ultimate tax assessment for the applicable period, a further charge to expense in the
period such shortfall is determined would result. Either such charge to expense could have a material and adverse effect on our operating results for the
applicable period.
Our future effective income tax rates could be adversely affected if tax authorities challenge our international tax structure or if our relative mix of
U.S. and international income changes for any reason. Accordingly, there can be no assurance that our effective income tax rate will be less than the U.S.
federal statutory rate in future periods.
We are subject to taxation-related risks in multiple jurisdictions, and the adoption and interpretation of new tax legislation, tax regulations, tax rulings,
or exposure to additional tax liabilities could materially affect our business, financial condition and results of operations.
Tax laws are regularly re-examined and evaluated globally. New laws and interpretations of the law are considered for financial statement purposes in
the quarter or year that they are enacted. Tax authorities are increasingly scrutinizing the tax positions of multinational companies. If U.S. or other foreign
tax authorities change applicable tax laws, or if there is a change in interpretation of existing law, our overall liability could increase, and our business,
financial condition and results of operations may be harmed.
For example, effective as of January 1, 2022, the Tax Cuts and Jobs Act of 2017 eliminated the option to deduct research and development
expenditures currently and requires such expenditures to be capitalized and amortized ratably over a five-year period for domestic expenditures or a fifteen-
year period for foreign expenditures. The Internal Revenue Service has not issued Treasury Regulations that provide guidance on how to apply this new tax
law. If or when Treasury Regulations are released, it may impact the Company’s estimate of capitalized costs or the Company’s current interpretation of the
tax law. However, recently proposed tax legislation, if enacted, would restore the ability to deduct domestic research and development expenditures in the
current year through 2025 and would retroactively restore this benefit for 2022 and 2023. Any change in tax law will be accounted for in the period of
enactment.
Further, the Inflation Reduction Act of 2022, among other things, imposes a one-percent non-deductible excise tax on certain repurchases of stock
that are made by U.S. publicly traded corporations on or after January 1, 2023, which may affect our share repurchase program.
In addition, the Organization for Economic Co-operation and Development (the “OECD”), the European Union, as well as a number of other
countries and organizations have recently enacted new laws, and proposed or recommended changes to existing tax laws, that may increase our tax
obligations in many countries where we do business or require us to change the manner in which we operate our business. For example, the OECD has
introduced a framework to implement a 15% global minimum corporate tax, referred to as Pillar 2, which has been adopted by the European Union for
implementation by its Member States into national legislation by the end of 2023 and may be adopted by other jurisdictions. As we expand the scale of our
business activities, any changes in U.S. or foreign tax laws that apply to such activities may increase our worldwide effective tax rate and harm our
business, financial condition and results of operations.
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We or our customers may face intellectual property infringement claims from third parties.
Legal, Regulatory and Compliance Risks
Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other
intellectual property rights. In particular, leading companies in the telco industry have extensive patent portfolios. Also, patent infringement claims and
litigation by entities that purchase or control patents, but do not produce goods or services covered by the claims of such patents (so-called “non-practicing
entities” or “NPEs”), have increased rapidly over the last decade or so. From time to time, third parties, including NPEs, have asserted, and may assert in
the future, patent, copyright, trademark and other intellectual property rights against us or our customers, and have initiated audits to determine whether we
have missed royalty payments for technology that we license. Our suppliers and their customers, including us, may have similar claims asserted against
them. A number of third parties, including companies with greater financial and other resources than us, have asserted patent rights to technologies that are
important to us.
Any intellectual property litigation, regardless of its outcome, could result in substantial expense and significant diversion of the efforts of our
management and technical personnel. An adverse determination in any such proceeding could subject us to significant liabilities and temporary or
permanent injunctions and require us to seek licenses from third parties or pay royalties that may be substantial. Furthermore, necessary licenses may not
be available on terms satisfactory to us, or at all. An unfavorable outcome on any such litigation matter could require that we pay substantial damages,
could require that we pay ongoing royalty payments, or could prohibit us from selling certain of our products. Any such outcome could have a material and
adverse effect on our business, operating results, financial condition and cash flows.
Our suppliers and customers may have intellectual property claims relating to our products asserted against them. We have agreed to indemnify some
of our suppliers and most of our customers for patent infringement relating to our products. The scope of this indemnity varies, but, in some instances,
includes indemnification for damages and expenses (including reasonable attorney’s fees) incurred by the supplier or customer in connection with such
claims. If a supplier or a customer seeks to enforce a claim for indemnification against us, we could incur significant costs defending such claim, the
underlying claim or both. An adverse determination in either such proceeding could subject us to significant liabilities and have a material and adverse
effect on our operating results, cash flows and financial condition.
We may be the subject of litigation which, if adversely determined, could harm our business and operating results.
We may be subject to claims arising in the normal course of business. The costs of defending any litigation, whether in cash expenses or in
management time, could harm our business and materially and adversely affect our operating results and cash flows. An unfavorable outcome on any
litigation matter could require that we pay substantial damages, or, in connection with any intellectual property infringement claims, could require that we
pay ongoing royalty payments or prohibit us from selling certain of our products. In addition, we may decide to settle any litigation, which could cause us
to incur significant settlement costs. A settlement or an unfavorable outcome on any litigation matter could have a material and adverse effect on our
business, operating results, financial condition and cash flows.
Our failure to adequately protect our proprietary rights and data may adversely affect us.
As of December 31, 2023, we held 133 issued U.S. patents and 47 issued foreign patents, and had 39 patent applications pending. Although we
attempt to protect our intellectual property rights through patents, trademarks, copyrights, licensing arrangements, maintaining certain technology as trade
secrets and other measures, we can give no assurances that any patent, trademark, copyright or other intellectual property rights owned by us will not be
invalidated, circumvented or challenged, that such intellectual property rights will provide competitive advantages to us, or that any of our pending or
future patent applications will be issued with the scope of the claims sought by us, if at all. We can give no assurances that others will not develop
technologies that are similar or superior to our technologies, duplicate our technologies or design around the patents that we own. In addition, effective
patent, copyright and trade secret protection may be unavailable or limited in certain foreign countries in which we do business or may do business in the
future.
We may enter into confidentiality or license agreements with our employees, consultants, and vendors and our customers, as needed, and generally
limit access to, and distribution of, our proprietary information. Nevertheless, we cannot provide assurances that the steps taken by us will prevent
misappropriation of our technology. In addition, we have taken in the past, and may take in the future, legal action to enforce our patents and other
intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of
infringement or invalidity. Such litigation could result in substantial costs and diversion of management time and other resources, and could materially and
adversely affect our business, operating results, financial condition and cash flows.
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Our use of open source software in some of our products may expose us to certain risks.
Some of our products contain software modules licensed for use from third-party authors under open source licenses. Use and distribution of open
source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other
contractual protections regarding infringement claims or the quality of the code. Some open source licenses contain requirements that we make available
source code for modifications or derivative works we create based upon the type of open source software we use. If we combine our proprietary software
with open source software in a certain manner, we could, under certain of the open source licenses, be required to release the source code of our proprietary
software to the public. This could allow our competitors to create similar products with lower development effort and in less time and ultimately could
result in a loss of product sales for us.
Although we monitor our use of open source closely, it is possible our past, present or future use of open source has triggered or may trigger the
foregoing requirements. Furthermore, the terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that such licenses
could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products. In such event, we
could be required to seek licenses from third parties in order to continue offering our products, to re-engineer our products or to discontinue the sale of our
products in the event re-engineering cannot be accomplished on a timely basis, any of which could materially and adversely affect our operating results,
financial condition and cash flows.
We are subject to import and export control and trade and economic sanction laws and regulations that could subject us to liability or impair our ability
to compete in international markets.
Our products are subject to U.S. export control laws, and may be exported outside the United States only with the required export license or through
an export license exception, in most cases because we incorporate encryption technology into certain of our products. We are also subject to U.S. trade and
economic sanction regulations which include prohibitions on the sale or supply of certain products and services to the United States embargoed or
sanctioned countries, governments, persons and entities. In addition, various countries regulate the import of certain technology and have enacted laws that
could limit our ability to distribute our products, or could limit our customers’ ability to implement our products, in those countries. Although we take
precautions and have processes in place to prevent our products and services from being provided in violation of such laws, our products may have been in
the past, and could in the future be, provided inadvertently in violation of such laws, despite the precautions we take. In March 2020, we received an
administrative subpoena from the U.S. Treasury Department’s office of Foreign Assets Control (“OFAC”) requesting information about transactions
involving Iran. The transactions were by the French company TVN, which we acquired in early 2016. Pursuant to regulations that remained in place until
2018, foreign subsidiaries of U.S. companies were allowed to engage in transactions with Iran if certain requirements were met. In February 2023, OFAC
notified us that it had completed its review of these matters and closed its review with the issuance of a Cautionary Letter. While OFAC did not assess any
penalties, the Cautionary Letter does not preclude OFAC from taking future enforcement actions if additional information warrants renewed attention.
Furthermore, OFAC may consider our regulatory history, including this subpoena, our disclosures and the Cautionary Letter, if we are involved in future
enforcement cases for failure to comply with export control laws and regulations. If we are found to have violated U.S. export control laws as a result of
future investigations, we and certain of our employees could be subject to civil or criminal penalties, including the possible loss of export privileges,
monetary penalties, and, in extreme cases, imprisonment of responsible employees for knowing and willful violations of these laws which could lead to
penalties, reputational harm, loss of access to certain markets, or otherwise.
In addition, we may be subject to customs duties that could have a significant adverse impact on our operating results or, if we are able to pass on the
related costs in any particular situation, would increase the cost of the related product to our customers. As a result, the future imposition of significant
increases in the level of customs duties or the creation of import quotas on our products in Europe or in other jurisdictions, or any of the limitations on
international sales described above, could have a material adverse effect on our business, operating results, financial condition and cash flows. Further,
some of our customers in Europe have been, or are being, audited by local governmental authorities regarding the tariff classifications used for importation
of our products. Import duties and tariffs vary by country and a different tariff classification for any of our products may result in higher duties or tariffs,
which could have an adverse impact on our operating results and potentially increase the cost of the related products to our customers.
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Our business and industry are subject to various laws and regulations that could adversely affect our business, operating results, cash flows and
financial condition.
Our business and industry are regulated under various federal, state, local and international laws. For example, we are subject to environmental
regulations such as the European Union’s Waste Electrical and Electronic Equipment (“WEEE”) and Restriction on the Use of Certain Hazardous
Substances in Electrical and Electronic Equipment (“RoHS”) directives and similar legislation enacted in other jurisdictions worldwide. Our failure to
comply with these laws could result in our being directly or indirectly liable for costs, fines or penalties and third-party claims, and could jeopardize our
ability to conduct business in such regions and countries. We expect that our operations will be affected by other new environmental laws and regulations
on an ongoing basis. Although we cannot predict the ultimate impact of any such new laws and regulations, they would likely result in additional costs, and
could require that we redesign or change how we manufacture our products, any of which could have a material and adverse effect on our operating results,
financial condition and cash flows.
We are subject to the Sarbanes-Oxley Act of 2002 which, among other things, requires an annual review and evaluation of our internal control over
financial reporting. If we conclude in future periods that our internal control over financial reporting is not effective or if our independent registered public
accounting firm is unable to provide an unqualified attestation as of future year-ends, we may incur substantial additional costs in an effort to correct such
problems, and investors may lose confidence in our financial statements, and our stock price may decrease in the short term, until we correct such
problems, and perhaps in the long term, as well.
We are subject to requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that require us to conduct research,
disclose, and report whether or not our products contain certain conflict minerals sourced from the Democratic Republic of Congo or its surrounding
countries. The implementation of these requirements could adversely affect the sourcing, availability, and pricing of the materials used in the manufacture
of components used in our products. In addition, we may incur certain additional costs to comply with the disclosure requirements, including costs related
to conducting diligence procedures to determine the sources of conflict minerals that may be used or necessary to the production of our products and, if
applicable, potential changes to products, processes or sources of supply as a consequence of such verification activities. It is also possible that we may
face reputational harm if we determine that certain of our products contain minerals not determined to be conflict-free and/or we are unable to alter our
products, processes or sources of supply to avoid such materials.
Changes in telco legislation and regulations in the United States and other countries could affect our sales and the revenue we are able to derive from
our products. In particular, on December 14, 2017, the U.S. Federal Communications Commission (“FCC”) voted to repeal the “net neutrality” rules and
return to a “light-touch” regulatory framework. The FCC’s new rules, which took effect in June 2018, granted providers of broadband internet access
services greater freedom to make changes to their services, including, potentially, changes that may discriminate against or otherwise harm our business.
However, a number of parties have appealed these rules, which appeals are currently being reviewed by the D.C. Circuit Court of Appeals; thus the future
impact of the FCC's repeal and any changes thereto remains uncertain. Additionally, on September 30, 2018, California enacted the California Internet
Consumer Protection and Net Neutrality Act of 2018. Since the FCC repealed its nationwide regulations, seven states have also enacted a state-level net
neutrality law and a number of other states are considering legislation or executive actions that would regulate the conduct of broadband providers. We
cannot predict whether the FCC order or state initiatives will be modified, overturned, or vacated by legal action of the court, federal legislation, or the
FCC. The repeal of the net neutrality rules or other regulations dealing with access by competitors to the networks of incumbent operators could slow or
stop infrastructure and services investments or expansion by service providers. Increased regulation of our customers’ pricing or service offerings could
limit their investments and, consequently, revenue from our products. The impact of new or revised legislation or regulations could have a material adverse
effect on our business, operating results, financial condition and cash flows.
We depend significantly on our international revenue and are subject to the risks associated with international operations, including those of our
resellers, contract manufacturers and outsourcing partners, which may negatively affect our operating results.
Revenue derived from customers outside of the United States in the fiscal years ended December 31, 2023, 2022 and 2021 represented approximately
33%, 37% and 44% of our revenue, respectively. Although no assurance can be given with respect to international sales growth in any one or more regions,
we expect that international revenue will likely continue to represent, from year to year, a significant, and potentially increasing, percentage of our annual
revenue for the foreseeable future. A significant percentage of our revenue is generated from sales to resellers, VARs and systems integrators, particularly
in emerging market countries. Furthermore, the majority of our employees are based in our international offices and locations, and most of our contract
manufacturing occurs outside of the United States. In addition, we outsource a portion of our research and development activities to certain third-party
partners with development centers located in different countries, particularly Ukraine and India.
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Our international operations, international operations of our resellers, contract manufacturers and outsourcing partners, and our efforts to maintain and
increase revenue in international markets are subject to a number of risks, which are generally greater with respect to emerging market countries, including
the following:
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growth and stability of the economy in one or more international regions, including regional economic impacts of the Hamas-Israel and
Russia-Ukraine conflicts and tensions between China and Taiwan and the United States;
fluctuations in currency exchange rates;
ability of certain non-U.S. customers to timely make payments in U.S. dollar due to local government currency controls;
changes in foreign government regulations and telco standards;
import and export license requirements, tariffs, taxes, economic sanctions, contractual limitations and other trade barriers;
our significant reliance on resellers and others to purchase and resell our products and solutions, particularly in our Video business and in
emerging market countries;
availability of credit, particularly in emerging market countries;
longer collection periods and greater difficulty in enforcing contracts and collecting accounts receivable, especially from smaller
customers and resellers, particularly in emerging market countries;
compliance with the FCPA, the U.K. Bribery Act and/or similar anti-corruption and anti-bribery laws, particularly in emerging market
countries;
the burden of complying with a wide variety of foreign laws, treaties and technical standards;
fulfilling “country of origin” requirements for our products for certain customers;
difficulty in staffing and managing foreign operations;
business and operational disruptions or delays caused by political, social and/or economic instability and unrest (e.g., Ukraine and Israel),
including risks related to terrorist activity, particularly in emerging market countries;
changes in economic policies by foreign governments, including the imposition and potential continued expansion of economic sanctions
by the United States and the European Union on the Russian Federation;
changes in diplomatic and trade relationships, including the imposition of new trade restrictions, trade protection measures, import or
export requirements, trade embargoes and other trade barriers, including those between the United States and China;
any negative economic impacts resulting from the political environment in the United States or the United Kingdoms’ exit from the
European Union; and
business and economic disruptions and delays caused by outbreaks of disease, epidemics and potential pandemics.
We have certain international customers who are billed in their local currency, primarily the Euro, British pound and Japanese yen, which subjects us
to foreign currency risk. In addition, a portion of our operating expenses relating to the cost of certain international employees, are denominated in foreign
currencies, primarily the Euro, Israeli shekel, British pound, Singapore dollar, Chinese yuan and Indian rupee. Although we do hedge against the Euro,
British pound, Israeli shekel and Japanese yen, gains and losses on the conversion to U.S. dollars of accounts receivable, accounts payable and other
monetary assets and liabilities arising from international operations may contribute to fluctuations in our operating results. Furthermore, payment cycles for
international customers are typically longer than those for customers in the United States. Unpredictable payment cycles could cause us to fail to meet or
exceed the expectations of security analysts and investors for any given period.
Most of our international revenue is denominated in U.S. dollars, and fluctuations in currency exchange rates could cause our products to become
relatively more expensive to customers in a particular country or region, leading to a reduction in revenue or profitability from sales in that country or
region. The potential negative impact of a strong U.S. dollar on our business may be exacerbated by the significant devaluation of a number of foreign
currencies. Also, if the U.S. dollar were to weaken against many foreign currencies, there can be no assurance that a weaker dollar would lead to growth in
customer spending in foreign markets.
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Our operations outside the United States also require us to comply with a number of U.S. and international regulations that prohibit improper
payments or offers of payments to foreign governments and their officials and political parties for corrupt purposes. For example, our operations in
countries outside the United States are subject to the FCPA and similar laws, including the U.K. Bribery Act. Our activities in certain emerging countries
create the risk of unauthorized payments or offers of payments by one of our employees, consultants, sales agents or channel partners that could be in
violation of various anti-corruption laws, even though these parties may not be under our control. Under the FCPA and U.K. Bribery Act, companies may
be held liable for the corrupt actions taken by their directors, officers, employees, channel partners, sales agents, consultants, or other strategic or local
partners or representatives. We have internal control policies and procedures with respect to FCPA compliance, have implemented FCPA training and
compliance programs for our employees, and include in our agreements with resellers a requirement that those parties comply with the FCPA. However, we
cannot provide assurances that our policies, procedures and programs will prevent violations of the FCPA or similar laws by our employees or agents,
particularly in emerging market countries, and as we expand our international operations. Any such violation, even if prohibited by our policies, could
result in criminal or civil sanctions against us.
The effect of one or more of these international risks could have a material and adverse effect on our business, financial condition, operating results
and cash flows.
Risks Related to Ownership of Our Common Stock
Some anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover
attempt.
We have provisions in our certificate of incorporation and bylaws that could have the effect of rendering more difficult or discouraging an acquisition
deemed undesirable by our Board. These include provisions:
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authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our
common stock;
limiting the liability of, and providing indemnification to, our directors and officers;
limiting the ability of our stockholders to call, and bring business before, special meetings;
requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of
candidates for election to our Board;
controlling the procedures for conducting and scheduling of Board and stockholder meetings; and
providing our Board with the express power to postpone previously scheduled annual meetings and to cancel previously scheduled
special meetings.
These provisions could delay hostile takeovers, changes in control of the Company or changes in our management. As a Delaware corporation, we are
also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prevents some stockholders holding
more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of substantially all of our
outstanding common stock. Any provision of our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a
change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the
price that some investors are willing to pay for our common stock.
Our common stock price may be extremely volatile, and the value of an investment in our stock may decline.
Our common stock price has been highly volatile. We expect that this volatility will continue in the future due to factors such as:
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general market and economic conditions, including inflation, rising interest rates, volatile capital markets, uncertainty and volatility in the
financial services sector, the Hamas-Israel and Russia-Ukraine conflicts and rising tensions between China and Taiwan and the United
States;
actual or anticipated variations in operating results;
increases or decreases in the general stock market or to the stock prices of technology companies;
announcements of technological innovations, new products or new services by us or by our competitors or customers;
changes in financial estimates or recommendations by stock market analysts regarding us or our competitors;
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announcements by us or our competitors of significant acquisitions, dispositions, strategic partnerships, joint ventures or capital
commitments;
announcements by our customers regarding end user market conditions and the status of existing and future infrastructure network
deployments;
additions or departures of key personnel; and
future equity or debt offerings or our announcements of these offerings.
In addition, in recent years, the stock market in general, and The NASDAQ Global Select Market and the securities of technology companies in
particular, have experienced extreme price and volume fluctuations. These fluctuations have often been unrelated or disproportionate to the operating
performance of individual companies. These broad market fluctuations have in the past, and may in the future, materially and adversely affect our stock
price, regardless of our operating results. In these circumstances, investors may be unable to sell their shares of our common stock at or above their
purchase price over the short term, or at all.
We cannot guarantee that our stock repurchase program will be fully implemented or that it will enhance long-term stockholder value.
In February 2022, our Board of Directors approved a stock repurchase program for the repurchase of up to $100 million of the outstanding shares of
our common stock. The repurchase program expires in February 2025 and we are not obligated to repurchase a specified number or dollar value of shares.
Share repurchases will be made from time to time in open market purchases and 10b5-1 trading plans, as permitted by securities laws and other legal
requirements. Any share repurchases remain subject to the circumstances in place at that time, including prevailing market prices. As a result, there can be
no guarantee around the timing or volume of our share repurchases. The stock repurchase program could affect the price of our common stock, increase
volatility and diminish our cash reserves. Our repurchase program may be suspended or terminated at any time and, even if fully implemented, may not
enhance long-term stockholder value.
Our stock price may decline if additional shares are sold in the market or if analysts drop coverage of or downgrade our stock.
Future sales of substantial amounts of shares of our common stock by our existing stockholders in the public market, or the perception that these sales
could occur, may cause the market price of our common stock to decline. In addition, we issue additional shares upon exercise of stock options, including
under our 2002 Employee Stock Purchase Plan, and in connection with grants of restricted stock units on an ongoing basis. To the extent we do not elect to
pay solely cash upon conversion of the Notes, we will also be required to issue additional shares of common stock upon conversion. Increased sales of our
common stock in the market after exercise of outstanding stock options or grants of restricted stock units could exert downward pressure on our stock price.
These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price we deem appropriate.
The trading market for our common stock relies in part on the availability of research and reports that third-party industry or securities analysts
publish about us and our business. If we do not maintain adequate research coverage or if one or more of the analysts who do cover us downgrade our stock
or publishes inaccurate or unfavorable research about our business, our stock price may decline. If one or more of these analysts cease coverage of us or
fails to publish reports on us regularly, we could lose visibility in the market, which in turn could cause the liquidity of our stock and our stock price to
decline.
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Item 1B.
UNRESOLVED STAFF COMMENTS
None.
Item 1C.
CYBER SECURITY
Risk Management and Strategy
We have established policies and processes for assessing, identifying, and managing material risk from cybersecurity threats, and have integrated
these processes into our overall risk management systems and processes. We routinely assess material risks from cybersecurity threats, including any
potential unauthorized occurrence on or conducted through our information systems that may result in adverse effects on the confidentiality, integrity, or
availability of our information systems or any information residing therein.
We conduct periodic and ad-hoc risk assessments to identify cybersecurity threats, as well as assessments in the event of a material change in our
business practices that may affect information systems that are vulnerable to such cybersecurity threats. These risk assessments include identification of
reasonably foreseeable internal and external risks, the likelihood and potential damage that could result from such risks, and the sufficiency of existing
policies, procedures, systems, and safeguards in place to manage such risks.
Following these risk assessments, we evaluate whether and how to re-design, implement, and maintain reasonable safeguards to mitigate identified
risks and reasonably address any identified gaps in existing safeguards. We also regularly monitor the effectiveness of our safeguards. We devote
significant resources and designate high-level personnel, including our Chief Cybersecurity Officer (“CCO”), who reports to our Chief Executive Officer,
to manage the risk assessment and mitigation process.
As part of our overall risk management system, we monitor and test our safeguards and train our employees on these safeguards, in collaboration with
human resources, IT, and management. Personnel at all levels and departments are made aware of our cybersecurity policies through trainings.
We engage auditors and other third parties in connection with our risk assessment processes. These service providers assist us to monitor, enhance and
test our safeguards.
We require key third-party service providers to certify that such providers have the ability to implement and maintain appropriate security measures,
consistent with all applicable laws, to implement and maintain reasonable security measures in connection with their work with us, and to promptly report
any suspected breach of their security measures that may affect our company.
For additional information regarding whether any risks from cybersecurity threats, including as a result of any previous cybersecurity incidents, have
materially affected or are reasonably likely to materially affect our company, including our business strategy, results of operations, or financial condition,
please refer to Item 1A, “Risk Factors,” in this annual report on Form 10-K, including the risk factors entitled “Cybersecurity incidents, including data
security breaches or computer viruses, could harm our business by disrupting our business operations, compromising our products and services, damaging
our reputation or exposing us to liability”.
Governance
One of the key functions of our board of directors is informed oversight of our risk management process, including risks from cybersecurity threats.
Our board of directors is responsible for monitoring and assessing strategic risk exposure, and our executive officers are responsible for the day-to-day
management of the material risks we face. Our board of directors administers its cybersecurity risk oversight function directly as a whole, as well as
through the audit committee.
Our CCO is primarily responsible for assessing and managing our material risks from cybersecurity threats, in close coordination with our Senior
Vice President, Operations and IT, and the senior executive leaders of our Video and Broadband business segments. Our CCO’s cybersecurity experience
includes overseeing the design and implementation of cybersecurity measures and safeguards for Harmonic’s Video business software and SaaS offerings
as the former long-serving Chief Technology Officer of the Video business, and responsibility at a previous company for the cybersecurity architecture and
implementation of an online banking platform and an online transaction processing system for gaming.
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Our CCO oversees our cybersecurity policies and processes, including those described in “Risk Management and Strategy” above, in close
coordination with the senior executive leaders of our corporate information technology function and Video and Broadband business segments. The
processes by which our CCO is informed about and monitors the prevention, detection, mitigation, and remediation of cybersecurity incidents includes the
following: regular reports from the Company’s 24/7 cybersecurity operations center monitoring systems and established incident reporting and escalation
from the executive leaders of our corporate information technology function and Video and Broadband business segments.
Our CCO provides quarterly briefings to the audit committee regarding our company’s cybersecurity risks and activities, including any recent
cybersecurity incidents and related responses, cybersecurity systems testing, activities of third parties, and the like. Our audit committee provides regular
updates to the board of directors on such reports. In addition, our CCO provides annual briefings to the board of directors on cybersecurity risks and
activities.
Item 2.
PROPERTIES
All of our facilities are leased, including our principal operations and corporate headquarters in San Jose, California. We have research and
development centers in the United States, France, Israel and Hong Kong. We have sales and service offices primarily in the United States and various
locations in Europe and Asia. Our leases, which expire at various dates through September 2032, are for an aggregate of approximately 292,742 square feet
of space. We have two business segments: Video and Broadband. Because of the interrelation of these segments, a majority of these segments use
substantially all of the properties, at least in part, and we retain the flexibility to use each of the properties in whole or in part for each of the segments. We
believe that the facilities that we currently occupy are adequate for our current needs and that suitable additional space will be available, as needed, to
accommodate the presently foreseeable expansion of our operations.
Item 3.
LEGAL PROCEEDINGS
From time to time, we are 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. While certain matters to which we are a party may specify the damages claimed, such claims may not represent reasonably possible
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.
An unfavorable outcome on any litigation matters could require us to pay substantial damages, or, in connection with any intellectual property
infringement claims, could require us to pay ongoing royalty payments or could prevent us from selling certain of our 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 our business,
operating results, financial position and cash flows.
Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other
intellectual property rights. From time to time, third parties have asserted, and may in the future assert, exclusive patent, copyright, trademark and other
intellectual property rights against us or our customers. Such assertions arise in the normal course of our operations. The resolution of any such assertions
and claims cannot be predicted with certainty.
Item 4.
MINE SAFETY DISCLOSURE
Not applicable.
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PART II
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Market Information of our Common Stock
Our common stock is traded on The NASDAQ Global Select Market under the symbol HLIT, and has been listed on NASDAQ since our initial
public offering in 1995.
Holders
As of February 12, 2024, there were approximately 269 holders of record of our common stock.
Dividend Policy
We have never declared or paid any dividends on our capital stock. At this time, we expect to retain future earnings, if any, for use in the operation
and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.
Unregistered Sales of Equity Securities
There were no unregistered sales of equity securities during the year ended December 31, 2023.
Issuer Purchases of Equity Securities
In February 2022, the Board of Directors authorized the Company to repurchase up to $100 million of the Company’s outstanding shares of common
stock through February 2025. The Company is authorized to repurchase, from time-to-time, shares of its outstanding common stock through open market
purchases and 10b5-1 trading plans, in accordance with applicable rules and regulations, at such time and such prices as management may decide. The
program does not obligate the Company to repurchase any specific number of shares and may be discontinued at any time. The actual timing and amount of
repurchases are subject to business and market conditions, corporate and regulatory requirements, stock price, acquisition opportunities and other factors.
As of December 31, 2023, approximately $94.9 million of the share repurchase authorization remained available.
There were no repurchase activities during the year ended December 31, 2023.
34
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3(cid:24)
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and the related notes. The following discussion
contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and those
listed under Item 1A, Risks Factors. For discussion of comparison of our results of operations and cash flows for the fiscal years ended December 31, 2022
and 2021, refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K
for the fiscal year ended December 31, 2022, filed with the SEC on February 28,2023.
Business Overview
We are a leading global provider of (i) broadband solutions that enable broadband operators to more efficiently and effectively deploy high-speed
internet, for data, voice and video services for their customers and (ii) versatile and high performance video delivery software, products, system solutions
and services that enable our customers to efficiently create, prepare, store, playout and deliver a full range of high-quality broadcast and streaming video
services to consumer devices, including televisions, personal computers, laptops, tablets and smart phones.
We classify our total revenue in two categories, “Appliance and integration” and “SaaS and service.” The “Appliance and integration” revenue
category includes hardware, licenses and professional services and is reflective of non-recurring revenue, while the “SaaS and service” category includes
usage fees for our SaaS platform and support service revenue from our appliance-based customers and reflects our recurring revenue stream.
We conduct business in three geographic regions—the Americas, EMEA and APAC—and operate in two segments, Broadband and Video. Our
Broadband business sells broadband access solutions and related services, including our cOS (formerly CableOS) software-based broadband access
solutions, to broadband operators globally. Our Video business sells video processing, production and playout solutions, and services worldwide to cable
operators and satellite and telco Pay-TV service providers, which we refer to collectively as “service providers,” as well as to broadcast and media
companies, including streaming media companies. Our Video business infrastructure solutions are delivered either through shipment of our products,
software licenses or as SaaS subscriptions.
Historically, our revenue has been dependent upon spending in the cable, satellite, telco, broadcast and media industries, including streaming media.
Our customers’ spending patterns are dependent on a variety of factors, including but not limited to: economic conditions in the United States and
international markets, and impact of factors such as the Hamas-Israel and Russia-Ukraine conflicts, inflation, rising interest rates, potential supply chain
disruptions, volatility in capital markets and foreign currency fluctuations; volatility and uncertainty in the banking and financial services sector; access to
financing; annual budget cycles of each of the industries we serve; impact of industry consolidations; customers suspending or reducing spending in
anticipation of new products or new standards; and 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 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 and suppliers, cloud service
providers, 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.
More recently, the United States has experienced high levels of inflation, which may result in decreased demand for our products and services,
increases in our operating costs including our labor costs, constrained credit and liquidity, reduced customer spending and volatility in financial markets.
The Federal Reserve has raised, and may continue to raise, interest rates in response to concerns over inflation risk. There continues to be uncertainty in the
changing market and economic conditions, including the possibility of additional measures that could be taken by the Federal Reserve and other
government agencies, related to macroeconomic conditions, adverse business conditions and liquidity concerns, or bank failures or instability in the
financial services sector, geopolitical disruptions and concerns over inflation risk.
36
Our Broadband strategy is focused on continuing to develop and deliver software-based broadband access technologies and related DAA nodes and
other hardware devices, which we refer to as our cOS solutions, to our broadband operator customers. We believe our cOS software-based broadband
access solutions are superior to hardware-based systems and deliver unprecedented scalability, agility and cost savings for our customers. Our cOS
solutions, which can be deployed based on a centralized, DAA or hybrid architecture, enable our customers to migrate to multi-gigabit broadband capacity
and the fast deployment of DOCSIS and/or FTTH data, video and voice services. We believe our cOS solutions resolve space and power constraints in
broadband operator facilities, eliminate dependence on hardware upgrade cycles and significantly reduce total cost of ownership, and are helping us
become a major player in the broadband access market. In the meantime, we believe our Broadband segment will continue to gain momentum in the
marketplace as our customers adopt and deploy our virtualized DOCSIS, CMTS and FTTH solutions and distributed access architectures. We continue to
make progress in the development of our cOS solutions and related DAA nodes and hardware devices, in the growth of our Broadband business, with
expanded commercial deployments, field trials, and customer engagements.
We believe a material and growing portion of the opportunities for our Video business are linked to the industry and our customers (i) continuing to
adopt streaming technologies to capture, process and deliver video content to consumers and, increasingly, utilizing public cloud solutions like our VOS
SaaS platform to do so; (ii) transforming existing broadcast infrastructure workflows into more flexible, efficient and cost-effective operations running in
public clouds; and (iii) for those customers maintaining on-premise video delivery infrastructure, continuing to upgrade and replace aging equipment with
next-generation software-based appliances that significantly reduce operational complexity. Our Video business strategy is focused on continuing to
develop and deliver products, solutions and services to enable and support these trends. Currently, we are seeing a slow-down in capital spending by some
of our Video business customers, which is causing delays for some of our appliance-based projects and creating near-term headwinds for our Video
appliance business.
Video Business Strategic Review
As previously disclosed in our Q3 2023 earnings press release and Form 10-Q filed on November 3, 2023, we initiated a formal strategic review
process for our Video business to better position the Company for long-term shareholder value creation. As noted in our prior disclosures, we received
indications of interest in our Video business from a number of parties. To date, that interest has not yet translated into a definitive agreement with any party.
We are continuing the strategic review process, and no specific timetable has been established for the completion of the review. We do not intend to
disclose further details with respect to the review process unless and until our board of directors approves a specific transaction or otherwise concludes its
review.
37
CRITICAL ACCOUNTING 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.
We believe that the following accounting estimates involve a greater degree of judgement or complexity than our other accounting estimates.
Accordingly, the critical accounting estimates that we believe have the most significant impact on Harmonic’s unaudited condensed consolidated financial
statements are set forth below:
•
•
Valuation of inventories; and
Accounting for income taxes
Valuation of Inventories
We state inventories at the lower-of-cost (determined on a first-in, first-out basis) or net realizable value, including allowances for excess and obsolete
inventory. These reserves are based on management’s assumptions about and analysis of relevant factors including current levels of orders and backlog,
forecasted demand, market conditions, and expected product lifecycles. Situations that could cause changes in the level of these inventory reserves include
a decline in business and economic conditions, a decline in consumer confidence caused by changes in market conditions, a sudden and significant decline
in demand for our products, inventory obsolescence because of rapidly changing technology and consumer requirements, or failure to estimate end
customer demand properly. If actual market conditions deteriorate from those anticipated by management, additional allowances for excess and obsolete
inventory could be required and may be material to our results of operations.
The gross amount of inventory reserves charged to the cost of revenues totaled $7.4 million, $6.0 million, in 2023 and 2022, respectively.
Accounting for Income Taxes
In preparing our consolidated financial statements, we estimate our income taxes for each of the jurisdictions in which we operate. We estimate actual
current tax expense together with assessing temporary differences resulting from different treatment of items, such as accruals and allowances not currently
deductible for tax purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets.
Management’s judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance
recorded against our net deferred tax assets. We record a valuation allowance to reflect uncertainties about whether we will be able to utilize our deferred
tax assets before they expire. In evaluating the need for a full or partial valuation allowance, all positive and negative evidence must be considered,
including our forecast of taxable income over the applicable carryforward periods, its current financial performance, its market environment, and other
factors. Based on the available objective evidence, at December 31, 2023, we determined it appropriate to release the valuation allowance against U.S.
federal and certain other states net deferred tax assets of $67.7 million and recorded a one-time income tax benefit. We believe it is not more likely than not
the California net deferred tax assets of $32.3 million will be realizable. Accordingly, a full valuation allowance of $32.3 million is maintained against the
California net deferred tax assets. To the extent that we determine the deferred tax assets are realizable on a more likely than not basis and an adjustment is
needed, an adjustment will be recorded in the fiscal period the determination is made.
38
Results of Operations
Net Revenue
The following table presents the breakdown of net revenue by category and geographical region:
(in thousands, except percentages)
Appliance and integration
as % of total net revenue
SaaS and service
as % of total net revenue
Total net revenue
Americas
as % of total net revenue
EMEA
as % of total net revenue
APAC
as % of total net revenue
Total net revenue
$
$
$
Year Ended December 31,
2023
2022
2021
2023 vs. 2022
435,878
$
473,806
$
369,767
$
(37,928)
$
$
72 %
172,029
28 %
607,907
447,700
74 %
127,689
21 %
32,518
5 %
$
$
76 %
151,151
24 %
624,957
452,869
73 %
133,095
21 %
38,993
6 %
$
$
73 %
137,382
27 %
507,149
335,731
66 %
126,427
25 %
44,991
9 %
(8)%
14 %
20,878
(17,050)
(3)%
(5,169)
(5,406)
(1)%
(4)%
(6,475)
(17)%
$
607,907
$
624,957
$
507,149
$
(17,050)
(3)%
Appliance and integration net revenue decreased by $37.9 million in 2023, as compared to 2022, primarily due to a decrease of $68.2 million in our
Video segment revenue, partially offset by an increase of $30.3 million in our Broadband segment revenue. The decrease in our Video segment revenue
was mainly due to a one-time deployment of our appliance products for a customer in 2022 amounting to a $41.6 million and a decrease of $26.6 million
attributable to lower sales across all regions in 2023. The increase in our Broadband segment revenue was mainly contributed by higher volume from our
existing customers including initial shipments on a new project with a large Tier 1 customer in 2023.
SaaS and service net revenue increased by $20.9 million in 2023, as compared to 2022, primarily due to an increase of $10.4 million in revenue from
increased usage by our existing customers, a $5.8 million increase in revenue from the acquisition of new customers, and a $4.7 million increase in revenue
from higher demand for support services from our existing customers.
Americas net revenue decreased by $5.2 million in 2023, as compared to 2022, primarily due to a one-time deployment of our Video appliance
products for a customer in 2022 amounting to a $41.6 million, and a $2.6 million reduction in sales within our Video segment in 2023. These decreases
were partially offset by an increase in our Broadband segment revenue of $39.0 million resulting from higher volume from our existing customers
including initial shipments on a new project with a large Tier 1 customer in 2023.
EMEA net revenue decreased by $5.4 million in 2023, as compared to 2022. This decline was primarily attributed to reduced sales, with decreases in
our Video and Broadband segments of $3.4 million and $2.0 million, respectively. The reduction in sales in both segments was a consequence of lower
demand for our products.
APAC net revenue decreased by $6.5 million in 2023, as compared to 2022, primarily due to a reduction in sales of $8.2 million in Video segment due
to lower demand, partially offset by a $1.7 million increase in revenue from higher demand in our Broadband segment.
Gross Profit
(in thousands, except percentages)
Gross profit
as % of total net revenue
(“gross margin”)
Year Ended December 31,
2023
2022
2021
2023 vs. 2022
$
312,545
$
315,884
$
259,742
$
(3,339)
(1)%
51.4 %
50.5 %
51.2 %
0.9 %
39
Our gross margins are dependent upon, among other factors, the proportion of software sales, product mix, supply chain impacts, customer mix,
product introduction costs, price reductions granted to customers and achievement of cost reductions.
Our gross margin increased by 90 basis points (bps) in 2023, as compared to 2022, primarily driven by margin expansion in both our Broadband and
Video segments, largely attributed to an increase of 53 bps from lower shipping costs and an increase of 37 bps due to favorable product mix.
Research and Development Expenses
(in thousands, except percentages)
Research and development
as % of total net revenue
Year Ended December 31,
2023
2022
2021
2023 vs. 2022
$
126,282
$
120,307
$
102,231
$
5,975
5 %
21 %
19 %
20 %
Our research and development expenses consist primarily of employee salaries and related expenses, contractors and outside consultants, supplies and
materials, equipment depreciation and facilities costs, all of which are associated with the design and development of new products and enhancements of
existing products. The research and development expenses are net of French Research and Development (“French R&D”) credits.
Research and development expenses increased in 2023, as compared to 2022, primarily due to higher employee compensation costs as a result of
headcount increases to support the growth of our Broadband business.
Selling, General and Administrative Expenses
(in thousands, except percentages)
Selling, general and administrative
as % of total net revenue
Year Ended December 31,
2023
2022
2021
2023 vs. 2022
$
163,282
$
146,717
$
138,085
$
16,565
11 %
27 %
23 %
27 %
Selling, general and administrative expenses increased in 2023, as compared to 2022, primarily due to higher employee compensation costs of $11.4
million as a result of headcount increases and annual compensation adjustments to support the growth of our Broadband business and non-recurring
advisory fees of $5.2 million incurred for the strategic review of the Video business.
Restructuring and Related Charges
We have implemented several restructuring plans in the past few years. The goal of these plans is to bring operational expenses to appropriate levels
relative to our net revenues, while simultaneously implementing extensive company-wide expense control programs. We account for our restructuring plans
under the authoritative guidance for exit or disposal activities. The restructuring and related charges are included in “Cost of revenue” and “Operating
expenses-restructuring and related charges” in the Consolidated Statements of Operations.
(in thousands, except percentages)
Cost of revenue
Operating expenses
Restructuring and related charges
Total restructuring and related charges
Year Ended December 31,
2023
2022
2021
2023 vs. 2022
687 $
533 $
571 $
154
29 %
809
1,496 $
3,341
3,874 $
110
681 $
(2,532)
(2,378)
(76)%
(61)%
$
$
Restructuring and related charges decreased in 2023, as compared to 2022, primarily due to higher severance and employee benefit costs recorded in
conjunction with restructuring activities in fiscal 2022.
Refer to Note 10, “Restructuring and Related Charges,” of the Notes to our Consolidated Financial Statements for additional information.
40
Interest Expense, Net
(in thousands, except percentages)
Interest expense, net
Year Ended December 31,
2023
2022
2021
$
(2,696) $
(5,040) $
(10,625) $
2023 vs. 2022
2,344
(47)%
Interest expense, net decreased in 2023, as compared to 2022, primarily due to the repayment of the 4.375% Convertible Senior Notes due 2022 upon
their maturity.
Other Income (Expense), Net
(in thousands, except percentages)
Other income (expense), net
Year Ended December 31,
2023
2022
2021
2023 vs. 2022
$
(335) $
4,006 $
687 $
(4,341)
(108)%
The change in other income (expense), net in 2023, as compared to 2022, was primarily due to a gain of $4.2 million recognized on the sale of our
investment in Encoding.com in May 2022. Refer to Note 3, “Investment in Equity Securities,” of the Notes to our Consolidated Financial Statements for
details on the sale of investment in Encoding.com.
Income Taxes
(in thousands, except percentages)
Provision for (benefit from) income taxes
2023
2022
2021
2023 vs. 2022
$
(64,853) $
16,303 $
(4,383) $
(81,156)
(498)%
Year Ended December 31,
The change in provision for (benefit from) income taxes for 2023, as compared to 2022, was primarily due to the release of the valuation allowance
against U.S. Federal and certain state deferred tax assets due to improved historical earnings and projected earnings.
41
Segment Financial Results
(1)
(in thousands, except percentages)
Video
Revenue
as % of total revenue
(1)
Operating income
Operating margin %
Broadband
Revenue
as % of total revenue
(1)
Operating income
Operating margin %
Total
Revenue
(1)
Year Ended December 31,
2023
2022
2021
2023 vs. 2022
$
$
$
219,425
$
274,189
$
288,507
$
(54,764)
(20)%
36 %
(8,741)
(4)%
44 %
22,322
8 %
57 %
28,460
10 %
(8)%
(31,063)
(139)%
(12)%
388,482
$
350,768
$
218,642
$
37,714
64 %
64,575
17 %
56 %
52,283
15 %
43 %
15,599
7 %
8 %
12,292
2 %
11 %
24 %
607,907
$
624,957
$
507,149
$
(17,050)
(3)%
(1) Segment operating income and segment operating margins are Non-GAAP financial measures. Refer to Note 16, “Segment information, Geographic Information and Customer
Concentration,” of the Notes to our Consolidated Financial Statements for a reconciliation of the Company’s consolidated segment operating income to consolidated income before income taxes.
Video
Our Video segment net revenue decreased by $54.8 million in 2023, as compared to 2022. This decrease was primarily driven by a reduction in
appliance and integration revenue of $68.2 million, partially offset by an increase of $13.4 million in our SaaS and services revenue. The decrease in
appliance and integration revenue was primarily due to a one-time deployment of our appliance products for a customer in 2022, amounting to $41.6
million, and a $26.6 million decline in sales across all regions in 2023, primarily due a decline in demand as a result of macroeconomic conditions
impacting our customers’ capital budgets in 2023. The increase in our SaaS and services revenue was primarily driven by $10.4 million increase in usage
from our existing customers and $5.8 million increase in revenue from the acquisition of new SaaS customers, partially offset by a $2.8 million decrease in
revenue attributable to lower support services revenue from existing customers. Video segment operating margin decreased in 2023, compared to 2022,
primarily due to the decrease in revenue.
Broadband
Our Broadband segment net revenue increased by $37.7 million in 2023, as compared to 2022, primarily due to a $30.3 million increase in revenue
from higher product sales and a $7.4 million increase in support services revenue from our existing customers. Our Broadband segment operating margin
increased in 2023, compared to 2022, primarily due to lower shipping costs in 2023.
42
Liquidity and Capital Resources
We expect to continue to manage our cash from operations effectively, together with deploying cash in working capital for growth. The cash we
generate from our operations enables us to fund ongoing operations, our research and development projects for new products and technologies, and other
business activities. We continually evaluate our cash needs and may decide it is best to raise additional capital or seek alternative financing sources to fund
our operations and the growth of our business, to take advantage of unanticipated strategic opportunities, or to strengthen our financial position, including
through drawdowns on existing or new debt facilities or new financing (debt and equity) funds. In the future, we may enter into other arrangements for
potential investments in, or acquisitions of, complementary businesses, services or technologies, which could require us to seek additional equity or debt
financing. Additional funds may not be available on terms favorable to us or at all. Conversely, we may also from time to time determine that it is in our
best interests to voluntarily repay certain indebtedness early. We believe that our current sources of funds will provide us with adequate liquidity during the
12-month period following December 31, 2023, as well as in the long-term.
Material Cash Requirements
Our principal uses of cash will include repayments of debt and related interest, purchases of inventory, stock repurchases, payments for payroll,
restructuring expenses, and other operating expenses related to the development and marketing of our products, purchases of property and equipment,
facility leases, and other contractual obligations for the foreseeable future.
As of December 31, 2023, we had outstanding $130.9 million in aggregate principal amount of indebtedness, consisting of our 2024 Notes and other
debts, of which $120.4 million is scheduled to become due in the 12-month period following December 31, 2023. As of December 31, 2023, our total
minimum lease payments are $30.7 million, of which $7.1 million is due in the 12-month period following December 31, 2023. For details regarding our
indebtedness and lease obligations, refer to Note 11, “Convertible Notes and Other Debts”, and Note 4, “Leases”, respectively, of the Notes to our
Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.
On February 3, 2022, the Board of Directors authorized us to repurchase, from time to time, up to $100 million of our outstanding shares of common
stock through February 2025, at such time and such prices as management may decide. The program does not obligate us to repurchase any specific
number of shares and may be discontinued at any time. As of December 31, 2023, approximately $94.9 million of the share repurchase authorization
remained available.
Sources and Conditions of Liquidity
Our sources to fund our material cash requirements are predominantly from sales of our products and services and, when applicable, proceeds from
debt facilities and debt and equity offerings.
As of December 31, 2023, our principal sources of liquidity consisted of cash and cash equivalents of $84.3 million, net accounts receivable of $141.5
million, $30.0 million from our receivables purchase arrangement, $160.0 million from our new credit agreement, and financing from French government
agencies.
Our cash and cash equivalents of $84.3 million as of December 31, 2023 consisted of bank deposits held throughout the world, of which $57.3 million
was held outside of the United States. At present, such foreign funds are considered to be indefinitely reinvested in foreign countries to the extent of
indefinitely reinvested foreign earnings. In the event funds from foreign operations are needed to fund cash needs in the United States and if U.S. taxes
have not already been previously accrued, we may be required to accrue and pay additional U.S. and foreign withholding taxes in order to repatriate these
funds.
On September 29, 2023, we entered into a Master Receivables Purchase Agreement with JPMorgan Chase Bank N.A, as purchaser. The agreement
allows us, from time to time, to sell certain eligible billed receivables in an aggregate outstanding amount of up to $30 million. As of December 31, 2023,
there were no receivables sold under this agreement.
On December 21, 2023, we entered into a Credit Agreement (the “Credit Agreement”), by and among the Company, certain of our subsidiaries from
time to time party thereto, the lenders from time to time party thereto, and Citibank, N.A., as administrative agent for the lenders. The Credit Agreement
provides for a secured revolving loan facility in an aggregate principal amount of up to $120.0 million (the “Revolving Facility”), with a $10.0 million
sublimit for the issuance of letters of credit, and a secured delayed draw term loan facility in an aggregate principal amount of up to $40.0 million (the
“Term Facility”). As of December 31, 2023, there were no borrowings outstanding and approximately $0.2 million of letters of credit outstanding under the
Credit Agreement. The Credit Agreement refinances and replaces our prior credit agreement, dated as of December 19, 2019, as amended, with JPMorgan
Chase Bank, N.A., as lender. For details regarding our Credit Agreement, refer to Note 11, “Convertible Notes and Other Debts”, of the Notes to our
Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.
43
Summary of Cash Flows
(in thousands)
Net cash provided by (used in)
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash, cash equivalents and restricted cash
Operating Activities
Year Ended December 31,
2023
2022
2021
$
$
7,059 $
(8,475)
(4,990)
1,089
(5,317) $
5,476 $
(1,288)
(43,133)
(4,900)
(43,845) $
41,017
(12,975)
7,939
(1,195)
34,786
Net cash provided by operating activities increased by $1.6 million in 2023, as compared to 2022, primarily due to a decrease of cash used in our
working capital, partially offset by lower income before income taxes.
We expect that cash provided by or used in operating activities may fluctuate in future periods as a result of a number of factors, including but not
limited to, instability and uncertainty in the financial services sector; the impact of the Russia-Ukraine and Hamas-Israel conflicts on macroeconomic
conditions, which may affect demand for our offerings; fluctuations in our operating results; shipment linearity; accounts receivable collections
performance; inventory and supply chain management; and the timing and amount of compensation and other payments.
Investing Activities
Net cash used in investing activities increased by $7.2 million in 2023, as compared to 2022, primarily due to proceeds from the sale of our investment
in Encoding.com in 2022.
Financing Activities
Net cash used in financing activities decreased by $38.1 million in 2023, as compared to 2022, primarily due to the repayment of the $37.7 million
principal of the 2022 Notes in 2022, and stock repurchase transactions in 2022. The decreases were partially offset by higher payment of tax withholding
obligations related to the net share settlement of restricted stock units and payments of debt issuance costs associated with the Credit Agreement.
44
New Accounting Pronouncements
Refer to Note 2 to the accompanying Consolidated Financial Statements for a full description of recent accounting pronouncements, including the
dates of adoption and estimated effects, if any, on results of operations and financial condition.
45
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Foreign Currency Exchange Risk
We market and sell our products and services through our direct sales force and indirect channel partners in North America, EMEA, APAC and Latin
America. Accordingly, we are subject to exposure from adverse movements in foreign currency exchange rates, primarily the Euro, British pound, Israeli
shekel and Japanese yen. Our U.S. dollar functional subsidiaries account for approximately 97%, 97% and 96% of our consolidated net revenues in 2023,
2022 and 2021, respectively. We recorded net billings denominated in foreign currencies of approximately 15%, 15% and 18% of total company billings in
2023, 2022 and 2021, respectively. In addition, a portion of our operating expenses, primarily the cost of personnel to deliver technical support on our
products and professional services, sales and sales support and research and development, are denominated in foreign currencies, primarily the Euro, Israeli
shekel and British pound.
We use derivative instruments, primarily forward contracts, to manage exposures to foreign currency exchange rates and we do not enter into foreign
currency forward contracts for trading purposes.
Derivatives Not Designated as Hedging Instruments (Balance Sheet Hedges)
We enter into forward currency contracts to hedge foreign currency denominated monetary assets and liabilities. These derivative instruments are
marked to market through earnings every period and mature generally within three months. Changes in the fair value of these foreign currency forward
contracts are recognized in “Other income (expense), net” in the Consolidated Statements of Operations, and are largely offset by the changes in the fair
value of the assets or liabilities being hedged.
The U.S. dollar equivalents of all outstanding notional amounts of foreign currency forward contracts are summarized as follows:
(in thousands)
Derivatives not designated as hedging instruments:
Purchase
December 31,
2023
2022
$
54,169 $
7,971
46
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our outstanding debt arrangements with variable rate interests as well as
our borrowings under the Credit Agreement.
On December 21, 2023, we entered into a Credit Agreement (the “Credit Agreement”), with Citibank, N.A., as administrative agent for the lenders.
The Credit Agreement provides for a secured revolving loan facility in an aggregate principal amount of up to $120.0 million (the “Revolving Facility”),
with a $10.0 million sublimit for the issuance of letters of credit, and a secured delayed draw term loan facility in an aggregate principal amount of up to
$40.0 million (the “Term Facility”). The Credit Agreement refinances and replaces the Company’s existing credit agreement, dated as of December 19,
2019, as amended, with JPMorgan Chase Bank, N.A., as lender.
Loans under the Revolving Facility and Term Facility will bear interest, at the Company’s election, at a floating rate per annum equal to either (a) a
base rate, defined as the greatest of (i) the prime rate then in effect, (ii) the federal funds rate then in effect, plus 0.50%, or (iii) an adjusted term SOFR rate
determined on the basis of a one-month interest period, plus 1.00%, in each case, plus a margin of between 1.00% to 1.75% (“Base Rate Loans”); and (b)
an adjusted term SOFR rate (based on one, three or six month interest periods), plus a margin of between 2.00% to 2.75% (“Adjusted Term SOFR Loans”).
The applicable margin in each case is determined based on the Company’s consolidated net leverage ratio. Interest is payable quarterly in arrears, in the
case of Base Rate Loans, and at the end of the applicable interest period, but at least every three months, in the case of Adjusted Term SOFR Loans. The
Company is also obligated to pay other customary fees (including letter of credit fees) for a credit agreement of this size and type. We had no borrowings
under the Credit Agreement from the closing of the Credit Agreement through December 31, 2023.
For our French entity, the aggregate debt balance at December 31, 2023 was $15.4 million, which are financed by French government agencies. These
debt instruments have maturities ranging from one to five years, expiring from 2024 through 2026. These loans are tied to the 1-month EURIBOR rate plus
spread. Refer to Note 11, “Convertible Notes and Other Debts,” of the Notes to our Consolidated Financial Statements for additional information. As of
December 31, 2023, a hypothetical 1.0% increase in interest rates on our debts subject to variable interest rate fluctuations would increase our interest
expense by approximately $0.1 million annually.
As of December 31, 2023, we had $115.5 million aggregate principal of the 2024 Notes outstanding, which have a fixed 2.00% coupon rate.
Additionally, during fiscal 2020, we received a loan from Société Générale S.A. in France which bears an effective interest rate of 0.51% per annum, in
connection with relief loan programs related to the COVID-19 pandemic. As of December 31, 2023, the outstanding balance of this loan was $4.1 million.
47
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Ernst & Young LLP - Independent Registered Public Accounting Firm (PCAOB Firm ID 42)
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
49
52
53
54
55
56
57
48
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Harmonic Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Harmonic Inc. (the Company) as of December 31, 2023 and 2022, the
related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion,
the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and
2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity
with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated
February 16, 2024, expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was
communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the
financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit
matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating
the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
49
Description of the Matter
How We Addressed the Matter
in Our Audit
Inventory Valuation
The Company’s net inventory totaled $84 million as of December 31, 2023. As explained in “Note 2:
Accounting Policies” within the consolidated financial statements, inventory is stated at the lower of cost
(determined on a first-in, first-out basis) or net realizable value. The Company establishes a provision for
excess and obsolete inventory to reduce such inventory to its estimated net realizable value.
Auditing management’s estimates for excess and obsolete inventory involved auditor judgment due to the
assessment of management’s estimates of whether a provision for excess and obsolete inventory is
required. The measurement of any excess of cost over net realizable value is judgmental and is impacted
by a number of factors that are affected by general economic and market conditions outside the Company’s
control. Specifically, excess and obsolete inventory calculations are sensitive to assumptions that relate to
future customer demand for the Company’s products.
We obtained an understanding, evaluated the design and tested the operating effectiveness of internal
controls over the Company’s excess and obsolete inventory reserve process. This included controls over
management’s determination of inventory valuation, including the evaluation of future demand of the
Company’s products and the completeness and accuracy of the data underlying the excess and obsolete
inventory valuation.
We performed audit procedures that included, among others, assessing the Company’s methodology over
the computation of the provision for excess and obsolete inventory, testing the significant assumptions and
the underlying inputs used by the Company in its analysis including historical sales trends, expectations
regarding future demand, changes in the Company’s business, customer base, product life cycles and other
relevant factors. We evaluated current inventory levels compared to future demand and historical sales.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2021.
San Jose, California
February 16, 2024
50
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Harmonic Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Harmonic Inc.’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the
COSO criteria). In our opinion, Harmonic Inc. (the Company) maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2023, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
2023 Consolidated Financial Statements of the Company and our report dated February 16, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Jose, California
February 16, 2024
51
HARMONIC INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Operating lease right-of-use assets, net
Goodwill
Deferred income taxes
Other non-current assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Convertible debt, current
Other debts, current
Accounts payable
Deferred revenue
Operating lease liabilities, current
Other current liabilities
Total current liabilities
Other debts, non-current
Operating lease liabilities, non-current
Other non-current liabilities
Total liabilities
Commitments and contingencies (Note 17)
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; 112,407 and 109,871 shares issued and outstanding at
December 31, 2023 and 2022, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2023
2022
84,269 $
141,531
83,982
20,950
330,732
36,683
20,817
239,150
104,707
36,117
768,206 $
114,880 $
4,918
38,562
46,217
6,793
61,024
272,394
10,495
18,965
29,478
331,332
89,586
108,427
120,949
26,337
345,299
39,814
25,469
237,739
11,776
49,921
710,018
113,981
4,756
67,455
62,383
6,773
66,724
322,072
11,161
24,110
28,169
385,512
—
—
112
2,405,043
(1,962,575)
(5,706)
436,874
768,206 $
110
2,380,651
(2,046,569)
(9,686)
324,506
710,018
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
52
HARMONIC INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
$
$
$
$
Year Ended December 31,
2023
2022
2021
435,878 $
172,029
607,907
473,806 $
151,151
624,957
236,773
58,589
295,362
312,545
126,282
163,282
—
809
290,373
22,172
(2,696)
(335)
19,141
(64,853)
83,994 $
259,027
50,046
309,073
315,884
120,307
146,717
—
3,341
270,365
45,519
(5,040)
4,006
44,485
16,303
28,182 $
0.75 $
0.72 $
0.27 $
0.25 $
111,651
117,359
105,080
112,378
369,767
137,382
507,149
195,445
51,962
247,407
259,742
102,231
138,085
507
110
240,933
18,809
(10,625)
687
8,871
(4,383)
13,254
0.13
0.12
101,484
106,171
Revenue:
Appliance and integration
SaaS and service
Total net revenue
Cost of revenue:
Appliance and integration
SaaS and service
Total cost of revenue
Total gross profit
Operating expenses:
Research and development
Selling, general and administrative
Amortization of intangibles
Restructuring and related charges
Total operating expenses
Income from operations
Interest expense, net
Other income (expense), net
Income before income taxes
Provision for (benefit from) income taxes
Net income
Net income per share:
Basic
Diluted
Weighted average common shares:
Basic
Diluted
The accompanying notes are an integral part of these consolidated financial statements.
53
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
HARMONIC INC.
(In thousands)
Net income
Other comprehensive income (loss):
Defined benefit plan
Translation gain (loss)
Other comprehensive income (loss) before tax
Provision for (benefit from) income taxes
Other comprehensive income (loss), net of tax
Total comprehensive income
Year Ended December 31,
2023
2022
2021
$
83,994 $
28,182 $
13,254
25
3,806
3,831
(149)
3,980
87,974 $
626
(6,956)
(6,330)
84
(6,414)
21,768 $
(233)
(8,022)
(8,255)
873
(9,128)
4,126
$
The accompanying notes are an integral part of these consolidated financial statements.
54
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
HARMONIC INC.
(In thousands)
Common Stock
Shares
Amount
Balance at December 31, 2020
Net income
Other comprehensive loss, net of tax
Issuance of common stock under stock option, award and
purchase plans
Stock-based compensation
Reclassification from equity to mezzanine equity for
2022 Notes
Balance at December 31, 2021
Cumulative effect of ASU 2020-06 adoption
Balance at January 1, 2022
Net income
Other comprehensive loss, net of tax
Issuance of common stock under stock option, award and
purchase plans, net
Repurchase of common stock
Stock-based compensation
Issuance of common stock upon conversion of 2022
Notes
Balance at December 31, 2022
Net income
Other comprehensive income, net of tax
Issuance of common stock under stock award and
purchase plans
Stock-based compensation
Balance at December 31, 2023
98,204 $
—
—
4,755
—
—
102,959 $
—
102,959
—
—
3,601
(571)
—
3,882
109,871 $
—
—
2,536
—
112,407 $
98 $
—
—
5
—
—
103 $
—
103
—
—
4
(1)
—
4
110 $
—
—
2
—
112 $
Additional
Paid-in
Capital
2,353,559 $
—
—
10,244
24,119
(883)
2,387,039 $
(32,249)
2,354,790
—
—
787
—
25,078
(4)
Accumulated
Deficit
(2,101,211) $
13,254
—
—
—
—
(2,087,957) $
18,339
(2,069,618)
28,182
—
—
(5,133)
—
—
2,380,651 $
(2,046,569) $
—
—
(2,937)
27,329
2,405,043 $
83,994
—
—
—
(1,962,575) $
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders’
Equity
5,856 $
—
(9,128)
—
—
—
(3,272) $
—
(3,272)
—
(6,414)
—
—
—
—
(9,686) $
—
3,980
—
—
(5,706) $
258,302
13,254
(9,128)
10,249
24,119
(883)
295,913
(13,910)
282,003
28,182
(6,414)
791
(5,134)
25,078
—
324,506
83,994
3,980
(2,935)
27,329
436,874
The accompanying notes are an integral part of these consolidated financial statements.
55
HARMONIC INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Year Ended December 31,
2023
2022
2021
$
83,994 $
28,182 $
Depreciation
Amortization of intangibles
Stock-based compensation
Amortization of convertible debt discount
Amortization of warrant
Foreign currency remeasurement
Deferred income taxes, net
Provision for expected credit losses and returns
Provision for excess and obsolete inventories
Gain on sale of investment in equity securities
Other adjustments
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Other assets
Accounts payable
Deferred revenues
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of investments
Proceeds from maturities of investments
Proceeds from sales of equity investments
Purchases of property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Payment of convertible debt
Payments for debt issuance costs
Proceeds from other debts
Repayment of other debts
Repurchase of common stock
Proceeds from common stock issued to employees
Taxes paid related to net share settlement of equity awards
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, end of the year
Supplemental disclosure of cash flow information:
Income tax payments, net
Interest payments, net
Supplemental schedule of non-cash investing and financing activities:
Capital expenditures incurred but not yet paid
12,255
—
27,329
899
870
1,453
(92,856)
2,778
7,396
—
151
(35,473)
35,403
25,483
(29,358)
(20,823)
(12,442)
7,059
(6,305)
6,305
—
(8,475)
(8,475)
—
(1,025)
3,835
(4,865)
—
6,558
(9,493)
(4,990)
1,089
(5,317)
89,586
12,260
—
25,212
1,171
1,734
(2,685)
4,894
1,954
5,988
(4,370)
513
(23,136)
(54,431)
(8,402)
5,837
2,610
8,145
5,476
—
—
7,962
(9,250)
(1,288)
(37,707)
—
3,499
(4,583)
(5,133)
7,092
(6,301)
(43,133)
(4,900)
(43,845)
133,431
13,254
12,546
507
24,056
6,308
1,741
(5,126)
(6,197)
4,142
3,460
—
181
(26,722)
(39,338)
(3,096)
42,303
15,014
(2,016)
41,017
—
—
—
(12,975)
(12,975)
—
—
3,861
(6,169)
—
12,311
(2,064)
7,939
(1,195)
34,786
98,645
$
$
$
$
84,269 $
89,586 $
133,431
18,128 $
1,626 $
9,036 $
3,796 $
618 $
1,075 $
2,525
4,095
751
The accompanying notes are an integral part of these consolidated financial statements.
56
HARMONIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: DESCRIPTION OF BUSINESS
Harmonic Inc. (“Harmonic” or the “Company”) is a leading global provider of (i) broadband access solutions that enable broadband operators to more
efficiently and effectively deploy high-speed internet, for data, voice and video services for their customers and (ii) versatile and high performance video
delivery software, products, system solutions and services that enable our customers to efficiently create, prepare, store, playout and deliver a full range of
high-quality broadcast and streaming video services to consumer devices, including televisions, personal computers, laptops, tablets and smart phones
The Company operates in two segments, Broadband and Video. The Broadband business sells broadband access solutions and related services,
including our cOS software-based broadband access solution, to broadband operators globally. The Video business sells video processing and production
and playout solutions and services worldwide to broadband operators and satellite and telecommunications (“telco”) pay-TV service providers, which are
collectively referred to as “service providers,” and to broadcast and media companies, including streaming media companies. The Video business
infrastructure solutions are delivered either through shipment of our products, software licenses or as software-as-a-service (“SaaS”) subscriptions.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include those of Harmonic and its wholly-owned subsidiaries, after elimination of all
intercompany accounts and transactions. The Company has reclassified certain amounts previously reported in its consolidated financial statements that
were not material, to conform to the current presentation. The Company’s fiscal quarters are based on 13-week periods, except for the fourth quarter which
ends on December 31.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“US 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s
reported financial positions or results of operations may be materially different under changed conditions or when using different estimates and
assumptions, particularly with respect to significant accounting policies. If estimates or assumptions differ from actual results, subsequent periods are
adjusted to reflect more current information.
Cash and Cash Equivalents
All highly liquid investments with an original maturity of three months or less at the date of purchase are considered cash equivalents. The carrying
amount of cash and cash equivalents approximates fair value because of the short maturity of those instruments.
Credit Risk and Major Customers/Supplier Concentration
Financial instruments which subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, and accounts receivable.
Cash and cash equivalents are invested in short-term, highly liquid, investment-grade instruments, in accordance with the Company’s investment policy.
The investment policy limits the amount of credit exposure to any one financial institution, commercial or governmental issuer.
The Company’s accounts receivable are derived from sales to worldwide cable, satellite, telco, and broadcast and media companies. The Company
generally does not require collateral from its customers, and performs ongoing credit evaluations of its customers and provides for expected losses. The
Company maintains an allowance for doubtful accounts based upon the expected collectability of its accounts receivable. Two customers had a balance
greater than 10% of the Company’s net accounts receivable balance as of December 31, 2023. One customer had a balance greater than 10% of the
Company’s net accounts receivable balance as of December 31, 2022. During the year ended December 31, 2023, 2022 and 2021, Comcast is the only
customer that accounted for more than 10% of the Company’s total net revenue.
Certain of the components and subassemblies included in the Company’s products are obtained from a single source or a limited group of suppliers.
Although the Company seeks to reduce dependence on those sole source and limited source suppliers, the partial or complete loss of certain of these
sources could have at least a temporary adverse effect on the Company’s results of operations and damage customer relationships.
57
Revenue Recognition
The Company classifies its total revenue in two categories on the face of the statement of operations, “Appliance and integration” and “SaaS and
service. Appliance and integration revenue includes revenue from the sale of hardware products and perpetual software licenses, as well as the associated
professional services such as testing, design, installation, commissioning, and integration, collectively referred to as “professional services. These
professional service agreements, associated with the sale of hardware products and perpetual software licenses, are typically of a short duration and are
considered an important component of the appliance business by management. SaaS and service revenue include usage fees for the Company’s SaaS
platform and support service revenue from its appliance-based customers.
The Company applies the provisions of ASC 606, Revenue from Contracts with Customers (ASC 606) as a single standard for revenue recognition that
applies to all of its hardware products, software licenses and services arrangements and generally require revenues to be recognized upon the transfer of
control of promised goods or services provided to its customers, reflecting the amount of consideration the Company expects to receive for those goods or
services. Pursuant to ASC 606, revenue is recognized upon the application of the following steps:
•
•
•
•
•
identification of the contract, or contracts, with a customer;
identification of the performance obligations in the contract;
determination of the transaction price;
allocation of the transaction price to each performance obligation in the contract; and
recognition of revenues when, or as, the contractual performance obligations are satisfied.
Hardware and Software: Revenue from the sale of hardware and software products is recognized when control is transferred. For most of the
Company’s product sales (including sales to distributors and system integrators), control is transferred at the time the product is shipped or delivery has
occurred because the customer has significant risks and rewards of ownership of the asset and the Company has a present right to payment at that time. The
Company’s agreements with the distributors and system integrators have terms which are generally consistent with the standard terms and conditions for
the sale of the Company’s equipment to end users, and do not provide for product rotation or pricing allowances, as are typically found in agreements with
stocking distributors.
Shipping and handling costs are accounted for as a fulfillment cost and are recorded in “Cost of revenue” in the Company’s Consolidated Statements of
Operations. Sales tax and other amounts collected on behalf of third parties are excluded from the transaction price.
Professional services: Revenues from professional services are generally recognized as the services are performed.
SaaS services: Revenue for SaaS service is recognized ratably over the contractual term as the customer simultaneously receives and consumes the
benefit of the underlying service. Over-usage fees are recognized as revenue when consumed and are included in the transaction price of an arrangement as
variable consideration.
Support and maintenance. Support and maintenance services are satisfied ratably over time as the customer simultaneously receives and consumes the
benefits of the services.
Arrangements with Multiple Performance Obligations. The Company has revenue arrangements that include multiple performance obligations. The
Company allocates the transaction price to all distinct performance obligations based on their relative standalone selling prices (“SSP”). The Company may
exercise judgment when determining whether products and services are considered distinct performance obligations that should be accounted for separately
versus together. The determination of SSP is generally based on the contractually stated, observable prices of the promised goods and services charged
when sold separately to the customer. Where SSP is not directly observable, we determine the SSP using information which considers multiple factors
including, but not limited to, major product groupings, gross margin objectives and pricing practices. Pricing practices taken into consideration include
discounts offered and applicable price lists.
Contract Balances. Deferred revenue represents the Company’s obligation to transfer goods or services to a customer for which the Company has
received consideration (or an amount of consideration is due) from the customer. The Company’s payment terms vary by the type and location of its
customer and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products or services and
customer types, the Company requires payment before the products or services are delivered to the customer.
The amount of revenues recognized during the years ended December 31, 2023 and 2022 that were included in the opening deferred revenue balance
as of January 1, 2023 and 2022, respectively, were $54.1 million and $47.9 million.
Contract assets exist when the Company has satisfied a performance obligation but does not have an unconditional right to consideration (e.g., because
the entity first must satisfy another performance obligation in the contract before it is entitled to invoice the customer).
58
Contract assets and deferred revenue consisted of the following:
(in thousands)
Contract assets
Deferred revenue
As of December 31,
2023
2022
$
$
4,772 $
59,705 $
5,580
80,471
Contract assets and the non-current portion of deferred revenue are reported as components of “Prepaid expenses and other current assets” and “Other
non-current liabilities”, respectively, on the Consolidated Balance Sheets.
Remaining performance obligations represent contracted revenues that had not yet been recognized and future revenue recognition is expected. The
aggregate balance of the Company’s remaining performance obligations as of December 31, 2023, was $653.2 million, of which approximately 51% is
expected to be recognized as revenue over the next 12 months and the remainder thereafter.
Contract costs. The incremental costs of obtaining a contract are capitalized if the costs are expected to be recovered. Costs that are recognized as
assets are amortized on a straight-line basis over the period during which the related goods or services transfer to the customer. Costs incurred to fulfill a
contract are capitalized if they are not covered by other relevant guidance, relate directly to a contract, will be used to satisfy future performance
obligations, and are expected to be recovered.
The balances of net capitalized contract costs included in the Company’s Consolidated Balance Sheets were as follows:
(in thousands)
Balance Sheet Location
Prepaid expenses and other current assets
Other non-current assets
Total net capitalized contract costs
As of December 31,
2023
2022
$
$
1,879 $
1,944
3,823 $
1,766
1,337
3,103
The amortization of the capitalized contract costs for the years ended December 31, 2023, 2022 and 2021 was $2.3 million, $2.2 million and
$2.3 million, respectively.
Refer to Note 16, “Segment Information, Geographic Information and Customer Concentration” for disaggregated revenue information.
Inventories
Inventories are stated at the lower of cost (determined on first-in, first-out basis) or net realizable value. The cost of inventories is comprised of
material and manufacturing labor and overheads. The Company establishes provisions for excess and obsolete inventories to reduce such inventories to
their estimated net realizable value after evaluation of historical sales, future demand and market conditions, expected product life cycles and current
inventory levels. Such provisions are charged to cost of revenue in the Company’s Consolidated Statements of Operations.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets.
Estimated useful lives are generally five years for furniture and fixtures, three years for software and four years for machinery and equipment. Depreciation
for leasehold improvements are computed using the shorter of estimated useful lives or the terms of the related leases. The Company reviews property and
equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For the years
ended December 31, 2023, 2022 and 2021, there were no impairment charges for property and equipment.
Goodwill
Goodwill is assigned to one or more reporting segments on the date of acquisition. We review our goodwill for impairment annually during our fourth
quarter of each fiscal year and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of any
one of our reporting units below its respective carrying amount. The Company monitors changing business conditions as well as industry and economic
factors, among others, for events which could trigger the need for an interim impairment analysis. In performing our goodwill impairment test, we first
perform a qualitative assessment, which requires that we consider events or circumstances including macroeconomic conditions, industry and market
considerations, cost factors, overall financial performance, changes in management or key personnel, changes in strategy, changes in customers, changes in
the composition or carrying amount of a reporting segment’s net assets and changes in our stock price. If, after assessing the totality of events or
circumstances, we determine that it is more likely than not that the fair values of our reporting segments are greater than the carrying amounts, then the
quantitative goodwill impairment test is not performed.
59
If the qualitative assessment indicates that the quantitative analysis should be performed, we then evaluate goodwill for impairment by comparing the
fair value of each of our reporting segments to its carrying value, including the associated goodwill. To determine the fair values, we use the market
approach based on comparable publicly traded companies in similar lines of businesses and the income approach based on estimated discounted future cash
flows. Our cash flow assumptions consider historical and forecasted revenue, operating costs and other relevant factors.
We completed our annual goodwill impairment test in the fourth quarter of fiscal 2023. We determined, after performing a qualitative review of each
reporting segment, that it is more likely than not that the fair value of each of our reporting segments exceeds the respective carrying amounts. Accordingly,
there was no indication of impairment and the quantitative goodwill impairment test was not performed. For the years ended December 31, 2023, 2022 and
2021, there were no impairment charges for goodwill.
Leases
The Company determines if an arrangement is a lease at inception. Operating lease liabilities are recognized at the lease commencement date based on
the present value of lease payments over the lease term. The Company’s lease contracts do not provide an implicit borrowing rate; hence the Company
determined the incremental borrowing rate based on information available at lease commencement to determine the present value of lease liability. Right-
of-use (“ROU”) assets related to our operating lease liabilities are measured at lease inception based on the initial measurement of the lease liability, plus
any prepaid lease payments and less any lease incentives. As of December 31, 2023, the Company has operating leases primarily consisting of facilities
with remaining lease terms of 1 year to 9 years, some of which included the option to extend the term. Optional periods to extend the lease, including by
not exercising a termination option, are included in the lease term when it is reasonably certain that the option will be exercised. The Company amortizes
ROU assets as operating lease expense on a straight-line basis over the lease term. Operating leases are included in “Operating lease right-of-use assets”,
“Operating lease liabilities, current”, and “operating lease liabilities, non-current” in the Consolidated Balance Sheets.
Foreign Currency
The functional currency of the Company’s Israeli and Swiss subsidiaries is the U.S. dollar. All other foreign subsidiaries use the respective local
currency as the functional currency. When the local currency is the functional currency, gains and losses from translation of these foreign currency financial
statements into U.S. dollars are recorded as a separate component of other comprehensive income (loss) in stockholders’ equity.
The Company’s foreign currency exposure is also related to its net position of monetary assets and monetary liabilities held by its foreign subsidiaries
in their nonfunctional currencies. These monetary assets and liabilities are being remeasured into the subsidiaries’ respective functional currencies using
exchange rates as of the balance sheet date. Such remeasurement gains and losses are included in “Other income (expense), net” in the Company’s
Consolidated Statements of Operations. During the years ended December 31, 2023, and 2022, the Company recorded remeasurement loss of
approximately $0.2 million and $0.3 million, respectively. During the year ended December 31, 2021, the Company recorded a remeasurement gain of
$0.6 million.
Derivative Instruments
The Company enters into derivative instruments, primarily foreign currency forward contracts, to minimize the short-term impact of foreign currency
exchange rate fluctuations on certain foreign currency denominated assets and liabilities as well as certain foreign currencies denominated expenses. The
Company does not enter into derivative instruments for trading purposes and these derivatives generally have maturities within three months.
The derivative instruments are recorded at fair value in prepaid expenses and other current assets or accrued and other current liabilities in the
Company’s Consolidated Balance Sheets. The Company enters into derivative instruments to hedge existing foreign currency denominated assets or
liabilities, the gains or losses on these hedges are recorded immediately in earnings to offset the changes in the fair value of the assets or liabilities being
hedged.
Research and Development
Research and development (“R&D”) costs are expensed as incurred and consist primarily of employee salaries and related expenses, contractors and
outside consultants, supplies and materials, equipment depreciation and facilities costs, all associated with the design and development of new products and
enhancements of existing products.
The Company’s French subsidiary participates in the French Crédit d’Impôt Recherche (“CIR”) program which allows companies to monetize eligible
research expenses. The R&D credits receivable from the French government for spending on innovative R&D under the CIR program are recorded as an
offset to R&D expenses. In the years ended December 31, 2023, 2022 and 2021, the Company had R&D credits of $6.2 million, $5.4 million and $5.7
million, respectively.
60
Restructuring and Related Charges
The Company’s restructuring charges consist primarily of employee severance, one-time termination benefits related to the reduction of its workforce,
and other costs. Liabilities for costs associated with a restructuring activity are recognized when the liability is incurred and are measured at fair value.
One-time termination benefits are expensed at the date the entity notifies the employee, unless the employee must provide future service, in which case the
benefits are expensed ratably over the future service period. Termination benefits are calculated based on regional benefit practices and local statutory
requirements.
Warranty
The Company accrues for estimated warranty costs at the time of revenue recognition and records such accrued liabilities as part of cost of revenue.
Management periodically reviews its warranty liability and adjusts the accrued liability 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.
Advertising Expenses
All advertising costs are expensed as incurred and included in “Selling, general and administrative expenses” in the Company’s Consolidated
Statements of Operations. Advertising expense was $0.5 million, $0.7 million and $1.0 million for the years ended December 31, 2023, 2022 and 2021,
respectively.
Stock-based Compensation
The Company measures and recognizes compensation expense for all stock-based compensation awards made to employees, including stock options,
restricted stock units (“RSUs”) and stock purchase rights under the Company’s Employee Stock Purchase Plan (“ESPP”), based upon the grant-date fair
value of those awards. The Company recognizes the impact of forfeitures as they occur.
The fair value of the Company’s stock options and stock purchase rights under ESPP is estimated at grant date using the Black-Scholes option pricing
model. The fair value of the Company’s RSUs and performance-based RSUs (“PRSUs”) is calculated based on the market value of the Company’s stock at
the grant date. The fair value of the Company’s market-based RSUs (“MRSUs”) is estimated using the Monte-Carlo valuation model with market vesting
conditions.
The Company recognizes the stock-based compensation for options, RSUs, MRSUs and stock purchase rights under ESPP on straight-line basis over
the requisite service period, which is generally the vesting period. The Company recognizes the stock-based compensation for PRSUs based on the
probability of achieving performance criteria defined in the PRSU agreements. The Company estimates the number of PRSUs ultimately expected to vest
and recognizes expense using the graded vesting attribution method over the requisite service period. Changes in the estimates related to probability of
achieving certain performance criteria and number of PRSUs expected to vest could significantly affect the related stock-based compensation expense from
one period to the next.
Pension Plan
Under French law, the Company’s subsidiary in France is obligated to provide for a defined benefit plan to its employees upon their retirement from
the Company. The Company’s defined benefit pension plan in France is unfunded.
The Company records its obligations relating to the pension plans based on calculations which include various actuarial assumptions including
employees’ age and period of service with the company; projected mortality rates, mobility rates and increases in salaries; and a discount rate. The
Company reviews its actuarial assumptions on an annual basis as of December 31 (or more frequently if a significant event requiring remeasurement
occurs) and modifies the assumptions based on current rates and trends when it is appropriate to do so. The effect of modifications to those assumptions is
recorded in other comprehensive income (loss) and amortized to net periodic benefit cost over the expected remaining period of service of the covered
employees using the corridor method. The Company believes that the assumptions utilized in recording its obligations under its pension plan are reasonable
based on its experience, market conditions and input from its actuaries.
Income Taxes
The Company accounts for income taxes using the asset and liability method of accounting for income taxes. The Company calculates and provides for
income taxes in each of the tax jurisdictions in which it operates. The deferred tax assets and liabilities are recognized for future tax consequences
attributable to temporary differences between the financial statement carrying values of existing assets and liabilities and their respective tax bases and all
operating losses carried forward, if any. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in
which the applicable temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates
or tax status is recognized in the statements of income in the period in which the change is identified. Deferred tax assets are reduced by a valuation
allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
61
The Company is subject to examination of its income tax returns by various tax authorities on a periodic basis. The Company regularly assesses the
likelihood of adverse outcomes resulting from such examinations to determine the adequacy of its provision for income taxes. The Company has applied
the provisions of the applicable accounting guidance on accounting for uncertainty in income taxes, which requires application of a more-likely-than-not
threshold to the recognition and de-recognition of uncertain tax positions. If the recognition threshold is met, the applicable accounting guidance permits
the Company to recognize a tax benefit measured at the largest amount of tax benefit that, in the Company’s judgment, is more than 50% likely to be
realized upon settlement. It further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in
earnings in the period of such change.
The Company files annual income tax returns in multiple taxing jurisdictions around the world. A number of years may elapse before an uncertain tax
position is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax
position, the Company believes that its reserves for income taxes reflect the most likely outcome. The Company adjusts these reserves and penalties, as
well as the related interest, in light of changing facts and circumstances. Changes in the Company’s assessment of its uncertain tax positions or settlement
of any particular position could materially and adversely impact the Company’s income tax rate, operating results, financial position and cash flows.
Recently Adopted Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2020-06, Accounting for
Convertible Instruments in an Entity’s Own Equity, which simplifies the accounting for convertible instruments and contracts on an entity’s own equity.
The Company adopted ASU 2020-06 effective on January 1, 2022, using the modified retrospective method. Among other changes, ASU 2020-06 removes
from U.S. GAAP the liability and equity separation model for convertible instruments with a cash conversion feature. As a result, the Company no longer
separately presents in equity an embedded conversion feature for such debt. Similarly, the embedded conversion feature is no longer amortized into
consolidated statement of operations as interest expense over the life of the instrument. The cumulative effect of the ASU adoption was as follows:
(in thousands)
Liabilities
Convertible debt, current
Convertible debt, non-current
Mezzanine equity
Convertible debt
Equity
Additional paid-capital
Accumulated deficit
Balance at
December 31, 2021
Adjustments from
Adoption of
ASU 2020-06
Balance at
January 1, 2022
$
36,824 $
98,941
883
2,387,039
(2,087,975)
626 $
14,167
(883)
(32,249)
18,339
37,450
113,108
—
2,354,790
(2,069,618)
The Company was contractually required to settle the principal amount of the 2022 Notes and is contractually required to settle the principal amount of
the 2024 Notes, in cash, and the 2022 Notes were settled in December 2022 upon maturity. Accordingly, the dilutive effect of the Company's 2022 Notes
was, and the diluted effect of the 2024 Notes will be, limited to the conversion premium.
From time to time, new accounting pronouncements are issued by the FASB, or other standards setting bodies, that are adopted by the Company as of
the specified effective date. Unless otherwise discussed, the Company believes the impact of recently issued standards that are not yet effective will not
have a material impact on its consolidated financial position, results of operations and cash flows upon adoption.
Recently Issued Accounting Pronouncement
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting, which expands annual and interim disclosure requirements for reportable
segments, primarily through enhanced disclosures about significant segment expenses. The updated standard is effective for our annual periods beginning
in fiscal 2024 and interim periods beginning in the first quarter of fiscal 2025. Early adoption is permitted. The Company is currently evaluating the impact
the new accounting standard will have on its segment reporting disclosures in the notes to the consolidated financial statements.
62
In December 2023, the FASB issued ASU No. 2023-09, Improvements to Income Tax Disclosures. This ASU requires disaggregated information about
a reporting entity’s effective tax rate reconciliation as well as additional information on income taxes paid. The ASU is effective on a prospective basis for
annual periods beginning after December 15, 2024. Early adoption is also permitted for annual financial statements that have not yet been issued or made
available for issuance. This ASU will result in the required additional disclosures being included in our consolidated financial statements, once adopted.
NOTE 3: INVESTMENTS IN EQUITY SECURITIES
In May 2022, the Company sold its investment in Encoding.com, Inc. for total consideration of up to approximately $10.7 million. The Company
received $7.8 million in May 2022 and recognized a gain of $4.2 million. The balance of the consideration of up to approximately $2.9 million is subject to
certain conditions and indemnity obligations, and will be recorded upon receipt by the Company.
NOTE 4. LEASES
The components of lease expense are as follows:
(in thousands)
Operating lease cost
Variable lease cost
Total lease cost
Supplemental cash flow information related to leases are as follows:
(in thousands)
Cash paid for amounts included in the measurement of operating lease liabilities
Right-of-use assets obtained in exchange for operating lease obligations
Other information related to leases are as follows:
Operating leases
Weighted-average remaining lease term (years)
Weighted-average discount rate
$
$
$
$
Year Ended December 31,
2023
2022
7,116 $
1,813
8,929 $
7,636
1,780
9,416
Year Ended December 31,
2023
2022
6,970 $
— $
7,528
862
Year Ended December 31,
2023
2022
5.5
6.4 %
6.2
6.3 %
Future minimum lease payments under non-cancelable operating leases as of December 31, 2023 are as follows (in thousands):
Years ending December 31,
2024
2025
2026
2027
2028
Thereafter
Total future minimum lease payments
Less: imputed interest
Total lease liability balance
$
$
$
7,121
5,940
4,921
3,805
3,139
5,747
30,673
(4,915)
25,758
63
NOTE 5: DERIVATIVES AND HEDGING ACTIVITIES
Derivatives Not Designated as Hedging Instruments (Balance Sheet Hedges)
The Company transacts business in various foreign currencies and has established a program that primarily utilizes foreign currency forward contracts
to offset the risks associated with the effects of certain foreign currency exposures. Under this program, the Company’s strategy is to enter into foreign
currency forward contracts so that increases or decreases in its foreign currency exposures are offset by gains or losses on the foreign currency forward
contracts in order to mitigate the risks and volatility associated with its foreign currency transactions. The Company may suspend this program from time
to time. The Company’s foreign currency exposures typically arise from foreign currency exchange rate fluctuation on cash and certain trade and
intercompany receivables and payables. The Company’s foreign currency forward contracts are generally short-term in duration.
The Company does not designate these forward contracts as hedging instruments pursuant to ASC 815, Derivatives and Hedging. Accordingly,
changes in the fair value of these foreign currency forward contracts are recognized in “Other expense, net” in the Consolidated Statements of Operations
and are largely offset by the changes in the fair value of the assets or liabilities being hedged. The balance sheet classification for the fair value of these
forward contracts is other current assets for forward contracts in an unrealized gain position and other current liabilities for forward contracts in an
unrealized loss position. Foreign currency forward contracts’ losses recognized during the year ended December 31, 2023 were $0.2 million. Foreign
currency forward contracts’ gains recognized during the years ended December 31, 2022 and 2021, were $0.3 million and $0.7 million, respectively.
The U.S. dollar equivalents of all outstanding notional amounts of foreign currency forward contracts were as follows:
(in thousands)
Purchase
As of December 31,
2023
2022
$
54,169 $
7,971
While the Company’s arrangements with its counterparties allow for net settlement, which is designed to reduce credit risk by permitting net settlement
with the same counterparty, the Company recognizes all derivative instruments in the Consolidated Balance Sheets on a gross basis. As of December 31,
2023, gross fair values of derivative assets and liabilities, recorded as components of “Prepaid expenses and other current assets” and “Other current
liabilities” were $0.2 million and $0.4 million, respectively, in the Consolidated Balance Sheets. Gross fair values of derivative assets and liabilities as of
December 31, 2022 were immaterial.
In connection with foreign currency derivatives entered in Israel, the Company’s subsidiaries in Israel are required to maintain a compensating balance
with their bank at the end of each month. The compensating balance arrangements do not legally restrict the use of cash. As of December 31, 2023 and
2022, the total compensating balance maintained was $1.0 million.
NOTE 6: 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 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. 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 follows:
•
•
•
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.
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, accounts receivable, accounts payable and accrued liabilities,
approximate fair value due to their short maturities.
64
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)
Cash equivalents
Money market funds
Prepaid and other current assets
Derivative assets
Total assets
Accrued and other current liabilities
Derivative liabilities
Total liabilities
$
$
$
$
$
December 31, 2023
December 31, 2022
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
23,683 $
— $
— $
23,683 $
— $
— $
— $
— $
23,683 $
— $
— $
194 $
194 $
384 $
384 $
— $
— $
194 $
23,877 $
— $
— $
384 $
384 $
— $
— $
— $
— $
— $
— $
33 $
33 $
— $
— $
— $
— $
—
—
—
33
33
The Company's financial instruments not measured at fair value on a recurring basis were as follows:
(in thousands)
2024 Notes
French and other loans
December 31, 2023
Carrying
Value
Level 1
Fair Value
Level 2
Level 3
Carrying
Value
December 31, 2022
Level 1
Fair Value
Level 2
Level 3
$
$
114,880 $
15,413 $
— $
— $
177,405 $
15,413 $
— $
— $
113,981 $
11,161 $
— $
— $
181,139 $
11,161 $
—
—
The fair value of the Company’s Notes is influenced by interest rates, the price of the Company’s common stock and stock market volatility. The
difference between the carrying value and the fair value is primarily due to the spread between the conversion price and the market value of the shares
underlying the conversion as of each respective balance sheet date. The Company’s French and other loans are classified within Level 2 because these
borrowings are not actively traded and the majority of them have a variable interest rate structure based upon market rates currently available to the
Company for debt with similar terms and maturities; therefore, the carrying value of these debts approximate its fair value. Refer to Note 11, “Convertible
Notes and Other Debts,” for additional information.
During the years ended December 31, 2023, 2022, and 2021, there were no nonrecurring fair value measurements of assets and liabilities subsequent to
initial recognition.
NOTE 7: GOODWILL
The changes in the Company’s carrying amount of goodwill are as follows:
(in thousands)
Balance as of December 31, 2021
Foreign currency translation adjustment
Balance as of December 31, 2022
Foreign currency translation adjustment
Balance as of December 31, 2023
NOTE 8: ACCOUNTS RECEIVABLE
Accounts receivable, net of allowances, consisted of the following:
(in thousands)
Accounts receivable
Less: allowance for expected credit losses and sales returns
Total
Video
Broadband
Total
$
$
$
179,398 $
(2,409)
176,989 $
1,380
178,369 $
60,815 $
(65)
60,750 $
31
60,781 $
240,213
(2,474)
237,739
1,411
239,150
As of December 31,
2023
2022
$
$
144,731 $
(3,200)
141,531 $
110,576
(2,149)
108,427
65
Trade accounts receivable are recorded at invoiced amounts and do not bear interest. The Company generally does not require collateral and performs
ongoing credit evaluations of its customers and provides for expected losses. The Company maintains an allowance for expected credit losses based upon
the expected collectability of its accounts receivable. The expectation of collectability is based on the Company’s review of credit profiles of customers,
contractual terms and conditions, current economic trends and historical payment experience. The Company offers return rights which are specifically
identified and accrued for as sales returns at the end of the period.
The following table is a summary of activities in allowances for expected credit losses and sales returns:
(in thousands)
Year ended December 31,
2023
2022
2021
Balance at
Beginning of
Period
Charges to
Revenue
Charges to
Expense
Deductions
from Reserves
Balance at End
of Period
$
$
$
2,149 $
2,853 $
2,068 $
1,224 $
1,118 $
2,609 $
1,554 $
836 $
1,533 $
(1,727) $
(2,658) $
(3,357) $
3,200
2,149
2,853
On September 29, 2023, the Company entered into a Master Receivable Purchase Agreement with JPMorgan Chase Bank, N.A. (“JPM”), as purchaser.
The agreement allows the Company, from time to time, to sell certain eligible billed receivables in an aggregate outstanding amount of up to $30 million to
JPM. The purchase price of the receivables is equal to the net invoice amount less a financing charge. The Company accounts for the transfers as sales
under ASC 860, Transfers and Servicing, derecognize the receivables from its consolidated balance sheets at the date of the sale, and includes the cash
received from JPM as part of the cash flows from operating activities on its Consolidated Statement of Operations. During the year ended December 31,
2023, the Company did not sell any of its billed receivables.
NOTE 9: CERTAIN BALANCE SHEET COMPONENTS
Inventories:
(in thousands)
Finished goods
Raw materials
Work-in-process
Service-related spares
Total
Prepaid expenses and other current assets:
(in thousands)
Prepaid expenses
(1)
Contract assets
Other current assets
Total
December 31,
2023
2022
43,987 $
27,806
5,056
7,133
83,982 $
65,308
46,081
3,251
6,309
120,949
December 31,
2023
2022
3,789 $
4,772
12,389
20,950 $
5,558
5,583
15,196
26,337
$
$
$
$
(1) Contract assets reflect the satisfied performance obligations for which the Company does not yet have an unconditional right to consideration.
Property and equipment, net:
(in thousands)
Machinery and equipment
Capitalized software
Leasehold improvements
Furniture and fixtures
Construction-in-progress
Property and equipment, gross
Less: accumulated depreciation and amortization
Total
December 31,
2023
2022
$
$
74,659 $
27,129
40,931
2,547
1,789
147,055
(110,372)
36,683 $
75,589
30,588
39,199
2,739
2,691
150,806
(110,992)
39,814
66
Other current liabilities:
(in thousands)
Accrued employee compensation and related expenses
Other
Total
NOTE 10: RESTRUCTURING AND RELATED CHARGES
December 31,
2023
2022
$
$
22,779 $
38,245
61,024 $
29,675
37,049
66,724
The Company has implemented several restructuring plans in the past few years. The goal of these plans was to bring operational expenses to
appropriate levels relative to the Company’s net revenue, while simultaneously implementing extensive company-wide expense control programs. The
restructuring plans have primarily been comprised of severance payments and termination benefits related to headcount reductions. The Company accounts
for its restructuring plans under the authoritative guidance for exit or disposal activities.
The following table summarizes the activities related to the Company’s restructuring plans accrual, reported as components of “Other current
liabilities” on the Consolidated Balance Sheets:
(in thousands)
Balance at December 31, 2022
Charges for current period
Cash payments
Other
Balance at December 31, 2023
Severance and
Benefits
$
$
1,044
1,496
(2,256)
29
313
For the year ended December 31, 2023, $0.7 million and $0.8 million of restructuring and related charges are included in “Cost of revenue” and
“Operating expenses - Restructuring and related charges”, respectively, in the Consolidated Statements of Operations.
NOTE 11: CONVERTIBLE NOTES AND OTHER DEBTS
4.375% Convertible Senior Notes due 2022 (the “2022 Notes”)
In June 2020, the Company issued the 2022 Notes with an aggregate principal amount of $37.7 million in a non-cash exchange for its 2020 Notes with
an equal principal amount pursuant to an indenture, dated June 2, 2020 (the “2022 Notes Indenture”), by and between the Company and U.S. Bank Trust
Company, National Association (as successor in interest to U.S. Bank National Association), as trustee. The 2022 Notes bore interest at a rate of 4.375%
per year, payable in cash on June 1 and December 1 of each year. The 2022 Notes matured on December 1, 2022.
The 2022 Notes were initially convertible into cash, shares of the Company’s common stock, or a combination thereof, at the Company’s election, at
an initial conversion rate of 173.9978 shares of the Company’s common stock per $1,000 principal amount of the 2022 Notes (which is equivalent to an
initial conversion price of approximately $5.75 per share). Pursuant to the supplemental indenture entered into by the Company and the trustee during the
fourth quarter of fiscal 2021, the Company made an irrevocable election to settle the principal amounts of the 2022 Notes solely with cash and may pay or
deliver, as the case may be, any conversion value greater than the principal amount in cash, shares of the Company’s common stock or a combination
thereof, at the Company’s election. The conversion rate, and thus the effective conversion price, was adjustable under certain circumstances, including in
connection with conversions made following certain fundamental changes and under other circumstances as set forth in the 2022 Notes Indenture.
As discussed in the Note 2. “Recent Accounting Pronouncements”, effective January 1, 2022, the Company adopted ASU 2020-06 using the modified
retrospective method and, as a result, accounted for the Convertible debt as a single liability measured at amortized cost.
Prior to maturity date, the entire principal balance of $37.7 million was converted by holders of the 2022 Notes. In accordance with provisions of the
2022 Notes Indenture and the aforementioned supplemental indenture, conversions were settled in a combination of cash and the Company’s common
Stock. The principal amount of $37.7 million that matured on December 1, 2022 was paid in cash. The conversion value greater than the principal amount
was delivered in 3.9 million shares of the Company’s common stock.
67
The following table presents interest expense recognized for the 2022 Notes:
(in thousands)
Contractual interest expense
Amortization of debt discount
Amortization of debt issuance costs
Total interest expense recognized
Year Ended December 31,
2023
2022
2021
$
$
— $
—
—
— $
1,511 $
—
257
1,768 $
1,648
685
214
2,547
2.00% Convertible Senior Notes due 2024 (the “2024 Notes”)
In September 2019, the Company issued $115.5 million of the 2024 Notes pursuant to an indenture (the “2024 Notes Indenture”), dated September 13,
2019, by and between the Company and U.S. Bank Trust Company, National Association (as successor in interest to U.S. Bank National Association), as
trustee. The 2024 Notes bear interest at a rate of 2.00% per year, payable semi-annually on March 1 and September 1 of each year, beginning March 1,
2020. The 2024 Notes will mature on September 1, 2024, unless earlier repurchased by the Company, redeemed by the Company or converted pursuant to
their terms.
The 2024 Notes were initially convertible into cash, shares of the Company’s common stock, or a combination thereof, at the Company’s election, at
an initial conversion rate of 115.5001 shares of the Company’s common stock per $1,000 principal amount of the 2024 Notes (which is equivalent to an
initial conversion price of approximately $8.66 per share). Pursuant to the supplemental indenture entered into by the Company and the trustee during the
fourth quarter of the fiscal year ended December 31, 2021, the Company made an irrevocable election to settle the principal amounts of the 2024 Notes
solely with cash and may pay or deliver, as the case may be, any conversion value greater than the principal amount in cash, shares of the Company’s
common stock or a combination thereof, at the Company’s election. The conversion rate, and thus the effective conversion price, may be adjusted under
certain circumstances, including in connection with conversions made following certain fundamental changes or a notice of redemption and under other
circumstances, in each case, as set forth in the 2024 Notes Indenture.
The 2024 Notes will be convertible at certain times and upon the occurrence of certain events in the future, in each case, specified in the 2024 Notes
Indenture. Further, on or after June 1, 2024, until the close of business on the scheduled trading day immediately preceding the maturity date, holders of the
2024 Notes may convert all or a portion of their 2024 Notes regardless of these conditions.
The 2024 Notes are recorded at face value less unamortized debt issuance costs. Amortization costs are reported as a component of interest expense
and are computed using the effective interest method. As the 2024 Notes mature within the next twelve months, they are classified as “Convertible debt,
current” on the Consolidated Balance Sheet as of December 31, 2023.
The following table presents the components of the 2024 Notes:
(in thousands, except for years and percentages)
Liability:
Principal amount
Less: Debt issuance costs, net of amortization
Carrying amount
The following table presents interest expense recognized for the 2024 Notes:
(in thousands)
Contractual interest expense
Amortization of debt discount
Amortization of debt issuance costs
Total interest expense recognized
As of December 31,
2023
2022
$
$
115,500 $
(620)
114,880 $
115,500
(1,519)
113,981
Year Ended December 31,
2023
2022
2021
$
$
2,312 $
—
898
3,210 $
2,312 $
—
874
3,186 $
2,312
4,718
641
7,671
68
Other Debts
The Company has a variety of debt and credit facilities primarily in France to satisfy the financing requirements of the operations of its French
subsidiary. These arrangements are summarized in the table below:
(in thousands)
Financing from French government agencies related to various government incentive programs
Relief loans
(2)
(1)
Total debt obligations
Less: current portion
Long-term portion
December 31,
2023
2022
$
$
11,268 $
4,145
15,413
(4,918)
10,495 $
(1) These loans bear variable interest rate at EURIBOR 1 month plus 1.9% and mature between 2024 through 2026.
(2) Refer to the below section “Relief Loans” for the description of these loans.
The table below presents the future minimum repayments of other debts as of December 31, 2023 (in thousands):
Year ending December 31,
2024
2025
2026
Total
Relief Loans
$
$
10,580
5,337
15,917
(4,756)
11,161
4,918
5,238
5,257
15,413
In June 2020, Harmonic France was granted a loan from Société Générale S.A. (the “SG Loan”) in the aggregate amount of 5 million Euros, pursuant
to a state guarantee program introduced in March 2020 to provide relief to companies from the financial consequences of the COVID-19 pandemic. The SG
Loan was initially maturing in June 2021. During 2021, SG Loan maturity was extended to June 2026. The SG loan bears an effective interest rate of
0.51% per annum payable annually and may be repaid at any time prior to maturity with no repayment penalties. There are no restrictions on the use of
funds from the SG Loan. The purpose of the funds from the SG Loan is to allow the preservation of activity and employment in France. As of
December 31, 2023, there was $4.1 million outstanding under the loan, of which $1.4 million was recorded in “Other debts, current” and $2.7 million was
recorded in “Other debts, non-current” in the Consolidated Balance Sheets.
Line of Credit
On December 21, 2023, the Company entered into a five-year Credit Agreement (the “Credit Agreement”), by and among the Company, certain
subsidiaries of the Company from time to time party thereto, the lenders from time to time party thereto, and Citibank, N.A., as administrative agent for the
lenders. The Credit Agreement provides for a secured revolving loan facility in an aggregate principal amount of up to $120.0 million (the “Revolving
Facility”), with a $10.0 million sublimit for the issuance of letters of credit, and a secured delayed term loan facility in an aggregate principal amount of up
to $40.0 million (the “Term Facility”). The Credit Agreement refinances and replaces the Company’s prior credit agreement, dated as of December 19,
2019, as amended, with JPMorgan Chase Bank, N.A., as lender.
The proceeds of the loans under the Revolving Facility may be used for general corporate purposes. To the extent drawn, the proceeds of the loans
under the Term Facility must be used to repurchase, redeem, acquire or otherwise settle the 2024 Notes. The Company may borrow term loans under the
Term Facility in up to three drawings through September 1, 2024, on which date any undrawn commitments under the Term Facility expire. The Revolving
Facility and Term Facility mature on December 21, 2028.
Loans under the Revolving Facility and Term Facility will bear interest, at the Company’s election, at a floating rate per annum equal to either (a) a
base rate, defined as the greatest of (i) the prime rate then in effect, (ii) the federal funds rate then in effect, plus 0.50%, or (iii) an adjusted term SOFR rate
determined on the basis of a one-month interest period, plus 1.00%, in each case, plus a margin of between 1.00% to 1.75% (“Base Rate Loans”); and (b)
an adjusted term SOFR rate (based on one, three or six month interest periods), plus a margin of between 2.00% to 2.75% (“Adjusted Term SOFR Loans”).
The applicable margin in each case is determined based on the Company’s consolidated net leverage ratio. Interest is payable quarterly in arrears, in the
case of Base Rate Loans, and at the end of the applicable interest period, but at least every three months, in the case of Adjusted Term SOFR Loans. The
Company incurred $1.3 million in origination fee related to the Credit Agreement and this origination fee is being amortized over the term of the Credit
Agreement. The Company is also obligated to pay other closing fees, commitment fees and letter of credit fees customary for a credit agreement of this size
and type.
69
The obligations under the Credit Agreement are required to be guaranteed by certain of the Company’s material subsidiaries and secured by
substantially all of the assets of the Company and such subsidiary guarantors. The Credit Agreement contains customary affirmative and negative
covenants, including covenants limiting the ability of the Company and its subsidiaries to, among other things, grant liens, incur debt, make acquisitions
and other investments, undergo certain fundamental changes, dispose of assets, make certain restricted payments, enter into transactions with affiliates, and
enter into burdensome agreements, in each case, subject to limitations and exceptions set forth in the Credit Agreement. The Company is also required to
maintain compliance with a maximum consolidated net leverage ratio and a minimum fixed charge coverage ratio, in each case, determined in accordance
with the terms of the Credit Agreement. As of December 31, 2023, the Company was in compliance with the covenants under the Credit Agreement.
As of December 31, 2023, there were no borrowings under the Credit Agreement outstanding and approximately $0.2 million of letters of credit
outstanding under the Credit Agreement.
NOTE 12: EMPLOYEE BENEFIT PLANS
Equity Award Plans
1995 Stock Plan
The 1995 Stock Plan provides for the grant of incentive stock options, non-statutory stock options and restricted stock units (“RSUs”). Incentive stock
options may be granted only to employees. All other awards may be granted to employees and non-employees. Under the terms of the 1995 Stock Plan, no
incentive stock option or non-statutory stock option may be granted in the ordinary course of business with a per share exercise price that is less than 100%
of the fair value of the Company’s common stock on the date of grant. RSUs have no exercise price. Both options and RSUs vest over a period of time as
determined by the Company’s Board of Directors (the “Board”), generally two to four years, and options expire seven years from the date of grant. Some of
the RSUs granted by the Company have performance-based vesting terms, where vesting is dependent on achievement of certain financial and non-
financial operating goals of the Company (performance-based RSUs, or “PRSUs”), or where vesting is dependent on performance of the Company’s total
shareholder return (“TSR”) relative to the TSR of the NASDAQ Telecommunication Index (market-based RSUs, or “MRSUs”). The fair value of PRSUs is
estimated on the date of grant based on the market value of our common stock. If the performance goals are not met as of the end of the performance
period, no compensation expense is recognized and any previously recognized compensation expense is reversed. The expected cost is based on the portion
of the awards that is probable to vest and is reflected over the service period. The fair value of MRSUs subject to targeted levels of relative TSR is
estimated on the date of grant using a Monte Carlo simulation model. Compensation expense is recognized based upon the assumption of 100%
achievement of the TSR goal and will not be reversed even if the threshold level of TSR is never achieved and is reflected over the service period. During
the fiscal year 2023, the Company granted 268,704 and 236,749 shares of PRSUs and MRSUs, respectively.
As of December 31, 2023, an aggregate of 8,537,211 shares of common stock were reserved for issuance under the 1995 Stock Plan, of which
5,481,584 shares remained available for future grants.
2002 Director Plan
The 2002 Director Plan provides for the grant of non-statutory stock options and RSUs to non-employee directors of the Company. Under the terms of
the 2002 Director Plan, no non-statutory stock option may be granted with a per share exercise price that is less than 100% of the fair value of the
Company’s common stock on the date of grant. RSUs have no exercise price. Both options and RSUs vest over a period of time as determined by the
Board, generally one year for RSUs and three years for options, and options expire seven years from the date of grant. As of December 31, 2023, an
aggregate of 637,671 shares of common stock were reserved for issuance under the 2002 Director Plan, of which 451,077 shares remained available for
future grants.
70
Employee Stock Purchase Plan
The 2002 Employee Stock Purchase Plan (“ESPP”) provides for the issuance of share purchase rights to employees of the Company. The ESPP is
intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. The ESPP enables employees to purchase
shares at 85% of the fair market value of the Common Stock at the beginning or end of the offering period, whichever is lower. Offering periods generally
begin on the first trading day on or after January 1 and July 1 of each year. Employees may participate through payroll deductions of 1% to 10% of their
earnings. 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. The Company’s stockholders approved an amendment to the
ESPP Plan at the 2023 Annual Meeting to increase the number of shares of common stock reserved for issuance thereunder by 650,000 shares. As of
December 31, 2023, 633,932 shares were reserved for future purchases by eligible employees. Under the ESPP, 733,030, 817,243 and 1,024,244 shares
were issued during fiscal 2023, 2022 and 2021, respectively, representing $6.6 million, $5.9 million and $5.1 million in contributions.
Stock Options
All stock options were fully vested and exercised as of December 31, 2022. No stock options were granted in 2023.
Restricted Stock Units
(in thousands, except per share amounts)
Balance at December 31, 2022
Granted
Vested
Forfeited
Balance at December 31, 2023
Number
of
Shares
Weighted Average
Grant-Date Fair Value
Per Share
3,499 $
2,539
(2,516)
(280)
3,242 $
8.93
13.65
8.96
9.40
12.42
The fair value of RSUs vested during the years ended December 31, 2023, 2022 and 2021 was $22.5 million, $22.4 million and $18.3 million,
respectively.
Share-based Compensation Cost
The following table sets forth the detailed allocation of the share-based compensation expense which was included in the Company’s Consolidated
Statements of Operations:
(in thousands)
Share-based compensation expense included in:
Cost of revenue
Research and development expense
Selling, general and administrative expense
Total
Share-based compensation expense by type of award:
RSUs
PRSUs
MRSUs
Employee stock purchase rights under ESPP
Total
Year Ended December 31,
2023
2022
2021
$
$
$
$
2,348 $
7,889
17,092
27,329 $
19,863 $
3,398
1,705
2,363
27,329 $
2,233 $
7,519
15,460
25,212 $
17,786 $
3,865
1,558
2,003
25,212 $
2,345
7,164
14,547
24,056
14,573
6,231
1,304
1,948
24,056
As of December 31, 2023, total unrecognized share-based compensation cost related to unvested RSUs was $26.3 million and is expected to be
recognized over a weighted-average period of approximately 1.6 years.
71
French Pension Plan
Under French law, the Company’s subsidiaries in France are obligated to make certain payments to their employees upon their retirement from the
Company. These payments are based on the retiring employee’s salary for a number of months that varies according to the employee’s period of service and
position. Salary used in the calculation is the employee’s average monthly salary for the twelve months prior to retirement. The payments are made in one
lump-sum at the time of retirement. The French pension plan is unfunded and there are no contributions to the plan required by related laws or funding
regulations. No required contributions are expected in fiscal 2024, but the Company, at its discretion, may make contributions to the defined benefit plan.
The Company’s defined benefit pension obligations are measured annually as of December 31. The present value of these lump-sum payments is
determined on an actuarial basis and the actuarial valuation considers the employees’ age and period of service with the Company, projected mortality
rates, mobility rates, increases in salaries and a discount rate.
The Company’s pension obligations as of December 31, 2023 and 2022, and the changes to the Company’s pension obligations for each of those years,
were as follows:
(in thousands)
Projected benefit obligation:
Balance at January 1
Service cost
Interest cost
Actuarial gains
Benefits paid
Foreign currency translation adjustment
Balance at December 31
Presented on the Consolidated Balance Sheets as:
Current portion (included in “Accrued and other current liabilities”)
Long-term portion (included in “Other non-current liabilities”)
The table below presents the components of net periodic benefit costs:
(in thousands)
Service cost
Interest cost
Net periodic benefit cost included in result of operations
The following assumptions were used in determining the Company’s pension obligation:
Discount rate
Mobility rate
Salary progression rate
2023
2022
$
$
$
$
5,283 $
217
169
(25)
(275)
227
5,596 $
33 $
5,563 $
Year Ended December 31,
2023
2022
2021
$
$
217 $
169
386 $
259 $
50
309 $
As of December 31,
2023
2022
3.8 %
6.2 %
3.0 %
6,003
259
50
(626)
(107)
(296)
5,283
242
5,041
272
20
292
3.3 %
6.6 %
3.0 %
The Company evaluates the discount rate assumption annually. The discount rate is determined using the average yields on high-quality fixed-income
securities that have maturities consistent with the timing of benefit payments.
The Company also evaluates other assumptions related to demographic factors, such as retirement age, mortality rates and turnover periodically,
updating them to reflect experience and expectations for the future. The mortality assumption related to the Company’s defined benefit pension plan used
the most current mortality tables published by the French National Institute of Statistics and Economic Studies.
72
As of December 31, 2023, future benefits expected to be paid in each of the next five years, and in the aggregate for the five-year period thereafter are
as follows (in thousands):
Year ending December 31,
2024
2025
2026
2027
2028
2029 – 2033
Total
Valuation Assumptions
$
$
33
154
180
399
797
4,210
5,773
The Company estimates the fair value of 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 purchase right granted under the ESPP using the following weighted average assumptions:
Expected term (in years)
Volatility
Risk-free interest rate
Expected dividends
Year Ended December 31,
2023
2022
2021
0.50
46 %
5.2 %
0.0 %
0.50
47 %
1.4 %
0.0 %
0.50
45 %
0.1 %
0.0 %
The expected term of the stock purchase right under 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 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 Company has not paid and does not plan to pay any cash dividends in the foreseeable future.
The estimated weighted-average fair value per share of stock purchase rights under the ESPP, granted for the years ended December 31, 2023, 2022
and 2021 was $4.23, $2.91 and $2.24, respectively.
NOTE 13: STOCKHOLDERS’ EQUITY
Share Repurchase Program
In February 2022, the Board of Directors authorized the Company to repurchase up to $100 million of the Company’s outstanding shares of common
stock through February 2025. The Company is authorized to repurchase, from time-to-time, shares of its outstanding common stock through open market
purchases and 10b5-1 trading plans, in accordance with applicable rules and regulations, at such time and such prices as management may decide. The
program does not obligate the Company to repurchase any specific number of shares and may be discontinued at any time. The actual timing and amount of
repurchases are subject to business and market conditions, corporate and regulatory requirements, stock price, acquisition opportunities and other factors.
There were no repurchase activities authorized during fiscal year 2023. As of December 31, 2023, approximately $94.9 million of the share repurchase
authorization remained available for repurchases under this program.
NOTE 14: INCOME TAXES
Income before income tax:
(in thousands)
Domestic
Foreign
Income before income taxes
Year Ended December 31,
2023
2022
2021
$
$
(1,734) $
20,875
19,141 $
24,680 $
19,805
44,485 $
(5,688)
14,559
8,871
73
Provision for (benefit from) income taxes:
(in thousands)
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
Total provision for (benefit from) income taxes
Year Ended December 31,
2023
2022
2021
$
$
19,441 $
4,582
3,980
(81,632)
(12,416)
1,192
(64,853) $
4,443 $
3,236
3,730
—
—
4,894
16,303 $
4
85
2,469
—
—
(6,941)
(4,383)
The difference between the tax provision at the statutory federal income tax rate and the provision for (benefit from) income tax as a percentage of
income (loss) before income taxes (effective tax rate) for each period was as follows:
Statutory U.S. federal income tax rate
Increase (reduction) in rate resulting from:
State Taxes
Differential in rates on foreign earnings
Change in valuation allowance
Change in liabilities for uncertain tax positions
Non-deductible stock-based compensation
Permanent differences
Adjustments related to tax positions taken during prior years
Research and development credits
Other
Effective tax rate
Year Ended December 31,
2023
2022
2021
21 %
(4)%
(13)%
(350)%
— %
6 %
(5)%
12 %
(6)%
— %
(339)%
21 %
7 %
1 %
15 %
— %
4 %
(1)%
(8)%
(2)%
— %
37 %
21 %
— %
42 %
(113)%
(2)%
11 %
— %
(3)%
(10)%
3 %
(49)%
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 differs from the U.S. federal statutory rate primarily due to geographical mix of income and losses, valuation allowance release on U.S.
federal and certain state deferred tax assets, and income taxes on earnings from operations in foreign tax jurisdictions. The Company’s effective income tax
rate may be affected by changes in its interpretations of tax laws and tax agreements in any given jurisdiction, 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, as well as one-time discrete items. During
fiscal 2023, the Company recorded a one-time benefit of $67.7 million due to the release of the valuation allowance on deferred tax assets in U.S. Federal
and state jurisdictions due to its improved earnings in recent years and projected earnings.
74
The components of deferred taxes are as follows:
(in thousands)
Deferred tax assets:
Reserves and accruals
Net operating loss carryforwards
Research and development credit carryforwards
Deferred stock-based compensation
Intangibles
Operating lease liabilities
Capitalized research and development expenses
Other
Gross deferred tax assets
Valuation allowance
Gross deferred tax assets after valuation allowance
Deferred tax liabilities:
Depreciation
Operating lease right-of-use assets
Gross deferred tax liabilities
Net deferred tax assets
As of December 31,
2023
2022
24,908 $
14,376
30,117
1,863
5,651
6,216
64,075
3,110
150,316
(37,084)
113,232
(3,506)
(5,019)
(8,525)
104,707 $
27,376
16,032
28,952
1,376
6,384
7,423
36,210
1,139
124,892
(101,020)
23,872
(5,971)
(6,125)
(12,096)
11,776
$
$
The following table summarizes the activities related to the Company’s valuation allowance:
(in thousands)
Balance at beginning of period
Additions
Deductions
Balance at end of period
Year Ended December 31,
2023
2022
2021
$
$
101,020 $
477
(64,413)
37,084 $
90,247 $
10,773
—
101,020 $
99,585
310
(9,648)
90,247
Management regularly assesses the ability to realize deferred tax assets recorded based upon the weight of available evidence, including such factors as
recent earnings history and expected future taxable income on a jurisdiction-by-jurisdiction basis. In 2023, the Company determined the deferred tax assets
in the U.S federal and certain state jurisdictions would more-likely-than-not be realizable and released the valuation allowance against those assets
accordingly. In the event the Company changes its determination as to the amount of realizable deferred tax assets, the Company will adjust its valuation
allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.
As of December 31, 2023, the Company had $89.3 million and $28.7 million of foreign and U.S. state net operating loss (“NOL”) carryforwards,
respectively. The Company has now fully utilized their available U.S. federal NOLs. Certain foreign NOLs expire beginning in 2026, if not utilized, while
the majority of the foreign NOLs carryforward indefinitely. Certain U.S. states NOL carryforward expires at various dates beginning in 2027, if not
utilized.
As of December 31, 2023, the Company had U.S. federal and California state tax credit carryforwards of $1.7 million and $37.0 million, respectively.
If not utilized, the U.S. federal tax credit carryforwards will begin to expire in 2031, while the California tax credit carryforward will not expire.
In the event the Company experiences an ownership change within the meaning of Section 382 of the Internal Revenue Code (“IRC”), the Company’s
ability to utilize net operating losses, tax credits and other tax attributes may be limited.
The Company has not provided U.S. state income taxes and foreign withholding taxes, on approximately $58.8 million of cumulative earnings for
certain non-U.S. subsidiaries, because such earnings are intended to be indefinitely reinvested. Determination of the amount of unrecognized deferred tax
liability for temporary differences related to investments in these non-U.S. subsidiaries that are essentially permanently in duration is not practicable.
75
The Company applies the provisions of the applicable accounting guidance regarding accounting for uncertainty in income taxes, which require
application of a more-likely-than-not threshold to the recognition and derecognition of uncertain tax positions. If the recognition threshold is met, the
applicable accounting guidance permits the recognition of a tax benefit measured at the largest amount of such tax benefit that, in the Company’s judgment,
is more than fifty percent likely to be realized upon settlement. It further requires that a change in judgment related to the expected ultimate resolution of
uncertain tax positions to be recognized in earnings in the period in which such determination is made. The Company will continue to review its tax
positions and provide for, or reverse, unrecognized tax benefits as issues arise. As of December 31, 2023, the Company had $12.5 million of unrecognized
future tax benefits. Of these, $5.8 million would favorably impact the effective tax rate in future periods if recognized, and $6.7 million will have no or
minimal impact on the effective tax rate in future periods if recognized due to a valuation allowance on such unrecognized tax benefits.
The following table summarizes the activities related to the Company’s gross unrecognized tax benefits:
(in millions)
Balance at beginning of period
Increase in balance related to tax positions taken during current year
Decrease in balance as a result of a lapse of the applicable statutes of limitations
Increase in balance related to tax positions taken during prior years
Decrease in balance related to tax positions taken during prior years
Balance at end of period
Year Ended December 31,
2023
2022
2021
11.1 $
0.4
—
1.0
—
12.5 $
13.8 $
0.3
—
—
(3.0)
11.1 $
17.6
0.3
(0.2)
—
(3.9)
13.8
$
$
The Company recognizes interest and penalties related to unrecognized tax positions in income tax expense on the Consolidated Statements of
Operations. The net interest and penalties charges recorded for the years ended December 31, 2021 through 2023, were not material.
The 2019 through 2022 tax years generally remain subject to examination by U.S. federal and most state tax authorities.Net operating losses generated
on a tax return basis by the Company for the 2015 to 2020 tax years and research and development credits for 2011 to 2022 tax years remain open to
examination. In addition, the Company remains subject to income tax examination for several other jurisdictions, including in Switzerland for years after
2018, Israel for years after 2019, and France for years after 2016.
76
NOTE 15: NET INCOME PER SHARE
Basic earnings per share is computed by dividing net income for the period by the weighted average number of common shares outstanding during the
period. Diluted earnings per shares is calculated by dividing net income by the weighted average number of common shares and potentially dilutive
securities outstanding during the period using the treasury stock method for the Company’s stock options, restricted stock units, and shares issuable under
the ESPP, and the if-converted method for the 2024 Notes.
As noted in Note 11, “Convertible Notes and Other Debts,” the principal amount of the 2024 Notes will be settled in cash. Therefore, for the purpose
of calculating diluted net income per share, it will be assumed that the conversion spread value will be settled in shares.
The following table sets forth the computation of the basic and diluted net income per share:
(in thousands, except per share amounts)
Numerator:
Net income
Denominator:
Weighted average number of shares outstanding:
Basic
2022 Notes
2024 Notes
Stock options
Restricted stock units
Stock purchase rights under ESPP
Diluted
Net income per share:
Basic
Diluted
Year Ended December 31,
2023
2022
2021
$
83,994 $
28,182 $
13,254
111,651
—
4,320
—
1,355
33
117,359
105,080
2,681
2,441
213
1,884
79
112,378
$
$
0.75 $
0.72 $
0.27 $
0.25 $
101,484
2,175
653
292
1,525
42
106,171
0.13
0.12
The following table set forth the potential dilutive shares that were excluded from the computation of diluted net income per share, because their
effects were anti-dilutive:
(in thousands)
Stock options
Restricted stock units
Stock purchase rights under the ESPP
Total
Year Ended December 31,
2023
2022
2021
—
276
—
276
—
38
—
38
8
27
390
425
77
NOTE 16: SEGMENT INFORMATION, GEOGRAPHIC INFORMATION AND CUSTOMER CONCENTRATION
Segment Information
Operating segments are defined as components of an enterprise that engage in business activities for which separate financial information is available
and evaluated by the Company’s Chief Operating Decision Maker (the “CODM”), which for the Company is its Chief Executive Officer, in deciding how
to allocate resources and assess performance. Based on the internal reporting structure, the Company consists of two operating segments: Video and
Broadband. The operating segments were determined based on the nature of the products offered. The Video segment provides video processing,
production and playout solutions and services worldwide to broadcast and media companies, new streaming media companies, broadband operators, and
satellite and telco Pay-TV service providers. The Broadband segment provides broadband access solutions and related services to broadband operators
globally. A measure of assets by segment is not applicable as segment assets are not included in the discrete financial information provided to the CODM.
The following table provides summary financial information by reportable segment:
(in thousands)
Video
Revenue
Operating income (loss)
Broadband
Revenue
Operating income
Total
Revenue
Operating income
Year Ended December 31,
2023
2022
2021
$
$
$
$
219,425 $
(8,741)
274,189 $
22,322
388,482 $
64,575
350,768 $
52,283
607,907 $
55,834 $
624,957 $
74,605 $
288,507
28,460
218,642
15,599
507,149
44,059
A reconciliation of the Company’s consolidated segment operating income to consolidated income before income taxes is as follows:
Year Ended December 31,
(1)
(in thousands)
Total consolidated segment operating income
Unallocated corporate expenses
Stock-based compensation
Amortization of intangibles
Consolidated income from operations
Non-operating expense, net
Income before income taxes
2023
2022
2021
55,834 $
(6,333)
(27,329)
—
22,172
(3,031)
19,141 $
74,605 $
(3,874)
(25,212)
—
45,519
(1,034)
44,485 $
44,059
(681)
(24,062)
(507)
18,809
(9,938)
8,871
$
$
(1) Together with amortization of intangibles and stock-based compensation, the Company does not allocate restructuring and related charges and
certain other non-recurring charges to the operating income (loss) for each segment because management does not include this information in the
measurement of the performance of the operating segments.
78
Disaggregation of Revenues
The following table provides a summary of total revenues disaggregated by type:
(in thousands)
Product sales
Professional services
Total Appliance and integration
SaaS
Support services
Total SaaS and services
Total revenue
The following table provides a summary of total net revenues by geographic region:
Net revenue:
(in thousands)
United States
Other countries
(1)
(1)
Total
(1) Revenue is attributed to countries based on the location of the customer.
Year Ended December 31,
2023
2022
2021
396,682
39,196
435,878
50,888
121,141
172,029
607,907
$
$
423,858 $
49,948
473,806
34,665
116,486
151,151
624,957 $
343,406
26,361
369,767
21,266
116,116
137,382
507,149
Year Ended December 31,
2023
2022
2021
408,951 $
198,956
607,907 $
393,991 $
230,966
624,957 $
282,912
224,237
507,149
$
$
$
$
Other than the United States, no single country accounted for 10% or more of the Company’s net revenues for the years ended December 31, 2023,
2022 and 2021.
Property and equipment, net:
(in thousands)
United States
Israel
France
Other countries
Total
Customer Concentration
As of December 31,
2023
2022
24,260 $
9,542
2,520
361
36,683 $
25,395
10,621
3,372
426
39,814
$
$
One customer, Comcast, accounted for 44%, 39% and 26% of the Company’s total net revenues during the years ended December 31, 2023, 2022 and
2021, respectively.
NOTE 17: COMMITMENTS AND CONTINGENCIES
Bank Guarantees and Standby Letters of Credit
As of December 31, 2023 and 2022, the Company has outstanding bank guarantees and standby letters of credit in aggregate of $2.3 million and $2.1
million, respectively, consisting of building leases and performance bonds issued to customers.
During 2017, one of the Company’s subsidiaries entered into a $2.0 million credit facility with a foreign bank for the purpose of issuing performance
guarantees. The credit facility is secured by a $2.2 million indemnity issued by the parent company. There were no amounts outstanding under this credit
facility as of December 31, 2023 and 2022.
79
On December 21, 2023, the Company entered into a Credit Agreement, with Citibank, N.A., as administrative agent for the lenders. The Credit
Agreement refinances and replaces the Company’s prior credit agreement, dated as of December 19, 2019, as amended, with JPMorgan Chase Bank, N.A.,
as lender. As of December 31, 2023, there were no borrowings under the Credit Agreement outstanding and approximately $0.2 million of letters of credit
outstanding under the Credit Agreement. The Company was in compliance with the covenants under the Credit Agreement as of December 31, 2023. Refer
to Note 11, “Convertible Notes and other Debts” of the Notes to the Consolidated Financial Statements for additional information regarding the Credit
Agreement.
Indemnification
The Company is obligated to indemnify its officers and its directors pursuant to its bylaws and contractual indemnity agreements. The Company also
indemnifies some of its suppliers and most of its customers for specified intellectual property matters pursuant to certain contractual arrangements, subject
to certain limitations. The scope of these indemnities varies, but, in some instances, includes indemnification for damages and expenses (including
reasonable attorneys’ fees). There have been no amounts accrued in respect of the indemnification provisions through December 31, 2023.
Purchase Commitments
As of December 31, 2023, the Company had approximately $95.4 million of commitments to purchase goods and services.
NOTE 18: 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 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.
NOTE 19: SUBSEQUENT EVENT
On January 30, 2024, the Company issued a notice to redeem its outstanding 2024 Notes. The redemption of the Notes will be effected pursuant to the
terms of the Indenture that governs the Notes (the “Indenture”). The Notes will be redeemed on April 18, 2024 (the “Redemption Date”) at a redemption
price equal to 100% of the principal amount of the Notes to be redeemed, plus any accrued and unpaid interest to, but excluding, the Redemption Date.
Holders of Notes called for redemption will have the right to convert their Notes at any time before the close of business on April 16, 2024 in accordance
with the Indenture at a conversion rate of 118.0550 shares (inclusive of Additional Shares, as defined in the Indenture) of the Company’s common stock per
$1,000 principal amount of the Notes converted. Pursuant to the terms of the Indenture, the Company has elected to settle any such conversions by
Combination Settlement (as defined in the Indenture) with a Specified Dollar Amount (as defined in the Indenture) of $1,000 per $1,000 principal amount
of Notes.
80
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that
information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our
disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure
controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure
controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act). Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the
criteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on the Company’s assessment, management concluded that its internal control over financial reporting was effective as of December 31, 2023.
The Company’s independent registered public accounting firm, Ernst & Young LLP, has audited the effectiveness of the Company’s internal control
over financial reporting, as stated in their report which appears in Part II, Item 8 of this Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during our fourth quarter of fiscal year 2023, which were identified in
connection with management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or
are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
OTHER INFORMATION
None.
Item 9C.
DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
81
Certain information required by Part III is omitted from this Annual Report on Form 10-K pursuant to Instruction G to Exchange Act Form 10-K, and
the Registrant will file its definitive Proxy Statement for its 2024 Annual Meeting of Stockholders, pursuant to Regulation 14A of the Securities Exchange
Act of 1934, as amended (the “2024 Proxy Statement”), not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-
K, and certain information included in the 2024 Proxy Statement is incorporated herein by reference.
PART III
Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item will be set forth in the 2024 Proxy Statement and is incorporated herein by reference.
Harmonic has adopted a Code of Business Conduct and Ethics (the “Code”) that applies to all employees, including Harmonic’s Chief Executive
Officer, Chief Financial Officer and Corporate Controller. The Code is available on the Company’s website at www.harmonicinc.com.
Harmonic intends to satisfy the disclosure requirement under Form 8-K regarding an amendment to, or waiver from, a provision of this Code of
Ethics by posting such information on our website, at the address specified above, and, to the extent required by the listing standards of The NASDAQ
Global Select Market, by filing a Current Report on Form 8-K with the Securities and Exchange Commission disclosing such information.
Item 11.
EXECUTIVE COMPENSATION
The information required by this item will be set forth in the 2024 Proxy Statement and is incorporated herein by reference.
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Information related to security ownership of certain beneficial owners and security ownership of management and related stockholder matters will be
set forth in the 2024 Proxy Statement and is incorporated herein by reference.
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item will be set forth in the 2024 Proxy Statement and is incorporated herein by reference.
Item 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item will be set forth in the 2024 Proxy Statement and is incorporated herein by reference.
82
Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
1. Financial Statements. See Index to Consolidated Financial Statements in Item 8 on page of this Annual Report on Form 10-K.
2. Financial Statement Schedules. Financial statement schedules have been omitted because the information is not required to be set forth herein, is
not applicable or is included in the financial statements or the notes thereto.
3. Exhibits. The documents listed in the Exhibit Index of this Annual Report on Form 10-K are filed herewith or are incorporated by reference in this
Annual Report on Form 10-K, in each case as indicated therein.
Exhibit
Number
3.1 (i)
3.2 (ii)
4.1 (iii)
4.2 (iv)
4.3 (v)
4.4 (vi)
4.5 (vii)
4.6 (viii)
4.7 (ix)
4.8 (x)
4.9 (xi)
10.1 (xii)*
10.2 (xiii)*
10.3 (xiv)*
10.4 (xv)*
10.5 (xvi)*
10.6 (xvii)*
10.7 (xviii)*
10.8 (xix)*
10.9 (xx)*
10.10 (xxi)
10.11 (xxii)
10.12 (xxiii)
10.13 (xxiv)
10.14 (xxv)
10.15 (xxvi)
Description
Certificate of Incorporation of Harmonic Inc., as amended
Amended and Restated Bylaws of Harmonic Inc.
Form of Common Stock Certificate
Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Harmonic Inc.
Indenture, dated September 13, 2019, between the Company and U.S. Bank National Association
Supplemental Indenture, dated November 15, 2021 by and between the Company and U.S. Bank National Association
Form of 2.00% Convertible Senior Note due 2024 (included in Exhibit 4.1)
Description of Common Stock
Indenture, dated June 2, 2020, by and between the Company and U.S. Bank National Association
Supplemental Indenture, dated November 15, 2021 by and between the Company and U.S. Bank National Association
Form of 4.375% Convertible Senior Note due 2022 (included in Exhibit 4.1)
Form of Indemnification Agreement
1995 Stock Plan, as amended and restated on June 9, 2022
2002 Director Stock Plan, as amended and restated on June 8, 2021
2002 Employee Stock Purchase Plan, as amended and restated on June 9, 2022
Amended and Restated Change of Control Severance Agreement between Harmonic Inc. and Patrick Harshman, effective
March 20, 2018
Form of Change of Control Severance Agreement between Harmonic Inc. and each of Nimrod Ben-Natan and Ian Graham
Offer Letter, dated as of May 10, 2023, between Harmonic Inc. and Walter Jankovic
Change of Control Severance Agreement, dated as of May 22, 2023, between Harmonic Inc. and Walter Jankovic
Amended and Restated Change of Control Severance Agreement, dated as of November 30, 2023, between Harmonic Inc. and
Neven Haltmayer
Harmonic Inc. 2002 Director Stock Plan Restricted Stock Unit Agreement
Professional Service Agreement between Harmonic Inc. and Plexus Services Corp., dated September 22, 2003
Amendment, dated January 6, 2006, to the Professional Services Agreement for Manufacturing between Harmonic Inc. and
Plexus Services Corp., dated September 22, 2003
Addendum 1, dated November 26, 2007, to the Professional Services Agreement between Harmonic Inc. and Plexus Services
Corp., dated September 22, 2003
Harmonic Inc. 1995 Stock Plan Restricted Stock Unit Agreement
Fifth Amendment to Credit Agreement, dated as of September 29, 2023, by and among Harmonic Inc., Harmonic International
GmbH and JPMorgan Chase Bank, N.A.
83
10.16 (xxvii)
10.17 (xxviii)
10.18(xxiv)
21.1
23.1
31.1
31.2
32.1
32.2
97.1
101
104
Master Receivables Purchase Agreement dated as of September 29, 2023, by and between Harmonic Inc. and JPMorgan Chase
Bank, N.A.
Credit Agreement, dated as of December 21, 2023, by and among Harmonic Inc., the lenders party thereto and Citibank, N.A.,
as administrative agent, swingline lender and L/C issuer
Cooperation Agreement, dated as of April 9, 2021, by and between Harmonic Inc. And Scopia Capital Management LP.
Subsidiaries of Harmonic Inc.
Consent of Independent Registered Public Accounting Firm
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Compensation Recovery Policy dated October 30, 2023
The following materials from Registrant’s Annual Report on Form 10-K for the year ended December 31, 2023, formatted in
Inline Extensible Business Reporting Language (XBRL) includes: Consolidated Balance Sheets at December 31, 2023 and
December 31, 2022; (ii) Consolidated Statements of Operations for the Years Ended December 31, 2023, December 31, 2022
and December 31, 2021; (iii) Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2023,
December 31, 2022 and December 31, 2021; (iv) Consolidated Statements of Stockholders’ Equity for the Years Ended
December 31, 2023, December 31, 2022 and December 31, 2021; (v) Consolidated Statements of Cash Flows for the Years
Ended December 31, 2023, December 31, 2022 and December 31, 2021; and (vi) Notes to Consolidated Financial Statements.
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
* Indicates a management contract or compensatory plan or arrangement relating to executive officers or directors of the Company.
† Registrant has omitted portions of this exhibit and filed such exhibit separately with the Securities and Exchange Commission pursuant to a grant of
confidential treatment under Rule 406 promulgated under the Securities Act.
(i)
(ii)
Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.
Previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the three months ended September 29, 2023.
(iii)
Previously filed as an exhibit to the Company’s Registration Statement on Form S-1 No. 33-90752.
(iv)
Previously filed as an exhibit to the Company’s Current Report on Form 8-K dated July 25, 2002.
(v)
Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on September 16, 2019.
(vi)
Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
(vii) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on September 16, 2019.
(viii) Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
(ix)
Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on June 2, 2020.
(x)
Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
(xi)
Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on June 2, 2020.
(xii) Previously filed as an exhibit to the Company’s Registration Statement on Form S-1 No. 33-90752.
(xiii) Previously filed as an exhibit to the Company’s Registration Statement on Form S-8, dated August 22, 2022.
(xiv) Previously filed as an exhibit to the Company’s Registration Statement on Form S-8, dated August 20, 2021.
(xv) Previously filed as an exhibit to the Company’s Registration Statement on Form S-8, dated August 22, 2022.
(xvi) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on March 26, 2018.
84
(xvii) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on March 26, 2018.
(xviii) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on May 22, 2023.
(xix) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on May 22, 2023.
(xx) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on December 6, 2023.
(xxi) Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
(xxii) Previously filed as an exhibit to the Company’s Current Annual Report on Form 10-K for the year ended December 31, 2008.
(xxiii) Previously filed as an exhibit to the Company’s Current Annual Report on Form 10-K for the year ended December 31, 2008.
(xxiv) Previously filed as an exhibit to the Company’s Current Annual Report on Form 10-K for the year ended December 31, 2008.
(xxv) Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
(xxvi) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on October 4, 2023.
(xxvii) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on October 4, 2023.
(xxviii) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on December 21, 2023.
(xxix) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on April 12, 2021.
Item 16.
FORM 10-K SUMMARY
None.
85
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant, Harmonic Inc., a Delaware corporation,
has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of
California, on February 16, 2024.
SIGNATURES
HARMONIC INC.
By:
/s/ PATRICK J. HARSHMAN
Patrick J. Harshman
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ PATRICK J. HARSHMAN
(Patrick J. Harshman)
/s/ WALTER JANKOVIC
(Walter Jankovic)
/s/ PATRICK GALLAGHER
(Patrick Gallagher)
/s/ SUSAN G. SWENSON
(Susan G. Swenson )
/s/ MITZI REAUGH
(Mitzi Reaugh)
/s/ DAVID KRALL
(David Krall)
/s/ DEBORAH L. CLIFFORD
(Deborah L. Clifford)
/s/ SOPHIA KIM
(Sophia Kim)
President & Chief Executive Officer (Principal Executive Officer)
February 16, 2024
Chief Financial Officer (Principal Financial and Accounting Officer)
February 16, 2024
Chairperson
February 16, 2024
February 16, 2024
February 16, 2024
February 16, 2024
February 16, 2024
February 16, 2024
Director
Director
Director
Director
Director
86
HARMONIC INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
The following table lists the direct and indirect subsidiaries of Harmonic Inc. as of December 31, 2023:
Exhibit 21.1
Name
Harmonic Delaware, L.L.C.
Harmonic Germany GmbH
Harmonic Japan GK
Harmonic India Private Limited
Harmonic International GmbH
Harmonic International Inc
Harmonic Lightwaves (Israel) Ltd
Harmonic Singapore P.T.E. Ltd.
Harmonic Spain SL
Harmonic Technologies (HK) Limited
Harmonic (UK) Limited
Harmonic Video Networks Ltd.
Horizon Acquisition Ltd
Harmonic Brasil LTDA
Harmonic S.R.I.
Harmonic Mexico International
Harmonic Video Networks Malaysia Sdn Bhd
Harmonic International Australia Pty Ltd
Harmonic Italia Srl
Financiere Kepler SAS
Harmonic France SAS
Thomson Video Networks India Private Ltd
Harmonic Technologies (Canada)
State or Other Jurisdiction
of Incorporation or Organization
U.S.A.
Germany
Japan
India
Switzerland
U.S.A.
Israel
Singapore
Spain
Hong Kong
United Kingdom
Israel
Israel
Brazil
Argentina
Mexico
Malaysia
Australia
Italy
France
France
India
Canada
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements (Form S-8 Nos. 333-38025, 333-65051, 333-86649,
333-84720, 333-91464, 333-116467, 333-136425, 333-154715, 333-159877, 333-167197, 333-176211, 333-182931, 333-192089, 333-
200032, 333-207866, 333-212242, 333-218902, 333-225874, 333-232431, 333-244390, 333-258980, 333-267002, and 333-275317) of
Harmonic, Inc. of our reports dated February 16, 2024, with respect to the consolidated financial statements of Harmonic, Inc. and the
effectiveness of internal control over financial reporting of Harmonic, Inc. included in this Annual Report (Form 10-K) of Harmonic, Inc. for the
year ended December 31, 2023.
Exhibit 23.1
/s/ Ernst & Young LLP
San Jose, California
February 16, 2024
Exhibit 31.1
I, Patrick J. Harshman, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Harmonic Inc.;
HARMONIC INC.
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting.
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: February 16, 2024
By:
/s/ Patrick J. Harshman
Patrick J. Harshman
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
I, Walter Jankovic, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Harmonic Inc.;
HARMONIC INC.
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting.
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: February 16, 2024
By:
/s/ Walter Jankovic
Walter Jankovic
Chief Financial Officer
HARMONIC INC.
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
As of the date hereof, I, Patrick J. Harshman, President and Chief Executive Officer of Harmonic Inc. (the “Company”), certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the annual report of the Company on Form 10-K for the fiscal
year ended December 31, 2023, as filed with the Securities and Exchange Commission (the “Report”), fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company. This written statement is being furnished to the Securities and Exchange Commission as an
exhibit accompanying such Report and shall not be deemed filed pursuant to the Securities Exchange Act of 1934, as amended.
Date: February 16, 2024
/s/ Patrick J. Harshman
Patrick J. Harshman
President and Chief Executive Officer
HARMONIC INC.
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
As of the date hereof, I, Walter Jankovic, Chief Financial Officer of Harmonic Inc. (the “Company”), certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the annual report of the Company on Form 10-K for the fiscal year ended
December 31, 2023, as filed with the Securities and Exchange Commission (the “Report”), fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company. This written statement is being furnished to the Securities and Exchange Commission as an exhibit accompanying
such Report and shall not be deemed filed pursuant to the Securities Exchange Act of 1934, as amended.
Date: February 16, 2024
/s/ Walter Jankovic
Walter Jankovic
Chief Financial Officer
Exhibit 97.1
HARMONIC INC.
COMPENSATION RECOVERY POLICY
As adopted on October 30, 2023
Harmonic Inc. (the “Company”) is commi(cid:425)ed to strong corporate governance. As part of this commitment, the Compensa(cid:415)on
Commi(cid:425)ee of the Company’s Board of Directors (the “Commi(cid:425)ee”) has adopted this clawback policy called the Compensa(cid:415)on Recovery
Policy (the “Policy”). The Policy is intended to further the Company’s pay-for-performance philosophy and to comply with applicable law
by providing for the reasonably prompt recovery of certain execu(cid:415)ve compensa(cid:415)on in the event of an Accoun(cid:415)ng Restatement.
Capitalized terms used in the Policy are defined below, and the defini(cid:415)ons have substan(cid:415)ve impact on its applica(cid:415)on so reviewing them
carefully is important to your understanding.
The Policy, which was approved as set forth above, is intended to comply with Sec(cid:415)on 10D of the Securi(cid:415)es Exchange Act of
1934 (the “Exchange Act”), with Exchange Act Rule 10D-1 and with the lis(cid:415)ng standards of the na(cid:415)onal securi(cid:415)es exchange (the
“Exchange”) on which the securi(cid:415)es of the Company are listed. The Policy will be interpreted in a manner that is consistent with the
requirements of Sec(cid:415)on 10D of the Exchange Act, Exchange Act Rule 10D-1 and with the lis(cid:415)ng standards of the Exchange, including any
interpre(cid:415)ve guidance provided by the Exchange.
In summary, the Policy provides rules related to the reasonably prompt recovery of certain incen(cid:415)ve-based compensa(cid:415)on
received by Execu(cid:415)ve Officers. With limited excep(cid:415)ons, which are detailed below, the applica(cid:415)on of the Policy to Execu(cid:415)ve Officers is not
discre(cid:415)onary and applies without regard to whether an Execu(cid:415)ve Officer was at fault, except to the limited extent provided below.
Persons Covered by the Policy
The Policy is binding and enforceable against all Execu(cid:415)ve Officers. “Execu(cid:415)ve Officer” means each individual who is or was ever
designated as an “officer” by the Board in accordance with Exchange Act Rule 16a-1(f). Each Execu(cid:415)ve Officer will be required to sign
and return to the Company an acknowledgement that such Execu(cid:415)ve Officer will be bound by the terms and comply with the Policy. The
failure to obtain such acknowledgement will have no impact on the applicability or enforceability of the Policy.
Administra(cid:415)on of the Policy
The Commi(cid:425)ee has full delegated authority to administer the Policy. The Commi(cid:425)ee is authorized to interpret and construe the
Policy and to make all determina(cid:415)ons necessary, appropriate, or advisable for the administra(cid:415)on of the Policy. In addi(cid:415)on, if determined
in the discre(cid:415)on of the Board, the Policy may be administered by the independent members of the Board or another commi(cid:425)ee of the
Board made up of independent members of the Board, in which case all references to the Commi(cid:425)ee will be deemed to refer to the
independent members of the Board or the other Board commi(cid:425)ee. All determina(cid:415)ons of the Commi(cid:425)ee will be final and binding and
will be given the maximum deference permi(cid:425)ed by law.
Events Requiring Applica(cid:415)on of the Policy
If the Company is required to prepare an accoun(cid:415)ng restatement due to the material noncompliance of the Company with any
financial repor(cid:415)ng requirement under the securi(cid:415)es laws, including any required accoun(cid:415)ng restatement to correct an error in
previously issued financial statements that is material to the previously issued financial statements, or that would result in a material
misstatement if the error were corrected in the current period or le(cid:332) uncorrected in the current period (an “Accoun(cid:415)ng Restatement”),
then the Commi(cid:425)ee must determine what compensa(cid:415)on, if any, must be recovered.
Compensa(cid:415)on Covered by the Policy
The Policy applies to all Incen(cid:415)ve-Based Compensa(cid:415)on (certain terms used in this Sec(cid:415)on are defined below) that is Received
on or a(cid:332)er October 2, 2023 (the “Effec(cid:415)ve Date”), while the Company has a class of securi(cid:415)es listed on a na(cid:415)onal securi(cid:415)es exchange,
and during the Covered Period by a person who was an Execu(cid:415)ve Officer during the Covered Period and during the performance period
for the Incen(cid:415)ve-Based Compensa(cid:415)on (“Clawback Eligible Incen(cid:415)ve-Based Compensa(cid:415)on”). The Incen(cid:415)ve-Based Compensa(cid:415)on that
must be recovered is the amount of Clawback Eligible Incen(cid:415)ve-Based Compensa(cid:415)on that exceeds the amount of Clawback Eligible
Incen(cid:415)ve-Based Compensa(cid:415)on that otherwise would have been Received had such Clawback Eligible Incen(cid:415)ve-Based Compensa(cid:415)on
been determined based on the restated amounts (such compensa(cid:415)on, as computed without regard to any taxes paid, the “Excess
Compensa(cid:415)on,” is referred to in the lis(cid:415)ngs standards as “erroneously awarded incen(cid:415)ve-based compensa(cid:415)on”).
To determine the amount of Excess Compensa(cid:415)on for Incen(cid:415)ve-Based Compensa(cid:415)on based on stock price or total shareholder
return, where it is not subject to mathema(cid:415)cal recalcula(cid:415)on directly from the informa(cid:415)on in an Accoun(cid:415)ng Restatement, the amount
must be based on a reasonable es(cid:415)mate of the effect of the Accoun(cid:415)ng Restatement on the stock price or total shareholder return upon
which the Incen(cid:415)ve-Based Compensa(cid:415)on was received and the Company must maintain documenta(cid:415)on of the determina(cid:415)on of that
reasonable es(cid:415)mate and provide such documenta(cid:415)on to the Exchange.
“Incen(cid:415)ve-Based Compensa(cid:415)on” means any compensa(cid:415)on that is granted, earned, or vested based wholly or in part upon the
a(cid:425)ainment of a Financial Repor(cid:415)ng Measure. For the avoidance of doubt, no compensa(cid:415)on that is poten(cid:415)ally subject to recovery under
the Policy will be earned un(cid:415)l the Company’s right to recover under the Policy has lapsed. The following items of compensa(cid:415)on are not
Incen(cid:415)ve-Based Compensa(cid:415)on under the Policy: salaries, bonuses paid solely at the discre(cid:415)on of the Commi(cid:425)ee or Board that are not
paid from a bonus pool that is determined by sa(cid:415)sfying a Financial Repor(cid:415)ng Measure, bonuses paid solely upon sa(cid:415)sfying one or more
subjec(cid:415)ve standards and/or comple(cid:415)on of a specified employment period, non-equity incen(cid:415)ve plan awards earned solely upon
sa(cid:415)sfying one or more strategic measures or opera(cid:415)onal measures, and equity awards for which the grant is not con(cid:415)ngent upon
achieving any Financial Repor(cid:415)ng Measure performance goal and ves(cid:415)ng is con(cid:415)ngent solely upon comple(cid:415)on of a specified
employment period (e.g., (cid:415)me-based ves(cid:415)ng equity awards) and/or a(cid:425)aining one or more non-Financial Repor(cid:415)ng Measures.
“Financial Repor(cid:415)ng Measures” are measures that are determined and presented in accordance with the accoun(cid:415)ng principles
used in preparing the Company’s financial statements, and any measures that are derived wholly or in part from such measures. Stock
price and total shareholder return are also Financial Repor(cid:415)ng Measures. A Financial Repor(cid:415)ng Measure need not be presented within
the financial statements or included in a filing with the Securi(cid:415)es and Exchange Commission.
Incen(cid:415)ve-Based Compensa(cid:415)on is “Received” under the Policy in the Company’s fiscal period during which the Financial
Repor(cid:415)ng Measure specified in the Incen(cid:415)ve-Based Compensa(cid:415)on award is a(cid:425)ained, even if the payment, ves(cid:415)ng, se(cid:425)lement or grant
of the Incen(cid:415)ve-Based Compensa(cid:415)on occurs a(cid:332)er the end of that period.
“Covered Period” means the three completed fiscal years immediately preceding the Accoun(cid:415)ng Restatement Determina(cid:415)on
Date. In addi(cid:415)on, Covered Period can include certain transi(cid:415)on periods resul(cid:415)ng from a change in the Company’s fiscal year. The
Company’s obliga(cid:415)on to recover Excess Compensa(cid:415)on is not dependent on if or when the restated financial statements are filed.
“Accoun(cid:415)ng Restatement Determina(cid:415)on Date” means the earliest to occur of: (a) the date the Board, a commi(cid:425)ee of the
Board, or one or more of the officers of the Company authorized to take such ac(cid:415)on if Board ac(cid:415)on is not required, concludes, or
reasonably should have concluded, that the Company is required to prepare an Accoun(cid:415)ng Restatement; and (b) the date a court,
regulator, or other legally authorized body directs the Company to prepare an Accoun(cid:415)ng Restatement.
2
Repayment of Excess Compensa(cid:415)on
The Company must recover such Excess Compensa(cid:415)on reasonably promptly and Execu(cid:415)ve Officers are required to repay Excess
Compensa(cid:415)on to the Company. Subject to applicable law, the Company may recover such Excess Compensa(cid:415)on by requiring the
Execu(cid:415)ve Officer to repay such amount to the Company by direct payment to the Company or such other means or combina(cid:415)on of
means as the Commi(cid:425)ee determines to be appropriate (these determina(cid:415)ons do not need to be iden(cid:415)cal as to each Execu(cid:415)ve Officer).
These means may include:
(1)
(2)
(3)
(4)
(5)
requiring reimbursement of cash Incen(cid:415)ve-Based Compensa(cid:415)on previously paid;
seeking recovery of any gain realized on the ves(cid:415)ng, exercise, se(cid:425)lement, sale, transfer, or other disposi(cid:415)on of any
equity-based awards;
offse(cid:427)ng the amount to be recovered from any unpaid or future compensa(cid:415)on to be paid by the Company or any
affiliate of the Company to the Execu(cid:415)ve Officer;
cancelling outstanding vested or unvested equity awards; and/or
taking any other remedial and recovery ac(cid:415)on permi(cid:425)ed by law, as determined by the Commi(cid:425)ee.
The repayment of Excess Compensa(cid:415)on must be made by an Execu(cid:415)ve Officer notwithstanding any Execu(cid:415)ve Officer’s belief
(whether legi(cid:415)mate or non-legi(cid:415)mate) that the Excess Compensa(cid:415)on had been previously earned under applicable law and therefore is
not subject to clawback.
In addi(cid:415)on to its rights to recovery under the Policy, the Company or any affiliate of the Company may take any legal ac(cid:415)ons it
determines appropriate to enforce an Execu(cid:415)ve Officer’s obliga(cid:415)ons to the Company or to discipline an Execu(cid:415)ve Officer, including
(without limita(cid:415)on) termina(cid:415)on of employment, ins(cid:415)tu(cid:415)on of civil proceedings, repor(cid:415)ng of misconduct to appropriate governmental
authori(cid:415)es, reduc(cid:415)on of future compensa(cid:415)on opportuni(cid:415)es or change in role. The decision to take any ac(cid:415)ons described in the
preceding sentence will not be subject to the approval of the Commi(cid:425)ee and can be made by the Board, any commi(cid:425)ee of the Board, or
any duly authorized officer of the Company or of any applicable affiliate of the Company.
Limited Excep(cid:415)ons to the Policy
The Company must recover the Excess Compensa(cid:415)on in accordance with the Policy except to the limited extent that the
condi(cid:415)ons set forth below are met, and the Commi(cid:425)ee determines that recovery of the Excess Compensa(cid:415)on would be imprac(cid:415)cable:
(1)
(2)
(3)
The direct expense paid to a third party to assist in enforcing the Policy would exceed the amount to be recovered.
Before reaching this conclusion, the Company must make a reasonable a(cid:425)empt to recover such Excess Compensa(cid:415)on,
document such reasonable a(cid:425)empt(s) to recover, and provide that documenta(cid:415)on to the Exchange;
Recovery would violate a law in the country where the Company was incorporated that was adopted prior to November
28, 2022. Before making this determina(cid:415)on, the Company must obtain an opinion of home country counsel, acceptable
to the Exchange, that recovery would result in such a viola(cid:415)on, and must provide such opinion to the Exchange; or
Recovery would likely cause an otherwise tax-qualified re(cid:415)rement plan, under which benefits are broadly available to
employees of the Company, to fail to meet the legal requirements as such.
3
Other Important Informa(cid:415)on in the Policy
The Policy is in addi(cid:415)on to the requirements of Sec(cid:415)on 304 of the Sarbanes-Oxley Act of 2002 that are applicable to the
Company’s Chief Execu(cid:415)ve Officer and Chief Financial Officer, as well as any other applicable laws, regulatory requirements, rules, but
the Policy supersedes in full all of the clawback policies of the Company that were in effect prior to the Effec(cid:415)ve Date to the extent such
policies were applicable with respect to Execu(cid:415)ve Officers and the opera(cid:415)ve por(cid:415)ons of such policies shall have no further force or effect
on or a(cid:332)er the Effec(cid:415)ve Date.
Notwithstanding the terms of any of the Company’s organiza(cid:415)onal documents (including, but not limited to, the Company’s
bylaws), any corporate policy or any contract (including, but not limited to, any indemnifica(cid:415)on agreement), neither the Company nor
any affiliate of the Company will indemnify or provide advancement for any Execu(cid:415)ve Officer against any loss of Excess Compensa(cid:415)on.
Neither the Company nor any affiliate of the Company will pay for or reimburse insurance premiums for an insurance policy that covers
poten(cid:415)al recovery obliga(cid:415)ons. In the event the Company is required to recover Excess Compensa(cid:415)on from an Execu(cid:415)ve Officer who is no
longer an employee pursuant to the Policy, the Company will be en(cid:415)tled to seek such recovery in order to comply with applicable law,
regardless of the terms of any release of claims or separa(cid:415)on agreement such individual may have signed.
The Commi(cid:425)ee or Board may review and modify the Policy from (cid:415)me to (cid:415)me.
If any provision of the Policy or the applica(cid:415)on of any such provision to any Execu(cid:415)ve Officer is adjudicated to be invalid, illegal
or unenforceable in any respect, such invalidity, illegality or unenforceability will not affect any other provisions of the Policy or the
applica(cid:415)on of such provision to another Execu(cid:415)ve Officer, and the invalid, illegal or unenforceable provisions will be deemed amended
to the minimum extent necessary to render any such provision or applica(cid:415)on enforceable.
The Policy will terminate and no longer be enforceable when the Company ceases to be listed issuer within the meaning of
Sec(cid:415)on 10D of the Exchange Act.
4
ACKNOWLEDGEMENT
•
•
•
•
•
•
•
•
I acknowledge that I have received and read the Compensa(cid:415)on Recovery Policy (the “Policy”) of Harmonic Inc. (the “Company”).
I understand and acknowledge that the Policy applies to me, and all of my beneficiaries, heirs, executors, administrators or other
legal representa(cid:415)ves and that the Company’s right to recovery in order to comply with applicable law will apply, regardless of the
terms of any release of claims or separa(cid:415)on agreement I have signed or will sign in the future.
I agree to be bound by and to comply with the Policy and understand that determina(cid:415)ons of the Commi(cid:425)ee (as such term is
used in the Policy) will be final and binding and will be given the maximum deference permi(cid:425)ed by law.
I understand and agree that my current indemnifica(cid:415)on rights, whether in an individual agreement or the Company’s
organiza(cid:415)onal documents, exclude the right to be indemnified for amounts required to be recovered under the Policy.
I understand that my failure to comply in all respects with the Policy is a basis for termina(cid:415)on of my employment with the
Company and any affiliate of the Company as well as any other appropriate discipline.
I understand that neither the Policy, nor the applica(cid:415)on of the Policy to me, gives rise to a resigna(cid:415)on for good reason (or similar
concept) by me under any applicable employment agreement or arrangement.
I acknowledge that if I have ques(cid:415)ons concerning the meaning or applica(cid:415)on of the Policy, it is my responsibility to seek
guidance from the Compliance Officer, Human Resources or my own personal advisers.
I acknowledge that neither this Acknowledgement nor the Policy is meant to cons(cid:415)tute an employment contract.
Please review, sign and return this form to Human Resources.
Execu(cid:415)ve
(print name)
(signature)
(date)
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