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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549 
 
FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019
OR
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: 001-37771
 
Acacia Communications, Inc.
(Exact Name of Registrant as Specified in its Charter)
 
Delaware
 
27-0291921
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
Three Mill and Main Place, Suite 400
Maynard, Massachusetts 01754
(Address of principal executive offices)
(978) 938-4896
(Registrant’s telephone number, including area code)
 
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  x    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  x    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
  
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  x 
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class
 
Trading Symbol(s)
 
Name of exchange on which registered
Common Stock, $0.0001 par value per share
 
ACIA
 
The Nasdaq Global Select Market

As of April 26, 2019, the registrant had 40,598,841 shares of common stock outstanding.
 



Table of Contents

ACACIA COMMUNICATIONS, INC.
Table of Contents
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EX-31.1
 
(CERTIFICATION OF THE CEO PURSUANT TO SECTION 302)
 
 
EX-31.2
 
(CERTIFICATION OF THE CFO PURSUANT TO SECTION 302)
 
 
EX-32.1
 
(CERTIFICATION OF THE CEO PURSUANT TO SECTION 906)
 
 
EX-32.2
 
(CERTIFICATION OF THE CFO PURSUANT TO SECTION 906)
 
 


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by terms such as “may,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” “will” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and assumptions described in the section titled “Risk Factors” under Part II, Item 1A below and elsewhere in this Quarterly Report on Form 10-Q. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as indicative of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Some of the key factors that could cause actual results to differ from our expectations include:
our ability to sustain or increase revenue from our larger customers, generate revenues from new customers, or offset the discontinuation of concentrated purchases by our larger customers with purchases by new or existing customers;
our ability to anticipate the timing and scale of demand for our products, including from our largest customers;
our expectations regarding our expenses and revenue, our ability to maintain and expand gross profit, the sufficiency of our cash resources and needs for additional financing;
our ability to produce products free of problems, defects, errors and vulnerabilities;
our anticipated growth strategies;
our expectations regarding competition;
the anticipated trends and challenges in our business and the market in which we operate;
our expectations regarding, and the capacity and stability of, our supply chain and manufacturing;
the size and growth of the potential markets for our products and the ability to serve those markets;
the scope, progress, expansion, and costs of developing and commercializing our products;
the timing, rate and degree of introducing any of our products into the market and the market acceptance of any of our products;
our ability to establish and maintain development partnerships;
our ability to attract or retain key personnel;
our expectations regarding federal, state and foreign regulatory requirements, including export controls, tax law changes and interpretations, economic sanctions and anti-corruption regulations;
regulatory or legislative developments in the United States and foreign countries, including trade policy and tariffs and export control laws or regulations that could impede our ability to sell our products to our customer ZTE Kangxun Telecom Co. Ltd. or any of its affiliates, together ZTE, or that could impede our ability to sell our products to other customers in certain foreign jurisdictions, particularly in China; and
our ability to obtain and maintain intellectual property protection for our products.
Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events or otherwise.


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PART I—FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited).
ACACIA COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(Unaudited)

 
March 31, 2019
 
December 31, 2018
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
73,532

 
$
60,444

Marketable securities - short-term
265,899

 
264,660

Accounts receivable
83,391

 
90,831

Inventory
26,712

 
25,511

Prepaid expenses and other current assets
11,793

 
12,598

Total current assets
461,327

 
454,044

Marketable securities - long-term
89,811

 
74,764

Property and equipment, net
26,619

 
26,643

Operating lease right-of-use assets
23,870

 

Deferred tax asset
40,166

 
38,717

Other assets
897

 
7,691

Total assets
$
642,690

 
$
601,859

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
48,974

 
$
46,650

Accrued liabilities
39,006

 
31,848

Deferred revenue
5,542

 
5,101

Total current liabilities
93,522

 
83,599

Income taxes payable
7,929

 
8,791

Non-current operating lease liabilities
14,784

 

Other long-term liabilities
6,829

 
6,742

Total liabilities
123,064

 
99,132

 
 
 
 
Commitments and contingencies (Note 12)


 


 
 
 
 
Stockholders’ equity:
 

 
 

Preferred stock, $0.0001 par value; 5,000 shares authorized; none issued and outstanding at March 31, 2019 and December 31, 2018

 

Common stock, $0.0001 par value; 150,000 shares authorized; 41,530 and 41,024 shares issued at March 31, 2019 and December 31, 2018, respectively
4

 
4

Treasury stock, at cost; 974 shares at March 31, 2019 and December 31, 2018
(39,712
)
 
(39,712
)
Additional paid-in capital
369,634

 
360,267

Accumulated other comprehensive income (loss)
183

 
(372
)
Retained earnings
189,517

 
182,540

Total stockholders’ equity
519,626

 
502,727

Total liabilities and stockholders’ equity
$
642,690

 
$
601,859

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

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ACACIA COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended March 31,
 
2019
 
2018
Revenue
$
105,216

 
$
72,941

Cost of revenue
55,374

 
48,870

Gross profit
49,842

 
24,071

Operating expenses:
 
 
 
Research and development
30,953

 
24,445

Sales, general and administrative
15,787

 
14,288

Total operating expenses
46,740

 
38,733

Income (loss) from operations
3,102

 
(14,662
)
Other income, net:
 
 
 
Interest income, net
2,446

 
1,354

Other expense, net
(52
)
 
(71
)
Total other income, net
2,394

 
1,283

Income (loss) before benefit for income taxes
5,496

 
(13,379
)
Benefit for income taxes
(1,481
)
 
(4,301
)
Net income (loss)
$
6,977

 
$
(9,078
)
Earnings (loss) per share:
 
 
 
Basic
$
0.17

 
$
(0.23
)
Diluted
$
0.17

 
$
(0.23
)
Weighted-average shares used to compute earnings (loss) per share:
 
 
 
Basic
40,284

 
39,836

Diluted
41,962

 
39,836


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

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ACACIA COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)
 
 
Three Months Ended March 31,
 
2019
 
2018
Net income (loss)
$
6,977

 
$
(9,078
)
Other comprehensive income (loss):
 
 
 
Changes in unrealized income (loss) on marketable securities, net of income taxes of $(88) and $88 for the three months ended March 31, 2019 and 2018, respectively
555

 
(402
)
Comprehensive income (loss)
$
7,532

 
$
(9,480
)

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

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ACACIA COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive (Loss) Income
 
 
 
 
 
 
Common Stock
 
Treasury Stock
 
 
 
Retained Earnings
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Total
Balance at December 31, 2017
 
39,606

 
$
4

 

 
$

 
$
324,944

 
$
(320
)
 
$
177,422

 
$
502,050

Adoption of ASU 2014-09, net of tax of $51
 
 
 
 
 
 
 
 
 
 
 
 
 
157

 
157

Vesting of restricted common stock
 
21

 
 

 
 
 
 
 
 

 
 

 
 

 

Exercise of common stock options
 
220

 

 
 
 
 
 
968

 
 

 
 

 
968

Vesting of restricted stock units
 
214

 

 
 
 
 
 

 
 
 
 
 

Stock-based compensation expense
 
 

 
 

 
 
 
 
 
6,514

 
 

 
 

 
6,514

Unrealized losses on marketable securities, net of tax of $88
 
 
 
 
 
 
 
 
 
 
 
(402
)
 
 
 
(402
)
Net loss
 
 

 
 

 
 
 
 
 
 

 
 

 
(9,078
)
 
(9,078
)
Balance at March 31, 2018
 
40,061

 
$
4

 

 
$

 
$
332,426

 
$
(722
)
 
$
168,501

 
$
500,209

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
 
41,024

 
$
4

 
974

 
$
(39,712
)
 
$
360,267

 
$
(372
)
 
$
182,540

 
$
502,727

Exercise of common stock options
 
190

 

 
 
 
 
 
1,400

 
 

 
 

 
1,400

Vesting of restricted stock units
 
316

 

 
 
 
 
 

 
 

 
 

 

Stock-based compensation expense
 
 

 
 

 
 
 
 
 
7,967

 
 

 
 

 
7,967

Unrealized gains on marketable securities, net of tax of $(88)
 
 

 
 

 
 
 
 
 
 

 
555

 
 

 
555

Net income
 
 

 
 

 
 
 
 
 
 

 
 

 
6,977

 
6,977

Balance at March 31, 2019
 
41,530

 
$
4

 
974

 
$
(39,712
)
 
$
369,634

 
$
183

 
$
189,517

 
$
519,626


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

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ACACIA COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited) 
 
Three Months Ended March 31,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

Net income (loss)
$
6,977

 
$
(9,078
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

Depreciation
3,243

 
3,266

Stock-based compensation
8,008

 
6,538

Deferred income taxes
(1,449
)
 
(3,239
)
Non-cash lease expense
1,074

 

Other non-cash (benefits) charges
(643
)
 
45

Changes in operating assets and liabilities:


 
 

Accounts receivable
7,440

 
11,837

Inventory
(1,201
)
 
5,076

Prepaid expenses and other current assets
805

 
(665
)
Other assets
(96
)
 
208

Accounts payable
1,658

 
(12,105
)
Accrued liabilities
4,661

 
5,527

Deferred revenue
519

 
3,358

Income taxes payable
(862
)
 
(1,829
)
Lease liabilities
(815
)
 

Other long-term liabilities
9

 
121

Net cash provided by operating activities
29,328

 
9,060

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Purchases of property and equipment
(2,724
)
 
(6,704
)
Purchases of marketable securities
(105,206
)
 
(73,534
)
Sales and maturities of marketable securities
90,290

 
87,830

Deposits

 
20

Net cash (used in) provided by investing activities
(17,640
)
 
7,612

 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Proceeds from the issuance of common stock under stock-based compensation plans
1,400

 
968

Net cash provided by financing activities
1,400

 
968

 
 
 
 
Net increase in cash and cash equivalents
13,088

 
17,640

Cash and cash equivalents—Beginning of period
60,444

 
67,495

Cash and cash equivalents—End of period
$
73,532

 
$
85,135

 
 
 
 
Supplemental cash flow disclosures:
 

 
 

Cash paid (refunds received) for income taxes, net
$
878

 
$
(72
)
 
 
 
 
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Right of use assets acquired under operating leases
$
3,328

 
$

Capital expenditures incurred but not yet paid
$
862

 
$
1,555


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

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Acacia Communications, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
 
1. NATURE OF THE BUSINESS AND OPERATIONS
 Acacia Communications, Inc. was incorporated on June 2, 2009, as a Delaware corporation. Acacia Communications, Inc. and its wholly-owned subsidiaries (the “Subsidiaries”) are collectively referred to as the Company. The Company’s mission is to deliver high-speed coherent optical interconnect products that transform communications networks, relied upon by cloud infrastructure operators and content and communication service providers, through improvements in performance and capacity and reductions in associated costs. By implementing optical interconnect technology in a silicon-based platform, a process the Company refers to as the siliconization of optical interconnect, the Company believes it is leading a disruption that is analogous to the computing industry’s integration of multiple functions into a microprocessor. The Company’s products fall into three product groups: embedded modules, pluggable modules and semiconductors. The Company’s embedded module and pluggable module product groups consist of optical interconnect modules with transmission speeds ranging from 100 to 1,200 gigabits per second (“Gbps”), for use in long-haul, metro and inter-data center markets. The Company’s semiconductor product group consists of its low-power coherent digital signal processor application-specific integrated circuits (“DSP ASICs”) and its silicon photonic integrated circuits (“silicon PICs”) which are either integrated into the Company’s embedded and pluggable modules or sold to customers on a standalone basis for integration into internally developed or other merchant modules. The Company is also developing a 400ZR module that will expand its pluggable module product group, and enable inter-data center transmission capacity of 400 Gbps in the same compact pluggable form factors used for 400G client optics, including QSFP-DD and OSFP. The Company’s modules perform a majority of the digital signal processing and optical functions in optical interconnects and offer low power consumption, high density and high speeds at attractive price points. Through the use of standard interfaces, the Company’s modules can be easily integrated with customers’ network equipment. The advanced software in the Company’s modules enables increased configurability and automation, provides insight into network and connection point characteristics and helps identify network performance problems, all of which increase flexibility and reduce operating costs.
The Company is headquartered in Maynard, Massachusetts, and has wholly-owned subsidiaries in North America, Europe and Asia.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited condensed consolidated financial statements include the accounts of Acacia Communications, Inc. and its Subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. For further information, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the SEC on February 21, 2019. There have been no significant changes in the Company’s accounting policies from those disclosed in the Annual Report on Form 10-K that have had a material impact on the Company’s condensed consolidated financial statements, except for changes as a result of the adoption of Accounting Standard Update (“ASU”) 2016-02, Leases (Topic 842) (“ASC 842”) as discussed below.
The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements as of and for the year ended December 31, 2018, and in management’s opinion, include all adjustments, consisting of only normal recurring adjustments, necessary for the fair statement of the Company’s condensed consolidated balance sheet as of March 31, 2019, its condensed consolidated statements of operations for the three months ended March 31, 2019 and 2018, its condensed consolidated statements of comprehensive income (loss) for the three months ended March 31, 2019 and 2018, its condensed consolidated statements of stockholders’ equity for the three months ended March 31, 2019 and 2018, and its condensed consolidated statements of cash flows for the three months ended March 31, 2019 and 2018. All intercompany balances and transactions have been eliminated in consolidation. The financial data and the other financial information disclosed in the notes to these condensed consolidated financial statements related to the three months ended March 31, 2019 and 2018 are also unaudited. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the full fiscal year or any other period.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and

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liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASC 842 which requires lessees to recognize a right-of-use (“ROU”) asset and lease liability on the balance sheet for virtually all leases. From a lessee perspective, ASC 842 retains a dual model requiring leases to be classified as either operating or financing leases for the income statement. Operating leases will result in straight-line expense, and financing leases will have a front-loaded expense pattern with an interest expense component. On January 1, 2019, the Company adopted ASC 842 and all related amendments using the modified retrospective approach and the effective date as the date of initial application. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. Adoption of the new standard resulted in the recording of lease ROU assets and lease liabilities of approximately $21.5 million and $16.0 million, respectively, as of January 1, 2019. The difference between the ROU assets and lease liabilities relates to deferred and prepaid rent balances which are now included as part of the ROU assets. The standard did not materially impact the Company’s condensed consolidated income statements. In accordance with ASC 842, the Company determines if an arrangement is a lease at inception based on whether there is an identified asset, whether the Company has the right to obtain substantially all of the economic benefits from use of the asset and whether the Company has the right to direct the use of the asset. Currently, the Company only has operating leases and does not have any financing leases. 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. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. See Note 8, Leases, for further disclosures and detail regarding our operating leases.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 is intended to provide more decision-useful information about expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The main provisions include presenting financial assets measured at amortized cost at the amount expected to be collected, which is net of an allowance for credit losses, and recording credit losses related to available-for-sale securities through an allowance for credit losses. The amendments in ASU 2016-13 are effective for fiscal years beginning after December 15, 2019, and must be applied using a modified retrospective approach with earlier adoption permitted for fiscal years beginning after December 15, 2018. The Company does not expect the adoption of this amendment to have a material impact on its condensed consolidated financial statements.
3. REVENUE
The opening and closing balances of the Company’s deferred revenue and accounts receivable for the three months ended March 31, 2019 are as follows (in thousands):
 
Balance at Beginning of Period
 
(Decrease) / Increase
 
Balance at End of Period
Three Months Ended March 31, 2019
 
 
 
 
 
Accounts receivable
$
90,831

 
(7,440
)
 
$
83,391

Deferred revenue (current)
$
5,101

 
441

 
$
5,542

Deferred revenue (non-current)
$
3,707

 
79

 
$
3,786

The amounts of revenue recognized in the period that were included in the opening deferred revenue balance was immaterial for the three months ended March 31, 2019. The increase in current and non-current deferred revenue is related to billings to, or advance payments from, customers for which the Company has not yet fulfilled its performance obligations. Deferred revenue not expected to be recognized within the Company’s operating cycle of one year is presented as a component of “Other long-term liabilities” on the condensed consolidated balance sheet.
At times, the Company receives orders for products that may be delivered over multiple dates that may extend across reporting periods. The Company invoices for each delivery upon shipment and recognizes revenues for each distinct product delivered, assuming transfer of control has occurred. Generally, scheduled delivery dates are within one year, and the Company has elected to use the optional exemption whereby revenues allocated to partially completed contracts with an expected duration of one year or less are not disclosed. The transaction price related to contracts with unsatisfied performance obligations with a duration of more than one year as of March 31, 2019 was $1.9 million.

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Disaggregation of Revenue
The following table provides information about disaggregated revenue based on product group (in thousands). Further disaggregation of revenue by geographic country can be found in Note 14.
 
Three Months Ended
 
As a % of
 
Three Months Ended
 
As a % of
 
March 31, 2019
 
Total Revenue
 
March 31, 2018
 
Total Revenue
Embedded modules
$
17,426

 
16
%
 
$
23,030

 
31
%
Pluggable modules
55,517

 
53
%
 
31,980

 
44
%
Semiconductors
32,273

 
31
%
 
17,931

 
25
%
Total revenue
$
105,216

 
100
%
 
$
72,941

 
100
%
4. FINANCIAL INSTRUMENTS
The following tables set forth the Company’s cash, cash equivalents and short- and long-term marketable securities as of March 31, 2019 and December 31, 2018 (in thousands):
 
March 31, 2019
 
 
 
Gross Unrealized
 
 
 
 
 
 
 
 
 
 
 
Losses
 
 
 
 
 
 
 
Amortized Cost
 
Gains
 
Less than One Year
 
Greater than One Year
 
Estimated Fair Value
 
Cash and Cash Equivalents
 
Marketable Securities
Cash
$
52,353

 
$

 
$

 
$

 
$
52,353

 
$
52,353

 
$

Money market funds
3,542

 

 

 

 
3,542

 
3,542

 

U.S. treasury bonds
72,717

 
23

 
(4
)
 
(1
)
 
72,735

 
10,295

 
62,440

Commercial paper
54,448

 
9

 
(1
)
 

 
54,456

 
5,216

 
49,240

Certificates of deposit
28,318

 
30

 
(1
)
 

 
28,347

 

 
28,347

Asset-backed securities
57,771

 
39

 
(1
)
 
(17
)
 
57,792

 

 
57,792

Corporate debt securities
159,888

 
183

 
(10
)
 
(44
)
 
160,017

 
2,126

 
157,891

Total
$
429,037

 
$
284

 
$
(17
)
 
$
(62
)
 
$
429,242

 
$
73,532

 
$
355,710


 
December 31, 2018
 
 
 
Gross Unrealized
 
 
 
 
 
 
 
Amortized Cost
 
 
 
Losses
 
Estimated Fair Value
 
Cash and Cash Equivalents
 
Marketable Securities
 
 
Gains
 
Less than One Year
 
Greater than One Year
 
 
 
Cash
$
49,650

 
$

 
$

 
$

 
$
49,650

 
$
49,650

 
$

Money market funds
1,563

 

 

 

 
1,563

 
1,563

 

U.S. treasury bonds
40,367

 

 
(9
)
 
(3
)
 
40,355

 

 
40,355

Commercial paper
60,435

 

 
(13
)
 

 
60,422

 
6,668

 
53,754

Certificates of deposit
36,839

 
13

 
(12
)
 

 
36,840

 

 
36,840

Asset-backed securities
47,798

 
1

 
(63
)
 
(22
)
 
47,714

 

 
47,714

Corporate debt securities
163,654

 
9

 
(239
)
 
(100
)
 
163,324

 
2,563

 
160,761

Total
$
400,306

 
$
23

 
$
(336
)
 
$
(125
)
 
$
399,868

 
$
60,444

 
$
339,424

The proceeds from the sales and maturities of marketable securities, which were primarily reinvested and resulted in realized gains and losses, were as follows (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Proceeds from the sales and maturities of marketable securities
$
90,290

 
$
87,830

Realized gains
$
3

 
$
4

Realized losses
$
(2
)
 
$
(2
)

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 The contractual maturities of short-term and long-term marketable securities held at March 31, 2019 and December 31, 2018 are as follows (in thousands):
 
March 31, 2019
 
December 31, 2018
 
Amortized Cost Basis
 
Aggregate Fair Value
 
Amortized Cost Basis
 
Aggregate Fair Value
Due within one year
$
265,810

 
$
265,899

 
$
264,959

 
$
264,660

Due after one year through four years
89,693

 
89,811

 
74,902

 
74,764

Total
$
355,503

 
$
355,710

 
$
339,861

 
$
339,424


As of March 31, 2019, the Company believed that any unrealized losses on its available-for-sale investments were temporary. The investments with unrealized losses consisted primarily of corporate debt securities. In making the determination that the decline in fair value of these securities was temporary, the Company considered various factors, including, but not limited to: the length of time each security was in an unrealized loss position; the extent to which fair value was less than cost; the financial condition and near-term prospects of the issuers; and the Company’s intent not to sell these securities and the assessment that it is more likely than not that the Company would not be required to sell these securities before the recovery of their amortized cost basis.
5. INVENTORY
Inventory consisted of the following as of March 31, 2019 and December 31, 2018 (in thousands):
 
March 31, 2019
 
December 31, 2018
Raw materials
$
17,995

 
$
18,420

Work-in-process
426

 
218

Finished goods
8,291

 
6,873

Inventory
$
26,712

 
$
25,511

On April 15, 2018, the U.S. Department of Commerce imposed a seven-year denial of export privileges that prohibited sales to ZTE Kangxun Telecom Co. Ltd. and certain of its affiliates, together ZTE, the Company’s largest customer (the “ZTE Ban”). As a result, the Company recorded inventory write-offs of $3.9 million in the first quarter of 2018 related to finished goods inventory that had either been designed specifically for ZTE, or had been intended for consumption by ZTE and had become excess inventory due to the suspension of sales to ZTE. On June 8, 2018, ZTE and the U.S. Department of Commerce reached a new settlement, pursuant to which the ZTE Ban was terminated and ZTE was removed from the Denied Persons List effective July 13, 2018. As a result of the ZTE Ban being terminated, the Company was able to consume a portion of the ZTE inventory, resulting in a remaining reserve as of March 31, 2019 which was immaterial in amount.
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of March 31, 2019 and December 31, 2018 (in thousands):
 
March 31, 2019
 
December 31, 2018
Engineering laboratory equipment
$
51,682

 
$
50,590

Computer software
3,304

 
3,132

Computer equipment
6,512

 
6,018

Furniture and fixtures
3,525

 
3,227

Leasehold improvements
3,644

 
3,581

Construction in progress
2,335

 
1,279

Total property and equipment
71,002

 
67,827

Less: Accumulated depreciation
(44,383
)
 
(41,184
)
Property and equipment, net
$
26,619

 
$
26,643

Depreciation expense was $3.2 million and $3.3 million for the three months ended March 31, 2019 and 2018, respectively.
7. ACCRUED LIABILITIES

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Accrued liabilities consisted of the following as of March 31, 2019 and December 31, 2018 (in thousands):
 
March 31, 2019
 
December 31, 2018
Employee-related liabilities
$
8,242

 
$
8,509

Current maturities of operating leases
3,922

 

Goods and services received not invoiced
2,657

 
3,592

Accrued manufacturing related expenses
2,784

 
2,342

Warranty reserve
9,517

 
8,220

Legal settlement accrual
6,000

 
2,500

Other accrued liabilities
5,884

 
6,685

Accrued liabilities
$
39,006

 
$
31,848

Certain prior period amounts have been reclassified to conform to the current period presentation. Specifically, as of December 31, 2018, $2.5 million of legal settlement accruals were included within “Other accrued liabilities” and have now been reclassified to be presented on a separate line in conformity with the current period presentation.
8. LEASES
The Company adopted ASC 842 effective January 1, 2019 using the modified retrospective approach and the effective date as the date of initial application. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allows the carry forward of the Company’s historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. As permitted by ASC 842, the Company has also elected not to apply the recognition requirements to short-term leases (with terms less than 12 months) and not to separate nonlease components from associated lease components for its real estate lease assets. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
The Company leases real estate assets and equipment. For leases with terms greater than 12 months, the Company records the related ROU asset and lease obligation at the present value of lease payments over the term. Many leases include fixed rental escalation clauses, renewal options and/or termination options that are factored into the determination of lease payments when appropriate. The Company’s leases do not usually provide a readily determinable implicit rate; therefore, an estimate of the Company’s incremental borrowing rate is used to discount the lease payments based on information available at lease commencement, including observable rates, adjusted for various factors including financing spreads and other lease specific adjustments, as applicable.
The Company’s leases have remaining lease terms of one year to six years. Some leases include one or more options to renew with renewal terms that can extend the lease term from two years to ten years, or options to terminate the leases, both at the Company’s discretion. The Company’s lease terms do not include options to extend or terminate leases because the Company was not reasonably certain that it would exercise those options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Company’s lease agreements do not contain any variable lease payments, material residual value guarantees or material restrictive covenants.
The table below presents the lease-related assets and liabilities recorded on the condensed consolidated balance sheet as of March 31, 2019 (in thousands):
 
 
Classification on the Balance Sheet
 
March 31, 2019
Assets
 
 
 

Operating lease assets
 
Operating lease right-of-use assets
 
$
23,870

Liabilities
 
 
 

Current - operating
 
Accrued liabilities
 
3,922

Noncurrent - operating
 
Noncurrent operating lease liabilities
 
14,784

Total lease liabilities
 
 
 
$
18,706

Weighted-average remaining lease term - operating leases
 
5.3 years

Weighted-average discount rate - operating leases(1)
 
4.69
%
 

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(1)
Upon adoption of ASC 842, discount rates used for existing leases were established at January 1, 2019, which was the date of initial application of ASC 842.
Operating lease costs during the three months ended March 31, 2019 were $1.2 million. Short-term lease costs during the three months ended March 31, 2019 were insignificant. Cash paid for amounts included in the measurement of lease liabilities during the three months ended March 31, 2019 was $1.0 million which is an operating cash outflow.
The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the operating lease liabilities recorded on the condensed consolidated balance sheet as of March 31, 2019 (in thousands):
 
 
Operating Leases
Remaining 2019
 
$
2,998

2020
 
4,056

2021
 
3,819

2022
 
3,622

2023
 
3,756

Thereafter
 
3,025

Total minimum lease payments
 
21,276

Less: amount of lease payments representing interest
 
(2,570
)
Present value of future minimum lease payments
 
18,706

Less: current obligation under leases
 
3,922

Long-term lease obligations
 
$
14,784

As of March 31, 2019, the Company entered into a lease amendment that has not yet commenced which requires additional future payments of $4.7 million. This lease amendment is expected to commence in the second quarter of 2019, with a lease term of eight years.
Disclosures related to periods prior to adoption of ASC 842
Rent expense for the three months ended March 31, 2018 was $1.2 million, recognized on a straight-line basis for the Company’s facility leases which were accounted for as operating leases. Future minimum lease payments due under those non-cancelable lease agreements as of December 31, 2018 were as follows (in thousands):
 
 
Amounts
2019
 
$
3,888

2020
 
4,280

2021
 
4,394

2022
 
4,248

2023
 
4,401

Thereafter
 
5,252

Total
 
$
26,463

9. FAIR VALUE MEASUREMENT
The Company measures certain financial assets and liabilities at fair value. Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, as follows:
Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities.

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Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company’s investments are in money market funds, U.S. treasury bonds, commercial paper, certificates of deposit, asset-backed securities and corporate debt securities, which are classified as Level 2 within the fair value hierarchy, and were initially valued at the transaction price and subsequently valued at each reporting date utilizing market-observable data. The market-observable data included reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, current spot rates and other industry and economic events.
The fair value of these assets measured on a recurring basis was determined using the following inputs as of March 31, 2019 and December 31, 2018 (in thousands):
 
March 31, 2019
 
Quoted Prices in Active Markets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total Fair Value
Assets:
 

 
 

 
 

 
 

Money market funds
$

 
$
3,542

 
$

 
$
3,542

U.S. treasury bonds

 
72,735

 

 
72,735

Commercial paper

 
54,456

 

 
54,456

Certificates of deposit

 
28,347

 

 
28,347

Asset-backed securities

 
57,792

 

 
57,792

Corporate debt securities

 
160,017

 

 
160,017

Total
$

 
$
376,889

 
$

 
$
376,889

  
 
December 31, 2018
 
Quoted Prices in Active Markets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total Fair Value
Assets:
 

 
 

 
 

 
 

Money market funds
$

 
$
1,563

 
$

 
$
1,563

U.S. treasury bonds

 
40,355

 

 
40,355

Commercial paper

 
60,422

 

 
60,422

Certificates of deposit

 
36,840

 

 
36,840

Asset-backed securities

 
47,714

 

 
47,714

Corporate debt securities

 
163,324

 

 
163,324

Total
$

 
$
350,218

 
$

 
$
350,218

There were no transfers between fair value measurement levels during the three months ended March 31, 2019 or 2018. For certain other financial instruments, including accounts receivable, accounts payable and other current liabilities, the carrying amounts approximate their fair value due to the relatively short maturity of these balances.
10. STOCK COMPENSATION PLANS
The following table summarizes the classification of stock-based compensation in the condensed consolidated statements of operations for the three months ended March 31, 2019 and 2018 (in thousands):

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Three Months Ended March 31,
 
2019
 
2018
Cost of revenue
$
520

 
$
521

Research and development
4,746

 
3,788

Sales, general and administrative
2,742

 
2,229

Total stock-based compensation
$
8,008

 
$
6,538

The following table summarizes stock-based compensation expense by award type for the three months ended March 31, 2019 and 2018 (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Stock options
$
577

 
$
601

Restricted stock units
7,081

 
5,595

Employee stock purchase plan
309

 
298

Other awards
41

 
44

Total stock-based compensation
$
8,008

 
$
6,538

Stock Options
A summary of stock option activity under the Company’s equity incentive plans for the three months ended March 31, 2019 is as follows:
 
Number of Options
(in thousands)
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Contractual Term
(in years)
 
Aggregate Intrinsic Value
(in thousands)
Outstanding at December 31, 2018
1,116

 
$
9.78

 
5.7
 
$
33,113

Granted

 
$

 
 
 
 

Exercised
(190
)
 
$
7.36

 
 
 
$
8,348

Cancelled
(5
)
 
$
22.19

 
 
 
 

Outstanding at March 31, 2019
921

 
$
10.22

 
5.4
 
$
44,209

Vested and expected to vest at:
 

 
 

 
 
 
 

March 31, 2019
921

 
$
10.22

 
5.4
 
$
44,209

December 31, 2018
1,116

 
$
9.78

 
5.7
 
$
33,113

Exercisable at:
 

 
 

 
 
 
 

March 31, 2019
735

 
$
7.86

 
5.0
 
$
36,886

December 31, 2018
837

 
$
7.38

 
5.3
 
$
26,544

As of March 31, 2019 and December 31, 2018, there was $1.8 million and $2.5 million, respectively, of unrecognized compensation cost related to unvested common stock options which is expected to be recognized over weighted-average periods of 1.0 year and 1.1 years, respectively.
No stock option awards were issued by the Company during the three months ended March 31, 2019 or 2018.
Restricted Stock Units
During the three months ended March 31, 2019, the Company granted approximately 403,000 restricted stock units (“RSUs”) to employees and executives under the 2016 Equity Incentive Plan that vest upon the satisfaction of a service condition, generally over four years. The cost of any RSUs with only a service condition is determined using the fair value of the Company’s common stock on the date of grant, and compensation is recognized on a ratable basis over the requisite vesting period.

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During the three months ended March 31, 2019, the Company granted awards covering up to a maximum of 187,234 performance-based RSUs to executive officers that include a market condition in addition to a service condition (“performance-based RSUs” or “PRSUs”). Each PRSU represents the right to receive one share of the Company’s common stock when and if the applicable vesting conditions are satisfied. The PRSUs are subject to performance-based vesting. The number of PRSUs that vest is measured based on the level of achievement of a performance objective over a three-year period (the “Performance Period”) running from January 1, 2019 through December 31, 2021, as determined and certified by the Compensation Committee of the Board of Directors following the end of the Performance Period. The level of achievement will be determined based on the Company’s percentile achievement of relative total shareholder returns against an external comparator group during the Performance Period (the “Relative TSR Objective”). Vesting of the PRSUs is also subject to the applicable officer’s continued provision of services to the Company through the vesting date, except in the case of death or disability where vesting will be pro-rated for time worked during the Performance Period. No PRSUs will vest unless a threshold level of achievement of the Relative TSR Objective is achieved. 
The Company estimated the fair value of the PRSUs using a Monte Carlo valuation model on the date of grant, using the following assumptions:
Risk-free interest rate
2.5%
Expected dividend yield
None
Expected volatility
57.3%
Expected term (in years)
2.9
Grant date fair value of underlying shares
$44.43
As soon as practicable following each vesting date of RSUs, including PRSUs, the Company will issue to the holder of the RSUs the number of shares of common stock equal to the aggregate number of RSUs that have vested. Notwithstanding the foregoing, the Company may, in its sole discretion, in lieu of issuing shares of common stock to the holder of the RSUs, pay the holder an amount in cash equal to the fair market value of such shares of common stock. To date, the Company has not settled any vested RSUs with cash.
A summary of the changes in the Company’s RSUs during the three months ended March 31, 2019 is as follows:
 
RSUs
(in thousands)
 
Weighted-Average Grant Date Fair Value
Outstanding at December 31, 2018
2,325

 
$
40.55

Granted
590

 
$
51.68

Vested
(316
)
 
$
35.93

Cancelled
(468
)
 
$
57.12

Outstanding at March 31, 2019
2,131

 
$
40.68

The granted amount includes the PRSUs described above, which were granted to executives during the three months ended March 31, 2019.  
As of March 31, 2019 and December 31, 2018, there was $70.2 million and $52.5 million, respectively, of total unrecognized compensation cost related to unvested RSUs which is expected to be recognized over weighted-average periods of 2.4 years and 1.9 years, respectively.
11. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of the Company’s basic and diluted net income (loss) per share (in thousands, except per share amounts):

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Three Months Ended March 31,
 
2019
 
2018
Numerator:
 

 
 

Net income (loss)
$
6,977

 
$
(9,078
)
Denominator:
 

 
 

Weighted-average shares used to compute net income (loss) per share - basic
40,284

 
39,836

Dilutive effect of stock options, unvested restricted stock and restricted stock units and employee stock purchase plan
1,678

 

Weighted-average shares used to compute net income (loss) per share - diluted
41,962

 
39,836

Net income (loss) per share
 

 
 

Basic
$
0.17

 
$
(0.23
)
Diluted
$
0.17

 
$
(0.23
)
The following common stock equivalents (in thousands) were excluded from the computation of diluted net income (loss) per share for the periods presented because including them would have been antidilutive:
 
Three Months Ended March 31,
 
2019
 
2018
Options to purchase common stock
49

 
1,218

Unvested restricted stock units and awards
176

 
1,445

Employee stock purchase plan

 
3

As discussed further in Note 10, in the three months ended March 31, 2019, the Company granted a maximum of 187,234 PRSUs to executives that include a market condition and a service condition. An estimate of the number of shares contingently issuable based on average market prices through March 31, 2019 for these, and all outstanding PRSUs with a market condition, have been included in the tables above.
12. COMMITMENTS AND CONTINGENCIES
Warranties
The Company’s standard warranty obligation to its customers provides for repair or replacement of a defective product at the Company’s discretion for a period of time following purchase, generally between 12 and 24 months. Factors that affect the warranty obligation include product failure rates, material usage and service delivery costs incurred in correcting product failures. In addition, from time to time, specific warranty accruals may be made if unforeseen technical problems arise. The estimated cost associated with fulfilling the Company’s warranty obligation to customers is recorded in cost of revenue.
Changes in the Company’s warranty liability, which is included as a component of accrued liabilities on the condensed consolidated balance sheets, are set forth in the table below (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Warranty reserve, beginning of period
$
8,220

 
$
8,306

Provisions made to warranty reserve during the period
5,026

 
3,463

Charges against warranty reserve during the period
(3,729
)
 
(4,351
)
Warranty reserve, end of period
$
9,517

 
$
7,418

Legal Contingencies
On January 21, 2016, ViaSat, Inc. filed a lawsuit in California state court, later removed to the U.S. District Court for the Southern District of California, against the Company alleging, among other things, breach of contract, breach of the implied covenant of good faith and fair dealing and misappropriation of trade secrets. On February 19, 2016, the Company responded to ViaSat’s lawsuit and alleged counterclaims against ViaSat including, among other things, patent misappropriation, breach of contract, breach of the implied covenant of good faith and fair dealing, misappropriation of trade secrets and unfair competition, which ViaSat denied in its response filed March 16, 2016. On September 28, 2018 the matter was remanded back to California state court. On March 22, 2019, a summary judgment hearing took place in California Superior Court, County of

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San Diego, North County Division. Both the Company’s and ViaSat’s summary judgment motions were denied in April 2019. At the court’s direction, the parties are participating in a mandatory settlement process, but no resolution has been reached. Trial is scheduled for June 2019.
On July 28, 2017, the Company filed a lawsuit in the Commonwealth of Massachusetts Superior Court - Business Litigation Session against ViaSat asserting commercial disparagement, libel, slander of title, unfair competition, intentional interference with advantageous relations and intentional interference with contractual relations. On April 5, 2018, ViaSat responded to the Company’s action and alleged counterclaims including, among other things, breach of contract, breach of the implied covenant of good faith and fair dealing, misappropriation of trade secrets, and unfair competition. On December 13, 2018, the Massachusetts court entered an order staying the Massachusetts litigation pending resolution of the California state court action discussed in the preceding paragraph. During the stay of the Massachusetts litigation, the Company may conduct and complete certain non-party discovery as provided in the court’s order.
The California and Massachusetts lawsuits are both pending resolution. Discovery is closed in the California action filed by ViaSat and ongoing in the Massachusetts action filed by the Company, subject to the conditions of the order to stay.
The Company intends to continue to engage in a vigorous defense and pursuit of Company favorable judgments of the ongoing litigation matters described above. However, the Company is unable to predict the ultimate outcome of these proceedings, and, therefore cannot estimate possible losses or ranges of losses, if any. The ultimate resolution of these proceedings may have a material adverse effect on the Company’s results of operations and cash flows, potentially in the near term. In addition, the timing of the final resolution of these proceedings is uncertain. The Company will continue to incur litigation and other expenses as a result of these proceedings, which could have a material impact on the Company’s business, consolidated financial position, results of operations and cash flows. As of March 31, 2019, the Company has accrued a total of $6.0 million in litigation and settlement-related reserves. The amount of such reserves is based upon currently available information and is subject to significant judgment and a variety of assumptions and known and unknown uncertainties, which may change quickly and significantly from time to time. As a result, actual losses could significantly exceed the amount of such reserves, and no conclusion as to the Company’s ultimate exposure from these proceedings should be drawn from such reserves.
As previously disclosed, four purported shareholder derivative lawsuits were filed against certain of the Company’s directors and executive officers (and the Company as a nominal defendant) between the fourth quarter of 2017 and the first quarter of 2018, and a lawsuit was filed against the Company seeking to inspect certain of its books and records pursuant to 8 Del. C. §220 in the second quarter of 2018. The parties to these proceedings reached a settlement of these matters, subject to court approval. On September 14, 2018, the parties in such proceedings executed their Stipulation and Agreement of Settlement, Compromise and Release, and the plaintiffs filed a motion for preliminary approval of the settlement. On September 17, 2018, the court issued an order preliminarily approving the settlement, requiring notice of the settlement be issued to the Company’s shareholders, and scheduling a hearing to consider final approval of the settlement. On November 7, 2018, the plaintiffs filed a motion for final approval of the settlement and a motion for an award of attorneys’ fees and expenses. On November 28, 2018, the defendants filed an opposition to plaintiffs’ motion for attorneys’ fees and expenses. The court held a hearing to consider final settlement approval and the plaintiffs’ request for an award of attorneys’ fees and expenses on December 19, 2018. The court approved the settlement and indicated that it would schedule a further evidentiary hearing on the motion for attorneys’ fees and expenses. The parties subsequently reached agreement on an agreed attorneys’ fee award of approximately $0.7 million and an agreed immaterial expense award. A portion of the fee and expense awards has been reimbursed to the Company by its insurance carrier. On January 23, 2019, the court issued an order granting final approval to the settlement, including the agreed upon awards of attorneys’ fees and expenses. The court entered final judgment on January 24, 2019. No notice of appeal was filed.
In addition, from time to time the Company may become involved in legal proceedings or be subject to claims arising in the ordinary course of its business. Although the results of litigation and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not have a material adverse effect on the Company’s business or on its consolidated financial position, results of operations or cash flows. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.
Indemnification
In the ordinary course of business, the Company enters into various agreements containing standard indemnification provisions. The Company’s indemnification obligations under such provisions are typically in effect from the date of execution of the applicable agreement through the end of the applicable statute of limitations. During the three months ended March 31,

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2019 and 2018, the Company did not experience any losses related to these indemnification obligations. The Company does not expect significant claims related to these indemnification obligations, and consequently, has concluded that the fair value of these obligations is not material. Accordingly, as of March 31, 2019 and December 31, 2018, no amounts have been accrued related to such indemnification provisions.
13. INCOME TAXES
The Company is subject to income tax in the United States as well as other tax jurisdictions in which it conducts business. Earnings from non-U.S. activities are subject to local country income tax. As a result of the concept of “deemed distributions” under the U.S. Tax Cuts and Jobs Act, the impact of global intangible low-tax income (“GILTI”) on the Company’s future foreign earnings, and lack of certain foreign governments’ withholding tax imposed on dividends, the Company no longer takes the position that most of its foreign earnings are permanently reinvested. For certain foreign operating subsidiaries, the Company continues to take the position that earnings are permanently reinvested.
The Company’s tax provision for interim periods has historically been determined using an estimate of its annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter, the Company updates its estimate of the annual effective tax rate, and if the estimated annual tax rate changes, the Company makes a cumulative adjustment in that quarter. The Company’s quarterly tax (benefit) provision, and its quarterly estimate of its annual effective tax rate, are subject to significant volatility due to several factors, including the Company’s ability to accurately predict its pre-tax income and loss in multiple jurisdictions, as well as the portions of stock-based compensation that will either not generate tax benefits or the tax benefit is unpredictable and reflected when realized by employees.
For the three months ended March 31, 2019, the Company recorded a benefit from income taxes of $1.5 million as compared to $4.3 million for the three months ended March 31, 2018, resulting in an effective tax rate of (26.9)% and 32.1% for the three months ended March 31, 2019 and 2018, respectively. The benefit from income taxes recorded in the three months ended March 31, 2019 and 2018 were primarily a result of the recognition of excess tax benefits from the taxable compensation on share-based awards recognized in the respective periods, as well as federal and state research and development credits. The Company’s historical (benefit) provision for income taxes is not necessarily reflective of its future tax provisions or results of operations. 
In the normal course of business, the Company is potentially subject to examination by tax authorities throughout the United States and other foreign jurisdictions in which the Company operates. All tax years since inception remain open to examination by major taxing jurisdictions to which the Company is subject, as carryforward attributes generated in prior period tax years may still be adjusted upon examination by the Internal Revenue Service or state tax authorities if they have or will be used in a future period. The Company also files foreign tax returns in the foreign jurisdictions in which it operates when required. The Company is currently being audited by the Internal Revenue Service for tax years 2014 through 2017. There are currently no state or foreign examinations in process.
As of March 31, 2019 and December 31, 2018, the Company identified $5.1 million and $5.0 million, respectively, of gross uncertain tax positions. Included in those balances as of March 31, 2019 and December 31, 2018 are $3.0 million and $3.0 million, respectively, of tax benefits that, if recognized, would impact the effective tax rate. These have been accrued for as long-term liabilities on the Company’s condensed consolidated balance sheets. The Company’s existing tax positions are expected to continue to generate an increase in unrecognized tax benefits in subsequent periods. The Company’s policy is to record interest and penalties related to unrecognized tax benefits as income tax expense. During the three months ended March 31, 2019 and 2018, the amounts recorded related to interest and penalties were immaterial in each period.  
14. SEGMENT INFORMATION AND GEOGRAPHIC DATA
The Company operates as one operating segment. Operating segments are defined as components of an enterprise for which separate financial information is regularly evaluated by the chief operating decision maker (“CODM”), which is the Company’s president and chief executive officer, in deciding how to allocate resources and assess performance. The CODM evaluates the Company’s financial information and resources and assesses the performance of these resources on a consolidated basis. Since the Company operates in one operating segment, all required financial segment information can be found in the condensed consolidated financial statements.
Revenue by country, based on ship-to destinations, which in certain instances may be the location of a contract manufacturer rather than the Company’s end customer, was as follows (in thousands):

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Three Months Ended March 31,
 
2019
 
2018
United States
$
12,340

 
$
9,427

China
42,887

 
22,083

Germany
10,833

 
19,746

Thailand
23,681

 
7,119

Other
15,475

 
14,566

Total revenue
$
105,216

 
$
72,941

Total long-lived assets by country consisted of the following as of March 31, 2019 and December 31, 2018 (in thousands):
 
March 31, 2019
 
December 31, 2018
United States
$
18,748

 
$
18,123

Thailand
3,567

 
4,147

China
1,429

 
1,703

Other
2,875

 
2,670

Total long-lived assets
$
26,619

 
$
26,643

15. CONCENTRATIONS OF RISK
Customer Concentration
Customers with revenue equal to or greater than 10% of total revenue for the three months ended March 31, 2019 and 2018 were as follows:
 
Three Months Ended March 31,
 
 
2019
 
2018
 
A
31
%
 
20
%
 
B
10
%
 
17
%
 
C
10
%
 
20
%
(1) 
E
18
%
 
*

 
 
*
Less than 10% of revenue in the period indicated
(1)
Customer C was acquired by one of the Company’s other customers on October 1, 2018. Pro forma revenue for the combined customer would have been 22% for the three months ended March 31, 2018.

Customers, which include their authorized contract manufacturers, that accounted for equal to or greater than 10% of accounts receivable at March 31, 2019 and December 31, 2018 were as follows:
 
March 31, 2019
 
December 31, 2018
A
26
%
 
30
%
B
*

 
13
%
D
*

 
10
%
F
20
%
 
17
%
 
*
Less than 10% of accounts receivable at the date indicated
Supplier Concentration
The Company’s most significant vendor spending is related to purchases from contract manufacturers and component suppliers located in China and Thailand, from which the Company purchases a substantial portion of its inventory. For the three months ended March 31, 2019 and 2018, total purchases from each of the suppliers were as follows:

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Three Months Ended March 31,
 
2019
 
2018
X
18
%
 
22
%
Y
56
%
 
48
%
The Company also outsources certain engineering projects to vendors located throughout the world. Total research and development costs incurred with one vendor were 15% during the three months ended March 31, 2019, and were 12% during the three months ended March 31, 2018.
16. RELATED PARTIES
One of the members of the Company’s board of directors, Vincent Roche, is also the President and Chief Executive Officer and a member of the board of directors of Analog Devices, Inc. (“ADI”). The Company, through its contract manufacturers, periodically purchases supplies from ADI pursuant to purchase orders negotiated on an arm’s length basis between ADI and the Company’s contract manufacturers at prevailing prices. These purchased supplies are used as content in certain of the Company’s manufactured products. Based on shipments during the respective periods, the Company’s contract manufacturers made purchases from ADI of approximately $0.9 million and $0.7 million during the three months ended March 31, 2019 and 2018, respectively.  
In 2018, the Company entered into a product development agreement with ADI related to the development of integrated circuits for $1.5 million, of which $0.3 million costs were incurred during the three months ended March 31, 2019 and $0.5 million of costs were incurred during the three months ended March 31, 2018.
One of the members of the Company’s board of directors, Peter Y. Chung, is also a member of the board of directors of MACOM Technology Solutions, Inc. (“MACOM”). The Company, through its contract manufacturers, periodically purchases supplies from MACOM. These purchased supplies are used as content in certain of the Company’s manufactured products. Based on shipments, the Company’s contract manufacturers made no purchases and $0.3 million of purchases from MACOM during the three months ended March 31, 2019 and 2018, respectively.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K filed with the SEC on February 21, 2019. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in the section titled “Risk Factors” under Part II, Item 1A below.
Company Overview
Our mission is to deliver high-speed coherent optical interconnect products that transform communications networks, relied upon by cloud infrastructure operators and content and communication service providers, through improvements in performance and capacity and reductions in associated costs. By implementing optical interconnect technology in a silicon-based platform, a process we refer to as the siliconization of optical interconnect, we believe we are leading a disruption that is analogous to the computing industry’s integration of multiple functions into a microprocessor. Our products fall into three product groups: embedded modules, pluggable modules and semiconductors. Our embedded module and pluggable module product groups consist of optical interconnect modules with transmission speeds ranging from 100 to 1,200 gigabits per second, or Gbps, for use in long-haul, metro and inter-data center markets. Our semiconductor product group consists of our low-power coherent digital signal processor application-specific integrated circuits, or DSP ASICs, and our silicon photonic integrated circuits, or silicon PICs, which are either integrated into our embedded and pluggable modules or sold to customers on a standalone basis for integration into internally developed or other merchant modules. We are also developing a 400ZR module that will expand our pluggable module product group, and enable inter-data center transmission capacity of 400 Gbps in the same compact pluggable form factors used for 400G client optics, including QSFP-DD and OSFP. Our modules perform a majority of the digital signal processing and optical functions in optical interconnects and offer low power consumption, high density and high speeds at attractive price points. Through the use of standard interfaces, our modules can be easily integrated with customers’ network equipment. The advanced software in our modules enables increased configurability and automation, provides insight into network and connection point characteristics and helps identify network performance problems, all of which increase flexibility and reduce operating costs.
Revenue from our five largest customers, the mix of which customers varied across each period, was 77% and 72% during the three months ended March 31, 2019 and 2018, respectively.
Results of Operations
The following tables set forth the components of our condensed consolidated statements of operations for each of the periods presented and as a percentage of our revenue for those periods. The period-to-period comparison of operating results is not necessarily indicative of results for future periods.  
 
Three Months Ended March 31,
 
2019
 
2018
 
(in thousands)
Consolidated Statement of Operation Data:
 

 
 

Revenue
$
105,216

 
$
72,941

Cost of revenue
55,374

 
48,870

Gross profit
49,842

 
24,071

Operating expenses:
 
 
 
Research and development
30,953

 
24,445

Sales, general and administrative
15,787

 
14,288

Total operating expenses
46,740

 
38,733

Income (loss) from operations
3,102

 
(14,662
)
Total other income, net
2,394

 
1,283

Income (loss) before benefit for income taxes
5,496

 
(13,379
)
Benefit for income taxes
(1,481
)
 
(4,301
)
Net income (loss)
$
6,977

 
$
(9,078
)


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Three Months Ended March 31,
 
2019
 
2018
Revenue
100
 %
 
100
 %
Cost of revenue
53
 %
 
67
 %
Gross profit
47
 %
 
33
 %
Operating expenses:
 
 
 
Research and development
29
 %
 
34
 %
Sales, general and administrative
15
 %
 
20
 %
Total operating expenses
44
 %
 
53
 %
Income (loss) from operations
3
 %
 
(20
)%
Total other income, net
2
 %
 
2
 %
Income (loss) before benefit for income taxes
5
 %
 
(18
)%
Benefit for income taxes
(1
)%
 
(6
)%
Net income (loss)
7
 %
 
(12
)%
 
Percentages in the table above are based on actual values. Totals may not sum due to rounding.
Three Months Ended March 31, 2019 Compared to the Three Months Ended March 31, 2018
Revenue
Revenue by product group and the related changes during the three months ended March 31, 2019 and 2018 were as follows:
 
Three Months Ended
 
As a % of
 
Three Months Ended
 
As a % of
 
Change in
 
March 31, 2019
 
Total Revenue
 
March 31, 2018
 
Total Revenue
 
$
 
%
 
(dollars in thousands)
Embedded modules
$
17,426

 
16
%
 
$
23,030

 
31
%
 
$
(5,604
)
 
(24
)%
Pluggable modules
55,517

 
53
%
 
31,980

 
44
%
 
23,537

 
74
 %
Semiconductors
32,273

 
31
%
 
17,931

 
25
%
 
14,342

 
80
 %
Total revenue
$
105,216

 
100
%
 
$
72,941

 
100
%
 
$
32,275

 
44
 %
 
Revenue increased by $32.3 million, or 44%, to $105.2 million in the three months ended March 31, 2019 from $72.9 million in the three months ended March 31, 2018. The increase was primarily due to a $23.5 million increase in sales of our pluggable modules and a $14.3 million increase in sales of our semiconductors, partially offset by a $5.6 million decrease in sales of our embedded modules. In the three months ended March 31, 2019 and 2018, we derived 41% and 30%, respectively, of our revenue from sales to customers with ship-to locations in China.
Cost of Revenue and Gross Profit

 
Three Months Ended March 31,
 
Change in
 
2019
 
2018
 
$
 
%
 
(dollars in thousands)
Cost of revenue
$
55,374

 
$
48,870

 
$
6,504

 
13
%
Gross profit percentage
47.4
%
 
33.0
%
 
 

 
 


Cost of revenue increased $6.5 million, or 13%, to $55.4 million in the three months ended March 31, 2019 from $48.9 million in the three months ended March 31, 2018. The increase is attributable to increased sales volumes, partially offset by the $7.1 million charge recorded in the three months ended March 31, 2018 related to inventory write-offs and reserves attributable to the seven-year denial of export privileges imposed by the U.S. Department of Commerce that prohibited sales to ZTE Kangxun Telecom Co. Ltd. and certain of its affiliates, together ZTE, our largest customer, the ZTE Ban.

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Our gross profit percentage increased to 47.4% in the three months ended March 31, 2019 compared to 33.0% in the three months ended March 31, 2018. The increase in gross profit percentage was primarily impacted by the charge recorded in the three months ended March 31, 2018 related to the ZTE Ban, as well as a favorable impact of semi-fixed costs relative to the current period revenue volume.
Research and Development

 
Three Months Ended March 31,
 
Change in
 
2019
 
2018
 
$
 
%
 
(dollars in thousands)
Research and development
$
30,953

 
$
24,445

 
$
6,508

 
27
%
 
Research and development expense increased $6.5 million, or 27%, to $31.0 million in the three months ended March 31, 2019 from $24.4 million in the three months ended March 31, 2018, primarily due to a $4.7 million increase in personnel-related and other costs as we continued investing in our product and technology roadmap, as well as a $1.8 million increase related to the timing of milestone payments associated with outsourcing and development related to our DSP ASIC program.
Sales, General and Administrative
 
 
Three Months Ended March 31,
 
Change in
 
2019
 
2018
 
$
 
%
 
(dollars in thousands)
Sales, general and administrative
$
15,787

 
$
14,288

 
$
1,499

 
10
%
 
Sales, general and administrative expenses increased $1.5 million, or 10%, to $15.8 million in the three months ended March 31, 2019 from $14.3 million in the three months ended March 31, 2018. This increase is primarily due to a $1.7 million increase in personnel-related and other costs as we increased sales and customer support staffing and related support resources.
Other Income, Net
 
 
Three Months Ended March 31,
 
Change in
 
2019
 
2018
 
$
 
%
 
(dollars in thousands)
Total other income, net
$
2,394

 
$
1,283

 
$
1,111

 
87
%
 
Total other income, net, was $2.4 million during the three months ended March 31, 2019, as compared to $1.3 million during the three months ended March 31, 2018, primarily due to an increase in interest income from marketable securities.  
Benefit from Income Taxes

 
Three Months Ended March 31,
 
Change in
 
2019
 
2018
 
$
 
%
 
(dollars in thousands)
Benefit from income taxes
$
(1,481
)
 
$
(4,301
)
 
$
2,820

 
(66
)%
Effective tax rate
(27
)%
 
32
%
 
 

 
(59
)%
 
Income tax benefit for the three months ended March 31, 2019 was $1.5 million compared to $4.3 million for the three months ended March 31, 2018. The benefit from income taxes recorded in the three months ended March 31, 2019 and 2018 was primarily a result of the recognition of excess tax benefits from the taxable compensation on share-based awards recognized in the respective periods and federal and state research and development credits. 

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Liquidity and Capital Resources
 
Three Months Ended March 31,
 
2019
 
2018
 
(in thousands)
Cash and cash equivalents
$
73,532

 
$
85,135

Marketable securities
355,710

 
282,371

Working capital
367,805

 
380,408

Net cash provided by operating activities
29,328

 
9,060

Net cash (used in) provided by investing activities
(17,640
)
 
7,612

Net cash provided by financing activities
1,400

 
968

 
Since 2014, we have funded our operations primarily through cash generated from operations and public offerings of our common stock. In May 2016, we completed our initial public offering in which we received aggregate proceeds of $97.8 million, net of underwriters’ discounts and commissions, before deducting offering costs of approximately $4.3 million. In October 2016, we completed a follow-on offering in which we received aggregate proceeds of $116.8 million, net of underwriters’ discounts and commissions, before deducting offering costs of approximately $1.2 million. As of March 31, 2019, we had cash and cash equivalents totaling $73.5 million, marketable securities of $355.7 million and accounts receivable of $83.4 million.   
We believe our existing cash balances and anticipated cash flow from future operations will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months and the foreseeable future. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth, the timing and extent of spending on research and development efforts and other business initiatives, purchases of capital equipment to support our growth, the expansion of sales and marketing activities, any expansion of our business through acquisitions of or investments in complementary products, technologies or businesses, the use of working capital to purchase additional inventory, the timing of new product introductions, market acceptance of our products and overall economic conditions. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. In the event additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all.
Operating Activities
Net cash provided by operating activities consists primarily of net income (loss) adjusted for certain non-cash items, including depreciation expense, stock-based compensation expense, deferred income taxes, non-cash lease expense and other non-cash (benefits) charges, net, as well as the effect of changes in working capital.
Net cash provided by operating activities was $29.3 million in the three months ended March 31, 2019 as compared to $9.1 million in the three months ended March 31, 2018. The increase of $20.3 million was primarily due to a $16.1 million increase in net income, a $3.6 million increase in non-cash expense items primarily consisting of stock-based compensation and deferred income taxes, and a $0.6 million increase in cash related to changes in operating assets and liabilities. Changes in cash flows related to operating assets and liabilities primarily consisted of a $12.9 million increase in cash due to the timing of our accounts payable and accrued liabilities and a $1.2 million increase in cash due to changes in prepaid and other asset balances, partially offset by a $6.3 million decrease in cash due to an increased inventory balance as compared to December 31, 2018 and a $4.4 million decrease in cash due to the timing of accounts receivable collections in the three months ended March 31, 2019 and a $2.8 million decrease in cash due to changes in deferred revenue balances.
Investing Activities
Our investing activities have consisted primarily of purchases, sales and maturities of marketable securities and purchases of lab and engineering equipment to support the development of new products and increase our manufacturing capacity to meet customer demand for existing products. In addition, our investing activities include expansion of, and improvements to, our leased facilities. We expect that we will continue to invest in these areas in line with growth in product demand.

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Net cash used in investing activities in the three months ended March 31, 2019 was $17.6 million, as compared to net cash provided by investing activities of $7.6 million in the three months ended March 31, 2018. This change was primarily attributable to a $29.2 million increase in net purchases of marketable securities during the three months ended March 31, 2019, partially offset by a $4.0 million decrease in property and equipment purchases.
Financing Activities
Our financing activities have consisted primarily of proceeds from the issuance of common stock under our stock-based compensation plans and payments to acquire treasury stock.
Net cash provided by financing activities during the three months ended March 31, 2019 was $1.4 million, as compared to $1.0 million during the three months ended March 31, 2018, attributable to an increase in proceeds from the issuance of common stock under stock-based compensation plans.
Contractual Obligations and Commitments
Our principal commitments consist of purchase obligations, taxes payable as a result of the U.S. Tax Cuts and Jobs Act, or the Tax Act, and other tax liabilities arising from the ordinary course of business. The following table summarizes these contractual obligations at March 31, 2019. Future events could cause actual payments to differ from these estimates.
 
Payments due by period
 
Total
 
Less than 1 Year
 
1-3 Years
 
3-5 Years
 
More Than 5 Years
 
(in thousands)
Purchase obligations (1)
$
84,748

 
$
84,748

 
$

 
$

 
$

Income taxes payable (2)
7,929

 

 
1,675

 
3,663

 
2,591

Unrecognized tax benefits (3)
3,042

 

 

 

 

Total
$
95,719

 
$
84,748

 
$
1,675

 
$
3,663

 
$
2,591

 
(1)
Our purchase obligations primarily consist of outstanding purchase orders with our contract manufacturers for inventory and other third parties for the manufacturing of our wafers. Our relationships with these vendors typically allow for the cancellation of outstanding purchase orders, but require payments of all expenses incurred through the date of cancellation. Other obligations include future non-inventory purchases and commitments related to future fixed asset purchases.
(2)
Income taxes payable relates to taxes owed as a result of the one-time transition tax on earnings of certain foreign subsidiaries that were previously tax-deferred until the enactment of the Tax Act in December 2017. The Tax Act allows the tax liability to be paid on an installment basis over eight years.
(3)
We had $5.1 million of uncertain tax positions as of March 31, 2019. Included in the balance of unrecognized tax benefits as of March 31, 2019 were $3.0 million of tax benefits that, if recognized, would impact the effective tax rate, which have been accrued for as a long-term liability on our condensed consolidated balance sheet. We are not able to provide reasonably reliable estimates of future payments relating to these obligations.
Off-Balance Sheet Arrangements
As of March 31, 2019, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, such as the use of unconsolidated subsidiaries, structured finance, special purpose entities or variable interest entities.
Recently Issued Accounting Pronouncements
Refer to the “Basis of Presentation and Summary of Significant Accounting Policies” footnote within our condensed consolidated financial statements for analysis of recent accounting pronouncements that are applicable to our business.
Critical Accounting Policies and Estimates
We prepare our condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States. The preparation of condensed consolidated financial statements also requires us to make

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estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management.
There have been no material changes to our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018 other than those described within the “Basis of Presentation and Summary of Significant Accounting Policies” footnote within our condensed consolidated financial statements.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
Our exposure to changes in interest rates relates primarily to interest earned on and the market value of our cash, cash equivalents and marketable securities. Our cash, cash equivalents and marketable securities consist of bank deposit accounts, money market funds, U.S. government agency debt securities, commercial paper, certificates of deposit, asset-backed securities and corporate debt securities. Our securities with fixed interest rates may have their market value adversely impacted by a rise in interest rates. As a result, we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because we classify our investments in debt securities as available‑for‑sale, no gains or losses are recognized in the condensed consolidated statements of operation unless such securities are sold prior to maturity or incur an other-than-temporary decline in fair value. A hypothetical 100 basis point increase in interest rates would not have resulted in a material change to our financial position or results of operations as of and for the three months ended March 31, 2019. We do not believe that we have a material exposure to interest rate risk as our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure from any single issue, issuer or type of investment.
Our exposure to market risk from changes in foreign currency exchange rates and inflation has not changed materially from our exposure as of December 31, 2018.
ITEM 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our principal executive officer and principal financial officer, has evaluated 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”)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of such date, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION
ITEM 1. Legal Proceedings.
On January 21, 2016, ViaSat, Inc. filed a lawsuit in California state court, later removed to the U.S. District Court for the Southern District of California, against us alleging, among other things, breach of contract, breach of the implied covenant of good faith and fair dealing and misappropriation of trade secrets. On Feb