Infinera Corp - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 28, 2019



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-33486

INFINERA CORPORATION

(Exact name of registrant as specified in its charter)



Delaware		77-0560433
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



140 Caspian Court
Sunnyvale,	California	94089
(Address of principal executive offices)		(Zip Code)

(408) 572-5200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading symbol	Name of exchange on which registered
Common shares, par value $0.001 per share	INFN	The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 8, 2019, 180,802,595 shares of the registrant’s Common Stock, $0.001 par value, were issued and outstanding.

Table of Contents

INFINERA CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE FISCAL QUARTER ENDED SEPTEMBER 28, 2019

INDEX



		Page
PART I. FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3

	Condensed Consolidated Balance Sheets - As of September 28, 2019 and December 29, 2018	3

	Condensed Consolidated Statements of Operations - Three and Nine Months ended September 28, 2019 and September 29, 2018	4

	Condensed Consolidated Statements of Comprehensive Loss - Three and Nine Months ended September 28, 2019 and September 29, 2018	5

	Condensed Consolidated Statements of Stockholders' Equity - Three and Nine Months ended September 28, 2019 and September 29, 2018	6

	Condensed Consolidated Statements of Cash Flows - Nine Months ended September 28, 2019 and September 29, 2018	8

	Notes to Condensed Consolidated Financial Statements	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	49

Item 4.	Controls and Procedures	49

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	51

Item 1A.	Risk Factors	52

Item 6.	Exhibits	74

	Signature Page	75

Table of Contents

PART I. FINANCIAL INFORMATION


Item 1.	Condensed Consolidated Financial Statements (Unaudited)

INFINERA CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par values)

(Unaudited)



	September 28, 2019			December 29, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	94,804		$	202,954
Short-term investments	—			26,511
Short-term restricted cash	—			13,229
Accounts receivable, net of allowance for doubtful accounts of $2,382 in 2019 and $3,680 in 2018	284,448			317,115
Inventory	324,845			311,888
Prepaid expenses and other current assets	118,502			85,400
Total current assets	822,599			957,097
Property, plant and equipment, net	156,570			342,820
Operating lease right-of-use assets	69,233			—
Intangible assets	184,183			233,119
Goodwill	234,485			227,231
Long-term restricted cash	25,826			26,154
Other non-current assets	13,375			14,849
Total assets	$	1,506,271		$	1,801,270
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	206,641		$	191,187
Accrued expenses and other current liabilities	160,747			131,891
Accrued compensation and related benefits	88,693			71,152
Short-term debt, net	6,939			—
Accrued warranty	22,437			20,103
Deferred revenue	72,870			88,534
Total current liabilities	558,327			502,867
Long-term debt, net	318,916			266,929
Long-term financing lease obligations	1,259			193,538
Accrued warranty, non-current	21,900			20,918
Deferred revenue, non-current	32,750			31,768
Deferred tax liability	9,146			13,347
Operating lease liabilities	65,142			—
Other long-term liabilities	72,132			68,082
Commitments and contingencies (Note 19)
Stockholders’ equity:
Preferred stock, $0.001 par value Authorized shares – 25,000 and no shares issued and outstanding	—			—
Common stock, $0.001 par value Authorized shares – 500,000 as of September 28, 2019 and December 29, 2018
Issued and outstanding shares – 180,595 as of September 28, 2019 and 175,452 as of December 29, 2018	181			175
Additional paid-in capital	1,729,875			1,685,916
Accumulated other comprehensive loss	(50,060		)	(25,300		)
Accumulated deficit	(1,253,297		)	(956,970		)
Total stockholders' equity	426,699			703,821
Total liabilities and stockholders’ equity	$	1,506,271		$	1,801,270

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

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INFINERA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



	Three Months Ended						Nine Months Ended
	September 28, 2019			September 29, 2018			September 28, 2019			September 29, 2018
Revenue:
Product	$	253,754		$	167,030		$	703,627		$	513,947
Services	71,587			33,383			210,671			97,374
Total revenue	325,341			200,413			914,298			611,321
Cost of revenue:
Cost of product	186,205			112,276			521,523			320,514
Cost of services	34,866			13,075			108,373			38,945
Amortization of intangible assets	7,796			4,876			24,146			15,160
Acquisition and integration costs	8,447			—			21,211			—
Restructuring and related	1,198			7			24,528			50
Total cost of revenue	238,512			130,234			699,781			374,669
Gross profit	86,829			70,179			214,517			236,652
Operating expenses:
Research and development	71,748			50,658			219,345			165,497
Sales and marketing	35,756			24,439			113,444			81,558
General and administrative	27,621			16,515			96,337			52,716
Amortization of intangible assets	6,861			1,467			20,663			4,561
Acquisition and integration costs	11,962			2,067			31,260			2,067
Restructuring and related	2,168			191			22,827			1,708
Total operating expenses	156,116			95,337			503,876			308,107
Loss from operations	(69,287		)	(25,158		)	(289,359		)	(71,455		)
Other income (expense), net:
Interest income	131			292			1,080			1,818
Interest expense	(7,868		)	(2,160		)	(22,711		)	(8,344		)
Other gain (loss), net	(6,195		)	(5,449		)	(5,908		)	(3,514		)
Total other income (expense), net	(13,932		)	(7,317		)	(27,539		)	(10,040		)
Loss before income taxes	(83,219		)	(32,475		)	(316,898		)	(81,495		)
Provision for (benefit from) income taxes	1,548			135			3,126			(667		)
Net loss	(84,767		)	(32,610		)	(320,024		)	(80,828		)
Net loss per common share:
Basic	$	(0.47	)	$	(0.21	)	$	(1.79	)	$	(0.53	)
Diluted	$	(0.47	)	$	(0.21	)	$	(1.79	)	$	(0.53	)
Weighted average shares used in computing net loss per common share:
Basic	179,988			153,492			178,357			152,028
Diluted	179,988			153,492			178,357			152,028

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

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INFINERA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(In thousands)

(Unaudited)



	Three Months Ended						Nine Months Ended
	September 28, 2019			September 29, 2018			September 28, 2019			September 29, 2018
Net loss	$	(84,767	)	$	(32,610	)	$	(320,024	)	$	(80,828	)
Other comprehensive income (loss), net of tax:
Change in unrealized gain (loss) on available-for-sale investments	2			175			91			274
Foreign currency translation adjustment	(10,525		)	2,069			(18,031		)	(26,242		)
Tax related to available-for-sale investment	—			(45		)	—			(71		)
Actuarial gain on pension liabilities	(7,301		)	—			(6,820		)	—
Net change in accumulated other comprehensive loss	(17,824		)	2,199			(24,760		)	(26,039		)
Comprehensive loss	$	(102,591	)	$	(30,411	)	$	(344,784	)	$	(106,867	)

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

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INFINERA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)



	Three Months Ended September 28, 2019
	Common Stock				Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders' Equity
	Shares		Amount		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders' Equity
Balance at June 29, 2019	179,339		$	179	$	1,715,657		$	(32,236	)	$	(1,168,530	)	$	515,070
ESPP shares issued	1,073		1		4,311									4,312
Shares withheld for tax obligations	(13	)	—		(39		)	—			—			(39		)
Restricted stock units released	196		1		—			—			—			1
Stock-based compensation	—		—		9,946			—			—			9,946
Other comprehensive loss	—		—		—			(17,824		)	—			(17,824		)
Net loss	—		—		—			—			(84,767		)	(84,767		)
Balance at September 28, 2019	180,595		$	181	$	1,729,875		$	(50,060	)	$	(1,253,297	)	$	426,699



	Nine Months Ended September 28, 2019
	Common Stock				Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders' Equity
	Shares		Amount		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders' Equity
Balance at December 29, 2018	175,452		$	175	$	1,685,916		$	(25,300	)	$	(956,970	)	$	703,821
ESPP shares issued	2,898		3		12,049			—			—			12,052
Shares withheld for tax obligations	(93	)	—		(393		)	—			—			(393		)
Restricted stock units released	2,338		3		(2		)	—			—			1
Stock-based compensation	—		—		32,305			—			—			32,305
Cumulative-effect adjustment from adoption of Topic 842	—		—		—			—			23,697			23,697
Other comprehensive loss	—		—		—			(24,760		)	—			(24,760		)
Net loss	—		—		—			—			(320,024		)	(320,024		)
Balance at September 28, 2019	180,595		$	181	$	1,729,875		$	(50,060	)	$	(1,253,297	)	$	426,699

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	Three Months Ended September 29, 2018
	Common Stock				Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders' Equity
	Shares		Amount		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders' Equity
Balance at June 30, 2018	152,940		$	153	$	1,450,136		$	(21,984	)	$	(790,893	)	$	637,412
Stock options exercised	3		—		20			—			—			20
Shares withheld for tax obligations	(13	)	—		(129		)	—			—			(129		)
Restricted stock units released	153		—		—			—			—			—
Stock-based compensation	—		—		10,972			—			—			10,972
Other comprehensive income	—		—		—			2,199			—			2,199
Net loss	—		—		—			—			(32,610		)	(32,610		)
Balance at September 29, 2018	153,988		$	154	$	1,547,451		$	(19,785	)	$	(823,503	)	$	704,317



	Nine Months Ended September 29, 2018
	Common Stock				Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders' Equity
	Shares		Amount		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders' Equity
Balance at December 30, 2017	149,471		$	149	$	1,417,043		$	6,254		$	(758,081	)	$	665,365
Stock options exercised	229		1		1,701			—			—			1,702
ESPP shares issued	2,189		2		15,990			—			—			15,992
Shares withheld for tax obligations	(102	)	—		(1,093		)	—			—			(1,093		)
Restricted stock units released	2,201		2		(2		)	—			—			—
Stock-based compensation	—		—		33,966			—			—			33,966
Cumulative-effect adjustment from adoption of Topic 606	—		—		—			—			15,406			15,406
Other comprehensive loss	—		—		—			(26,039		)	—			(26,039		)
Net loss	—		—		—			—			(80,828		)	(80,828		)
Balance at September 29, 2018	153,988		$	154	$	1,547,451		$	(19,785	)	$	(823,503	)	$	704,317

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

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INFINERA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Nine Months Ended
	September 28, 2019			September 29, 2018
Cash Flows from Operating Activities:
Net loss	$	(320,024	)	$	(80,828	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	91,181			50,339
Non-cash restructuring charges and related (credits)	22,236			(81		)
Amortization of debt discount and issuance costs	14,107			6,752
Operating lease expense	31,263			—
Impairment of non-marketable equity investment	—			4,260
Stock-based compensation expense	31,565			34,394
Other loss	579			(836		)
Changes in assets and liabilities:
Accounts receivable	27,521			(27,728		)
Inventory	(23,339		)	(926		)
Prepaid expenses and other assets	(53,470		)	294
Accounts payable	16,487			26,254
Accrued liabilities and other expenses	12,807			(30,754		)
Deferred revenue	(8,073		)	(8,669		)
Net cash used in operating activities	(157,160		)	(27,529		)
Cash Flows from Investing Activities:
Purchase of available-for-sale investments	—			(2,986		)
Proceeds from sales of available-for-sale investments	—			53,039
Proceeds from sale of non-marketable equity investments	1,009			1,050
Proceeds from maturities of investments	26,584			98,112
Acquisition of business, net of cash acquired	(10,000		)	—
Proceeds from sale of assets	778			—
Purchase of property and equipment	(28,331		)	(27,027		)
Net cash provided by (used in) investing activities	(9,960		)	122,188
Cash Flows from Financing Activities:
Proceeds from issuance of debt, net	37,334			391,431
Payment of debt issuance cost	(124		)	—
Purchase of capped call transactions	—			(48,880		)
Repayment of debt	(197		)	(150,000		)
Proceeds from issuance of common stock	12,053			17,693
Minimum tax withholding paid on behalf of employees for net share settlement	(393		)	(1,093		)
Net cash provided by financing activities	48,673			209,151
Effect of exchange rate changes on cash and restricted cash	(3,260		)	(3,054		)
Net change in cash, cash equivalents and restricted cash	(121,707		)	300,756
Cash, cash equivalents and restricted cash at beginning of period	242,337			121,486
Cash, cash equivalents and restricted cash at end of period⁽¹⁾	$	120,630		$	422,242
Supplemental disclosures of cash flow information:
Cash paid for income taxes, net of refunds	$	15,924		$	3,320
Cash paid for interest	$	13,369		$	1,332

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Supplemental schedule of non-cash investing and financing activities:
Third party manufacturer funding for transfer expenses incurred	$	6,541	$	—
Unpaid debt issuance cost	$	1,931	$	—
Transfer of inventory to fixed assets	$	2,440	$	1,165

⁽¹⁾ Reconciliation of cash, cash equivalents and restricted cash to the condensed consolidated balance sheets:



	September 28, 2019		September 29, 2018

	(In thousands)
Cash and cash equivalents	$	94,804	$	416,406
Short-term restricted cash	—		402
Long-term restricted cash	25,826		5,434
Total cash, cash equivalents and restricted cash	$	120,630	$	422,242

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

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INFINERA CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


1.	Basis of Presentation and Significant Accounting Policies

Basis of Presentation

Infinera Corporation (the “Company”) prepared its interim condensed consolidated financial statements that accompany these notes in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”), consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2018.

The Company has made certain estimates, assumptions and judgments that can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Significant estimates, assumptions and judgments made by management include revenue recognition, stock-based compensation, employee benefit and pension plans, inventory valuation, accrued warranty, operating lease liabilities, business combinations, fair value measurement of investments and accounting for income taxes. Other less significant estimates, assumptions and judgments made by management include allowances for sales returns, allowances for doubtful accounts, useful life of intangible assets, and property, plant and equipment. Management believes that the estimates and judgments upon which they rely are reasonable based upon information available to them at the time that these estimates and judgments are made. To the extent there are material differences between these estimates and actual results, the Company’s condensed consolidated financial statements will be affected.

The interim financial information is unaudited, but reflects all adjustments that are, in management’s opinion, necessary to provide a fair presentation of results for the interim periods presented. All adjustments are of a normal recurring nature. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.

This interim information should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2018.

The Company reclassified certain amounts reported in previous periods to conform to the current presentation. Effective for the fourth quarter of 2018, the Company elected to present amortization of intangible assets and acquisition and integration costs as separate line items within cost of revenue and operating expenses. As a result, the costs previously reflected in cost of revenue and operating expenses were reclassified to amortization of intangible assets and acquisition and integration costs within total cost of revenue and total operating expenses. Prior period amounts have been revised to conform to the current period presentation. This change in presentation does not affect the Company's total cost of revenue or total operating expenses.

The following tables show reclassified amounts to conform to the current period's presentation (in thousands):



	Three Months Ended September 29, 2018
	Previously Reported		Change in Presentation Reclassification			Current Presentation
Cost of revenue:
Cost of product	$	117,152	$	(4,876	)	$	112,276
Cost of services	13,075		—			13,075
Amortization of intangible assets⁽¹⁾	—		4,876			4,876
Restructuring and related	7		—			7
Total	$	130,234	$	—		$	130,234

Operating expenses:
Research and development	$	50,658	$	—		$	50,658
Sales and marketing	26,073		(1,634		)	24,439
General and administrative	18,415		(1,900		)	16,515
Amortization of intangible assets⁽¹⁾	—		1,467			1,467
Acquisition and integration costs⁽¹⁾	—		2,067			2,067
Restructuring and related	191		—			191
Total	$	95,337	$	—		$	95,337



	Nine Months Ended September 29, 2018
	Previously Reported		Change in Presentation Reclassification			Current Presentation
Cost of revenue:
Cost of product	$	335,674	$	(15,160	)	$	320,514
Cost of services	38,945		—			38,945
Amortization of intangible assets⁽¹⁾	—		15,160			15,160
Restructuring and related	50		—			50
Total	$	374,669	$	—		$	374,669

Operating expenses:
Research and development	$	165,497	$	—		$	165,497
Sales and marketing	86,286		(4,728		)	81,558
General and administrative	54,616		(1,900		)	52,716
Amortization of intangible assets⁽¹⁾	—		4,561			4,561
Acquisition and integration costs⁽¹⁾	—		2,067			2,067
Restructuring and related	1,708		—			1,708
Total	$	308,107	$	—		$	308,107


⁽¹⁾	These lines were not previously reported in the consolidated statements of operations.

To date, a few of the Company’s customers have accounted for a significant portion of its revenue. For the three months ended September 28, 2019, one customer accounted for 15% of the Company's total revenue and for the corresponding period in 2018, two customers individually accounted for 17% and 14% of the Company's total revenue, respectively. For the nine months ended September 28, 2019, one customer accounted for 13% of the Company's total revenue and for the corresponding period in 2018, two customers individually accounted for 22% and 14% of the Company's total revenue, respectively.

There have been no material changes in the Company’s significant accounting policies for the nine months ended September 28, 2019 compared to those disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2018, with the exception of the Company's lease accounting policy. Effective December 30, 2018, the Company adopted Accounting Standards Update 2016-02, “Leases (Topic 842)” ("Topic 842"). See Note 3, “Leases” to the Notes to Condensed Consolidated Financial Statements for discussion on the impact of the adoption of these standards on the Company's policy for leases.


2.	Recent Accounting Pronouncements

Accounting Pronouncements Recently Adopted

In July 2019, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2019-07, "Codification Updates to SEC Sections" (“ASU 2019-07”). This update amends various SEC paragraphs pursuant to the issuance of SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization. One of the changes that ASU 2019-07 requires is a presentation of changes in stockholders’ equity in the form of a reconciliation, either as a separate financial statement or in the notes to the financial statements, for the current and comparative year-to-date interim periods. The Company presented changes in stockholders' equity as separate financial statements for the current and comparative year-to-date interim periods beginning on December 30, 2018. The additional elements of ASU 2019-07 did not have a material impact on the Company's Consolidated Financial Statements. This guidance was effective immediately upon issuance.

In August 2018, the FASB issued Accounting Standards Update No. 2018-15, “Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”). This update provides guidance for determining if a cloud computing arrangement is within the scope of internal-use software guidance, and would require capitalization of certain implementation costs. The Company adopted ASU 2018-15 in the first quarter of 2019. The Company's adoption of ASU 2018-15 during its first quarter of 2019 did not have a significant impact on its consolidated financial statements.

In June 2018, the FASB issued Accounting Standards Update No. 2018-07, “Improvements to Non-employee Share-Based Payment Accounting” (“ASU 2018-07”), which simplifies the accounting for share-based payments granted to non-employees for goods and services. Under ASU 2018-07, certain guidance on such payments to non-employees is aligned with the requirements for share-based payments granted to employees. The Company's adoption of ASU 2017-09 during its first quarter of 2019 did not have a significant impact on its consolidated financial statements.

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, “Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). This update eliminates Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The Company elected to early adopt the standard prospectively during its first quarter of 2019 and the adoption of the standard did not have any impact on its consolidated financial statements.

In February 2016, the FASB issued Topic 842, which amends the existing accounting standards for leases. This new standard requires lessees to record a right-of-use asset and a corresponding lease liability on the balance sheet (with the exception of short-term leases). For lessees, leases will continue to be classified as either operating or financing in the income statement. The Company adopted Topic 842 in the first quarter of 2019 utilizing the modified retrospective transition method through a cumulative-effect adjustment at the beginning of the first quarter of 2019. The Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to carryforward its historical lease classification, assessment on whether a contract was or contains a lease, and initial direct costs for leases that existed prior to December 30, 2018. The Company also elected to combine its lease and non-lease components and not recognize right-of-use (“ROU”) assets and lease liabilities for leases with an initial term of 12 months or less. The Company did not elect to apply the hindsight practical expedient when determining lease terms and assessing impairment of ROU assets.

Accounting Pronouncements Not Yet Effective

In August 2018, the FASB issued Accounting Standards Update No. 2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU 2018-14”). This update eliminates, adds and modifies certain disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. ASU 2018-14 is effective for the Company in its first quarter of 2020, with early adoption permitted. The Company is currently evaluating the impact the adoption of ASU 2018-14 would have on its consolidated financial statements.

In August 2018, the FASB issued Accounting Standards Update No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). This update eliminates, adds and modifies certain disclosure requirements for fair value measurements. ASU 2018-13 is effective for the Company in its first quarter of 2020 and early adoption is permitted of the entire standard or only the provisions that eliminate or modify disclosure requirements. The Company is currently evaluating the impact the adoption of ASU 2018-13 would have on its consolidated financial statements.

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”) further amended by Accounting Standards Update No. 2019-04 issued in April 2019 and Accounting Standards Update No. 2019-05 issued in May 2019, which require measurement and recognition of expected credit losses for financial assets held. This guidance is effective for the Company in its first quarter of fiscal 2020 and early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2016-13, ASU 2019-04 and ASU 2019-05 would have on its consolidated financial statements.

3. Leases

Effective December 30, 2018, the Company adopted Topic 842 utilizing the modified retrospective transition method, which requires a cumulative-effect adjustment, if any, to the opening balance of retained earnings to be recognized on the date of adoption with prior periods not restated.

The Company leases facilities under non-cancelable operating lease agreements. These leases have varying terms that range from one to 11 years and contain leasehold improvement incentives, rent holidays and escalation clauses. In addition, some of these leases have renewal options for up to five years.

The Company determines if an arrangement contains a lease at inception. Operating leases are included in operating lease ROU assets, accrued expenses and operating lease liabilities on the Company's consolidated balance sheets. Finance leases are included in property, plant and equipment, accrued expenses and finance lease liabilities on the Company's consolidated balance sheets.

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. Operating lease ROU assets also include any lease payments made and exclude lease incentives and initial direct costs incurred. Variable lease payments are expensed as incurred and are not included within the ROU asset and lease liability calculation. Variable lease payments primarily include reimbursements of costs incurred by lessors for common area maintenance and utilities. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Company rents or subleases certain real estate under agreements that are classified as operating leases.

Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company does not account for lease components (e.g., fixed payments including rent) separately from the non-lease components (e.g., common-area maintenance costs).

Adoption of Topic 842

The primary impact for the Company was the balance sheet recognition of operating lease ROU assets and operating lease liabilities. In addition, the Company's financing lease obligations that historically did not qualify for sale leaseback accounting under ASC 840-40, “Leases - Sale-Leaseback Transactions” (“ASC 840-40”) now meet the criteria for sale under Topic 842 and are recorded as operating leases. As a result, the Company reclassified financing liabilities of $198.3 million from accrued expenses and long-term financing lease obligations and assets of $174.6 million from property, plant and equipment, net, to $23.8 million accumulated deficit adjustment reflecting the cumulative effect of an accounting change related to the sale-leasebacks.

The following table summarizes the impacts of adopting Topic 842 on the Company's condensed consolidated balance sheet as of December 29, 2018 (in thousands):



	As Reported Balance as of December 29, 2018		Adjustments due to Topic 842			As Adjusted Balance as of December 29, 2018
Assets
Property, plant and equipment, net	$	342,820	$	(174,386	)	$	168,434
Operating lease right-of-use assets	$	—	$	78,855		$	78,855
Other non-current assets	$	14,849	$	(4,884	)	$	9,965

Liabilities
Accrued expenses and other current liabilities	$	131,891	$	(7,343	)	$	124,548
Long-term financing lease obligation	$	193,538	$	(193,538	)	$	—
Other long-term liabilities	$	68,082	$	(4,907	)	$	63,175
Operating lease liabilities - short-term	$	—	$	19,209		$	19,209
Operating lease liabilities - long-term	$	—	$	62,467		$	62,467

Equity
Accumulated deficit	$	956,970	$	(23,697	)	$	933,273

The Company has operating leases for real estate and automobiles. During the three months ended September 28, 2019, operating lease expense was approximately $8.0 million (including $1.5 million of accelerated rent expense due to restructuring resulting in abandonment of lease facilities). During the nine months ended September 28, 2019, operating lease expense was approximately $31.3 million (including $11.9 million of accelerated rent expense due to restructuring resulting in abandonment of lease facilities). Variable lease cost, short-term lease cost and sublease income were immaterial during the three and nine months ended September 28, 2019.

The following table presents maturity of lease liabilities under the Company's non-cancelable operating leases as of September 28, 2019 (in thousands):



Remainder of 2019	$	6,727
2020	23,475
2021	17,081
2022	14,655
2023	11,780
Thereafter	45,297
Total lease payments	$	119,015
Less: interest⁽¹⁾	35,709
Present value of lease liabilities	$	83,306

⁽¹⁾ Calculated using the interest rate for each lease.

The following table presents supplemental information for the nine months ended September 28, 2019 (in thousands, except for weighted average and percentage data):



Weighted average remaining lease term	5.88
Weighted average discount rate	8.83		%
Cash paid for amounts included in the measurement of lease liabilities	$	20,058
Operating cash flow from operating leases	$	20,058
Leased assets obtained in exchange for new operating lease liabilities	$	18,088

ASC 840-40 Disclosures

The following table presents future minimum lease payments related to the non-cancelable portion of operating leases as of December 29, 2018 (in thousands):



	2019		2020		2021		2022		2023		Thereafter		Total
Operating lease payments	$	18,352	$	14,047	$	7,888	$	5,926	$	4,905	$	18,303	$	69,421

Financing Lease Obligations

The Company evaluated two sale-leaseback transactions that were assumed by the Company in the Acquisition (as defined in Note 7, "Business Combination" to the Notes to Condensed Consolidated Financial Statements). It was determined that these transactions did not qualify for sale-leaseback accounting under ASC 840-40.

The Company leases a facility (land and all attached real property) in Naperville, Illinois that was sold to a third party and subsequently leased back. This was determined to be a failed sale-leaseback due to a $31.5 million imposition reimbursement payment to be made over 10 years, which was linked to the total building income generated each year. As a result of purchase accounting, the financing lease obligation was recorded at the present value of the remaining lease payments and expected value of the facility at the end of the occupancy period. The financing lease obligation will continue to be amortized over the remaining period of the lease term under ASC 840-40. The assets will continue to be depreciated over their remaining useful lives under ASC 840-40.

Additionally, the Company leases a facility (land and all attached real property) in Espoo, Finland, which was sold to a third party and subsequently leased back. The lease was determined to be a failed sale-leaseback due to the deposit being considered a form of collateral. The amount of the deposit was equal to one year of rental payments, whereas typical deposits are approximately two to three months of rental payments. As a result of purchase accounting, the financing lease obligation was recorded at the present value of the remaining lease payments and expected value of the facility at the end of the occupancy period. The financing lease obligation will continue to be amortized over the remaining period of the lease term under ASC 840-40. The assets will continue to be depreciated over their remaining useful lives.

In conjunction with the adoption of the new lease accounting standard in the first quarter of 2019, the transactions qualified for sale-leaseback accounting under Topic 842, as control of the underlying assets was transferred to the lessor. As such, the balances of fixed assets, accrued expenses and other long-term liabilities as of the transition date related to the Naperville, Illinois and Espoo, Finland leases were reclassified to accumulated deficit as a cumulative effect of an accounting change.

4. Revenue Recognition

Capitalization of Costs to Obtain a Contract

The ending balance of the Company’s capitalized costs to obtain a contract as of September 28, 2019 and December 29, 2018 were $0.2 million and $0.4 million, respectively. The Company's amortization expense was not material for the three and nine months ended September 28, 2019 and September 29, 2018, respectively.

Disaggregation of Revenue

The following table presents the Company's revenue disaggregated by revenue source (in thousands):



	Three Months Ended				Nine Months Ended
	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018
Product	$	253,754	$	167,030	$	703,627	$	513,947
Services	71,587		33,383		210,671		97,374
Total revenue	$	325,341	$	200,413	$	914,298	$	611,321

The following table presents the Company's revenue disaggregated by geography, based on the shipping address of the customer and by sales channel (in thousands):



	Three Months Ended				Nine Months Ended
	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018
United States	$	160,645	$	98,097	$	426,380	$	348,109
Other Americas	20,574		6,775		65,241		16,867
Europe, Middle East and Africa	113,417		59,131		302,876		180,492
Asia Pacific	30,705		36,410		119,801		65,853
Total revenue	$	325,341	$	200,413	$	914,298	$	611,321

The Company sells its products directly to customers who are predominantly service providers and to channel partners that sell on its behalf. The following table presents the Company’s revenue disaggregated by direct and indirect sales (in thousands):



	Three Months Ended				Nine Months Ended
	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018
Direct	$	254,886	$	172,918	$	744,099	$	557,004
Indirect	70,455		27,495		170,199		54,317
Total revenue	$	325,341	$	200,413	$	914,298	$	611,321

Contract Balances

The following table provides information about receivables, contract assets and contract liabilities from contracts with customers (in thousands):



	September 28, 2019		December 29, 2018
Accounts receivable, net	$	284,448	$	317,115
Contract assets	$	28,490	$	24,981
Deferred revenue	$	105,620	$	120,302

Revenue recognized for the three and nine months ended September 28, 2019 that was included in the deferred revenue balance at the beginning of the reporting period was $22.9 million and $90.6 million, respectively. Changes in the contract asset and liability balances during the three and nine months ended September 28, 2019 were not materially impacted by other factors.

Transaction Price Allocated to the Remaining Performance Obligation

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially satisfied) at the end of the reporting period (in thousands):



	Remainder of 2019		2020		2021		2022		2023		Thereafter		Total
Revenue expected to be recognized in the future as of September 28, 2019	$	373,343	$	132,902	$	30,863	$	9,757	$	4,265	$	2,270	$	553,400

5. Fair Value Measurements

Pursuant to the accounting guidance for fair value measurements and its subsequent updates, fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

Valuation techniques used by the Company are based upon observable and unobservable inputs. Observable or market inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions about market participant assumptions based on the best information available. Observable inputs are the preferred source of values. These two types of inputs create the following fair value hierarchy:



Level 1	–	Quoted prices in active markets for identical assets or liabilities.

Level 2	–	Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3	–	Prices or valuations that require management inputs that are both significant to the fair value measurement and unobservable.

The Company measures its cash equivalents, foreign currency exchange forward contracts and marketable debt securities at fair value and classifies its investments in accordance with the fair value hierarchy. The Company’s money market funds and U.S. treasuries are classified within Level 1 of the fair value hierarchy and are valued based on quoted prices in active markets for identical securities.

Foreign Currency Exchange Forward Contracts

As discussed in Note 6, “Derivative Instruments” to the Notes to Condensed Consolidated Financial Statements, the Company mainly holds non-speculative foreign exchange forward contracts to hedge certain foreign currency exchange exposures. The Company estimates the fair values of derivatives based on quoted market prices or pricing models using current market rates. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit risk, foreign exchange rates, and forward and spot prices for currencies.

Table of Contents

The following tables represent the Company’s fair value hierarchy for its assets and liabilities measured at fair value on a recurring basis (in thousands):



	As of September 28, 2019								As of December 29, 2018
	Fair Value Measured Using								Fair Value Measured Using
	Level 1		Level 2			Total			Level 1		Level 2			Total
Assets
Money market funds	$	—	$	—		$	—		$	10,347	$	—		$	10,347
Corporate bonds	—		—			—			—		23,512			23,512
U.S. agency notes	—		—			—			—		2,999			2,999
U.S. treasuries	—		—			—			23,987		—			23,987
Total assets	$	—	$	—		$	—		$	34,334	$	26,511		$	60,845
Liabilities
Foreign currency exchange forward contracts	$	—	$	(102	)	$	(102	)	$	—	$	(91	)	$	(91	)

During the nine months ended September 28, 2019, there were no transfers of assets or liabilities between Level 1 and Level 2 of the fair value hierarchy. As of December 29, 2018, none of the Company’s existing securities were classified as Level 3 securities.

Cash, Cash Equivalents and Investments

Cash, cash equivalents and investments were as follows (in thousands):



	September 28, 2019
	Adjusted Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Cash	$	94,804	$	—	$	—	$	94,804
Total cash, cash equivalents and investments	$	94,804	$	—	$	—	$	94,804



	December 29, 2018
	Adjusted Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Cash	$	168,620	$	—	$	—		$	168,620
Money market funds	10,347		—		—			10,347
U.S. treasuries	23,986		1		—			23,987
Total cash and cash equivalents	$	202,953	$	1	$	—		$	202,954
Corporate bonds	23,603		—		(91		)	23,512
U.S. agency notes	3,000		—		(1		)	2,999
Total short-term investments	$	26,603	$	—	$	(92	)	$	26,511
Total cash, cash equivalents and investments	$	229,556	$	1	$	(92	)	$	229,465

As of September 28, 2019, the Company has liquidated all its investments. Gross realized gains and losses on investments were insignificant in all periods reported. The specific identification method is used to account for gains and losses on available-for-sale investments.

As of September 28, 2019, the Company had $94.8 million of cash, cash equivalents, including $62 million of cash and cash equivalents held by its foreign subsidiaries. In addition, the Company had $25.8 million of restricted cash as of September 28, 2019. The Company's cash in foreign locations is used for operational and investing activities in those locations, and the Company does not currently have the need or the intent to repatriate those funds to the United States.

6. Derivative Instruments

Foreign Currency Exchange Forward Contracts

The Company transacts business in various foreign currencies and has international sales, cost of sales, and expenses denominated in foreign currencies, and carries foreign-currency-denominated monetary assets and liabilities, subjecting the Company to foreign currency risk. The Company’s primary foreign currency risk management objective is to protect the U.S. dollar value of future cash flows and minimize the volatility of reported earnings. The Company utilizes foreign currency exchange forward contracts, primarily short term in nature.

The Company periodically enters into foreign currency exchange forward contracts to manage its exposure to fluctuation in foreign exchange rates that arise from its euro and British pound denominated receivables and restricted cash balances. Gains and losses on these contracts are intended to offset the impact of foreign exchange rate fluctuations on the underlying foreign currency denominated accounts receivables and restricted cash, and therefore, do not subject the Company to material balance sheet risk.

The Company also enters into foreign currency exchange forward contracts to reduce the volatility of cash flows primarily related to forecasted revenue and expenses denominated in euros, British pounds and Swedish kronors (“SEK”). The contracts are settled at maturity and at rates agreed to at inception of the contracts. The gains and losses on these foreign currency derivatives are recorded to the consolidated statement of operations line item, in the current period, to which the item that is being economically hedged is recorded.

For the three months ended September 28, 2019 and September 29, 2018, the before-tax effect of the foreign currency exchange forward contracts was a net gain of $0.5 million and $0.1 million, respectively, and for the nine months ended September 28, 2019 and September 29, 2018, the before-tax effect of the foreign currency exchange forward contracts was a net gain of $1.2 million and $0.6 million, respectively. In each of these periods, the impact of the gross gains and losses was offset by foreign exchange rate fluctuations on the underlying foreign currency denominated amounts.

As of September 28, 2019, the Company did not designate foreign currency exchange forward contracts as hedges for accounting purposes and accordingly, changes in the fair value are recorded in the accompanying condensed consolidated statements of operations. These contracts were entered into with one high-quality institution and the Company consistently monitors the creditworthiness of the counterparties.

The fair value of derivative instruments not designated as hedging instruments in the Company’s condensed consolidated balance sheets was as follows (in thousands):



	As of September 28, 2019					As of December 29, 2018
	Gross Notional⁽¹⁾		Other Accrued Liabilities			Gross Notional⁽¹⁾		Other Accrued Liabilities
Foreign currency exchange forward contracts
Related to euro denominated receivables	$	30,527	$	(102	)	$	40,068	$	(52	)
Related to British pound denominated receivables	$	—	—			$	6,412	(38		)
Related to euro denominated restricted cash	$	—	—			$	240	(1		)
			$	(102	)			$	(91	)


⁽¹⁾	Represents the face amounts of forward contracts that were outstanding as of the end of the period noted.

Accounts Receivable Factoring

The Company has sold certain designated trade account receivables based on factoring arrangements to a large international banking institution. Pursuant to the terms of the arrangements, the Company accounts for these transactions in accordance with ASC 860, “Transfers and Servicing.” The Company's factor purchases trade accounts receivables on a non-recourse basis and without any further obligations. Trade accounts receivables balances sold are removed from the consolidated balance sheets and cash received are reflected as cash provided by operating activities in the consolidated statements of cash flow. The difference between the fair value of the Company's trade receivables and the proceeds received is recorded as interest expense in the Company's condensed consolidated statements of operations, and for the three and nine months ended September 28, 2019, the Company's recognized factoring related interest expense was approximately $0.1 million and $0.5 million,

respectively. The gross amount of trade accounts receivables sold during the three and nine months ended September 28, 2019, totaled approximately $17.2 million and $62.8 million, respectively. The Company did not enter into any factoring arrangements during the three and nine months ended September 29, 2018.

7. Business Combination

On October 1, 2018 (the “Acquisition Date”), the Company completed the acquisition of all the outstanding limited liability company interests of Telecom Holding Parent LLC (“Coriant”), a Delaware limited liability company (the “Acquisition”) pursuant to the Unit Purchase Agreement entered into on July 23, 2018 (the “Purchase Agreement”). The Acquisition positions the Company as one of the largest providers of vertically integrated transport networking solutions in the world, enhances the Company's ability to serve a global customer base and accelerates delivery of the innovative solutions its customers demand. The Acquisition also positions the Company to expand the breadth of customer applications it can address, including metro aggregation and switching, disaggregated transport and routing, and software-enabled multi-layer network management and control. The Acquisition was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, “Business Combinations” (“Topic 805”) and consisted of the following (in thousands):



Cash⁽¹⁾	$	154,192
Equity consideration⁽²⁾	129,628
Total	$	283,820


⁽¹⁾	Cash consideration of $154.2 million includes $10.0 million that the Company held in escrow as of December 29, 2018.


⁽²⁾	Based on the closing price of the Company's common stock of $6.18 on October 1, 2018, the $129.6 million equity consideration represents the fair value of approximately 21 million shares of the Company's common stock issued to Coriant shareholders in accordance with the Purchase Agreement.

The Company financed the cash portion of the purchase price of the Acquisition with the net proceeds from its offering of $402.5 million in aggregate principal amount of its 2.125% convertible senior notes due September 1, 2024 (the “2024 Notes”). See Note 13, “Debt” to the Notes to Condensed Consolidated Financial Statements for more information regarding the 2024 Notes.

The Company allocated the fair value of the purchase price of the Acquisition to the tangible and intangible assets acquired as well as liabilities assumed, based on their estimated fair values. The excess of the purchase price over the fair values of these identifiable assets and liabilities was recorded as goodwill.

The Company prepared an initial determination of the fair value of assets acquired and liabilities assumed as of the Acquisition Date using preliminary information. In accordance with Topic 805, during the measurement period an acquirer retrospectively adjusts the provisional amounts recognized at the Acquisition Date to reflect information obtained about facts and circumstances that existed as of the Acquisition Date that, if known, would have affected the measurement of the amounts recognized as of the Acquisition Date. Accordingly, the Company has recognized measurement period adjustments made during the first three quarters of 2019 to the fair value of certain assets acquired and liabilities assumed as a result of additional information obtained. None of the adjustments had a material impact on the Company's financial results.

The following table summarizes the Company’s preliminary allocation of the purchase consideration based on the fair value of assets acquired and liabilities assumed at the Acquisition Date (in thousands):



	Amounts Recognized as of Acquisition Date			Measurement Period Adjustments			Total
Cash and cash equivalents	$	15,549		$	—		$	15,549
Restricted cash	25,743			—			25,743
Accounts receivable	170,466			(2,784		)	167,682
Inventory	96,067			(7,113		)	88,954
Property, plant and equipment, net	217,991			—			217,991
Other assets	39,145			(1,090		)	38,055
Intangible assets, net	200,700			—			200,700
Goodwill	48,235			21,569			69,804
Financing lease obligation	(194,700		)	—			(194,700		)
Deferred revenue	(43,502		)	5,732			(37,770		)
Other liabilities	(291,874		)	(16,314		)	(308,188		)
Total net assets	$	283,820		$	—		$	283,820

The Company expects to finalize the allocation of the purchase consideration as soon as practicable, pending finalization of income taxes and any other adjustments related to acquired assets or liabilities. The Company currently expects finalizing this allocation following the completion of its fourth quarter ending December 28, 2019. The measurement period adjustments were primarily related to adjustments to acquired liabilities, receivables, inventory, deferred revenue, tax effects of these purchase accounting adjustments and changes in assessment of certain tax positions. The Company does not believe that the measurement period adjustments had a material impact on its consolidated statements of operations, balance sheets or cash flows in any periods previously reported.

The following table presents details of the identifiable assets acquired at the Acquisition Date (in thousands, except estimated useful life data):



	Fair Value		Estimated Useful Life (In Years)
Customer relationships and backlog	$	111,400	8
Developed technology	70,550		5
In-process technology	17,750		n/a
Trade name	1,000		1
Total	$	200,700

Goodwill generated from this business combination is primarily attributable to the synergies from combining the operations of Coriant with that of the Company, which resulted in strengthening the Company's ability to serve a global customer base and accelerate delivery of product solutions. The goodwill recorded in the Acquisition is not expected to be deductible for income tax purposes.

8. Goodwill and Intangible Assets

Goodwill

Goodwill is recorded when the purchase price of an acquisition exceeds the fair value of the net tangible and identified intangible assets acquired.

The following table presents details of the Company’s goodwill during the nine months ended September 28, 2019 (in thousands):



Balance as of December 29, 2018	$	227,231
Adjustment to goodwill acquired	21,569
Foreign currency translation adjustments	(14,315		)
Balance as of September 28, 2019	$	234,485

The gross carrying amount of goodwill may change due to the effects of foreign currency fluctuations as a portion of these assets are denominated in foreign currency. To date, the Company has zero accumulated impairment loss on goodwill.

Intangible Assets

The following tables present details of the Company’s intangible assets as of September 28, 2019 and December 29, 2018 (in thousands, except for weighted average data):



	September 28, 2019
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Remaining Useful Life (In Years)
Intangible assets with finite lives:
Trade names	$	1,000	$	(1,000	)	$	—	—
Customer relationships	154,371		(60,682		)	93,689		3.3
Developed technology	158,686		(85,942		)	72,744		1.5
Total intangible assets with finite lives	$	314,057	$	(147,624	)	$	166,433	4.8
In-process technology	17,750		—			17,750
Total intangible assets	$	331,807	$	(147,624	)	$	184,183

*NMF = Not meaningful



	December 29, 2018
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Remaining Useful Life (In Years)
Intangible assets with finite lives:
Trade names	$	1,000	$	(250	)	$	750	NMF*
Customer relationships	158,110		(42,478		)	115,632		3.5
Developed technology	166,355		(67,368		)	98,987		1.7
Total intangible assets with finite lives	$	325,465	$	(110,096	)	$	215,369	5.2
In-process technology	17,750		—			17,750
Total intangible assets	$	343,215	$	(110,096	)	$	233,119

*NMF = Not meaningful

The gross carrying amount of intangible assets and the related amortization expense of intangible assets may change due to the effects of foreign currency fluctuations as a portion of these assets are denominated in foreign currency. Amortization expense was $14.7 million and $44.8 million for the three and nine months ended September 28, 2019, respectively, and was $6.3 million and $19.7 million, respectively, for the corresponding periods in 2018.

Intangible assets are carried at cost less accumulated amortization. Amortization expenses are recorded to the appropriate cost and expense categories.

The following table summarizes the Company’s estimated future amortization expense of intangible assets with finite lives as of September 28, 2019 (in thousands):



			Fiscal Years
	Total		Remainder of 2019		2020		2021		2022		2023		2024 and Thereafter
Total future amortization expense	$	166,433	$	14,338	$	43,538	$	31,516	$	29,015	$	23,206	$	24,820

9. Balance Sheet Details

Restricted Cash

The Company’s restricted cash balance is primarily comprised of certificates of deposit and money market funds, of which the majority is not insured by the Federal Deposit Insurance Corporation. These amounts primarily collateralize the Company’s issuances of standby letters of credit and bank guarantees. Additionally, the Company's restricted cash balance includes amounts pledged as collateral on its derivative instruments.

The following table provides details of selected balance sheet items (in thousands):



	September 28, 2019			December 29, 2018
Inventory
Raw materials	$	47,247		$	74,435
Work in process	52,232			57,232
Finished goods	225,366			180,221
Total inventory	$	324,845		$	311,888
Property, plant and equipment, net
Computer hardware	$	34,811		$	15,633
Computer software⁽¹⁾	35,190			40,923
Laboratory and manufacturing equipment⁽²⁾	311,065			304,889
Land and building	12,349			187,184
Furniture and fixtures	2,515			2,587
Leasehold and building improvements	45,584			46,038
Construction in progress	43,253			32,997
Subtotal	$	484,767		$	630,251
Less accumulated depreciation and amortization	(328,197		)	(287,431		)
Total property, plant and equipment, net	$	156,570		$	342,820
Accrued expenses and other current liabilities
Loss contingency related to non-cancelable purchase commitments	21,042			$	26,042
Professional and other consulting fees	14,267			10,442
Taxes payable	43,169			23,249
Accrued rebate and customer prepay liability	5,342			13,501
Restructuring accrual	27,423			13,097
Right of return and buyback	398			—
Acquisition related funds in escrow	—			10,000
Short-term financing lease obligation	768			4,718
Short-term operating lease liability	18,164			—
Other customer related charges	—			800
Other accrued expenses and other current liabilities	30,174			30,042
Total accrued expenses	$	160,747		$	131,891


⁽¹⁾	Included in computer software at September 28, 2019 and December 29, 2018 were $21.3 million and $13.1 million, respectively, related to enterprise resource planning (“ERP”) systems that the Company implemented. The unamortized ERP costs at September 28, 2019 and December 29, 2018 were $10.2 million and $3.9 million, respectively.

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⁽²⁾

Included in laboratory and manufacturing equipment at September 28, 2019 was $2 million related to an equipment finance lease entered by the Company for a term of three years with an option to purchase at the end of the three year term. The finance lease was recorded at $2 million using a discount rate of 8.2% and was included in property, plant and equipment, net. As of September 28, 2019, $0.8 million was included in accrued expenses and other current liabilities and $1.2 million as long term finance lease obligation.

10. Restructuring and Related Costs

In December of 2018, the Company implemented a restructuring initiative (the “2018 Restructuring Plan”) as part of a comprehensive review of the Company's operations and ongoing integration activities in order to optimize resources for future growth, improve efficiencies and address redundancies following the Acquisition. As part of the 2018 Restructuring Plan, the Company hopes to reduce selected ongoing expenses, streamline the organization, and eliminate fixed costs to align more closely with its needs going forward. The Company expects to incur additional restructuring during 2019 as it progresses with the 2018 Restructuring Plan. The Company expects to substantially complete activities under the 2018 Restructuring Plan by the end of 2019.

In the fourth quarter of 2017, the Company implemented a plan to restructure its worldwide operations (the "2017 Restructuring Plan") in order to reduce expenses and establish a more cost-effective structure that better aligns the Company's operations with its long-term strategies.

The following table presents restructuring and other related costs included in cost of revenue and operating expenses in the accompanying consolidated statements of operations under the 2018 Restructuring Plan, Coriant's previous restructuring and reorganization plans, and the 2017 Restructuring Plan (in thousands):



	Three Months Ended						Nine Months Ended
	September 28, 2019						September 28, 2019
	Cost of Revenue			Operating Expenses			Cost of Revenue		Operating Expenses
Severance and related expenses	$	(369	)	$	1,101		$	21,593	$	9,341
Facilities	—			1,113			—		2,194
Accelerated amortization of lease assets due to cease use	1,155			—			1,155		11,338
Accelerated depreciation and other asset impairment charges	412			(46		)	1,780		(46		)
Total	$	1,198		$	2,168		$	24,528	$	22,827



	Three Months Ended				Nine Months Ended
	September 29, 2018				September 29, 2018
	Cost of Revenue		Operating Expenses		Cost of Revenue		Operating Expenses
Severance and related expenses	$	7	$	28	$	50	$	1,873
Facilities	—		163		—		(874		)
Asset impairment	—		—		—		(74		)
License impairment	—		—		—		783
Total	$	7	$	191	$	50	$	1,708

Restructuring liabilities are reported within accrued expenses, operating lease liabilities and other long-term liabilities in the accompanying condensed consolidated balance sheets (in thousands):

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	December 29, 2018		Charges		Cash			Non-cash Settlements and Other			September 28, 2019
Severance and related expenses	$	19,842	$	30,934	$	(14,660	)	$	(3,605	)	$	32,511
Facilities	4,266		2,194		(1,831		)	(4,629		)	—
Accelerated amortization of lease assets due to cease use	—		12,493		—			(12,493		)	—
Accelerated depreciation and other asset impairment charges	243		1,734		(243		)	(1,734		)	—
Total	$	24,351	$	47,355	$	(16,734	)	$	(22,461	)	$	32,511

As of September 28, 2019, the Company's restructuring liability was comprised of $32.5 million of severance and related expenses, primarily due to the closure of the Company's Berlin, Germany manufacturing facility, which was transitioned to a third-party contract manufacturer during the third quarter of 2019. The Company has committed funding from a third party to cover the costs associated with the closure of this facility.

11. Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss includes certain changes in equity that are excluded from net loss. The following table sets forth the changes in accumulated other comprehensive income (loss) by component for the nine months ended September 28, 2019 (in thousands):



	Unrealized Loss on Other Available-for-Sale Securities			Foreign Currency Translation			Accumulated Tax Effect			Actuarial Gain (Loss) on Pension			Total
Balance at December 29, 2018	$	(91	)	$	(18,932	)	$	(964	)	$	(5,313	)	$	(25,300	)
Net current-period other comprehensive income (loss)	91			(18,031		)	—			(6,820		)	(24,760		)
Balance at September 28, 2019	$	—		$	(36,963	)	$	(964	)	$	(12,133	)	$	(50,060	)

12. Basic and Diluted Net Loss Per Common Share

Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed using net loss and the weighted average number of common shares outstanding plus potentially dilutive common shares outstanding during the period. Potentially dilutive common shares include the assumed exercise of outstanding stock options, assumed release of outstanding restricted stock units (“RSUs”) and performance stock units (“PSUs”), and assumed issuance of common stock under the Company's 2007 Employee Stock Purchase Plan (“ESPP”) using the treasury stock method. Potentially dilutive common shares also include the assumed conversion of the 2024 Notes from the conversion spread (as further discussed in Note 13, “Debt” to the Notes to Condensed Consolidated Financial Statements). The Company would include the dilutive effects of the 2024 Notes in the calculation of diluted net income per common share if the average market price is above the conversion price. Upon conversion of the 2024 Notes, it is the Company’s intention to pay cash equal to the lesser of the aggregate principal amount or the conversion value of the 2024 Notes being converted, therefore, only the conversion spread relating to the 2024 Notes would be included in the Company’s diluted earnings per share calculation unless their effect is anti-dilutive. The Company includes the common shares underlying PSUs in the calculation of diluted net income per common share only when they become contingently issuable.

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The following table sets forth the computation of net loss per common share – basic and diluted (in thousands, except per share amounts):



	Three Months Ended						Nine Months Ended
	September 28, 2019			September 29, 2018			September 28, 2019			September 29, 2018
Net loss	$	(84,767	)	$	(32,610	)	$	(320,024	)	$	(80,828	)
Weighted average common shares outstanding - basic and diluted	179,988			153,492			178,357			152,028
Net loss per common share - basic and diluted	$	(0.47	)	$	(0.21	)	$	(1.79	)	$	(0.53	)

The Company incurred net losses during the three and nine months ended September 28, 2019 and September 29, 2018, and as a result, potential common shares from stock options, RSUs, PSUs and the assumed release of outstanding shares under the ESPP were not included in the diluted shares used to calculate net loss per share, as their inclusion would have been anti-dilutive. Additionally, due to the net loss position during these periods, the Company excluded the potential shares issuable upon conversion of the 2024 Notes and the $150.0 million in aggregate principal amount of its 1.75% convertible senior notes due June 1, 2018 (the “2018 Notes”) in the calculation of diluted earnings per share as their inclusion would have been anti-dilutive.

The following sets forth the potentially dilutive shares excluded from the computation of the diluted net loss per share because their effect was anti-dilutive (in thousands):



	Three Months Ended		Nine Months Ended
	September 28, 2019	September 29, 2018	September 28, 2019	September 29, 2018
Stock options	820	1,115	920	1,140
RSUs	11,884	7,406	11,835	8,141
PSUs	2,255	1,219	2,350	1,336
ESPP shares	—	1,513	442	1,253
Total	14,959	11,253	15,547	11,870

13. Debt

Asset-based revolving credit facility

On August 1, 2019, the Company entered into a Credit Agreement (the "Credit Agreement") with Wells Fargo Bank. The Credit Agreement provides for a senior secured asset-based revolving credit facility of up to $100 million (the "Credit Facility"), which the Company may draw upon from time to time. The Company may increase the total commitments under the Credit Facility by up to an additional $50 million, subject to certain conditions. The Credit Agreement provides for a $50 million letter of credit sub-facility and a $10 million swing loan sub-facility.

The proceeds of the loans under the Credit Agreement may be used to pay the fees, costs and expenses incurred in connection with the Credit Agreement and for working capital and general corporate purposes. The Credit Facility matures, and all outstanding loans become due and payable, on March 5, 2024. Availability under the Credit Facility is based upon periodic borrowing base certifications valuing certain inventory and accounts receivable, as reduced by certain reserves. The Credit facility is secured by first-priority security interest (subject to certain exceptions) in inventory, certain related assets, specified deposit accounts, and certain other accounts in certain domestic subsidiaries.

Loans under the Credit Agreement bear interest, at our option, at either a rate based on the London Interbank Offered Rate (“LIBOR”) for the applicable interest period or a base rate, in each case plus a margin. The margin ranges from 2.00% to 2.50% for LIBOR rate loans and 1.00% to 1.50% for base rate loans, depending on the utilization of the Credit Facility. The commitment fee payable on the unused portion of the Credit Facility ranges from 0.375% to 0.625% per annum, also based on the current utilization of the Credit Facility. The letter of credit will accrue a fee at a per annum rate equal to the applicable LIBOR rate margin times the average amount of the letter of credit usage during the immediately preceding quarter in addition to the fronting fees, commissions and other fees.

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The Credit Agreement contains customary affirmative covenants, such as financial statement reporting requirements and delivery of borrowing base certificates. The Credit Agreement also contains customary covenants that limit the ability of the Company and its subsidiaries to, among other things, incur debt, create liens and encumbrances, engage in certain fundamental changes, dispose of assets, prepay certain indebtedness, make restricted payments, make investments, and engage in transactions with affiliates. The Credit Agreement also contains a financial covenant that requires the Company to maintain a minimum amount of liquidity and customary events of default.

In connection with the Credit Facility, the Company incurred lender and other third-party costs of approximately $3.3 million for the period ended September 28, 2019, which are recorded as a deferred asset and are amortized to interest expense using a straight-line method over the term of the Credit Facility. During the three and nine months ended September 28, 2019, the Company recorded $0.1 million as amortization of deferred debt issuance cost, $0.2 million as contractual interest expense and an immaterial amount of letter of credit facility charges.

As of September 28, 2019, the Company had availability of $66.9 million under the Credit Agreement and had letters of credit outstanding of approximately $3.1 million.

Finance Assistance Agreement

During March 2019, the Company signed an agreement with a third-party contract manufacturer that governs the transfer of the activities from the legacy Coriant manufacturing facility in Berlin, Germany to a third-party contract manufacturer. Subsequently in May 2019, the Company entered into a financing assistance agreement with the contract manufacturer whereby the contract manufacturer agreed to provide funding of up to $40 million to cover severance, retention and other costs associated with the transfer. The funding is secured against certain foreign assets, carries a fixed interest rate of 6% and is repayable in 12 months from the date of each draw down. As of September 28, 2019, $6.5 million was outstanding, which was included in short-term debt.

Mortgage Payable

In March 2019, the Company mortgaged a property it owns. The Company received proceeds of $8.7 million in connection with the loan. The loan carries a fixed interest rate of 5.25% and is repayable in 59 equal monthly installments of approximately $0.1 million each with the remaining unpaid principal balance plus accrued unpaid interest due five years from the date of the loan. As of September 28, 2019, $8.5 million remained outstanding, of which $0.4 million was included in short-term debt and $8.1 million was included in long-term debt.

2024 Notes

In September 2018, the Company issued the 2024 Notes due on September 1, 2024, unless earlier repurchased, redeemed or converted. The 2024 Notes are governed by a base indenture dated as of September 11, 2018 and a first supplemental indenture dated as of September 11, 2018 (together, the “Indenture”), between the Company and U.S. Bank National Association, as trustee. The 2024 Notes are unsecured, and the Indenture does not contain any financial covenants or any restrictions on the payment of dividends, the incurrence of senior debt or other indebtedness, or the issuance or repurchase of the Company's other securities by the Company.

Interest is payable semi-annually in arrears on March 1 and September 1 of each year, which commenced on March 1, 2019. The net proceeds to the Company were approximately $391.4 million, of which approximately $48.9 million was used to pay the cost of the capped call transactions with certain financial institutions (“Capped Calls”). The Company also used a portion of the remaining net proceeds to fund the cash portion of the purchase price of the Acquisition, including fees and expenses relating thereto, and intends to use the remaining net proceeds for general corporate purposes.

The Capped Calls have an initial strike price of $9.87 per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2024 Notes. The Capped Calls have initial cap prices of $15.19 per share, subject to certain adjustments. The Capped Calls cover, subject to anti-dilution adjustments, 40.8 million shares of common stock. The capped call transactions are expected generally to reduce or offset potential dilution to the Company's common stock upon any conversion of the 2024 Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted 2024 Notes, as the case may be, with such reduction and/or offset subject to a cap. The Capped Calls expire on various dates between July 5, 2024 and

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August 29, 2024. The Capped Calls were recorded as a reduction of the Company’s stockholders’ equity in the accompanying condensed consolidated balance sheets.

Upon conversion, it is the Company’s intention to pay cash equal to the lesser of the aggregate principal amount or the conversion value of the 2024 Notes. For any remaining conversion obligation, the Company intends to pay or deliver, as the case may be, either cash, shares of its common stock, or a combination of cash and shares of its common stock, at the Company’s election. The initial conversion rate is 101.2812 shares of common stock per $1,000 principal amount of 2024 Notes, subject to anti-dilution adjustments, which is equivalent to a conversion price of approximately $9.87 per share of common stock.

Throughout the term of the 2024 Notes, the conversion rate may be adjusted upon the occurrence of certain events, including for any cash dividends. Holders of the 2024 Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a 2024 Note. Accrued but unpaid interest will be deemed to be paid in full upon conversion rather than canceled, extinguished or forfeited. Prior to June 1, 2024, holders may convert their 2024 Notes under the following circumstances:

•

during any fiscal quarter commencing after the fiscal quarter ended on December 29, 2018 (and only during such fiscal quarter) if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day;


•	during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of 2024 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day;


•	if the Company calls the 2024 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date;


•	upon the occurrence of specified corporate events described under the Indenture, such as a consolidation, merger or binding share exchange; or


•	at any time on or after June 1, 2024 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2024 Notes at any time, regardless of the foregoing circumstances.

If the Company undergoes a fundamental change as defined in the Indenture governing the 2024 Notes, holders may require the Company to repurchase for cash all or any portion of their 2024 Notes at a repurchase price equal to 100% of the principal amount of the 2024 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, upon the occurrence of a “make-whole fundamental change” (as defined in the Indenture), the Company may, in certain circumstances, be required to increase the conversion rate by a number of additional shares for a holder that elects to convert its 2024 Notes in connection with such make-whole fundamental change.

The net carrying amounts of the debt obligation were as follows (in thousands):



	September 28, 2019			December 29, 2018
Principal	$	402,500		$	402,500
Unamortized discount ⁽¹⁾	(114,219		)	(127,264		)
Unamortized issuance cost ⁽¹⁾	(7,456		)	(8,307		)
Net carrying amount	$	280,825		$	266,929


⁽¹⁾	Unamortized debt conversion discount and issuance costs will be amortized over the remaining life of the 2024 Notes, which is approximately 60 months.

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As of September 28, 2019, the carrying amount of the equity component of the 2024 Notes was $128.7 million.

In accounting for the issuance of the 2024 Notes, the Company separated the 2024 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the 2024 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense over the term of the 2024 Notes.

The Company allocated the total issuance costs incurred to the liability and equity components of the 2024 Notes based on their relative values. Issuance costs attributable to the liability component were recorded as a reduction to the liability portion of the 2024 Notes and will be amortized as interest expense over the term of the 2024 Notes. The issuance costs attributable to the equity component were netted with the equity component in stockholders’ equity.

The Company recorded a deferred tax liability of $30.9 million in connection with the issuance of the 2024 Notes, and a corresponding reduction in valuation allowance. The impact of both was recorded to stockholders' equity.

The Company determined that the embedded conversion option in the 2024 Notes does not require separate accounting treatment as a derivative instrument because it is both indexed to the Company’s own stock and would be classified in stockholders’ equity if freestanding.

The following table sets forth total interest expense recognized related to the 2024 Notes (in thousands):



	Three Months Ended		Nine Months Ended
	September 28, 2019		September 28, 2019
Contractual interest expense	$	2,138	$	6,415
Amortization of debt issuance costs	290		851
Amortization of debt discount	4,456		13,045
Total interest expense	$	6,884	$	20,311

For the three and nine months ended September 28, 2019, the debt discount and debt issuance costs were amortized, using an annual effective interest rate of 10.07%, to interest expense over the term of the 2024 Notes.

As of September 28, 2019, the fair value of the 2024 Notes was $354.9 million. The fair value was determined based on the quoted bid price of the 2024 Notes in an over-the-counter market on June 29, 2019. The 2024 Notes are classified as Level 2 of the fair value hierarchy.

Based on the closing price of the Company’s common stock of $5.60 per share on September 27, 2019 (last trading day of the fiscal quarter), the if-converted value of the 2024 Notes did not exceed their principal amount.

2018 Notes

In May 2013, the Company issued the 2018 Notes, which matured on June 1, 2018. Upon maturity of the 2018 Notes, the Company repaid in full all $150.0 million in aggregate principal amount and the final coupon interest of $1.3 million.

The following table sets forth total interest expense recognized related to the 2018 Notes (in thousands):



	Three Months Ended		Nine Months Ended
	September 29, 2018		September 29, 2018
Contractual interest expense	—		1,094
Amortization of debt issuance costs	—		402
Amortization of debt discount	—		4,671
Total interest expense	$	—	$	6,167

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The coupon rate was 1.75%. For the nine months ended September 29, 2018, the debt discount and debt issuance costs were amortized, using an annual effective interest rate of 10.23%, to interest expense over the term of the 2018 Notes.

14. Stockholders’ Equity

Stock-based Compensation Plans

The Company has stock-based compensation plans pursuant to which the Company has granted stock options, RSUs and PSUs. The Company also has an ESPP for all eligible employees.

In February 2016, the Company's board of directors adopted the 2016 Equity Incentive Plan (“2016 Plan”) and the Company's stockholders approved the 2016 Plan in May 2016. In May 2019, the company's stockholders approved an amendment to the 2016 Plan to increase the number of shares authorized for issuance under the 2016 Plan by 7.3 million shares. As of September 28, 2019, the Company has reserved a total of 22.7 million shares of common stock for issuance of stock options, RSUs and PSUs to employees, non-employees, consultants and members of the Company's board of directors, pursuant to the 2016 Plan, plus any shares subject to awards granted under the Company’s 2007 Equity Incentive Plan (the “2007 Plan”) that, after the effective date of the 2016 Plan, expire, are forfeited or otherwise terminate without having been exercised in full to the extent such awards were exercisable, and shares issued pursuant to awards granted under the 2007 Plan that, after the effective date of the 2016 Plan, are forfeited to or repurchased by the Company due to failure to vest. The 2016 Plan has a maximum term of 10 years from the date of adoption, or it can be earlier terminated by the Company's board of directors. The 2007 Plan was canceled; however, it continues to govern outstanding grants under the 2007 Plan.

In May 2019, the company's stockholders also approved an amendment of the Company's 2007 Employee Stock Purchase Plan to increase the number of shares authorized for issuance thereunder by 10.5 million shares.

In July 2019, the Company's board of directors approved a new 2019 Inducement Equity Incentive Plan and set the maximum number of shares to be issued at 750,000.

The following tables summarize the Company’s equity award activity and related information (in thousands, except per share data):



	Number of Stock Options		Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value
Outstanding at December 29, 2018	1,115		$	8.09	$	—
Stock options granted	—		$	—	$	—
Stock options exercised	—		$	—	$	—
Stock options canceled	(295	)	$	7.25
Outstanding at September 28, 2019	820		$	8.39	$	—
Exercisable at September 28, 2019	820		$	8.39	$	—



	Number of Restricted Stock Units		Weighted Average Grant Date Fair Value Per Share		Aggregate Intrinsic Value
Outstanding at December 29, 2018	6,746		$	10.83	$	26,446
RSUs granted	8,505		$	4.30
RSUs released	(2,239	)	$	4.43	$	9,909
RSUs canceled	(1,129	)	$	8.66
Outstanding at September 28, 2019	11,883		$	6.27	$	66,549



	Number of Performance Stock Units		Weighted Average Grant Date Fair Value Per Share		Aggregate Intrinsic Value
Outstanding at December 29, 2018	1,129		$	16.10	$	4,425
PSUs granted	1,942		$	4.48
PSUs released	(99	)	$	4.75	$	472
PSUs canceled	(717	)	$	14.56
Outstanding at September 28, 2019	2,255		$	6.56	$	12,628
Expected to vest at September 28, 2019	1,788				$	10,011

The aggregate intrinsic value of unexercised stock options is calculated as the difference between the closing price of the Company’s common stock of $5.60 at September 27, 2019 (the last trading day of the fiscal

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quarter) and the exercise prices of the underlying stock options. The aggregate intrinsic value of the stock options that have been exercised is calculated as the difference between the fair market value of the common stock at the date of exercise and the exercise price of the underlying stock options.

The aggregate intrinsic value of unreleased RSUs and unreleased PSUs is calculated using the closing price of the Company's common stock of $5.60 at September 27, 2019 (the last trading day of the fiscal quarter). The aggregate intrinsic value of RSUs and PSUs released is calculated using the fair market value of the common stock at the date of release.

The following table presents total stock-based compensation cost for instruments granted but not yet amortized, net of estimated forfeitures, of the Company’s equity compensation plans as of September 28, 2019. These costs are expected to be amortized on a straight-line basis over the following weighted-average periods (in thousands, except for weighted average period data):



	Unrecognized Compensation Expense, Net		Weighted Average Period (in Years)
RSUs	$	56,972	2.18
PSUs	$	7,863	1.97

Employee Stock Options

The Company did not grant any stock options during the three and nine months ended September 28, 2019. Amortization of stock-based compensation related to stock options in the three and nine months ended September 28, 2019 and the corresponding periods in 2018 was insignificant.

Employee Stock Purchase Plan

The fair value of the shares was estimated at the date of grant using the following assumptions (stock- based compensation expense amounts in thousands):



	Three Months Ended		Nine Months Ended
Employee Stock Purchase Plan	September 28, 2019	September 29, 2018	September 28, 2019	September 29, 2018
Volatility	70%	48%	70%-72%	48%-62%
Risk-free interest rate	1.76%	2.31%	1.76%-2.48%	1.90% -2.31%
Expected life	0.5 years	0.5 years	0.5 years	0.5 years
Estimated fair value	$1.64	$2.47	$1.64-$1.76	$2.47 - $3.13
Total stock-based compensation expense	$1,351	$1,477	$3,463	$4,369

Restricted Stock Units

During the three and nine months ended September 28, 2019, the Company granted RSUs representing the right to receive 1.4 million and 8.5 million shares of the Company’s common stock, respectively. All RSUs awarded are subject to each individual's continued service to the Company through each applicable vesting date. The Company accounted for the fair value of the RSUs using the closing market price of the Company’s common stock on the date of grant. Amortization of stock-based compensation related to RSUs in the three and nine months ended September 28, 2019 was approximately $8.1 million and $24.2 million, respectively, and was approximately $7.3 million and $22.7 million in the corresponding periods of 2018, respectively.

Performance Stock Units

Pursuant to the 2016 Plan, the Company has granted PSUs to certain of the Company’s executive officers, senior management and other employees. All PSUs awarded are subject to each individual's continued service to the Company through each applicable vesting date and if the performance metrics are not met within the time limits specified in the award agreements, the PSUs will be canceled.

PSUs granted to the Company’s executive officers and senior management under the 2016 Plan during 2017 and the first half of 2018 are based on the total stockholder return ("TSR") of the Company's common stock price relative to the TSR of the individual companies listed in the S&P North American Technology Multimedia Networking Index (“SPGIIPTR”) over the span of one year, two years and three years. The number of shares to be

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issued upon vesting of these PSUs range from zero to two times the target number of PSUs granted depending on the Company’s performance against the individual companies listed in the SPGIIPTR.

The ranges of estimated values of the PSUs granted that are compared to the SPGIIPTR, as well as the assumptions used in calculating these values were based on estimates as follows:



	2018	2017
Index volatility	33%	33% - 34%
Infinera volatility	58% - 59%	55% - 56%
Risk-free interest rate	2.37% - 2.40%	1.41% - 1.63%
Correlation with index/index component	0.04 - 0.48	0.10 - 0.49
Estimated fair value	$14.99 - $19.46	$15.23 - $17.35

PSUs granted to the Company's executive officers and senior management under the 2016 Plan during the first, second and third quarter of 2019 are based on performance criteria related to a specific financial target over the span of a three-year performance period. These PSUs may become eligible for vesting to begin before the end of the three year performance period, if the applicable financial target is met. The number of shares to be issued upon vesting of these PSUs is capped at the target number of PSUs granted. Certain other employees were awarded PSUs that will only vest upon the achievement of specific financial and operational performance criteria.

In addition, one of the Company's executive officers was awarded a PSU that will be eligible to vest if the market price condition is met. The assumptions used in calculating the estimated values of this award granted in fiscal 2019 were based upon Monte Carlo Model Assumptions and estimates as follows:



		2019
Index volatility		N/A
Infinera volatility		64% - 68%
Risk-free interest rate		2.17% - 2.48%
Correlation with index/index component		N/A
Estimated fair value		$2.08 - $2.89

The following table summarizes by grant year, the Company’s PSU activity for the nine months ended September 28, 2019 (in thousands):




	Total Number of Performance Stock Units		2016		2017		2018		2019
Outstanding at December 29, 2018	1,129		156		481		492		—
PSUs granted	1,942		—		—		—		1,942
PSUs released	(99	)	—		(26	)	(25	)	(48	)
PSUs canceled	(717	)	(156	)	(256	)	(197	)	(108	)
Outstanding at September 28, 2019	2,255		—		199		270		1,786

Amortization of stock-based compensation related to PSUs in the three and nine months ended September 28, 2019 was approximately $0.5 million and $4.6 million, respectively, and in the corresponding periods of 2018 was approximately $2.2 million and $6.9 million, respectively.

Stock-Based Compensation

The following tables summarize the effects of stock-based compensation on the Company’s condensed consolidated balance sheets and statements of operations for the periods presented (in thousands):

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	September 28, 2019		December 29, 2018
Stock-based compensation effects in inventory	$	5,480	$	4,750



	Three Months Ended				Nine Months Ended
	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018
Stock-based compensation effects included in net loss before income taxes
Cost of revenue	$	662	$	590	$	1,863	$	1,092
Research and development	4,153		4,077		13,883		12,593
Sales and marketing	2,189		2,744		5,835		8,688
General and administration	1,826		2,578		7,291		8,112
	$	8,830	$	9,989	$	28,872	$	30,485
Cost of revenue – amortization from balance sheet ⁽¹⁾	1,116		1,378		2,834		3,909
Total stock-based compensation expense	$	9,946	$	11,367	$	31,706	$	34,394


⁽¹⁾	Stock-based compensation expense deferred to inventory in prior periods and recognized in the current period.

15. Income Taxes

Income taxes for the three and nine months ended September 28, 2019 were tax expense of $1.5 million and $3.1 million, respectively, on pre-tax losses of $83.2 million and $316.9 million, respectively. This compared to a tax expense of $0.1 million and benefit from income taxes of $0.7 million, on pre-tax loss of $32.5 million and $81.5 million, respectively, for the three and nine months ended September 29, 2018, respectively. Provision for income taxes increased by approximately $1.4 million and approximately $3.8 million during the three and nine months ended September 28, 2019, respectively, as a result of additional foreign tax expense from the entities from the Acquisition.

The tax expense and benefit projected in the Company's effective tax rate primarily represents foreign taxes of the Company's overseas profitable subsidiaries, as well as the results of the Company's Swedish operations, inclusive of purchase accounting amortization and other charges for the three and nine months ended September 28, 2019.

The Company must assess the likelihood that some portion or all of its deferred tax assets will be recovered from future taxable income within the respective jurisdictions. In the past, the Company established a valuation allowance against its deferred tax assets as it determined that its ability to recover the value of these assets did not meet the “more-likely-than-not” standard. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management judgment is required on an on-going basis to determine whether it needs to maintain the valuation allowance recorded against its net deferred tax assets. The Company must consider all positive and negative evidence, including its forecasts of taxable income over the applicable carryforward periods, its current financial performance, its market environment and other factors in evaluating the need for a valuation allowance against its net U.S. deferred tax assets. At September 28, 2019, the Company does not believe that it is more-likely-than-not that it would be able to utilize its domestic deferred tax assets in the foreseeable future. Accordingly, the domestic net deferred tax assets continued to be fully reserved with a valuation allowance. To the extent that the Company determines that deferred tax assets are realizable on a more-likely-than-not basis, and adjustment is needed, that adjustment will be recorded in the period that the determination is made and would generally decrease the valuation allowance and record a corresponding benefit to earnings.

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16. Segment Information

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the Company’s Chief Executive Officer (“CEO”). The Company’s CEO reviews financial information presented on a consolidated basis, accompanied by information about revenue by geographic region for purposes of allocating resources and evaluating financial performance. The Company has one business activity as a provider of optical transport networking equipment, software and services. Accordingly, the Company is considered to be in a single reporting segment and operating unit structure.

The following table sets forth long-lived assets by geographic region (in thousands):



	September 28, 2019		December 29, 2018
United States	$	122,896	$	288,614
Other Americas	2,562		2,370
Europe, Middle East and Africa	21,893		38,273
Asia Pacific	9,219		13,563
Total property, plant and equipment, net	$	156,570	$	342,820

For information regarding revenue disaggregated by geography, see Note 4, “Revenue Recognition” to the Notes to Condensed Consolidated Financial Statements.

17. Guarantees

Product Warranties

Activity related to product warranty was as follows (in thousands):



	Three Months Ended						Nine Months Ended
	September 28, 2019			September 29, 2018			September 28, 2019			September 29, 2018
Beginning balance	$	44,146		$	30,237		$	41,021		$	30,909
Charges to operations	6,591			5,680			17,288			15,203
Utilization	(6,246		)	(4,391		)	(17,835		)	(12,896		)
Change in estimate⁽¹⁾	(154		)	(1,044		)	3,863			(2,734		)
Balance at the end of the period	$	44,337		$	30,482		$	44,337		$	30,482

⁽¹⁾

The Company records product warranty liabilities based on the latest quality and cost information available as of the date the revenue is recorded. The changes in estimate shown here are due to changes in overall actual failure rates, the mix of new versus used units related to replacement of failed units, and changes in the estimated cost of repair including product recalls. As the Company's products mature over time, failure rates and repair costs associated with such products generally decline leading to favorable changes in warranty reserves.

Letters of Credit and Bank Guarantees

The Company had $29.0 million of standby letters of credit and bank guarantees outstanding as of September 28, 2019 that consisted of $13.3 million related to customer performance guarantees, $1.8 million related to value added tax and customs licenses, $5.9 million related to property leases, $7.2 million related to restructuring plans, $0.5 million related to credit cards and $0.4 million related to suppliers. The Company had $30.0 million of standby letters of credit and bank guarantees outstanding as of December 29, 2018 that consisted of $23.4 million related to customer performance guarantees, $1.4 million related to a value added tax license, $2.9 million related to property leases, $1.8 million related to Coriant's pre-Acquisition restructuring plans and $0.5 million related to credit cards.

As of September 28, 2019, the Company had $4.7 million of outstanding floating charges, of which the Company holds $2.2 million and the remaining $2.5 million is issued as a registered debenture certificate to a multinational bank, secured by a pledge against the general assets of a subsidiary of the Company. The registered

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debenture serves as security for various guarantees and a line of credit issued by such multinational bank. This line of credit for approximately $1.5 million is established to support the issuance of banker’s guarantees or performance bonds to a customer, of which none had been issued and outstanding as of September 28, 2019.

As of September 28, 2019 and December 29, 2018, the Company had a line of credit for approximately $1.6 million to support the issuance of letters of credit, of which zero had been issued and outstanding for both periods. The Company has pledged approximately $4.7 million and $4.9 million of assets of a subsidiary to secure this line of credit and other obligations as of period ended September 28, 2019 and December 29, 2018, respectively.

18. Pension and Post-Retirement Benefit Plans

As a result of the Acquisition, the Company acquired a number of post-employment plans in Germany, as well as a number of smaller post-employment plans in other countries, including both defined contribution and defined benefit plans. The defined benefit plans expose the Company to actuarial risks such as, investment risk, interest rate risk, life expectancy risk and salary risk. The characteristics of the defined benefit plans and the risks associated with them vary depending on legal, fiscal and economic requirements.

Components of Net Periodic Benefit Cost

Net periodic benefit cost for the Company's pension and other post-retirement benefit plans for the three and nine months ended September 28, 2019 consisted of the following (in thousands):



	Three Months Ended			Nine Months Ended
	September 28, 2019			September 28, 2019
Service cost	$	(414	)	$	817
Interest cost	510			1,543
Expected return on plan assets	(594		)	(2,391		)
Amortization of actuarial loss	408			1,234
Total net periodic benefit cost	$	(90	)	$	1,203

Actuarial gains and losses are amortized using a corridor approach. The gain/loss corridor is equal to 10% of the greater of the pension benefit obligation and the market-related value of assets. Gains and losses in excess of the corridor are generally amortized over the average future working lifetime of the pension plan participants. All components of net periodic benefit cost are recorded in operating expense of the Company's condensed consolidated statements of operations.

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19. Litigation and Contingencies

Legal Matters

On November 23, 2016, Oyster Optics, LLC (“Oyster Optics”) filed a complaint against the Company in the United States District Court for the Eastern District of Texas. The complaint asserts infringement of U.S. Patent Nos. 6,469,816, 6,476,952, 6,594,055, 7,099,592, 7,620,327 (the “’327 patent”), 8,374,511 (the “‘511 patent”) and 8,913,898 (the “’898 patent”) (collectively, the “Oyster Optics patents in suit”). The complaint seeks unspecified damages and a permanent injunction. The Company filed its answer to Oyster Optics' complaint on February 3, 2017. The Company filed two petitions for Inter Partes Review (“IPR”) of the '898 patent with the U.S Patent and Trademark Office ("USPTO"). Other defendants have filed IPR petitions in connection with the remaining Oyster Optics patents in suit. The USPTO instituted two IPRs of the ‘511 patent and two IPRs of the ‘898 patent but denied IPR petitions in connection with the ‘327 patent. A Markman decision was issued on December 5, 2017 and fact discovery closed on December 22, 2017. Oyster Optics dropped the ‘511 and ‘898 patents, leaving only a few claims in the ‘327 patent at issue in the case. On May 15, 2018, Oyster Optics filed a new patent infringement complaint with the court, naming the Company as a defendant. In its new complaint, Oyster Optics alleges infringement of the ‘327 patent, U.S. Patent No. 9,749,040 and the ‘898 patent. On June 8, 2018, the court granted the parties’ joint motion to sever and consolidate the first-filed lawsuit with the later filed case. The Company filed its answer to the new complaint on July 16, 2018. A case management conference was held on September 11, 2018, and the court set a trial date for November 4, 2019. On October 26, 2018, the Company filed an amended answer to include a license defense. On November 29, 2018, the Company filed a motion for summary judgment based on the license defense. The court issued a second Markman decision on May 3, 2019, in which the parties were ordered to schedule a mediation within 30 days of the decision. The parties participated in a mediation on May 16, 2019, but no settlement agreement was agreed upon. On June 12, 2019, the court held a hearing in connection with the license defense. On June 25, 2019, the court granted our Motion for Summary Judgment and on June 28, 2019, the court entered a final judgment for the Company. On July 22, 2019, Oyster filed an appeal of the court’s decision with the Court of Appeals for the Federal Circuit. The Company is currently unable to predict the outcome of this litigation and therefore cannot reasonably estimate the possible loss or range of loss, if any, arising from this matter.

On July 29, 2019, Oyster Optics filed a third complaint against the Company, Coriant (USA) Inc., Coriant North America, LLC and Coriant Operations, Inc. in the United States District Court for the Eastern District of Texas. The complaint asserts infringement of U.S. Patent No. 6,665,500 (the “Oyster III patent in suit”). The complaint seeks unspecified damages and a permanent injunction. On October 7, 2019, the Company filed its answer to the complaint asserting among other things, counterclaims and defenses based on non-infringement, invalidity, and a license to the Oyster III patent in suit. On October 28, 2019, Oyster amended its complaint to add additional counts related to the Company’s license defense. The Company is unable to predict the outcome of this litigation at this time and therefore cannot reasonably estimate the possible loss or range of loss, if any, arising from this matter.

On August 26, 2019, Oyster Optics filed a fourth complaint against the Company, Coriant (USA) Inc., Coriant North America, LLC, and Coriant Operations, Inc. in the Superior Court of California, County of Santa Clara. The complaint sought unspecified damages. On November 5, 2019, Oyster moved the court to voluntarily dismiss its complaint.

On March 24, 2017, Core Optical Technologies, LLC (“Core Optical”) filed a complaint against the Company in the United States District Court for the Central District of California. The complaint asserts infringement of U.S. Patent No. 6,782,211 (the “Core Optical patent in suit”). During the May 28, 2019 mediation, the Company agreed with Core Optical on the preliminary terms to settle the lawsuit and grant the Company a license to the Core Optical patent in suit and release of claims of past infringement. The parties entered into a final settlement agreement on August 30, 2019 and the case was dismissed with prejudice on September 13, 2019.

On June 8, 2017, a Civil Investigative Demand was issued to Coriant pursuant to a False Claims Act investigation by the U.S. government as to whether there has been any violation of 31 U.S.C. §3729. Coriant provided documents and other responses to the U.S. government, and the Company will continue to cooperate in the ongoing investigation.

In addition to the matters described above, the Company is subject to various legal proceedings, claims and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, the Company does not expect that the ultimate costs to resolve these matters will have a material effect on its consolidated financial position, results of operations or cash flows.

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Loss Contingencies

The Company is subject to the possibility of various losses arising in the ordinary course of business. These may relate to disputes, litigation and other legal actions. In the preparation of its quarterly and annual financial statements, the Company considers the likelihood of loss or the incurrence of a liability, including whether it is probable, reasonably possible or remote that a liability has been incurred, as well as the Company’s ability to reasonably estimate the amount of loss, in determining loss contingencies. In accordance with U.S. GAAP, an estimated loss contingency is accrued when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The Company regularly evaluates current information to determine whether any accruals should be adjusted and whether new accruals are required. As of June 29, 2019 and December 29, 2018, the Company has accrued the estimated liabilities associated with certain loss contingencies. During the nine months ended September 28, 2019, the Company recorded a reduction in revenue related to a loss accrual made for certain claims made by one of the Company’s customers.

Indemnification Obligations

From time to time, the Company enters into certain types of contracts that contingently require it to indemnify parties against third-party claims. The terms of such indemnification obligations vary. These contracts may relate to: (i) certain real estate leases under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises; and (ii) certain agreements with the Company’s officers, directors and certain key employees, under which the Company may be required to indemnify such persons for liabilities.

In addition, the Company has agreed to indemnify certain customers for claims made against the Company’s products, where such claims allege infringement of third-party intellectual property rights, including, but not limited to, patents, registered trademarks, and/or copyrights. Under the aforementioned intellectual property indemnification clauses, the Company may be obligated to defend the customer and pay for the damages awarded against the customer under an infringement claim as well as the customer’s attorneys’ fees and costs. These indemnification obligations generally do not expire after termination or expiration of the agreement containing the indemnification obligation. In certain cases, there are limits on and exceptions to the Company’s potential liability for indemnification. The Company cannot estimate the amount of potential future payments, if any, that it might be required to make as a result of these agreements. The maximum potential amount of any future payments that the Company could be required to make under these indemnification obligations could be significant.

As permitted under Delaware law and the Company’s charter and bylaws, the Company has agreements whereby it indemnifies certain of its officers and each of its directors. The term of the indemnification period is for the officer’s or director’s lifetime for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements could be significant; however, the Company has a director and officer insurance policy that may reduce its exposure and enable it to recover all or a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal.

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Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve risks, estimates and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include, but are not limited to, our expectations regarding revenue, gross margin, operating expenses, cash flows and other financial items; any statements of the plans, strategies and objectives of management for future operations and personnel; statements regarding our acquisition of Coriant, including our ability to realize significant synergies, anticipated strategic and financial benefits, and integration plans; statements regarding the successful completion of the integration; statements regarding the integration of enterprise resource planning (“ERP”) systems; the effects of seasonal patterns in our business; factors that may affect our operating results; our ability to leverage our vertically-integrated manufacturing infrastructure; anticipated customer acceptance of our solutions; the impact of new customer network footprint on our gross margin; statements concerning new products or services, including new product features; statements related to capital expenditures; statements related to liquidity; statements related to future economic conditions, performance, market growth or our sales cycle; our ability to identify, attract and retain highly skilled personnel; statements related to our convertible senior notes and credit facility; statements related to the impact of tax regulations; statements related to the effects of litigation on our financial position, results of operations or cash flows; statements related to new accounting standards; statements as to industry trends and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. These statements are often identified using of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” "possible," "predict" or “will,” and similar expressions or variations. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in Part II, Item 1A. of this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission (“SEC"), including our Annual Report on Form 10-K for the fiscal year ended December 29, 2018 filed on March 14, 2019. Such forward-looking statements speak only as of the date of this report. We disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. You should review these risk factors for a more complete understanding of the risks associated with an investment in our securities. The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

Overview

We are a global supplier of networking solutions comprised of networking equipment, software and services. Our portfolio of solutions includes optical transport platforms, converged packet-optical transport platforms, optical line systems, disaggregated router platforms and SDN-based network automation solutions.

Our customers include telecommunications service providers, internet content providers (“ICPs”), cable providers, wholesale carriers, research and education institutions, large enterprises and government entities. Our networking solutions enable our customers to deliver business and consumer communications services. Our comprehensive portfolio of networking solutions also enables our customers to scale their transport networks as end-user services and applications continue to drive growth in demand for network bandwidth. These end-user services and applications include, but are not limited to, high-speed Internet access, business Ethernet services, 4G/5G mobile broadband, cable high-speed Internet distribution, cloud-based services, high-definition video streaming services, virtual and augmented reality and the Internet of Things (“IoT”).

Our systems are highly scalable, flexible and designed with open networking principles for ease of deployment. We build our systems using a combination of internally manufactured and third-party components. Our portfolio includes systems that leverage our innovative optical engine technology comprised of large-scale photonic integrated circuits (“PICs”) and digital signal processors (“DSPs”). We optimize the manufacturing process by using indium phosphide to build our PICs, which enables the integration of hundreds of optical functions onto a set of semiconductor chips. This large-scale integration of our PICs and advanced DSPs allows us to deliver high-performance transport networking platforms with features that customers care about the most, including low cost per bit, low power consumption and space savings. In addition, we design our optical engines to increase the

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capacity and reach performance of our products by leveraging coherent optical transmission. Over time, we plan to integrate our optical engine technology into a broader set of transport platforms in order to enhance customer value and lower production costs.

Over the past several years, we expanded our portfolio of solutions, evolving from our initial focus on the long-haul and subsea optical transport markets to offering a more complete suite of packet-optical networking solutions that address multiple markets within the end-to-end transport infrastructure. These markets include metro access, metro aggregation and switching, data center interconnect (“DCI”), long-haul and subsea.

We have grown our portfolio through internal development as well as acquisitions. In October 2018, we materially expanded our product portfolio and customer base through the acquisition of Telecom Holding Parent LLC ("Coriant"), a Delaware limited liability company (the "Acquisition"). The Acquisition positions us as one of the largest vertically integrated transport networking solutions providers in the world, strengthens our ability to serve a global customer base and accelerates delivery of innovative solutions our customers demand. This Acquisition also positions us to expand the breadth of customer applications we can address, including metro aggregation and switching, disaggregated transport and routing, and software-enabled multi-layer network management and control.

In 2018, the majority of our product revenue was from transport systems built on the Infinite Capacity Engine (ICE), our optical engine technology. ICE enables different subsystems that can be customized for a variety of network applications in different transport markets, including metro, DCI, long-haul and subsea. Our latest generation of optical engine technology delivers multi-terabit opto-electronic subsystems powered by our fourth-generation PIC and latest generation FlexCoherent DSP (the combination of which we market as “ICE4”). As part of the Acquisition, we added both 200 gigabits per second (200G) and 600G transmission capabilities powered by Coriant’s CloudWave technology suite, which enabled us to expand the high-speed transmission applications we can address. In 2019, we announced our next-generation ICE6 technology featuring 800G waves and leading optical performance.

Our products are designed to be managed by a suite of software solutions that enable end-to-end common network management, multi-layer service orchestration, and automated operations. We also provide software-enabled programmability that offers differentiated capabilities such as Instant Bandwidth. Combined with our differentiated hardware solutions, Instant Bandwidth enables our customers to purchase and activate bandwidth as needed through our unique software licensing feature set. This, in turn, allows our customers to accomplish two key objectives: (1) limit their initial network startup costs and investments; and (2) instantly activate new bandwidth as their customers’ and their own network needs evolve.

We believe our portfolio of solutions benefits our customers by providing a unique combination of highly scalable capacity and features that address various applications and ultimately simplify and automate packet-optical network operations. Over the long term, we believe the combination of providing our unique solutions together with the efforts and investments we have made to expand the markets and customers we serve, will enable us to grow revenue and achieve profitability. Our ability to grow revenue and achieve profitability is dependent on our successfully executing the integration of Coriant and realizing the anticipated cost synergies as well as the level of new and existing customers spending for our solutions.

To date, a few of our customers have accounted for a significant portion of our revenue. For the three months ended September 28, 2019, one customer accounted for 15% of our total revenue and for the corresponding period in 2018, two customers individually accounted for 17% and 14% of our total revenue, respectively. For the nine months ended September 28, 2019, one customer accounted for 13% of our total revenue and for the corresponding period in 2018, two customers individually accounted for 22% and 14% of our total revenue, respectively.

We are headquartered in Sunnyvale, California, with employees located throughout the Other Americas, Europe, Middle East and Africa ("EMEA"), and Asia Pacific ("APAC") regions. We sell our products both through our direct sales force and indirectly through channel partners.

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Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our condensed consolidated financial statements, which we have prepared in accordance with the U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of these financial statements requires management to make estimates, assumptions and judgments that can affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

An accounting policy is deemed to be critical if it requires a significant accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. Management believes that there have been no significant changes during the nine months ended September 28, 2019 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 29, 2018.

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Results of Operations

The results of operations for the three and nine months ended September 28, 2019 reflected the inclusion of the Coriant business, which was acquired on October 1, 2018. The results of operations for the three and nine months ended September 29, 2018 do not include the results of the Coriant business. The following sets forth, for the periods presented, certain unaudited condensed consolidated statements of operations information (in thousands, except percentage data):



	Three Months Ended
	September 28, 2019				September 29, 2018
	Amount		% of total revenue		Amount		% of total revenue		Change		% Change
Revenue:
Product	$	253,754	78	%	$	167,030	83	%	$	86,724	52	%
Services	71,587		22	%	33,383		17	%	38,204		114	%
Total revenue	$	325,341	100	%	$	200,413	100	%	$	124,928	62	%
Cost of revenue:
Product	$	186,205	57	%	$	112,276	56	%	$	73,929	66	%
Services	34,866		11	%	13,075		7	%	21,791		167	%
Amortization of intangible assets	7,796		2	%	4,876		2	%	2,920		60	%
Acquisition and integration costs	8,447		3	%	—		—	%	8,447		100	%
Restructuring and related	1,198		—	%	7		—	%	1,191		NMF*
Total cost of revenue	$	238,512	73	%	$	130,234	65	%	$	108,278	83	%
Gross profit	$	86,829	26.7	%	$	70,179	35.0	%	$	16,650	24	%



	Nine Months Ended
	September 28, 2019				September 29, 2018
	Amount		% of total revenue		Amount		% of total revenue		Change			% Change
Revenue:
Product	$	703,627	77	%	$	513,947	84	%	$	189,680		37	%
Services	210,671		23	%	97,374		16	%	113,297			116	%
Total revenue	$	914,298	100	%	$	611,321	100	%	$	302,977		50	%
Cost of revenue:
Product	$	521,523	57	%	$	320,514	52	%	$	201,009		63	%
Services	108,373		12	%	38,945		6	%	69,428			178	%
Amortization of intangible assets	24,146		3	%	15,160		2	%	8,986			59	%
Acquisition and integration costs	21,211		2	%	—		—	%	21,211			100	%
Restructuring and related	24,528		3	%	50		—	%	24,478			NMF*
Total cost of revenue	$	699,781	77	%	$	374,669	60	%	$	325,112		87	%
Gross profit	$	214,517	23.5	%	$	236,652	38.7	%	$	(22,135	)	(9	)%

*NMF = Not meaningful

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Revenue

Total product revenue increased by $86.7 million, or 52%, during the three months ended September 28, 2019 compared to the corresponding period in 2018. Total product revenue increased by $189.7 million, or 37%, during the nine months ended September 28, 2019 compared to the corresponding period in 2018. The increase in revenue for both periods was driven primarily from the inclusion of Coriant’s U.S.-based Tier-1 customers and a strong quarter from a large ICP customer, and also strong growth in the third quarter of 2019 from an international Tier-1 customer. The increase in both periods was partially offset by a revenue decline from a traditionally large Cable customer and other ICP customers, whose respective spending in 2019 has been lower relative to 2018, when we introduced our ICE4 products.

Total services revenue increased by $38.2 million, or 114%, during the three months ended September 28, 2019 and by $113.3 million, or 116%, during the nine months ended September 28, 2019 compared to the corresponding periods in 2018. These increases were primarily due to the Acquisition, as Coriant had a large installed base of customers and annual services revenue.

We expect our total revenue will be higher in the fourth quarter of 2019 compared to the third quarter of 2019 driven primarily by higher revenue from our Cable and Tier-1 verticals investing in products across our broader product portfolio and continued strength from ICP customers.

The following table summarizes our revenue by geography and sales channel for the periods presented (in thousands, except percentage data):



	Three Months Ended
	September 28, 2019				September 29, 2018
	Amount		% of total revenue		Amount		% of total revenue		Change		% Change
Total revenue by geography:
Domestic	$	160,645	49	%	$	98,097	49	%	$	62,548	64	%
International	164,696		51	%	102,316		51	%	62,380		61	%
	$	325,341	100	%	$	200,413	100	%	$	124,928	62	%
Total revenue by sales channel:
Direct	$	254,886	78	%	$	172,918	86	%	$	81,968	47	%
Indirect	70,455		22	%	27,495		14	%	42,960		156	%
	$	325,341	100	%	$	200,413	100	%	$	124,928	62	%



	Nine Months Ended
	September 28, 2019				September 29, 2018
	Amount		% of total revenue		Amount		% of total revenue		Change		% Change
Total revenue by geography:
Domestic	$	426,379	47	%	$	348,109	57	%	$	78,270	22	%
International	$	487,919	53	%	263,212		43	%	224,707		85	%
	$	914,298	100	%	$	611,321	100	%	$	302,977	50	%
Total revenue by sales channel:
Direct	$	744,099	81	%	$	557,004	91	%	$	187,095	34	%
Indirect	170,199		19	%	54,317		9	%	115,882		213	%
	$	914,298	100	%	$	611,321	100	%	$	302,977	50	%

Domestic revenue increased by $62.5 million, or 64%, during the three months ended September 28, 2019 and by $78.3 million, or 22%, during the nine months ended September 28, 2019 compared to the corresponding periods in 2018. Domestic revenue during the three months ended September 28, 2019 benefited primarily from the inclusion of Coriant’s U.S.-based Tier-1 customers and a strong quarter from a large ICP customer. Growth in the nine month period was attributable to the same divers but was heavily offset by a decline in our Cable business driven by our largest Cable customer slowing its spend. We expect spend from our Tier-1 and ICP customers to remain strong in the fourth quarter and also anticipate some recovery from our Cable vertical.

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International revenue increased by $62.4 million, or 61%, during the three months ended September 28, 2019 and by $224.7 million, or 85%, during the nine months ended September 28, 2019 compared to the corresponding periods in 2018. This growth in both periods resulted primarily from the inclusion of Coriant, whose historical revenue split was weighted more internationally. Strength in the third quarter of 2019 also stemmed from a strong quarter from an international Tier-1.

Amortization of Intangible Assets

Amortization of intangible assets increased by $2.9 million and by $9.0 million during the three and nine months ended September 28, 2019, respectively, compared to the corresponding periods in 2018 due to the increase in intangible assets related to the Acquisition.

Acquisition and Integration Costs

Acquisition and integration costs were $8.4 million and $21.2 million during the three and nine months ended September 28, 2019, respectively, attributable to one-time investments to build common platforms and establish a better cost structure. Acquisition and integration costs during the three months ended September 28, 2019, were primarily attributable to investments to support the transition of our Berlin, Germany manufacturing facility to a third-party contract manufacturer, which was completed during the third quarter of 2019. Acquisition and integration costs during the three months ended September 28, 2019 decreased relative to the prior three month period as a result of renegotiation of an agreement with an outside party that had historically provided engineering consulting services for Coriant that are no longer required. Acquisition and integration costs during the nine months ended September 28, 2019 were primarily attributable to the aforementioned investments to support the transition of our Berlin, Germany manufacturing facility and renegotiation of a consulting agreement.

Restructuring and Related

Restructuring and related costs increased by $1.2 million and by $24.5 million during the three and nine months ended September 28, 2019, respectively, compared to the corresponding periods in 2018. The increases were primarily due to severance and related expenses and facility charges associated with the planned closure of our Berlin, Germany manufacturing facility. See Note 10, “Restructuring and Related Costs” to the Notes to Condensed Consolidated Financial Statements for more information.

Cost of Revenue and Gross Margin

Gross margin was 26.7% and 23.5% during the three and nine months ended September 28, 2019, respectively, down from 35% and 38.7% during the three and nine months ended September 29, 2018, primarily as a result of restructuring and integration-related costs and less favorable product mix. The Coriant business had a lower margin profile prior to the Acquisition.

We currently expect that gross margin in the fourth quarter of 2019 will be higher than that of the third quarter of 2019 primarily as a result of lower integration costs and a lower fixed cost structure within our services and manufacturing organizations, combined with quarter-over-quarter revenue growth. This expected increase will be partially offset by growth in certain customer verticals that carry a lower gross margin than the corporate average initially. Over time, we anticipate gross margin will continue to improve and we remain committed to lowering our overall cost structure by continuing to drive cost synergies and leveraging vertical integration across our full end-to-end portfolio solution set.

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Operating Expenses

The following tables summarize our operating expenses for the periods presented (in thousands, except percentage data):



	Three Months Ended
	September 28, 2019				September 29, 2018
	Amount		% of total revenue		Amount		% of total revenue		Change		% Change
Operating expenses:
Research and development	$	71,748	22	%	$	50,658	25	%	$	21,090	42	%
Sales and marketing	35,756		11	%	24,439		12	%	11,317		46	%
General and administrative	27,621		9	%	16,515		8	%	11,106		67	%
Amortization of intangible assets	6,861		2	%	1,467		—	%	5,394		368	%
Acquisition and integration costs	11,962		4	%	2,067		1	%	9,895		479	%
Restructuring and related	2,168		—	%	191		—	%	1,977		NMF*
Total operating expenses	$	156,116	48	%	$	95,337	46	%	$	60,779	64	%

*NMF = Not meaningful



	Nine Months Ended
	September 28, 2019				September 29, 2018
	Amount		% of total revenue		Amount		% of total revenue		Change		% Change
Operating expenses:
Research and development	$	219,345	24	%	$	165,497	27	%	$	53,848	33	%
Sales and marketing	113,444		12	%	81,558		14	%	31,886		39	%
General and administrative	96,337		11	%	52,716		9	%	43,621		83	%
Amortization of intangible assets	20,663		2	%	4,561		1	%	16,102		353	%
Acquisition and integration costs	31,260		3	%	2,067		—	%	29,193		NMF*
Restructuring and related	22,827		2	%	1,708		1	%	21,119		NMF*
Total operating expenses	$	503,876	55	%	$	308,107	52	%	$	195,769	64	%

*NMF = Not meaningful

Research and Development Expenses

Research and development expenses increased by $21.1 million, or 42%, and by $53.8 million, or 33%, during the three and nine months ended September 28, 2019, respectively, compared to the corresponding periods in 2018. The increase for both periods of 2019 was primarily due to the addition of headcount in connection with the Acquisition. Overall research and development expenses increased at a lower rate than overall revenue growth primarily due to headcount, equipment and other cost reductions that have been undertaken since the completion of the Acquisition. Somewhat offsetting these cost reductions in both periods were higher investments in our PIC and DSP capabilities to support our next generation of vertically integrated technologies.

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Sales and Marketing Expenses

Sales and marketing expenses increased by $11.3 million, or 46%, and by $31.9 million, or 39%, during the three and nine months ended September 28, 2019, respectively, compared to the corresponding periods in 2018. The increase during both periods in 2019 was primarily attributable to the addition of headcount in connection with the Acquisition. In addition, commissions have increased as a result of higher revenue and bookings. These increases were slightly offset by lower lab trial and demo expenses as we supported a higher volume of customer demand with more efficient utilization of inventory in trials. Sales and marketing expenses grew at a slower rate than overall revenue primarily as a result of headcount reductions since the completion of the Acquisition.

General and Administrative Expenses

General and administrative expenses increased $11.1 million, or 67%, and by $43.6 million, or 83%, during the three and nine months ended September 28, 2019, respectively, compared to the corresponding periods in 2018. The increase during both periods in 2019 was primarily due to the addition of headcount in connection with the Acquisition and higher outside professional services costs to support the integration of the combined business. The increase for the nine months ended September 28, 2019 was also due to a charge related to a legal settlement in the second quarter of 2019.

Amortization of Intangible Assets

Amortization of intangible assets increased by $5.4 million and by $16.1 million during the three and nine months ended September 28, 2019, respectively, compared to the corresponding periods in 2018 due to the increase in intangible assets related to the Acquisition.

Acquisition and Integration Costs

Acquisition and integration costs increased by $9.9 million and $29.2 million during the three and nine months ended September 28, 2019, respectively, compared to the corresponding periods in 2018. The increase in both periods is attributable to one-time systems and headcount investments to build a unified IT infrastructure, common platforms and better cost structure for the post-Acquisition combined business. Acquisition and integration costs during the three months ended September 28, 2019 were slightly lower relative to the prior three month period with gradual reductions in integration spending across most functions, as we wind down our integration activities. This was partially offset by growth in IT-related costs to support the implementation of a single ERP system. During the nine months ended September 28, 2019, we have made substantial investments across the organization to consolidate and unify processes and platforms to drive future efficiencies and lower our cost structure. Acquisition and integration costs in the corresponding periods in 2018 were predominantly limited to professional fees incurred related to the acquisition. We expect acquisition and integration costs to decline in the fourth quarter as we have implemented the new ERP system and anticipate substantial completion of integration activities during the fourth quarter of 2019.

Restructuring and Related

Restructuring and related costs increased by $2 million and $21.1 million during the three and nine months ended September 28, 2019, respectively, compared to the corresponding periods in 2018. The increase in both periods was primarily due to facility charges. We also incurred severance and related charges of $1.1 million and $9.3 million during the three and nine months ended September 28, 2019, respectively, compared to an immaterial amount and $1.9 million during the three and nine months ended September 29, 2018, respectively. See Note 10, “Restructuring and Related Costs” to the Notes to Condensed Consolidated Financial Statements for more information.

We currently expect that overall operating expenses in the fourth quarter of 2019 will be lower than the third quarter of 2019, primarily due to lower integration costs, while other categories are expected to remain relatively flat.

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Other Income (Expense), Net



	Three Months Ended
	September 28, 2019			September 29, 2018			Change			% Change

	(In thousands)
Interest income	$	131		$	292		$	(161	)	(55	)%
Interest expense	(7,868		)	(2,160		)	(5,708		)	264	%
Other gain (loss), net	(6,195		)	(5,449		)	(746		)	14	%
Total other expense, net	$	(13,932	)	$	(7,317	)	$	(6,615	)	90	%



	Nine Months Ended
	September 29, 2019			September 29, 2018			Change			% Change

	(In thousands)
Interest income	$	1,080		$	1,818		$	(738	)	(41	)%
Interest expense	(22,711		)	(8,344		)	(14,367		)	172	%
Other gain (loss), net	(5,908		)	(3,514		)	(2,394		)	68	%
Total other expense, net	$	(27,539	)	$	(10,040	)	$	(17,499	)	174	%

Interest income during the three and nine months ended September 28, 2019 decreased by $0.2 million and $0.7 million, respectively, compared to the corresponding periods in 2018. The decrease in both periods was primarily due to lower average cash and investment balances as a result of utilization of cash in operations. Interest expense during the three and nine months ended September 28, 2019 increased by $5.7 million and by $14.4 million, respectively, compared to the corresponding periods in 2018. The increase in both periods was primarily result of higher amortization of debt discount and debt issuance costs on the current convertible debt due to a higher underlying principle, contractual interest and amortization of debt issuance costs on our new revolving line of credit obtained in the third quarter of 2019. The change in other gain (loss), net, during the three and nine months ended September 28, 2019, respectively, compared to the corresponding periods in 2018 was primarily due to foreign exchange losses related to the revaluation of foreign currency into functional currency and gain on non-marketable equity investment.

Income Tax Benefit/Expense

Income taxes during the three and nine months ended September 28, 2019 included a tax expense of $1.5 million and $3.1 million, respectively, on pre-tax losses of $83.2 million and $316.9 million, respectively. This compares to a tax expense of $0.1 million and benefit from income taxes of $0.7 million on pre-tax losses of $32.5 million and $81.5 million, respectively, during the three and nine months ended September 29, 2018, respectively. Provision for income taxes increased by approximately $1.4 million and approximately $3.8 million during the three and nine months ended September 28, 2019, respectively, as a result of additional foreign tax expense from the entities from the Acquisition.

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Liquidity and Capital Resources



	Nine Months Ended
	September 28, 2019			September 29, 2018

	(In thousands)
Net cash flow provided by (used in):
Operating activities	$	(157,160	)	$	(27,529	)
Investing activities	$	(9,960	)	$	122,188
Financing activities	$	48,673		$	209,151



	September 28, 2019		September 29, 2018

	(In thousands)
Cash and cash equivalents	$	94,804	$	416,406
Investments	—		30,480
Restricted cash	25,826		5,836
	$	120,630	$	452,722

Cash, cash equivalents and short-term investments consist of highly-liquid investments in certificates of deposit, money market funds, commercial paper, corporate bonds, U.S. agencies and U.S. treasuries. Our restricted cash balance amounts are primarily pledged as collateral for certain standby and commercial letters of credit related to customer performance guarantees, value added tax licenses and property leases. Additionally, our restricted cash balance includes amounts pledged as collateral on our derivative instruments.

Operating Activities

Net cash used in operating activities during the nine months ended September 28, 2019 was $157.2 million compared to $27.5 million for the corresponding period in 2018.

Net loss adjusted for non-cash items such as depreciation, stock-based compensation, amortization of intangibles, operating lease expense, amortization of debt discount and debt issuance cost on our terms loans and 2024 Notes was $129.1 million during the nine months ended September 28, 2019 compared to $14.0 million for the corresponding period in 2018, reflecting a higher net loss in 2019.

Net cash used to fund working capital was $28.1 million during the nine months ended September 28, 2019. Accounts receivable decreased by $27.5 million primarily due to timing of invoicing and more timely collections on customer accounts. Inventory increased by $23.3 million as we built buffer inventory to reduce risk related to revenue plan execution and the transition of our Berlin, Germany manufacturing facility to a third-party contract manufacturer and increase in sales inventory for subsea customer. Accounts payable increased by $16.5 million largely to support the increase in inventory and were primarily offset by payment of overdue accounts associated with the acquired Coriant business. Prepaid and other assets increased by $53.5 million primarily due to timing of tax payments, and increase in customer contract assets. Accrued liabilities and other expenses increased by $12.8 million primarily due to increased compensation related expenses and timing of tax payments. Deferred revenue decreased by $8.1 million due to the recognition of revenue on maintenance services provided to our customers, which are typically contracted on an annual or multi-year basis.

Net cash used to fund working capital was $41.5 million during the nine months ended September 29, 2018. Accounts receivable increased by $ 27.7 million primarily attributable to higher revenue levels and the timing of invoicing and collections. Inventory increased by $0.9 million to address strong customer demand for our new products, while decreasing the inventory levels of our prior generation products. Accounts payable increased by $ 26.3 million primarily reflecting the timing of payments and inventory purchases during the period. Accrued liabilities and other expenses decreased by $30.8 million primarily due to lower restructuring liabilities resulting from payments and changes in estimates. Additionally, this decrease was attributable to the reduction of customer right of returns, net of an increase in customer prepayments due to our adoption of ASC 606. Deferred revenue increased $8.7 million due to maintenance renewals on our growing installed base, which are typically contracted on an annual or multi-year basis, net of adjustments related to our adoption of ASC 606.

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Investing Activities

Net cash used in investing activities during the nine months ended September 28, 2019 was $10.0 million as compared to net cash provided by investing activities of $122.2 million in the corresponding period in 2018. Investing activities during the nine months ended September 28, 2019 included proceeds of $26.6 million associated with maturities of investments and capital expenditures of $28.3 million. Additionally, $10.0 million held in escrow related to the Acquisition was released due to the absence of underlying claims during the nine months ended September 28, 2019 and $1.0 million was received from sale of non-marketable equity investment.

Investing activities during the nine months ended September 29, 2018 included net proceeds of $148.2 million associated with sales, maturities and purchases of investments as we liquidated our investment portfolios in order to prepare for the repayment of the 2018 Notes in June 2018. Additionally, capital expenditures amounted to $27.0 million during the period and we received additional proceeds on the sale of our non-marketable equity investment of $1.1 million.

Financing Activities

Net cash provided by financing activities during the nine months ended September 28, 2019 was $48.7 million compared to net cash used in financing activities of $209.2 million in the corresponding period of 2018. Financing activities during the nine months ended September 28, 2019 included proceeds of $8.6 million from issuance of debt associated with mortgaging one of our facilities and $28.8 million from new revolving line of credit obtained in August 2019. Both periods included net proceeds from the issuance of shares under our 2007 Employee Stock Purchase Plan and minimum tax withholdings paid on behalf of certain employees for net share settlements of restricted stock units. Financing activities during the nine months ended September 29, 2018 also included proceeds from the issuance of the 2024 Notes of $391.4 million, offset by the payment for capped call transactions related to the 2024 Notes of $48.9 million. Additionally, financing activities during the nine months ended September 29, 2018 included $150.0 million for the repayment of the 2018 Notes, which matured on June 1, 2018.

Liquidity

We believe that our current cash, cash equivalents and investments, along with the Credit Facility (as defined below) we entered into with Wells Fargo Bank, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures, including the interest payments on the 2024 Notes for at least 12 months. If these sources of cash are insufficient to satisfy our liquidity requirements, we may require additional capital from equity or debt financings to fund our operations, to respond to competitive pressures or strategic opportunities, or otherwise. In addition, we are continuously evaluating alternatives for efficiently funding our capital expenditures and ongoing operations. We may, from time to time, opportunistically engage in a variety of financing transactions for such purposes. We may not be able to secure timely additional financing on favorable terms, or at all. The terms of any additional financings may place limits on our financial and operating flexibility. If we raise additional funds through further issuances of equity or equity-linked securities, our existing stockholders could suffer dilution in their percentage ownership of us, and any new securities we issue could have rights, preferences and privileges senior to those of holders of our common stock.

On August 1, 2019, we entered into a Credit Agreement (the "Credit Agreement") with Wells Fargo Bank. The Credit Agreement provides for a senior secured asset-based revolving credit facility of up to $100 million (the "Credit Facility"), which the we may draw upon from time to time. We may increase the total commitments under the Credit Facility by up to an additional $50 million, subject to certain conditions. In addition, the Credit Agreement provides for a $50 million letter of credit sub-facility and a $10 million swing loan sub-facility. The proceeds of the loans under the Credit Agreement may be used to pay the fees, costs, and expenses incurred in connection with the Credit Agreement and for working capital and general corporate purposes. The Credit Facility matures, and all outstanding loans become due and payable, on March 5, 2024.

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of credit usage during the immediately preceding quarter in addition to the fronting fees, commissions and other fees.

As of September 28, 2019, we have outstanding borrowings of $30 million due in March 2024 and related interest due monthly. For more information regarding the Credit Facility, see Note 13, “Debt” to the Notes to Condensed Consolidated Financial Statements.

In September 2018, we issued the 2024 Notes, which will mature on September 1, 2024, unless earlier repurchased, redeemed or converted. Interest is payable semi-annually in arrears on March 1 and September 1 of each year, which commenced on March 1, 2019. The net proceeds from the 2024 Notes issuance were approximately $391.4 million, of which approximately $48.9 million was used to pay the cost of the capped call transactions. We also used a portion of the remaining net proceeds to fund the cash portion of the purchase price of the Acquisition, including fees and expenses relating thereto, and intend to use the remaining net proceeds for general corporate purposes.

Upon conversion, it is our intention to pay cash equal to the lesser of the aggregate principal amount or the conversion value of the 2024 Notes. For any remaining conversion obligation, we intend to pay or deliver, as the case may be, cash, shares of our common stock, or a combination of cash and shares of our common stock, at our election. As of June 29, 2019, long-term debt, net, was $280.8 million, which represents the liability component of the $402.5 million principal balance, net of $126.4 million of unamortized debt discount and debt issuance costs. The debt discount and debt issuance costs are currently being amortized over the remaining term until maturity of the 2024 Notes on September 1, 2024. To the extent that the holders of the 2024 Notes request conversion during an early conversion window, we may require funds for repayment of such 2024 Notes prior to their maturity date.

As of September 28, 2019, contractual obligations related to the 2024 Notes are payments of $8.6 million due each year from 2020 through 2023 and $406.8 million due in 2024. These amounts represent principal and interest cash payments over the term of the 2024 Notes. Any future redemption or conversion of the Notes could impact the amount or timing of our cash payments. For more information regarding the 2024 Notes, see Note 13, “Debt” to the Notes to Condensed Consolidated Financial Statements.

As of September 28, 2019, we had $94.8 million of cash, cash equivalents and short-term investments, including $62 million of cash and cash equivalents held by our foreign subsidiaries. Our policy with respect to undistributed foreign subsidiaries' earnings is to consider those earnings to be indefinitely reinvested. As a result of the Tax Act, if and when funds are actually distributed in the form of dividends or otherwise, we expect minimal tax consequences, except for foreign withholding taxes, which would be applicable in some jurisdictions.

Off-Balance Sheet Arrangements

As of September 28, 2019, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.


Item 3.	Quantitative and Qualitative Disclosures about Market Risk

For a discussion of our exposure to market risk, see “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 29, 2018. There have been no material changes to our market risk during the three months ended September 28, 2019.


Item 4.	Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation was performed by management, with the participation of our chief executive officer (“CEO”) and our chief financial officer (“CFO”), of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d -15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based on this evaluation, our CEO and CFO have concluded that, as of the end of the fiscal period covered by this quarterly report on Form 10-Q, our disclosure controls and procedures were effective to provide reasonable assurance 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 by the SEC’s rules and forms and that such information is accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting

During the third quarter of 2019, we integrated three separate global ERP instances into a single ERP system. In connection with this ERP implementation, we modified the design and documentation of our internal control processes and procedures relating to the new system.

No other changes in our internal control over financial reporting occurred during the quarter ended September 28, 2019 that materially affected, or which are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

We do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls 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; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with

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policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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PART II. OTHER INFORMATION


Item 1.	Legal Proceedings

On November 23, 2016, Oyster Optics, LLC (“Oyster Optics”) filed a complaint against us in the United States District Court for the Eastern District of Texas. The complaint asserts infringement of U.S. Patent Nos. 6,469,816, 6,476,952, 6,594,055, 7,099,592, 7,620,327 (the "'327 patent"), 8,374,511 (the "'511 patent") and 8,913,898 (the "'898 patent") (collectively, the asserted patent are referred to herein as the “Oyster Optics patents in suit”). The complaint seeks unspecified damages and a permanent injunction. We filed our answer to Oyster Optics' complaint on February 3, 2017. We filed two petitions for Inter Partes Review (“IPR”) of the '898 patent with the U.S. Patent and Trademark Office ("USPTO"). Other defendants have filed IPR petitions in connection with the remaining Oyster Optics patents in suit. The USPTO instituted two IPRs of the ‘511 patent and two IPRs of the ‘898 patent but denied IPR petitions in connection with the ‘327 patent. A Markman decision was issued on December 5, 2017 and fact discovery closed on December 22, 2017. Oyster Optics dropped the ‘511 and ‘898 patents, leaving only a few claims in the ‘327 patent at issue in the case. On May 15, 2018, Oyster Optics filed a new patent infringement complaint with the court, naming us as a defendant. In its new complaint, Oyster Optics alleges infringement of the ‘327 patent, U.S. Patent No. 9,749,040 and the ‘898 patent. On June 8, 2018, the court granted the parties’ joint motion to sever and consolidate the first-filed lawsuit with the later filed case. We filed our answer to the new complaint on July 16, 2018. A case management conference was held on September 11, 2018, and the court set a trial date for November 4, 2019. On October 26, 2018, we filed an amended answer to include a license defense. On November 29, 2018, we filed a motion for summary judgment based on the license defense. The court issued a second Markman decision on May 3, 2019, in which the parties were ordered to schedule a mediation within 30 days of the decision. The parties participated in a mediation on May 16, 2019, but no settlement agreement was agreed upon. On June 12, 2019, the court held a hearing in connection with the license defense. On June 25, 2019, the court granted our Motion for Summary Judgment and on June 28, 2019, the court entered a final judgment for us. On July 22, 2019, Oyster filed an appeal of the court’s decision with the Court of Appeals for the Federal Circuit. We are currently unable to predict the outcome of this litigation and therefore cannot reasonably estimate the possible loss or range of loss, if any, arising from this matter.

On July 29, 2019, Oyster Optics filed a third complaint against us, Coriant (USA) Inc., Coriant North America, LLC and Coriant Operations, Inc. in the United States District Court for the Eastern District of Texas. The complaint asserts infringement of U.S. Patent No. 6,665,500 (the “Oyster III patent in suit”). The complaint seeks unspecified damages and a permanent injunction. On October 7, 2019, we filed our answer to the complaint asserting among other things, counterclaims and defenses based on non-infringement, invalidity, and a license to the Oyster III patent in suit. On October 28, 2019, Oyster amended its complaint to add additional counts related to our license defense. We are unable to predict the outcome of this litigation at this time and therefore cannot reasonably estimate the possible loss or range of loss, if any, arising from this matter.

On August 26, 2019, Oyster Optics filed a fourth complaint against us, Coriant (USA) Inc., Coriant North America, LLC, and Coriant Operations, Inc. in the Superior Court of California, County of Santa Clara. The complaint sought unspecified damages. On November 5, 2019, Oyster moved the court to voluntarily dismiss its complaint.

On March 24, 2017, Core Optical Technologies, LLC (“Core Optical”) filed a complaint against us in the United States District Court for the Central District of California. The complaint asserts infringement of U.S. Patent No. 6,782,211 (the “Core Optical patent in suit”). During the May 28, 2019 mediation, we agreed with Core Optical on the preliminary terms to settle the lawsuit and grant us a license to the Core Optical patent in suit and release of claims of past infringement. The parties entered into a final settlement agreement on August 30, 2019 and the case was dismissed with prejudice on September 13, 2019.

On June 8, 2017, a Civil Investigative Demand was issued to Coriant pursuant to a False Claims Act investigation by the U.S. government as to whether there has been any violation of 31 U.S.C. §3729. Coriant provided documents and other responses to the U.S. government, and we will continue to cooperate in the ongoing investigation.

In addition to the matters described above, we are subject to various legal proceedings, claims and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, we do not expect that the ultimate costs to resolve these matters will have a material effect on our consolidated financial position, results of operations or cash flows.

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Item 1A.	Risk Factors

Investing in our securities involves a high degree of risk and a description of the risks and uncertainties associated with our business is set forth below. This description includes any material changes to and supersedes the description of the risks and uncertainties associated with our business previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 29, 2018. You should carefully consider such risks and uncertainties, together with the other information contained in this report, our Annual Report on Form 10-K for the fiscal year ended December 29, 2018 and in our other public filings. Because of the following factors, as well as other variables affecting our operating results, past financial performance should not be considered as a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods. If any of such risks and uncertainties actually occurs, our business, financial condition or operating results could differ materially from the plans, projections and other forward-looking statements included in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report and in our other public filings, which could cause the market price of our common stock to decline, perhaps significantly.

Risks Related to the Acquisition

We may be unable to successfully integrate Coriant’s business and realize the anticipated strategic and financial benefits expected from the Acquisition.

We will be required to devote significant management attention and resources to integrating the business and operations of Coriant in order to realize the anticipated strategic and financial benefits of the Acquisition. Potential difficulties we may encounter in the integration process include the following:


•	the loss of customers and associated revenue as a result of such parties deciding not to continue business at the same or similar levels with us after the Acquisition;


•	challenges associated with operating the combined business in markets and geographies in which we have not historically operated in since Coriant's operations are more widely distributed around the globe;


•	the complexities associated with managing our company and integrating personnel from Coriant, resulting in a significantly larger combined company, while at the same time providing high quality products to customers;


•	unanticipated issues in integrating and efficiently operating our ERP, accounting, information technology, communications, administration and other systems;


•	challenges associated with the transition from certain suppliers historically used by Coriant without disrupting our global supply chain:


•	the failure to identify and eliminate redundant and underperforming functions and products;


•	the failure to retain key employees of the combined company;


•	potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the Acquisition; and


•	performance shortfalls as a result of the diversion of management’s attention caused by integrating Coriant’s operations.

Our ability to realize the anticipated strategic and financial benefits of the Acquisition will depend on, among other things, our ability to combine our business with Coriant’s business in a manner that facilitates growth, realizes anticipated cost savings and retains Coriant’s and our customers, suppliers and employees. We must successfully combine our business with the business of Coriant in a manner that enables these anticipated benefits to be realized and we must achieve the anticipated growth and cost savings without adversely affecting the combined company's revenue base. Failure to achieve all of the anticipated strategic and financial benefits in a timely manner may have a material adverse effect on our business, financial condition and results of operations.

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In August 2019, we migrated to a single ERP system by integrating three separate ERP systems, which caused us to experience a delay in our financial reporting for the three months ended September 28, 2019. In addition, we may continue to experience operating or reporting disruptions during the course of utilizing the new ERP system, including unintended disruptions in our ability to deliver and bill for customer shipments, project our inventory requirements, and manage our supply chain, including our hardware servicing operations. Further, these impacts could cause us to lose customers or have reduced revenue if customers shift to other suppliers.

In addition, although our integration plan involves us making significant cash outlays to transform the business, if the integration does not generate the returns we anticipate within the timeframe expected, it could cause us to decrease our cash and investment position or require us to evaluate alternatives for efficiently funding our capital expenditures and ongoing operations. This may cause customers to lose confidence in our business and make them reluctant to continue to do business with us.

We may be unable to realize the anticipated synergies related to the Acquisition, which could have a material adverse effect on our business, financial condition and results of operations.

We expect to realize significant synergies from cost savings, including from consolidation of the combined company's supply chain, operational scale efficiencies throughout the combined company and our ability to integrate our optical engine into key Coriant products. In order to achieve these synergies, we also expect to incur material one-time costs. In addition, the elimination of duplicative costs may not be possible or may take longer than anticipated, or the benefits from the Acquisition may be offset by costs incurred or delays in integrating the companies. For example, we expect to incur additional restructuring expenses related to the closure of our German facilities. While we believe significant synergies are achievable, our ability to achieve such estimated synergies in the amounts and time frames expected are subject to a number of risks, which may or may not be realized, as well as the incurrence of other costs in our operations that may offset all or a portion of such synergies and other factors outside our control. As a consequence, we may not be able to realize all of these synergies within the time frame expected or at all, or the amounts of such synergies could be significantly reduced, and we may incur additional and/or unexpected costs to realize these synergies. In addition, if we fail to achieve the anticipated cost reductions throughout the supply chain or integrating our optical engine in key Coriant products in a timely manner, we may be unable realize all the anticipated synergies. Failure to achieve the expected synergies could significantly reduce the expected benefits associated with the Acquisition and adversely affect our business, financial condition and results of operations.

We may be unable to generate the cash flow necessary to make anticipated capital expenditures or to service our debt.

We may not be able to generate sufficient cash flow to make anticipated capital expenditures or to enable us to service our debt. For example, in each of the fiscal quarters since the completion of the Acquisition, the combined company had a net loss and negative cash flows and we may continue to incur losses over the next few quarters. Our ability to pay our expenses, service our debt and fund planned capital expenditures will depend on our future performance, which will be affected by general economic, competitive, legislative, political, regulatory and other factors beyond our control, and our ability to continue to realize synergies and anticipated cost savings. If we are unable to generate sufficient cash flow from operations or to borrow sufficient funds in the future to service our debt or to make anticipated capital expenditures, we may be required to sell assets, reduce capital expenditures or obtain additional financing, including the issuance of equity, equity-linked and debt securities. For example, although in August 2019, we completed the Credit Facility with Wells Fargo Bank to provide additional working capital flexibility to manage our business, we may not be able to increase the total commitments under the Credit Facility in the future. For additional risk related to the 2024 Notes, please see “Risk Related to our 2024 Notes” below.

If we are unable to maintain effective internal control over financial reporting for the combined companies or successfully integrate multiple enterprise resource systems, we may fail to prevent or detect material misstatements in our financial statements, in which case investors may lose confidence in the accuracy and completeness of our financial statements.

Prior to the Acquisition, we maintained separate internal controls over financial reporting with different financial reporting processes and different ERP systems, and Coriant, as a private company, was not required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. In August 2019, we migrated to an integrated ERP system. As a result of the integration, we may encounter difficulties and unanticipated issues due to the complexity

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of the business processes and technical challenges faced by moving to a single ERP system. If we are unable to successfully manage our integrated ERP system, and implement and maintain effective internal control over financial reporting of the combined company, we may fail to prevent or detect material misstatements in our financial statements, in which case investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our securities may decline. Additionally, integration of our ERP system may cause time delays and impact our ability to undertake financial reporting in a timely manner. For example, we required additional time to complete our quarter-end closing procedures for the three months ended September 28, 2019 due to issues encountered as part of the integration of three separate global instances into a single ERP system.

Risks Related to Our Business and Our Common Stock

Our quarterly results may vary significantly from period to period, which could make our future results difficult to predict and could cause our operating results to fall below investor or analyst expectations.

Our quarterly results and, in particular, our revenue, gross margins, operating expenses, operating margins and net income (loss), have historically varied significantly from period to period and may continue to do so in the future. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Our budgeted expense levels are based, in large part, on our expectations of future revenue and the development efforts associated with that future revenue. Consequently, if our revenue does not meet projected levels in the short-term, our inventory levels, cost of goods sold and operating expenses would be high relative to revenue, resulting in potential operating losses. For example, in each of the prior nine quarters, we have had operating losses, largely as a result of lower than expected revenue and gross margins.

Factors that may contribute to fluctuations in our quarterly results, many of which are outside our control and may be difficult to predict, include:


•	fluctuations in demand, sales cycles and prices for products and services, including discounts given in response to competitive pricing pressures, as well as the timing of purchases by our key customers;


•	our ability to integrate our operations with Coriant's operations and realize the anticipated synergies related to the Acquisition, including the timing of these synergies;


•	changes in customers’ budgets for optical transport network purchases and changes or variability in their purchasing cycles;


•	fluctuations in our customer, product or geographic mix, including the impact of new customer deployments, which typically carry lower gross margins, and customer consolidation, which may affect our ability to grow revenue;


•	the timing and acceptance of our new product releases and our competitors' new product releases;


•	how quickly, or whether at all, the markets in which we operate adopt our solutions;


•	our ability to increase volumes and yields on products manufactured in our internal manufacturing facilities;


•	our ability to successfully restructure our operations within our anticipated time frame and realize our anticipated savings;


•	the quality and timing of delivery of key components from suppliers;


•	order cancellations, reductions or delays in delivery schedules by our customers;


•	any delay in collecting or failure to collect accounts receivable;


•	our ability to control costs, including our operating expenses and the costs and availability of components we purchase for our products;


•	any significant changes in the competitive dynamics of the markets we serve, including any new entrants, new technologies, or customer or competitor consolidation;

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•	readiness of customer sites for installation of our products as well as the availability of third-party service partners to provide contract engineering and installation services for us;


•	the timing of revenue recognition and revenue deferrals;


•	any future changes in U.S. generally accepted accounting principles (“U.S. GAAP”) or new interpretations of existing accounting rules;


•	the impact of a significant natural disaster, such as an earthquake, severe weather, or tsunami or other flooding, as well as interruptions or shortages in the supply of utilities such as water and electricity, in a key location such as our Northern California facilities, which is located near major earthquake fault lines and in a designated flood zone; and


•	general economic and political conditions in domestic and international markets.

Many factors affecting our results of operations are beyond our control and make it difficult to predict our results for a particular quarter and beyond. If our revenue or operating results do not meet the expectations of investors or securities analysts or fall below any guidance we provide to the market, the price of our common stock may decline substantially.

Any delays in the development and introduction of our new products or in releasing enhancements to our existing products may harm our business.

Because our products are based on complex technologies, including, in many cases, the development of next-generation PICs, DSPs and specialized ASICs (key components of our optical engines), and also may depend on technologies from outside suppliers, we may experience unanticipated delays in developing, improving, manufacturing or deploying these products. The development process for our optical engines is lengthy, and any modifications entail significant development cost and risks.

At any given time, various new product introductions and enhancements to our existing products are in the development phase and are not yet ready for commercial manufacturing or deployment. We rely on third parties, some of which are relatively early stage companies, to develop, manufacture and deliver components for our next-generation products, which can often require custom development. The development process from laboratory prototype to customer trials, and subsequently to general availability, involves a significant number of simultaneous efforts. These efforts often must be completed in a timely and coordinated manner so that they may be incorporated into the product development cycle for our systems, and include:


•	completion of product development, including the development and completion of our next-generation optical engines, and the completion of associated module development;


•	the qualification and multiple sourcing of critical components;


•	validation of manufacturing methods and processes;


•	extensive quality assurance and reliability testing and staffing of testing infrastructure;


•	validation of software; and


•	establishment of systems integration and systems test validation requirements.

Each of these steps, in turn, presents risks of failure, rework or delay, any one of which could decrease the speed and scope of product introduction and marketplace acceptance of our products. New generations of our optical engines as well as intensive software testing are important to the timely introduction of new products and enhancements to our existing products, and are subject to these development risks. In addition, unexpected intellectual property disputes, failure of critical design elements, limited or constrained engineering resources, and a host of other development execution risks may delay, or even prevent, the introduction of new products or enhancements to our existing products. If we do not develop and successfully introduce or enhance products in a timely manner, our competitive position will suffer.

Additionally, as a result of the Acquisition, significant development effort is in progress to enhance our end-to-end product portfolio, including the newly added Coriant products, with network management and network automation software and features that would enable our current and future potential customers to deploy networks more easily and take advantage of features such as Instant Bandwidth. This effort may not result in the expected

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benefits to our current and future potential customers and we may not realize the planned financial and strategic benefits to our business.

As we transition customers to new products, we face significant risk that our new products may not be accepted by our current or new customers. To the extent that we fail to introduce new and innovative products that are adopted by customers, we could fail to obtain an adequate return on these investments and could lose market share to our competitors, which could be difficult or impossible to regain. Similarly, we may face decreased revenue, gross margins and profitability due to a rapid decline in sales of current products as customers hold spending to focus purchases on new product platforms. We could incur significant costs in completing the transition, including costs of inventory write-downs of the current product as customers transition to new product platforms. In addition, products or technologies developed by others may render our products noncompetitive or obsolete and result in significant reduction in orders from our customers and the loss of existing and prospective customers.

Our ability to increase our revenue will depend upon continued growth of demand by consumers and businesses for additional network capacity and on the level and timing of capital spending by our customers.

Our future success depends on factors that increase the amount of data transmitted over communications networks and the growth of optical transport networks to meet the increased demand for optical capacity. These factors include the growth of mobile, video and cloud-based services, increased broadband connectivity and the continuing adoption of high-capacity, revenue-generating services. If demand for such bandwidth does not continue, or slows down, the market for optical transport networking equipment may not continue to grow and our product sales would be negatively impacted.

In addition, demand for our products depends on the level and timing of capital spending in optical networks by service providers as they construct, expand and upgrade the capacity of their optical networks. Capital spending is cyclical in our industry and spending by customers can change on short notice. Any future decisions by our customers to reduce capital spending, whether caused by lower customer demand or weakening economic conditions, changes in government regulations relating to telecommunications and data networks, customer or other reasons, could have a material adverse effect on our business, results of operations and financial condition.

Actions that we are taking to restructure our business to cut costs in order to align our operating structure with current opportunities may not be as effective as anticipated.

In December 2018, we implemented a restructuring initiative (the “2018 Restructuring Plan”) as part of a comprehensive review of our operations and ongoing integration synergies in order to optimize resources for future growth, improve efficiencies and address redundancies following the Acquisition. As part of the 2018 Restructuring Plan, we hope to reduce expenses, streamline the organization, and reallocate resources to align more closely with our needs going forward. While we expect to realize efficiencies from these actions, these activities might not produce the full efficiency and cost reduction benefits we expect. For example, in the third quarter of 2019, we completed the transfer of our manufacturing operations in Berlin, Germany to a contract manufacturer. We may not fully realize all the projected cost savings from the closure of this site or other sites, which would harm our business. In addition, any disruptions in the smooth transition to a third-party manufacturer could damage customer relations and harm our ability to achieve our financial plans.

Further, any anticipated benefits from the 2018 Restructuring Plan may be realized later than expected, and the ongoing costs of implementing these measures may be greater than anticipated. In addition, as a result of the restructuring, our ability to execute on product development, address key market opportunities and/or meet customer demand, could be materially and adversely affected.

Our gross margin may fluctuate from period to period and may be adversely affected by a number of factors, some of which are beyond our control.

Our gross margin fluctuates from period to period and varies by customer and by product. Over the past eight fiscal quarters, our gross margin has ranged from 20.8% to 40.5%. Our gross margin is likely to continue to fluctuate and will be affected by a number of factors, including:


•	the mix of the types of customers purchasing our products as well as the product mix, including sales of former Coriant products;

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•	the initial products released powered by our next-generation technologies generate lower margin initially, as per unit production costs for initial units tend to be higher and experience more variability in production yields;


•	the pace at which we deploy solutions powered by our next generation technologies, which could lead to higher excess or obsolete inventory;


•	significant new deployments to existing and new customers, often with a higher portion of lower margin common equipment as we deploy network footprint;


•	aggressive pricing tactics by our competitors;


•	changes in our manufacturing costs, including fluctuations in yields and production volumes;


•	pricing and commercial terms designed to secure long-term customer relationships, as well as commercial deals to transition certain customers to our new products;


•	consolidation amongst our suppliers, which may increase prices of components for our products;


•	the volume of Instant Bandwidth-enabled solutions sold, and capacity licenses activated;


•	price discounts negotiated by our customers;


•	charges for excess or obsolete inventory;


•	changes in the price or availability of components for our products, including the possible effect of new or increased tariffs on the prices of raw materials used in such components; and


•	changes in warranty related costs.

It is likely that the average unit prices of our products will decrease over time in response to competitive pricing pressures. In addition, some of our customer contracts contain clauses that require us to annually decrease the sales price of our products to these customers. In response, we will need to reduce the cost of our products through manufacturing efficiencies, design improvements and cost reductions from our supply partners. If these efforts are not successful or if we are unable to reduce our costs by more than the reduction in the price of our products, our gross margin will decline, causing our operating results to decline. Fluctuations in gross margin may make it difficult to manage our business and achieve or maintain profitability.

Aggressive business tactics by our competitors may harm our business.

The markets in which we compete are extremely competitive and this often results in aggressive business tactics by our competitors, including:


•	aggressively pricing their optical transport products and other portfolio products, including offering significant one-time discounts and guaranteed future price decreases;


•	offering optical products at a substantial discount or for free when bundled together with broader technology purchases, such as router or wireless equipment purchases;


•	providing financing, marketing and advertising assistance to customers; and


•	influencing customer requirements to emphasize different product capabilities, which better suit their products.

The level of competition and pricing pressure tend to increase when competing for larger high-profile opportunities or during periods of economic weakness when there are fewer network build-out projects. If we fail to compete successfully against our current and future competitors, or if our current or future competitors continue or expand their aggressive business tactics, including those described above, demand for our products could decline, we could experience delays or cancellations of customer orders, and/or we could be required to reduce our prices to compete in the market.

We are dependent on a small number of key customers for a significant portion of our revenue from period to period and the loss of, or a significant reduction in, orders from one or more of our key customers would reduce our revenue and harm our operating results.

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While our revenue and customer base are more diversified as a result of the Acquisition, today a relatively small number of customers account for a large percentage of our revenue from period to period. For example, for the first three quarters of fiscal 2019, our top ten customers accounted for approximately 54% of our total revenue. For the fiscal year 2018, our top ten customers accounted for approximately 54% of our total revenue. Our business will likely be harmed if any of our key customers are acquired, do not generate as much revenue as we forecast, stop purchasing from us, delay anticipated product purchases, or substantially reduce their orders to us. In addition, our business will be harmed if we fail to maintain our competitive advantage with our key customers or do not add new larger customers over time. We continue to expect a relatively small number of customers to continue to account for a large percentage of revenue from period to period. However, customer consolidation could reduce the number of key customers that generate a significant percentage of our revenue and may increase the risks relating to dependence on a small number of customers.

Our ability to continue to generate revenue from our key customers will depend on our ability to maintain strong relationships with these customers and introduce competitive new products at competitive prices. In most cases, our sales are made to these customers pursuant to standard purchase agreements rather than long-term purchase commitments, and orders may be canceled or reduced readily. In the event of a cancellation or reduction of an order, we may not have enough time to reduce operating expenses to minimize the effect of the lost revenue on our business. Our operating results will continue to depend on our ability to sell our products to our key customers.

Increased consolidation among our customers and suppliers in the communications networking industry has had, and could continue to have, an adverse effect on our business and results of operations.

We have seen increased consolidation in the communications networking industry over the past few years, which has adversely affected our business and results of operations. For example, several of our customers have consolidated in the past. During 2016, Charter Communications completed its acquisition of Time Warner Cable, Inc. and Altice completed its acquisition of Cablevision. During 2017, Verizon completed its acquisition of XO Communications and CenturyLink completed its acquisition of Level 3 Communications. Customer consolidation has led to changes in buying patterns, slowdowns in spending, redeployment of existing equipment and re-architecture of parts of existing networks or future networks, as the combined companies evaluate the needs of the combined business. Moreover, the significant purchasing power of these large companies can increase pricing and competitive pressures for us, including the potential for decreases in our average selling prices. If one of our customers is acquired by another company that does not rely on us to provide it with products or relies on another provider of similar products, we may lose that customer’s business. Such consolidation may further reduce the number of customers that generate a significant percentage of our revenue and may exacerbate the risks relating to dependence on a small number of customers. Any of the foregoing results will adversely affect our business, financial condition and results of operations.

In addition, our suppliers in the communications networking industry have recently begun to consolidate. For example, in the fourth quarter of 2018, Lumentum completed its acquisition of Oclaro and, in the third quarter of 2019, II-VI completed its acquisition of Finisar. Supplier consolidation may lead to increased prices of components for our products, deployment delays and/or a disruption in output. In addition, such consolidation may exacerbate the risks relating to our dependence on a small number of suppliers.

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If we lose key personnel or fail to attract and retain additional qualified personnel when needed, our business may be harmed.

Our success depends to a significant degree upon the continued contributions of our key management, engineering, sales and marketing, and finance personnel, many of whom would be difficult to replace. For example, senior members of our engineering team have unique technical experience that would be difficult to replace. We do not have long-term employment contracts or key person life insurance covering any of our key personnel. Because our products are complex, we must hire and retain highly trained customer service and support personnel to ensure that the deployment of our products does not result in network disruption for our customers. We believe our future success will depend in large part upon our ability to identify, attract and retain highly skilled personnel and competition for these individuals is intense in our industry, especially in the San Francisco Bay Area where we are headquartered. In addition, we may not succeed in identifying, attracting and retaining appropriate personnel. The loss of the services of any of our key personnel, the inability to identify, attract or retain qualified personnel in the future or delays in hiring qualified personnel, particularly engineers and sales personnel, could make it difficult for us to manage our business and meet key objectives, such as timely product introductions. For example, in August 2019, we announced the appointment of our new Chief Financial Officer to replace our prior Chief Financial Officer who departed during in September 2019. In addition, as a result of the Acquisition, our current and prospective employees may experience uncertainty about their futures that may impair our ability to retain, recruit or motivate key management, engineering, technical and other personnel.

Product performance problems, including undetected errors in our hardware or software, or deployment delays could harm our business and reputation.

The development and production of products with high technology content is complicated and often involves problems with hardware, software, components and manufacturing methods. Complex hardware and software systems, such as our products, can often contain undetected errors or bugs when first introduced or as new versions are released. In addition, errors associated with components we purchase from third parties, including customized components, may be difficult to resolve. We have experienced issues in the past in connection with our products, including failures due to the receipt of faulty components from our suppliers and performance issues related to software updates. From time to time we have had to replace certain components, provide software remedies or other remediation in response to errors or bugs, and we may have to do so again in the future. In addition, performance issues can be heightened during periods where we are developing and introducing multiple new products to the market, as any performance issues we encounter in one technology or product could impact the performance or timing of delivery of other products. Our products may suffer degradation of performance and reliability over time. Also, as a result of the Acquisition, we will be adding, augmenting, and modifying significant parts of our combined portfolio with network management and network automation software and features. These efforts may introduce new software bugs or network level reliability issues that are not known at this time, which could cause us to lose customers and fail to add new customers.

If reliability, quality, security or network monitoring problems develop, a number of negative effects on our business could result, including:


•	reduced orders from existing customers;


•	declining interest from potential customers;


•	delays in our ability to recognize revenue or in collecting accounts receivables;


•	costs associated with fixing hardware or software defects or replacing products;


•	high service and warranty expenses;


•	delays in shipments;


•	high inventory excess and obsolescence expense;


•	high levels of product returns;


•	diversion of our engineering personnel from our product development efforts; and


•	payment of liquidated damages, performance guarantees or similar penalties.

Because we outsource the manufacturing of certain components of our products, we may also be subject to product performance problems as a result of the acts or omissions of third parties.

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From time to time, we encounter interruptions or delays in the activation of our products at a customer’s site. These interruptions or delays may result from product performance problems or from issues with installation and activation, some of which are outside our control. If we experience significant interruptions or delays that we cannot promptly resolve, the associated revenue for these installations may be delayed or confidence in our products could be undermined, which could cause us to lose customers, fail to add new customers, and consequently harm our financial results.

The markets in which we compete are highly competitive and we may not be able to compete effectively.

Competition in the packet-optical equipment market is intense. Our main competitors include WDM system suppliers, such as ADVA Optical Networking, Ciena Corporation, Cisco Systems, ECI, Huawei Technologies Co., Ltd., Nokia and ZTE. In addition, there are several other companies that offer one or more products that partially compete with our offerings.

Competition in the markets we serve is based on any one or a combination of the following factors:


•	price and other commercial terms;


•	functionality;


•	existing business and customer relationships;


•	the ability of products and services to meet customers’ immediate and future network requirements;


•	power consumption;


•	heat dissipation;


•	form factor or density;


•	installation and operational simplicity;


•	quality and reliability;


•	service and support;


•	security and encryption requirements;


•	scalability and investment protection; and


•	product lead times.

In addition to our current competitors, other companies have, or may in the future develop, products that are or could be competitive with our products. We also could encounter competitor consolidation in the markets in which we compete, which could lead to a changing competitive landscape, capabilities and market share, and could impact our results of operations. For example, in the third quarter of fiscal 2019, Cisco Systems announced its intention to acquire optical communications supplier Acacia Communications.

Some of our competitors have substantially greater name recognition, technical, financial and marketing resources, and better-established relationships with potential customers than we have. Many of our competitors have more resources and more experience in developing or acquiring new products and technologies, and in creating market awareness for those products and technologies. In addition, many of our competitors have the financial resources to offer competitive products at aggressive pricing levels that could prevent us from competing effectively. Further, many of our competitors have built long-standing relationships with some of our prospective and existing customers and have the ability to provide financing to customers and could, therefore, have an inherent advantage in selling products to those customers.

We also compete with low-cost producers that can increase pricing pressure on us and a number of smaller companies that provide competition for a specific product, customer segment or geographic market. In addition, we may also face increased competition from system and component companies that develop products based on off-the-shelf hardware that offers the latest commercially available technologies. Due to the narrower focus of their efforts, these competitors may achieve commercial availability of their products more quickly than we can and may provide attractive alternatives to our customers.

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We rely on various third-party service partners to help complement our global operations, and failure to adequately manage these relationships could adversely impact our financial results and relationships with customers.

We rely on a number of third-party service partners, both domestic and international, to complement our global operations. We rely upon these partners for certain installation, maintenance, logistics and support functions. In addition, as our customers increasingly seek to rely on vendors to perform additional services relating to the design, construction and operation of their networks, the scope of work performed by our service partners is likely to increase and may include areas where we have less experience providing or managing such services. We must successfully identify, assess, train and certify qualified service partners in order to ensure the proper installation, deployment and maintenance of our products. The vetting and certification of these partners can be costly and time-consuming, and certain partners may not have the same operational history, financial resources and scale as we have. Moreover, certain service partners may provide similar services for other companies, including our competitors. We may not be able to manage our relationships with our service partners effectively, and we cannot be certain that they will be able to deliver services in the manner or time required, that we will be able to maintain the continuity of their services, or that they will adhere to our approach to ethical business practices. We may also be exposed to a number of risks or challenges relating to the performance of our service partners, including:


•	delays in recognizing revenue;


•	liability for injuries to persons, damage to property or other claims relating to the actions or omissions of our service partners;


•	our services revenue and gross margin may be adversely affected; and


•	our relationships with customers could suffer.

If we do not effectively manage our relationships with third-party service partners, or if they fail to perform these services in the manner or time required, our financial results and relationships with our customers could be adversely affected.

We must respond to rapid technological change and comply with evolving industry standards and requirements for our products to be successful.

The optical transport networking equipment market is characterized by rapid technological change, changes in customer requirements and evolving industry standards. We continually invest in research and development to sustain or enhance our existing products, but the introduction of new communications technologies and the emergence of new industry standards or requirements could render our products obsolete. Further, in developing our products, we have made, and will continue to make, assumptions with respect to which standards or requirements will be adopted by our customers and competitors. If the standards or requirements adopted by our prospective customers are different from those on which we have focused our efforts, market acceptance of our products would be reduced or delayed, and our business would be harmed.

We are continuing to invest a significant portion of our research and development efforts in the development of our next-generation products. We expect our competitors will continue to improve the performance of their existing products and introduce new products and technologies and to influence customers’ buying criteria so as to emphasize product capabilities that we do not, or may not, possess. To be competitive, we must anticipate future customer requirements and continue to invest significant resources in research and development, sales and marketing, and customer support. If we do not anticipate these future customer requirements and invest in the technologies necessary to enable us to have and to sell the appropriate solutions, it may limit our competitive position and future sales, which would have an adverse effect on our business and financial condition. We may not have sufficient resources to make these investments and we may not be able to make the technological advances necessary to be competitive.

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We are dependent on sole source and limited source suppliers for several key components, and if we fail to obtain these components on a timely basis, we will not meet our customers’ product delivery requirements.

We currently purchase several key components for our products from sole or limited sources. In particular, we rely on our own production of certain components of our products, such as PICs, and on third parties, including sole source and limited source suppliers, for certain of the components of our products, including ASICs, field-programmable gate arrays, processors, and other semiconductor and optical components. We have increased our reliance on third parties to develop and manufacture components for certain products, some of which require custom development. We purchase most of these components on a purchase order basis and generally only have long-term contracts with these sole source or limited source suppliers. If any of our sole source or limited source suppliers suffer from capacity constraints, lower than expected yields, deployment delays, work stoppages or any other reduction or disruption in output, they may be unable to meet our delivery schedule which could result in lost revenue, additional product costs and deployment delays that could harm our business and customer relationships. Further, our suppliers could enter into exclusive arrangements with our competitors, refuse to sell their products or components to us at commercially reasonable prices or at all, go out of business or discontinue their relationships with us. We may be unable to develop alternative sources for these components within a suitable time frame to be able to operate our business, or at all.

The loss of a source of supply, or lack of sufficient availability of key components, could require us to redesign products that use such components, which could result in lost revenue, additional product costs and deployment delays that could harm our business and customer relationships. In addition, if our contract manufacturers do not receive critical components in a timely manner to build our products, then we would not be able to ship in a timely manner and would, therefore, be unable to meet our prospective customers’ product delivery requirements. In the past, we have experienced delivery delays because of lack of availability of components or reliability issues with components that we were purchasing. In addition, some of our suppliers have gone out of business, merged with another supplier, or limited their supply of components to us, which may cause us to experience longer than normal lead times, supply delays and increased prices. We may in the future experience a shortage of certain components as a result of our own manufacturing issues, manufacturing issues at our suppliers or contract manufacturers, capacity problems experienced by our suppliers or contract manufacturers, strong demand in the industry for such components, or other disruptions in our supply chain. In addition, disruptions to global macroeconomic conditions may create pressure on us and our suppliers to accurately project overall component demand and manufacturing capacity. These supplier disruptions may continue to occur in the future, which could limit our ability to produce our products and cause us to fail to meet a customer’s delivery requirements. Any failure to meet our customers’ product delivery requirements could harm our reputation and our customer relationships, either of which would harm our business and operating results.

The manufacturing process for our optical engine, and the assembly of our finished products, is very complex. The partial or complete loss of any of our manufacturing facilities, a reduction in yields of our PICs or an inability to scale capacity to meet customer demands could harm our business.

The manufacturing process for our optical engine, including the PICs, DSPs and specialized ASICs, and the assembly of our finished products, is very complex. In the event that any of our manufacturing facilities utilized to build these components and assemble our finished products were fully or partially destroyed, or shut down, as a result of a natural disaster, work stoppage or otherwise, it would limit our ability to sell our products. Because of the complex nature of our manufacturing facilities, such loss would take a considerable amount of time to repair or replace. The partial or complete loss of any of our manufacturing facilities, or an event causing the interruption in our use of any such facilities, whether as a result of a natural disaster, work stoppage or otherwise, for any extended period of time would cause our business, financial condition and operating results to be harmed.

Minor deviations in the PIC manufacturing process can cause substantial decreases in yields and, in some cases, cause production to be suspended. In the past, we have had significant variances in our PIC yields, including production interruptions and suspensions and may have continued yield variances, including additional interruptions or suspensions in the future. Lower than expected yields from our PIC manufacturing process or defects, integration issues or other performance problems in our products could limit our ability to satisfy customer demand requirements, and could damage customer relations and cause business reputation problems, harming our business and operating results.

Our inability to obtain sufficient manufacturing capacity to meet demand, either in our own facilities or through foundry or similar arrangements with third parties, could harm our relationships with our customers, our business and our results of operations.

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If we fail to accurately forecast our manufacturing requirements or customer demand, we could incur additional costs, including inventory write-downs or equipment write-offs, which would adversely affect our business and results of operations.

We generate forecasts of future demand for our products several months prior to the scheduled delivery to our prospective customers. This requires us to make significant investments before we know if corresponding revenue will be recognized. Lead times for materials and components, including ASICs, that we need to order for the manufacture of our products vary significantly and depend on factors such as the specific supplier, contract terms and demand for each component at a given time. In the past, we have experienced lengthened in lead times for certain components. If the lead times for components are lengthened, we may be required to purchase increased levels of such components to satisfy our delivery commitments to our customers. In addition, we must manage our inventory to ensure we continue to meet our commitments as we introduce new products or make enhancements to our existing products.

If we overestimate market demand for our products and, as a result, increase our inventory in anticipation of customer orders that do not materialize, we will have excess inventory, which could result in increased risk of obsolescence and significant inventory write-downs. Furthermore, this will result in reduced production volumes and our fixed costs will be spread across fewer units, increasing our per unit costs. If we underestimate demand for our products, we will have inadequate inventory, which could slow down or interrupt the manufacturing of our products and result in delays in shipments and our ability to recognize revenue. In addition, we may be unable to meet our supply commitments to customers, which could result in a loss of certain customer opportunities or a breach of our customer agreements resulting in payment of damages.

If our contract manufacturers do not perform as we expect, our business may be harmed.

We rely on third-party contract manufacturers to perform a portion of the manufacturing of our products, and our future success will depend on our ability to have sufficient volumes of our products manufactured in a cost-effective and quality-controlled manner. We have engaged third parties to manufacture certain elements of our products at multiple contract manufacturing sites located around the world but do not have long-term agreements in place with some of our manufacturers and suppliers that will guarantee product availability, or the continuation of particular pricing or payment terms. There are a number of risks associated with our dependence on contract manufacturers, including:


•	reduced control over delivery schedules, particularly for international contract manufacturing sites;


•	reliance on the quality assurance procedures of third parties;


•	potential uncertainty regarding manufacturing yields and costs;


•	potential lack of adequate capacity during periods of high demand;


•	limited warranties on components;


•	potential misappropriation of our intellectual property; and


•	potential manufacturing disruptions (including disruptions caused by geopolitical events, military actions, work stoppages or natural disasters).

Any of these risks could impair our ability to fulfill orders. Any delays by our contract manufacturers may cause us to be unable to meet the delivery requirements of our customers, which could decrease customer satisfaction and harm our product sales. In addition, if our contract manufacturers are unable or unwilling to continue manufacturing our products or components of our products in required volumes or our relationship with any of our contract manufacturers is discontinued for any reason, we would be required to identify and qualify alternative manufacturers, which could cause us to be unable to meet our supply requirements to our customers and result in the breach of our customer agreements. Qualifying a new contract manufacturer and commencing volume production is expensive and time-consuming and if we are required to change or qualify a new contract manufacturer, we could lose revenue and damage our customer relationships.

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Our large customers have substantial negotiating leverage, which may cause us to agree to terms and conditions that result in lower average selling prices and potentially increased cost of sales leading to lower gross margin, each of which would harm our results of operations.

Many of our customers are large service providers and ICPs that have substantial purchasing power and leverage in negotiating contractual arrangements with us. In addition, customer consolidation in the past few years has created combined companies that are even larger and have greater negotiating leverage. Our customers have sought and may continue to seek advantageous pricing, payment and other commercial terms. We have agreed and may continue to agree to unfavorable commercial terms with these customers, including the potential of reducing the average selling price of our products, increasing cost of sales or agreeing to extended payment terms in response to these commercial requirements or competitive pricing pressures. To maintain acceptable operating results, we will need to comply with these commercial terms, develop and introduce new products and product enhancements on a timely basis, and continue to reduce our costs.

Our sales cycle can be long and unpredictable, which could result in an unexpected revenue shortfall in any given quarter.

Our products can have a lengthy sales cycle, which can extend from six to twelve months and may take even longer for larger prospective customers. Our prospective customers conduct significant evaluation, testing, implementation and acceptance procedures before they purchase our products. We incur substantial sales and marketing expenses and expend significant management effort during this time, regardless of whether we make a sale.

Because the purchase of our equipment involves substantial cost, most of our customers wait to purchase our equipment until they are ready to deploy it in their network. As a result, it is difficult for us to accurately predict the timing of future purchases by our customers. In addition, product purchases are often subject to budget constraints, multiple approvals and unplanned administrative processing and other delays. If sales expected from customers for a particular quarter are not realized in that quarter or at all, our revenue will be negatively impacted.

If we need additional capital in the future, it may not be available to us on favorable terms, or at all.

Our business requires significant capital. For example, in August 2019 we completed a Credit Facility with Wells Fargo to provide additional capital to manage our business. We have historically relied on outside debt or equity financing as well as cash flow from operations to fund our operations, capital expenditures and expansion. We may require additional capital from equity or equity-linked financing, debt financing or other financings in the future to fund our operations, respond to competitive pressures or strategic opportunities or to refinance our existing debt obligations. In the event that we require additional capital, we may not be able to secure timely additional financing on favorable terms, or at all. The terms of any additional financing may place limits on our financial and operating flexibility. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer dilution in their percentage ownership of our company, and any new securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, if and when we require it, our ability to grow or support our business and to respond to business challenges could be limited and our business will be harmed.

If we fail to protect our intellectual property rights, our competitive position could be harmed, or we could incur significant expense to enforce our rights.

We depend on our ability to protect our proprietary technology. We rely on a combination of methods to protect our intellectual property, including limiting access to certain information, and utilizing trade secret, patent, copyright and trademark laws and confidentiality agreements with employees and third parties, all of which offer only limited protection. The steps we have taken to protect our proprietary rights may be inadequate to preclude misappropriation or unauthorized disclosure of our proprietary information or infringement of our intellectual property rights, and our ability to police such misappropriation, unauthorized disclosure or infringement is uncertain, particularly in countries outside of the United States. This is likely to become an increasingly important issue if we expand our operations and product development into countries that provide a lower level of intellectual property protection. We do not know whether any of our pending patent applications will result in the issuance of patents or whether the examination process will require us to narrow our claims, and even if patents are issued, they may be contested, circumvented or invalidated. Moreover, the rights granted under any issued patents may not provide us with a competitive advantage, and, as with any technology, competitors may be able to develop similar or superior technologies to our own now or in the future.

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Protecting against the unauthorized use of our products, trademarks and other proprietary rights is expensive, difficult, time consuming and, in some cases, impossible. Litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity or scope of the proprietary rights of others. Such litigation could result in substantial cost and diversion of management resources, either of which could harm our business, financial condition and operating results. Furthermore, many of our current and potential competitors have the ability to dedicate substantially greater resources to enforce their intellectual property rights than we do. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.

Claims by others that we infringe their intellectual property could harm our business.

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, many leading companies in the optical transport networking industry, including our competitors, have extensive patent portfolios with respect to optical transport networking technology. In addition, non-practicing patent holding companies seek to monetize patents they have purchased or otherwise obtained. We expect that infringement claims may increase as the number of products and competitors in our market increases and overlaps in technology implementation occur. From time to time, third parties may assert exclusive patent, copyright, trademark and other intellectual property rights to technologies and related standards that are important to our business or seek to invalidate the proprietary rights that we hold. Competitors or other third parties have asserted, and may continue to assert claims or initiate litigation or other proceedings against us or our manufacturers, suppliers or customers alleging infringement of their proprietary rights, or seeking to invalidate our proprietary rights, with respect to our products and technology. In addition, in the past we have had certain patent licenses with third parties that have not been renewed, and if we cannot successfully renew these licenses, we could face claims of infringement. In the event that we are unsuccessful in defending against any such claims, or any resulting lawsuits or proceedings, we could incur liability for damages and/or have valuable proprietary rights invalidated. For additional information regarding certain of the legal proceedings in which we are involved, see Part II, Item 1, "Legal Proceedings."

Any claim of infringement from a third party, even one without merit, could cause us to incur substantial costs defending against the claim, and could distract our management from running our business. Furthermore, a party making such a claim, if successful, could secure a judgment that requires us to pay substantial damages or could include an injunction or other court order that could prevent us from offering our products. In addition, we might be required to seek a license for the use of such intellectual property, which may not be available on commercially reasonable terms or at all. Alternatively, we may be required to develop non-infringing technology, which would require significant effort and expense and may ultimately not be successful. Any of these events could harm our business, financial condition and operating results. Competitors and other third parties have and may continue to assert infringement claims against our customers and sales partners. Any of these claims would require us to initiate or defend potentially protracted and costly litigation on their behalf, regardless of the merits of these claims, because we generally indemnify our customers and sales partners from claims of infringement of proprietary rights of third parties. If any of these claims succeed, we may be forced to pay damages on behalf of our customers or sales partners, which could have an adverse effect on our business, financial condition and operating results.

We may also be required to indemnify some customers under our contracts if a third party alleges, or a court finds, that our products have infringed upon the proprietary rights of other parties. From time to time, we have agreed to indemnify certain customers for claims made against our products, where such claims allege infringement of third-party intellectual property rights, including, but not limited to, patents, registered trademarks and/or copyrights. If we are required to make a significant payment under any of our indemnification obligations, our result of operations may be harmed.

We incorporate free and open source licensed software into our products. Although we monitor our use of such open source software closely, 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 addition, non-compliance with open source software license terms and conditions could subject us to potential liability, including intellectual property infringement and/or contract claims. In such events, we may 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 in a timely manner, any of which could adversely affect our business, operating results and financial condition.

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The trading price of our common stock has been volatile and is likely to be volatile in the future.

The trading prices of our common stock and the securities of other technology companies have been and may continue to be highly volatile. Factors affecting the trading price of our common stock include:


•	variations in our operating results;


•	announcements of technological innovations, new services or service enhancements, strategic alliances or agreements by us or by our competitors;


•	the gain or loss of customers;


•	recruitment or departure of key personnel;


•	changes in the estimates of our future operating results or external guidance on those results or changes in recommendations or business expectations by any securities analysts that elect to follow our common stock;


•	mergers and acquisitions by us, by our competitors or by our customers;


•	market conditions in our industry, the industries of our customers and the economy as a whole, including global trade tariffs; and


•	adoption or modification of regulations, policies, procedures or programs applicable to our business.

In addition, if the market for technology stocks or the broader stock market experience a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or operating results. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. Each of these factors, among others, could harm the value of your investment in our common stock. Some companies that have had volatile market prices for their securities have had securities class action lawsuits filed against them. If a suit were filed against us, regardless of its merits or outcome, it could result in substantial costs and divert management’s attention and resources.

Unfavorable macroeconomic and market conditions may adversely affect our industry, business and financial results.

In the past, unfavorable macroeconomic and market conditions have resulted in sustained periods of decreased demand for optical communications products. These conditions may also result in the tightening of credit markets, which may limit or delay our customers’ ability to obtain necessary financing for their purchases of our products. A lack of liquidity in the capital markets or the continued uncertainty in the global economic environment may cause our customers to delay or cancel their purchases, increase the time they take to pay or default on their payment obligations, each of which would negatively affect our business and operating results. Weakness and uncertainty in the global economy could cause some of our customers to become illiquid, delay payments or adversely affect our collection of their accounts, which could result in a higher level of bad debt expense. In addition, currency fluctuations could negatively affect our international customers’ ability or desire to purchase our products.

Challenging economic conditions have from time to time contributed to slowdowns in the telecommunications industry in which we operate. Such slowdowns may result in:


•	reduced demand for our products as a result of constraints on capital spending by our customers;


•	increased price competition for our products, not only from our competitors, but also as a result of our customer’s or potential customer’s utilization of inventoried or underutilized products, which could put additional downward pressure on our near-term gross profits;


•	risk of excess or obsolete inventories;


•	excess manufacturing capacity and higher associated overhead costs as a percentage of revenue; and


•	more limited ability to accurately forecast our business and future financial performance.

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A lack of liquidity and economic uncertainty may adversely affect our suppliers or the terms on which we purchase products from these suppliers. It may also cause some of our suppliers to become illiquid. Any of these impacts could limit our ability to obtain components for our products from these suppliers and could adversely impact our supply chain or the delivery schedule to our customers. This also could require us to purchase more expensive components, or re-design our products, which could cause increases in the cost of our products and delays in the manufacturing and delivery of our products. Such events could harm our gross margin and harm our reputation and our customer relationships, either of which could harm our business and operating results.

Our international sales and operations subject us to additional risks that may harm our operating results.

Sales of our products into international markets are an important part of our business and will be increasingly important given Coriant's international revenue mix. During the first three quarters of fiscal 2019, fiscal 2018 and fiscal 2017, we derived approximately 53%, 43% and 40%, respectively, of our revenue from customers outside of the United States. We expect that significant management attention and financial resources will be required for our international activities over the foreseeable future as we continue to operate in international markets. In some countries, our success in selling our products and growing revenue will depend in part on our ability to form relationships with local partners. Our inability to identify appropriate partners or reach mutually satisfactory arrangements for international sales of our products could impact our ability to maintain or increase international market demand for our products. In addition, many of the companies we compete against internationally have greater name recognition and a more substantial sales and marketing presence.

We have sales and support personnel in numerous countries worldwide. In addition, we have established development centers in Canada, China, Finland, Germany, India, Portugal and Sweden. There is no assurance that our reliance upon development resources in international locations will enable us to achieve meaningful cost reductions or greater resource efficiency. As a result of the Acquisition, we now have sales and support personnel in a greater number of geographical locations throughout APAC (including China) and EMEA (with offices in the Middle East).

Our international operations are subject to inherent risks, and our future results could be adversely affected by a variety of factors, many of which are outside of our control, including:


•	greater difficulty in collecting accounts receivable and longer collection periods;


•	difficulties of managing and staffing international offices, and the increased travel, infrastructure and legal compliance costs associated with multiple international locations;


•	political, social and economic instability, including wars, terrorism, political unrest, boycotts, curtailment of trade and other business restrictions;


•	tariff and trade barriers and other regulatory requirements or contractual limitations on our ability to sell or develop our products in certain foreign markets;


•	less effective protection of intellectual property than is afforded to us in the United States or other developed countries;


•	local laws and practices that favor local companies, including business practices that we are prohibited from engaging in by the Foreign Corrupt Practices Act and other anti-corruption laws and regulations;


•	potentially adverse tax consequences; and


•	effects of changes in currency exchange rates, particularly relative increases in the exchange rate of the U.S. dollar versus other currencies that could negatively affect our financial results and cash flows.

International customers may also require that we comply with certain testing or customization of our products to conform to local standards. The product development costs to test or customize our products could be extensive and a material expense for us.

Our international operations are subject to increasingly complex foreign and U.S. laws and regulations, including but not limited to anti-corruption laws, such as the Foreign Corrupt Practices Act and the UK Bribery Act and equivalent laws in other jurisdictions, antitrust or competition laws, and data privacy laws, among others. Violations of these laws and regulations could result in fines and penalties, criminal sanctions against us, our officers, or our employees, prohibitions on the conduct of our business and on our ability to offer our products and

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services in one or more countries, and could also materially affect our reputation, our international expansion efforts, our ability to attract and retain employees, our business, and our operating results. Although we have implemented policies, procedures and training designed to ensure compliance with these laws and regulations, there can be no complete assurance that any individual employee, contractor or agent will not violate our policies. Additionally, the costs of complying with these laws (including the costs of investigations, auditing and monitoring) could also adversely affect our current or future business.

As we continue to expand our business globally, our success will depend, in large part, on our ability to effectively anticipate and manage these and other risks and expenses associated with our international operations. For example, political instability and uncertainty in the European Union and, in particular, the United Kingdom's pending exit from the E.U. (Brexit) as well as other countries potentially choosing to exit the E.U., could slow economic growth in the region, affect foreign exchange rates, and could further discourage near-term economic activity, including our customers delaying purchases of our products. Our failure to manage any of these risks successfully could harm our international operations and reduce our international sales, and business generally, adversely affecting our business, financial condition and results of operations.

We may be adversely affected by fluctuations in currency exchange rates.

A portion of our sales and expenses stem from countries outside of the United States, and are in currencies other than U.S. dollars, and therefore subject to foreign currency fluctuation. Accordingly, fluctuations in foreign currency rates could have a material impact on our financial results in future periods. We may enter into other financial contracts to reduce the impact of foreign currency fluctuations. We currently enter into foreign currency exchange forward contracts to reduce the impact of foreign currency fluctuations on accounts receivable, and also to reduce the volatility of cash flows primarily related to forecasted foreign currency revenue and expenses. These forward contracts reduce the impact of currency exchange rate movements on certain transactions, but do not cover all foreign-denominated transactions and therefore do not entirely eliminate the impact of fluctuations in exchange rates that could negatively affect our results of operations and financial condition.

Our effective tax rate may increase or fluctuate, which could increase our income tax expense and reduce our net income.

Our effective tax rate can be adversely affected by several factors, many of which are outside of our control, including:


•	changes in the valuation of our deferred tax assets and liabilities, and in deferred tax valuation allowances;


•	changes in the relative proportions of revenue and income before taxes in the various jurisdictions in which we operate that have differing statutory tax rates;


•	changing tax laws, regulations, rates and interpretations in multiple jurisdictions in which we operate;


•	changes to the financial accounting rules for income taxes;


•	the tax effects of acquisitions; and


•	the resolution of issues arising from tax audits.

The U.S. enacted significant tax reform under the Tax Cuts and Jobs Act of 2017. The U.S. Department of Treasury has broad authority to issue regulations and interpretative guidance that may significantly impact how we will apply the law, which could affect our results of operations in the period issued. Many countries and organizations such as the Organization for Economic Cooperation and Development are actively considering changes to existing tax laws or have proposed or enacted new laws that could increase our tax obligations in countries where we do business or cause us to change the way we operate our business. Any changes in federal, state or international tax laws or tax rulings could adversely affect our effective tax rate and our results of operations.

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If we fail to maintain effective internal control over financial reporting in the future, the accuracy and timing of our financial reporting may be adversely affected.

We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. The provisions of the act require, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. Preparing our financial statements involves a number of complex processes, many of which are done manually and are dependent upon individual data input or review. These processes include, but are not limited to, calculating revenue, deferred revenue and inventory costs. While we continue to automate our processes and enhance our review and put in place controls to reduce the likelihood for errors, we expect that for the foreseeable future, many of our processes will remain manually intensive and thus subject to human error. In addition, if we are unable to implement key operation controls around pricing, spending and other financial processes, we may not be able to improve our financial performance.

Any acquisitions we make could disrupt our business and harm our financial condition and operations.

We have made strategic acquisitions of businesses, technologies and other assets in the past, including most recently the Acquisition. In order to make acquisitions, we may use cash, issue equity that could dilute our current stockholders, or incur debt or assume indebtedness. If we are unable to achieve the anticipated strategic benefits of such acquisitions, it could adversely affect our business, financial condition and results of operations. In addition, the market price of our common stock could be adversely affected if the integration or the anticipated financial and strategic benefits of such acquisitions are not realized as rapidly as, or to the extent anticipated by investors and securities analysts.

Acquisitions can also result in adverse tax consequences, warranty or product liability exposure related to acquired assets, additional stock-based compensation expense, and write-up of acquired inventory to fair value. In addition, we may record goodwill and other purchased intangible assets in connection with an acquisition and incur impairment charges in the future. If our actual results, or the plans and estimates used in future impairment analyses, are less favorable than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges.

Acquisitions also involve numerous risks that could disrupt our ongoing business and distract our management team, including:


•	problems integrating the acquired operations, technologies or products with our own;


•	diversion of management’s attention from our core business;


•	adverse effects on existing business relationships with suppliers and customers;


•	risks associated with entering new markets; and


•	loss of key employees.

Our failure to adequately manage the risks associated with an acquisition could have an adverse effect on our business, financial condition and operating results.

Unforeseen health, safety and environmental costs could harm our business.

Our manufacturing operations use substances that are regulated by various federal, state and international laws governing health, safety and the environment, including the Waste Electrical and Electronic Equipment Directive, Directive on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment, and the Registration, Evaluation, Authorization, and Restriction of Chemicals regulations adopted by the European Union. If we experience a problem with complying with these regulations, it could cause an interruption or delay in our manufacturing operations or it could cause us to incur liabilities for any costs related to health, safety or environmental remediation. We could also be subject to liability if we do not handle these substances in compliance with safety standards for storage and transportation and applicable laws. If we experience a problem or fail to comply with such safety standards, our business, financial condition and operating results may be harmed.

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We are subject to governmental regulations that could adversely affect our business.

We are subject to U.S. and foreign trade control laws that may limit where and to whom we sell our products. These trade control laws also limit our ability to conduct product development activities in certain countries and restrict the handling of our U.S. export controlled technology. In addition, various countries regulate the import of certain technologies and have enacted laws that could limit our ability to distribute our products and certain product features or could limit our customers’ ability to implement our products in those countries. Changes in our products or changes in U.S. and foreign import and export regulations may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products throughout their global systems or, in some cases, prevent the import and export of our products to certain countries altogether. Any change in import and export regulations or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the countries, persons or technologies impacted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations. Failure to comply with these and similar laws on a timely basis, or at all, or any limitation on our ability to develop, export or sell our products would adversely affect our business, financial condition and operating results.

Our product or manufacturing standards could also be impacted by new or revised environmental rules and regulations or other social initiatives. For instance, the SEC has adopted disclosure requirements relating to the use of conflict minerals originating from the Democratic Republic of Congo and certain other adjoining countries. Those rules, which require us to report on our processes and supply chain around sourcing these minerals, could adversely affect our costs, the availability of minerals used in our products and our relationships with customers and suppliers.

The Federal Communications Commission (“FCC”) has jurisdiction over the entire U.S. communications industry and, as a result, our products and our U.S. customers are subject to FCC rules and regulations. In December 2017, the FCC voted to roll back its 2015 order regulating broadband Internet service providers as telecommunications service carriers under Title II of the Telecommunications Act. This decision repeals net neutrality regulations that prohibit blocking, degrading or prioritizing certain types of Internet traffic and restores the light touch regulatory treatment of broadband service in place prior to 2015. Changes in regulatory requirements or uncertainty associated with the regulatory environment could delay or impede investment in network infrastructures. Similarly, changes in regulatory tariff requirements or other regulations relating to pricing or terms of carriage on communications networks could slow the development or expansion of network infrastructures and adversely affect our business, operating results, and financial condition. For example, in 2018 and 2019, the United States imposed tariffs on a large variety of products originating from China, including some on components that are supplied to us from China. Depending upon the duration and implementation of these and future tariffs, as well as our ability to mitigate their impact, these tariffs could materially affect our business, including in the form of increased cost of goods sold, increased pricing for customers, and reduced sales. At this time, it remains unclear what additional actions, if any, will be taken by the governments of the United States or China with respect to such trade and tariff matters.

In addition, international regulatory standards could impair our ability to develop products for international customers in the future. Moreover, many jurisdictions are evaluating or implementing regulations relating to cybersecurity, privacy and data protection, which can affect the market and requirements for networking and communications equipment. For example, in May 2018, the General Data Protection Regulation (the “GDPR”) came into effect, which superseded then-current EU data protection regulations. The GDPR imposes stringent data handling requirements on companies that receive or process personal data of residents of the EU, and non-compliance with the GDPR could result in significant penalties, including data protection audits and heavy fines. Any failure to obtain the required approvals or comply with such laws and regulations could harm our business and operating results.

Natural disasters, terrorist attacks or other catastrophic events could harm our operations.

Our headquarters and the majority of our infrastructure, including our PIC fabrication manufacturing facility, are located in Northern California, an area that is susceptible to earthquakes, floods and other natural disasters. Further, a terrorist attack aimed at Northern California or at the United States energy or telecommunications infrastructure could hinder or delay the development and sale of our products. In the event that an earthquake, terrorist attack or other man-made or natural catastrophe were to destroy any part of our facilities, or certain of our contract manufacturers’ facilities, destroy or disrupt vital infrastructure systems or interrupt our operations for any extended period of time, our business, financial condition and operating results would be harmed.

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Security incidents, such as data breaches and cyber-attacks, could compromise our intellectual property and proprietary or confidential information and cause significant damage to our business and reputation.

In the ordinary course of our business, we maintain sensitive data on our networks, including data related to our intellectual property and data related to our business, customers and business partners, which is considered proprietary or confidential information. We believe that companies in the technology industry have been increasingly subject to a wide variety of security incidents, cyber-attacks and other attempts to gain unauthorized access. While the secure maintenance of this information is critical to our business and reputation, our network and storage applications, and those systems and other business applications maintained by our third-party providers, may be subject to unauthorized access by hackers or breached due to operator error, malfeasance or other system disruptions. It may be difficult to anticipate or immediately detect such security incidents or data breaches and the damage caused as a result. Accordingly, a data breach, cyber-attack, or unauthorized access or disclosure of our information, could compromise our intellectual property and reveal proprietary or confidential business information. While we continually work to safeguard our internal network systems and validate the security of our third-party providers to mitigate these potential risks, including through information security policies and employee awareness and training, there is no assurance that such actions will be sufficient to prevent cyber-attacks or security breaches. We have been subjected in the past to a range of incidents including phishing, emails purporting to come from an executive or vendor seeking payment requests, and communications from look-alike corporate domains. While these have not had a material effect on our business or our network security to date, security incidents involving access or improper use of our systems, networks or products could compromise confidential or otherwise protected information, destroy or corrupt data, or otherwise disrupt our operations. These security incidents could cause us to incur significant remediation costs and expenses, subject us to regulatory action, disrupt key business operations, open us up to liability, and divert attention of management and key information technology resources, any of which could cause significant harm to our business and reputation.

Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control of our company and may affect the trading price of our common stock.

We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law, which apply to us, may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our amended and restated certificate of incorporation and amended and restated bylaws may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Our amended and restated certificate of incorporation and amended and restated bylaws:


•	authorize the issuance of “blank check” convertible preferred stock that could be issued by our board of directors to thwart a takeover attempt;


•	establish a classified board of directors, as a result of which the successors to the directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following their election;


•	require that directors only be removed from office for cause and only upon a supermajority stockholder vote;


•	provide that vacancies on the board of directors, including newly-created directorships, may be filled only by a majority vote of directors then in office rather than by stockholders;


•	prevent stockholders from calling special meetings; and


•	prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders.

Risks Related to our 2024 Notes

Our debt obligations may adversely affect our ability to raise additional capital and will be a burden on our future cash resources, particularly if we elect to settle these obligations in cash upon conversion or upon maturity or required repurchase.

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In September 2018, we issued the 2024 Notes, which will mature on September 1, 2024, unless earlier repurchased by us or converted. The degree to which we are leveraged could have important consequences, including, but not limited to, the following:


•	our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, litigation, general corporate or other purposes may be limited; and


•	a substantial portion of our future cash balance may be dedicated to the payment of the principal of our indebtedness as we have stated the intention to pay the principal amount of the 2024 Notes in cash upon conversion or when otherwise due, such that we would not have those funds available for use in our business.

Our ability to meet our payment obligations under our debt instruments, including the 2024 Notes, depends on our future cash flow performance. This, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors, as well as other factors that may be beyond our control. There can be no assurance that our business will generate positive cash flow from operations, or that additional capital will be available to us, in an amount sufficient to enable us to meet our debt payment obligations and to fund other liquidity needs. For example, in each of the fiscal quarters after the Acquisition, the combined company had a significant net loss and negative cash flows. If we are unable to generate sufficient cash flow to service our debt obligations, we may need to refinance or restructure our debt, sell assets, reduce or delay capital investments, or seek to raise additional capital. If we are unable to implement one or more of these alternatives, we may be unable to meet our debt payment obligations. As a result, we may be more vulnerable to economic downturns, less able to withstand competitive pressures and less flexible in responding to changing business and economic conditions.

We may issue additional shares of our common stock in connection with conversions of the 2024 Notes, and thereby dilute our existing stockholders and potentially adversely affect the market price of our common stock.

In the event that some or all of the 2024 Notes are converted and we elect to deliver shares of common stock, the ownership interests of existing stockholders will be diluted, and any sales in the public market of any shares of our common stock issuable upon such conversion could adversely affect the prevailing market price of our common stock. In addition, the anticipated conversion of the 2024 Notes could depress the market price of our common stock.

The fundamental change provisions of the 2024 Notes may delay or prevent an otherwise beneficial takeover attempt of us.

If a fundamental change, such as an acquisition of our company, occurs prior to the maturity of the 2024 Notes, holders of the 2024 Notes will have the right, at their option, to require us to repurchase all or a portion of their 2024 Notes. In addition, if such fundamental change also constitutes a make-whole fundamental change, the conversion rate for the 2024 Notes may be increased upon conversion of the 2024 Notes in connection with such make-whole fundamental change. Any increase in the conversion rate will be determined based on the date on which the make-whole fundamental change occurs or becomes effective and the price paid (or deemed paid) per share of our common stock in such transaction. Any such increase will be dilutive to our existing stockholders. Our obligation to repurchase 2024 Notes or increase the conversion rate upon the occurrence of a make-whole fundamental change may, in certain circumstances, delay or prevent a takeover of us that might otherwise be beneficial to our stockholders.

The capped call transactions may affect the value of the 2024 Notes and our common stock.

In connection with the issuance of the 2024 Notes, we entered into capped call transactions with the “option counterparties.” The capped call transactions are expected generally to reduce or offset the potential dilution upon conversion of the 2024 Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted 2024 Notes, as the case may be, with such reduction and/or offset subject to a cap.

From time to time, the option counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the 2024 Notes. This activity could also cause or avoid an increase or a decrease in the market price of our common stock.

We are subject to counterparty risk with respect to the capped call transactions.

The option counterparties to the capped call transactions are financial institutions, and we will be subject to the risk that any or all of them might default under the capped call transactions. Our exposure to the credit risk of the

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counterparties will not be secured by any collateral. Past global economic conditions have resulted in the actual or perceived failure or financial difficulties of many financial institutions. If an option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at the time under the capped call transactions with such option counterparty. Our exposure will depend on many factors but, generally, an increase in our exposure will be correlated to an increase in the market price and in the volatility of our common stock. In addition, upon a default by an option counterparty, we may suffer adverse tax consequences and more dilution than we currently anticipate with respect to our common stock. We can provide no assurance as to the financial stability or viability of the option counterparties.

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Item 6.	Exhibits



Exhibit No.		Description
10.1*		Offer Letter between Infinera Corporation and Nancy Erba dated July 8, 2019.

10.2*		Infinera Corporation 2019 Inducement Equity Incentive Plan, incorporated herein by reference to Exhibit 4.1 of the Registrant’s Registration Statement on Form S-8 (No. 333-233150), filed with the SEC on August 8, 2019.

10.3*		Form of Restricted Stock Unit Agreement (Inducement Plan), incorporated herein by reference to Exhibit 4.2 of the Registrant’s Registration Statement on Form S-8 (No. 333-233150), filed with the SEC on August 8, 2019.

10.4*		Form of Performance Share Agreement (Inducement Plan), incorporated herein by reference to Exhibit 4.3 of the Registrant’s Registration Statement on Form S-8 (No. 333-233150), filed with the SEC on August 8, 2019.
10.5		Credit Agreement, dated as of August 1, 2019, by and among Infinera Corporation, Coriant Operations, Inc., Coriant North America, LLC, Coriant America Inc., Coriant (USA) Inc., and Wells Fargo Bank, National Association, as administrative agent, incorporated herein by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (No. 001-33486), filed with the SEC on August 2, 2019.

10.6		Guaranty and Security Agreement, dated as of August 1, 2019, by and among Infinera Corporation, the lenders party thereto, and Wells Fargo Bank, National Association, as administrative agent, incorporated herein by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K (No. 001-33486), filed with the SEC on August 2, 2019.

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101


*	Management contract or compensatory plan, contract or arrangement.

The certification attached as Exhibit 32.1 that accompanies this Quarterly Report on Form 10-Q is not deemed filed with the SEC and is not to be incorporated by reference into any of our filings under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



Infinera Corporation

By:		/s/ NANCY ERBA
		Nancy Erba Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)

Date:		November 12, 2019