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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: June 30, 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: 0-26820
 
______________________________________________ 
CRAY INC.
(Exact name of registrant as specified in its charter)
______________________________________________ 
 
Washington
 
93-0962605
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
901 Fifth Avenue, Suite 1000
 
98164
Seattle,
Washington
 
 
(Address of Principal Executive Office)
 
(Zip Code)
206 701-2000
(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 each exchange on which registered
Common Stock
CRAY
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically 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  ý    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
ý
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  ý
As of July 31, 2019, there were 41,414,306 shares of Common Stock issued and outstanding.




CRAY INC.
TABLE OF CONTENTS
 
 
Page No.
 
 
Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2019 and June 30, 2018
Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2019 and June 30, 2018
Condensed Consolidated Statements of Shareholders’ Equity for the Three and Six Months Ended June 30, 2019 and June 30, 2018
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and June 30, 2018

CRAY, ClusterStor, DataWarp, and Sonexion are registered trademarks of Cray Inc. in the United States and other countries. The CS and XC families of supercomputers, Shasta, and other Cray technologies are all trademarks of Cray Inc. Other trademarks used in this report are the property of their respective owners.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports and proxy statements filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge at our website at www.cray.com as soon as reasonably practicable after we electronically file such reports with the U.S. Securities and Exchange Commission.


3



PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
CRAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands, except share data)
 
June 30,
2019
 
December 31,
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
147,533

 
$
228,434

Restricted cash
3,772

 
1,300

Accounts and other receivables, net
76,501

 
87,819

Inventory
88,035

 
80,360

Prepaid expenses and other current assets
25,053

 
22,331

Total current assets
340,894

 
420,244

 
 
 
 
Long-term restricted cash
13,847

 
16,030

Property and equipment, net
38,290

 
35,737

Operating lease right-of-use assets
32,656

 

Goodwill
14,182

 
14,182

Intangible assets other than goodwill, net
2,602

 
3,178

Other non-current assets
17,200

 
27,761

TOTAL ASSETS
$
459,671

 
$
517,132

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
30,098

 
$
32,847

Accrued payroll and related expenses
20,462

 
23,703

Accrued and other liabilities
13,206

 
10,805

Customer contract liabilities
54,353

 
61,983

Total current liabilities
118,119

 
129,338

 
 
 
 
Long-term customer contract liabilities
23,077

 
32,021

Long-term operating lease liabilities
39,845

 

Other non-current liabilities
2,384

 
12,394

TOTAL LIABILITIES
183,425

 
173,753

Commitments and contingencies (Note 10)
 
 
 
 
 
 
 
Shareholders’ equity:
 
 
 
Preferred stock — Authorized and undesignated, 5,000,000 shares; no shares issued or outstanding

 

Common stock and additional paid-in capital, par value $.01 per share — Authorized, 75,000,000 shares; issued and outstanding 41,337,879 and 40,893,807 shares, respectively
654,948

 
647,045

Accumulated other comprehensive income
1,534

 
3,208

Accumulated deficit
(380,236
)
 
(306,874
)
TOTAL SHAREHOLDERS’ EQUITY
276,246

 
343,379

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
459,671

 
$
517,132

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

4



CRAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands, except per share data)
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
Revenue:
 
 
 
 
 
 
 
 
Product
 
$
29,924

 
$
83,379

 
$
64,082

 
$
127,833

Service
 
38,775

 
36,824

 
76,163

 
71,964

Total revenue
 
68,699

 
120,203

 
140,245

 
199,797

Cost of revenue:
 
 
 
 
 
 
 
 
Cost of product revenue
 
23,424

 
65,274

 
49,526

 
99,319

Cost of service revenue
 
21,328

 
17,122

 
40,748

 
35,719

Total cost of revenue
 
44,752

 
82,396

 
90,274

 
135,038

Gross profit
 
23,947

 
37,807

 
49,971

 
64,759

Operating expenses:
 
 
 
 
 
 
 
 
Research and development, net
 
37,171

 
29,382

 
72,957

 
59,274

Sales and marketing
 
14,919

 
15,218

 
29,194

 
30,883

General and administrative
 
15,890

 
5,624

 
21,832

 
11,403

Restructuring
 

 

 

 
476

Total operating expenses
 
67,980

 
50,224

 
123,983

 
102,036

Loss from operations
 
(44,033
)
 
(12,417
)
 
(74,012
)
 
(37,277
)
 
 
 
 
 
 
 
 
 
Other income, net
 
272

 
430

 
25

 
48

Interest income, net
 
1,223

 
667

 
2,148

 
1,380

Loss before income taxes
 
(42,538
)
 
(11,320
)
 
(71,839
)
 
(35,849
)
Income tax benefit (expense)
 
(22
)
 
370

 
(141
)
 
(109
)
Net loss
 
$
(42,560
)
 
$
(10,950
)
 
$
(71,980
)
 
$
(35,958
)
 
 
 
 
 
 
 
 
 
Basic net loss per common share
 
$
(1.03
)
 
$
(0.27
)
 
$
(1.75
)
 
$
(0.89
)
Diluted net loss per common share
 
$
(1.03
)
 
$
(0.27
)
 
$
(1.75
)
 
$
(0.89
)
 
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
 
41,191

 
40,616

 
41,069

 
40,527

Diluted weighted average shares outstanding
 
41,191

 
40,616

 
41,069

 
40,527

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

5



CRAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited and in thousands)
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
Net loss
 
$
(42,560
)
 
$
(10,950
)
 
$
(71,980
)
 
$
(35,958
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Unrealized gain on available-for-sale investments
 

 
9

 

 
7

Foreign currency translation adjustments
 
(52
)
 
(1,185
)
 
156

 
(1,159
)
Unrealized gain (loss) on cash flow hedges
 
(912
)
 
2,306

 
(1,761
)
 
1,074

Reclassification adjustments on cash flow hedges included in net loss
 
143

 
633

 
143

 
1,109

Other comprehensive income (loss)
 
(821
)
 
1,763

 
(1,462
)
 
1,031

Comprehensive loss
 
$
(43,381
)
 
$
(9,187
)
 
$
(73,442
)
 
$
(34,927
)
The accompanying notes are an integral part of these condensed consolidated financial statements

6



CRAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited and in thousands)

 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
Total shareholders’ equity, beginning balance
 
$
317,672

 
$
378,878

 
$
343,379

 
$
400,297

 
 
 
 
 
 
 
 
 
Common stock and additional paid-in capital:
 
 
 
 
 
 
 
 
Beginning balance
 
651,441

 
637,783

 
647,045

 
633,408

Exercise of stock options
 
740

 
255

 
1,569

 
1,792

Restricted shares issued for compensation, net of forfeitures and taxes
 
(1,334
)
 
(1,448
)
 
(1,433
)
 
(1,552
)
Share-based compensation
 
4,101

 
3,192

 
7,767

 
6,134

Ending balance
 
654,948

 
639,782

 
654,948

 
639,782

 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income:
 
 
 
 
 
 
 
 
Beginning balance
 
2,355

 
183

 
3,208

 
915

Other comprehensive income (loss)
 
(821
)
 
1,763

 
(1,462
)
 
1,031

Reclassification of stranded tax effects resulting from adoption of ASU 2018-02
 

 

 
(212
)
 

Ending balance
 
1,534

 
1,946

 
1,534

 
1,946

 
 
 
 
 
 
 
 
 
Accumulated deficit:
 
 
 
 
 
 
 
 
Beginning balance
 
(336,124
)
 
(259,088
)
 
(306,874
)
 
(234,026
)
Net loss
 
(42,560
)
 
(10,950
)
 
(71,980
)
 
(35,958
)
Restricted shares issued for compensation, net of forfeitures and taxes
 
(1,552
)
 
(963
)
 
(1,594
)
 
(1,017
)
Reclassification of stranded tax effects resulting from adoption of ASU 2018-02
 

 

 
212

 

Ending balance
 
(380,236
)
 
(271,001
)
 
(380,236
)
 
(271,001
)
 
 
 
 
 
 
 
 
 
Total shareholders’ equity, ending balance
 
$
276,246

 
$
370,727

 
$
276,246

 
$
370,727

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

7



CRAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
 
Six Months Ended
June 30,
 
2019
 
2018
Operating activities:
 
 
 
Net loss
$
(71,980
)
 
$
(35,958
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
7,608

 
8,269

Share-based compensation expense
7,767

 
6,134

Other
577

 
(384
)
Cash provided (used) due to changes in operating assets and liabilities:
 
 
 
Accounts and other receivables
11,407

 
46,484

Inventory
(9,561
)
 
32,755

Prepaid expenses and other assets
7,429

 
6,056

Accounts payable
(2,628
)
 
(40,264
)
Accrued payroll and related expenses and other liabilities
(5,403
)
 
3,777

Customer contract liabilities
(16,396
)
 
(27,049
)
Net cash used in operating activities
(71,180
)
 
(180
)
Investing activities:
 
 
 
Sales/maturities of available-for-sale investments

 
7,000

Cash received in strategic transaction

 
1,584

Purchases of property and equipment
(7,952
)
 
(3,275
)
Net cash provided by (used in) investing activities
(7,952
)
 
5,309

Financing activities:
 
 
 
Purchase of employee restricted shares to fund related statutory tax withholding
(3,027
)
 
(2,569
)
Proceeds from exercises of stock options
1,569

 
1,792

Net cash used in financing activities
(1,458
)
 
(777
)
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash
(22
)
 
(185
)
Net increase (decrease) in cash, cash equivalents and restricted cash
(80,612
)
 
4,167

Cash, cash equivalents and restricted cash:
 
 
 
Beginning of period
245,764

 
140,320

End of period
$
165,152

 
$
144,487

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for income taxes
$
308

 
$
401

Non-cash investing and financing activities:
 
 
 
Inventory transfers to fixed assets and service spares
$
1,261

 
$
5,503

The following is a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Condensed Consolidated Statements of Cash Flows:
 
June 30,
2019
 
December 31,
2018
Cash and cash equivalents
$
147,533

 
$
228,434

Restricted cash (1)
3,772

 
1,300

Long-term restricted cash (1)
13,847

 
16,030

Total cash, cash equivalents and restricted cash
$
165,152

 
$
245,764

(1)
Restricted cash primarily associated with certain letters of credit to secure customer prepayments and other customer related obligations.
The accompanying notes are an integral part of these condensed consolidated financial statements

8



CRAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1— Basis of Presentation
In these notes, the Company and its wholly-owned subsidiaries are collectively referred to as the “Company.” In the opinion of management, the accompanying Condensed Consolidated Balance Sheets, Statements of Operations, Statements of Comprehensive Loss, Statements of Shareholders’ Equity and Statements of Cash Flows have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Management believes that all adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation have been included. Interim results are not necessarily indicative of results for a full year. The information included in this quarterly report on Form 10-Q should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2018.
The Company’s revenue, results of operations and cash balances are likely to fluctuate significantly from quarter to quarter. These fluctuations are due to such factors as the high average sales prices and limited number of sales of the Company’s products, the timing of purchase orders and product deliveries, the revenue recognition accounting policy of generally not recognizing product revenue until customer acceptance and other contractual provisions have been fulfilled and the timing of payments for product sales, maintenance services, government research and development funding and purchases of inventory. Given the nature of the Company’s business, its revenue, receivables and other related accounts are likely to be concentrated among a relatively small number of customers.
Pending Merger with Hewlett Packard Enterprise Company
On May 16, 2019, the Company entered into an agreement and plan of merger, (the “Merger Agreement”), with Hewlett Packard Enterprise Company, a Delaware corporation (“HPE”), and Canopy Merger Sub, Inc., a Washington corporation and a wholly owned subsidiary of HPE (“Merger Sub”).
Pursuant to the terms of the Merger Agreement, and subject to the conditions specified in the Merger Agreement, Merger Sub will merge with and into the Company, and the Company will become a wholly owned subsidiary of HPE (such transaction, the “Merger”). If the Merger is completed, the Company’s shareholders will be entitled to receive $35.00 in cash, without interest and less any withholding taxes required by applicable law, for each share of the Company’s common stock owned by them as of immediately prior to the effective time of the Merger, except with respect to Company shareholders who have properly demanded statutory dissenters’ rights with respect to the Merger.
The consummation of the Merger is subject to certain conditions, including (i) approval of the Merger Agreement by holders of not less than a majority of the outstanding shares of the Company’s common stock; (ii) the absence of any temporary restraining order, preliminary or permanent injunction, or any law or other judgment enacted, issued, promulgated, enforced or entered into by any governmental authority of competent jurisdiction that is then in effect and has the effect of making the Merger illegal or otherwise prevents or prohibits the consummation of the Merger; (iii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), as well as all other required approvals, consents or clearances as may be required under the competition, merger control, antitrust or similar law of certain non-U.S. jurisdictions; (iv) the accuracy of the Company’s, HPE’s and Merger Sub’s respective representations and warranties, subject to specified materiality qualifications; (v) the absence of a Material Adverse Effect (as defined in the Merger Agreement); and (vi) other customary conditions. The consummation of the Merger is not subject to a financing condition and the Company expects HPE to finance the payment of the applicable consideration in the Merger with cash on hand, existing financing facilities and/or other debt financing.
The special meeting of the Company’s shareholders to vote on the approval of the Merger Agreement is scheduled to be held on August 27, 2019. The Company anticipates that the closing of the transactions contemplated by the Merger Agreement is expected to occur in the next 3 ½ to 6 ½ months, subject to the Company’s shareholders approving the Merger Agreement at the special meeting, all regulatory approvals being received and all other conditions set forth in the Merger Agreement being either satisfied or waived. On June 14, 2019, the Company and HPE filed their respective notification and report forms pursuant to the HSR Act with the Antitrust Division of the U.S. Department of Justice and the Federal Trade Commission. On July 15, 2019, HPE voluntarily withdrew its notification and report form for administrative reasons and refiled it on July 17, 2019. The Company expects that the waiting period under the HSR Act will, absent a second request, expire or be terminated on or before August 16, 2019. For additional information related to the Merger and the Merger Agreement, please refer to the Company’s Current Report on Form 8-K filed with the SEC on May 16, 2019 and the Definitive Proxy Statement on Schedule

9



14A filed with the Securities and Exchange Commission on June 25, 2019. Upon completion of the Merger, shares of the Company’s common stock will cease trading on The Nasdaq Global Select Market.

The Company recorded transaction-related costs of $7.6 million principally for legal and investment banker fees associated with the pending Merger, during the three months ended June 30, 2019. These costs are recorded in general and administrative expenses included in the condensed consolidated statement of operations for the three months ended June 30, 2019. Retention bonuses of approximately $17 million have also been granted to employees. Payment of these bonuses is contingent on completion of the transaction and continued service of the employees through the closing of the Merger. Additional transaction-related costs are expected to be incurred through the closing of the Merger.

The Company may be required to pay HPE a $46.0 million termination fee if the Merger Agreement is terminated in accordance with certain circumstances provided therein.

Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.
New Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-02, Leases: Topic 842 (ASU 2016-02), which replaces existing lease guidance. The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use (“ROU”) assets and corresponding lease liabilities on the balance sheet. The new standard initially required application with a modified retrospective approach to each prior reporting period presented with various optional practical expedients. In July 2018, this requirement was amended with the issuance of Accounting Standards Update No. 2018-11, Leases: Topic 842: Targeted Improvements (ASU 2018-11), which permits an additional (and optional) transition method to adopt the new leases standard.
The Company adopted ASU 2016-02 and related ASUs, collectively ASC 842, on January 1, 2019 using the optional transition method. Consequently, periods before January 1, 2019 will continue to be reported in accordance with the prior accounting guidance, ASC 840, Leases.
The Company elected the package of practical expedients, which permits the Company to retain prior conclusions about lease identification, lease classification and initial direct costs for leases that commenced before January 1, 2019. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases that qualify. The Company also elected the practical expedient to combine lease and non-lease components for all of its leases other than net lease real estate leases.
Adoption of ASC 842 resulted in the recording of ROU assets and lease liabilities of $34.4 million and $46.6 million, respectively, as of January 1, 2019. The difference between ROU assets and lease liabilities relates to liabilities of $12.2 million for deferred rent and lease incentives liabilities that were included on the Company’s Condensed Consolidated Balance Sheets prior to adoption of ASC 842. These amounts were eliminated at the time of adoption and are included in the lease liabilities number above. Adoption of ASC 842 did not have a material impact on the Company’s consolidated net earnings and had no impact on cash flows.
In August 2017, FASB issued Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12). The new standard simplifies and expands the eligible hedging strategies for financial and nonfinancial risks. It also enhances the transparency of how hedging results are presented and disclosed. Further, the new standard provides partial relief on the timing of certain aspects of hedge documentation and eliminates the requirement to recognize hedge ineffectiveness separately in earnings. The Company adopted ASU 2017-12 on January 1, 2019. Adoption of ASU 2017-12 did not have a material impact on the Company’s consolidated financial statements. Upon adoption of ASU 2017-12, the Company revised its accounting policy for foreign currency derivatives from the policy included in the Notes to Consolidated Financial Statements in its annual report on Form 10-K for year ended December 31, 2018. The revised accounting policy for foreign currency derivatives is included below.
In February 2018, FASB issued Accounting Standards Update No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02).

10



The new standard amends ASC 220 to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act and requires entities to provide certain disclosures regarding stranded tax effects. The Company adopted ASU 2018-02 on January 1, 2019. At the time of adoption, the Company reclassified $0.2 million of stranded tax effects resulting from the Tax Cuts and Jobs Act from accumulated other comprehensive income to accumulated deficit. Adoption of ASU 2018-02 did not have a material impact on the Company’s consolidated financial statements.
In August 2018, 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). The new standard makes various modifications to the disclosure requirements on fair value measurement in Topic 820. The Company adopted ASU 2018-13 on January 1, 2019. Adoption of ASU 2018-13 did not have a material impact on the Company’s consolidated financial statements.
Revised Accounting Policies
Foreign Currency Derivatives
The Company uses foreign currency exchange contracts to manage certain foreign currency exposures. Foreign currency exchange contracts are cash flow hedges of the Company’s foreign currency exposures on certain revenue contracts and are recorded at the contract’s fair value. Most of the Company’s foreign currency exchange contracts are designated as cash flow hedges for the purposes of hedge accounting treatment and any gains or losses on the foreign currency exchange contract is initially reported in “Accumulated other comprehensive income,” a component of shareholders’ equity, with a corresponding asset or liability recorded based on the fair value of the foreign currency exchange contract. When the hedged transaction is recognized, any unrecognized gains or losses on the hedged transaction are reclassified into results of operations in the same period and presented in the same income statement line item as the earnings effect of the hedged item. The Company excludes the changes in fair value of the contract related to forward points from the assessment of hedge effectiveness and the gains and losses associated with the excluded component are presented in the same line of the income statement for the hedged item. For hedging relationships executed before the date of adoption of ASU 2017-12, the gains and losses associated with the excluded components are recognized currently in earnings. The amortization approach is used for hedging relationships executed after the date of adoption of ASU 2017-02. Cash flows from foreign currency exchange contracts accounted for as cash flow hedges are classified in the same category as the cash flows from the items being hedged. The Company typically dedesignates its cash flow hedges for the purposes of hedge accounting treatment when the receivable related to the hedged cash flow is recorded. Unrealized gains or losses related to foreign currency exchange contracts that are not designated as cash flow hedges for the purposes of hedge accounting treatment are recorded in other income (expense) in the Condensed Consolidated Statements of Operations and are generally offset by foreign currency adjustments on related receivables. The Company does not use derivative financial instruments for speculative purposes.
Note 2— Revenue Recognition
The Company’s performance obligations are satisfied over time as work is performed or at a point in time. The majority of the Company’s revenue is recognized at a point in time when products are accepted, installed or delivered. Most of the Company’s revenue is derived from long-term contracts that can span several years. Revenue is recognized when performance obligations under the terms of a contract with the customer are satisfied; generally, this occurs with the transfer of control of the Company’s systems or services. In general, this does not occur until the products have been shipped or services provided to the customer, risk of loss has transferred to the customer, and, where applicable, a customer acceptance has been obtained. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. Sales, value add, and other taxes that the Company collects concurrent with revenue-producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are recognized as expense.
To determine the proper revenue recognition method for contracts, the Company evaluates whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. Contracts are often modified to account for changes in contract specifications and requirements. To determine the proper revenue recognition method for contract modifications, the Company evaluates whether the contract modification should be accounted for as a separate contract, part of an existing contract, or termination of an existing contract and the creation of a new contract. This evaluation requires significant judgment and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using the Company’s estimate of the standalone selling price of each distinct good or service in the contract.
The Company determines the transaction price by reviewing the established contractual terms and other relevant information. Contracts can include penalty clauses and contracts with government customers may not be fully funded, both of which represent variable consideration. Generally, the Company includes both the funded and unfunded portions of a contract with a government customer in the transaction price, as most often it is deemed the contract will become fully funded. The Company also assesses

11



the likelihood of certain penalties that would result in contract price reductions and, if deemed probable, the transaction price is adjusted.
The majority of the Company’s contracts include multiple promised goods and services, which are assessed at contract inception. Each distinct good or service is identified as a performance obligation, which may be an individual good or service or a bundle of goods or services. In order to determine whether the promises are distinct, the Company assesses the use of its products and services by its customers to determine whether the customer can benefit from the good or service on its own or from other readily available resources, and whether the promised transfer of goods or services is separately identifiable from other promises in the contract.
The majority of the Company’s revenues are from product solutions which include supercomputers, storage, and data analytics systems, each of which are usually separate performance obligations. Revenue is recognized when obligations under the terms of a contract with a customer are satisfied. Product revenue is typically recognized upon customer acceptance, or upon installation or delivery if formal acceptance is not required. Service revenue is typically recognized over time and consists mainly of system maintenance, analyst services, and engineering services, each of which are usually separate performance obligations. System maintenance commences upon customer acceptance or installation, depending on the contract terms, and revenue is recognized ratably over the remaining term of the maintenance contract. On-site analysts provide specialized services to customers, the revenue for which is recognized ratably over the contract period. Service revenue is recognized on a straight-line basis over the service period as the services are available continuously to the customer. Revenue from engineering services can be recognized as services are performed or as milestones are achieved, depending on the terms of the contract and nature of services performed. If, in a contract, the customer has an option to acquire additional goods or services, that option gives rise to a performance obligation if the option provides a material right to the customer that it would not receive without entering into that contract. Revenue from purchase options can be recognized as those future goods or services are transferred or when the option expires.
The Company performs an assessment to determine whether a significant financing component is present in a contract. If a contract is determined to include a significant financing component, the interest rate used in the calculation is based on the prevailing interest rates at contract inception and the entity’s creditworthiness. When the period between providing a good or service to the customer is expected to be less than one year from payment, the Company applies the practical expedient and does not adjust the consideration for the effects of a significant financing component.
Occasionally, the Company’s contracts include noncash consideration. This typically consists of returned parts when a system is upgraded or de-installed. Noncash consideration is measured at contract inception at estimated fair value.
The total transaction price is allocated to each performance obligation identified in the contract based on its relative standalone selling price. The Company does not have directly observable standalone selling prices for the majority of its performance obligations due to a relatively small number of customer contracts that differ in system size and contract terms which can be due to infrequently selling each performance obligation separately, not pricing products within a narrow range, or only having a limited sales history, such as in the case of certain advanced and emerging technologies. When a directly observable standalone selling price is not available, the Company estimates the standalone selling price. In determining the estimated standalone selling price, the Company uses the cost to provide the product or service plus a margin, or considers other factors. When using cost plus a margin, the Company considers the total cost of the product or service, including customer-specific and geographic factors as appropriate. The Company also considers the historical margins of the product or service on previous contracts and several other factors including any changes to pricing methodologies, competitiveness of products and services, and cost drivers that would cause future margins to differ from historical margins.
The Company sometimes offers discounts to its customers. As these discounts are offered on bundles of goods and services, the discounts are applied to all performance obligations in the contract on a pro-rata basis.
The following table provides information about contract receivables, contract assets, and contract liabilities from contracts with customers (in thousands) and includes both short-term and long-term portions:
 
 
June 30,
2019
 
December 31, 2018
 
Change
Contract receivables
 
$
67,214

 
$
78,634

 
$
(11,420
)
Contract assets
 
5,793

 
6,404

 
(611
)
Contract liabilities
 
77,430

 
94,004

 
(16,574
)

Contract receivables consist of amounts billed to customers and include the Company's investment in a sales type lease, a portion of which is due beyond one year. Generally, billing occurs subsequent to product revenue recognition and payment is expected within 30 days. Contract assets primarily relate to the Company's rights to consideration for work completed but not billed where right to payment is not just subject to the passage of time. Contract assets become contract receivables when the rights become unconditional. The Company sometimes receives advances or deposits from customers before revenue is recognized,

12



resulting in customer contract liabilities (formerly deferred revenue). These assets and liabilities are reported on the Condensed Consolidated Balance Sheet on a contract-by-contract basis at the end of each reporting period. The Company’s payment terms vary from contract to contract. Contracts may require payment before, at or after the Company’s performance obligations have been satisfied.
For the six month period ended June 30, 2019, the Company recognized $35.1 million in revenues from the contract liability balance at the beginning of the period.
The Company’s incremental direct costs of obtaining a contract come primarily from sales commissions, a portion of which are payable upon contract signing. These commissions are generally capitalized upon payment and expensed at the time of revenue recognition. These deferred commissions are included in prepaid expenses in the Condensed Consolidated Balance Sheet. As of June 30, 2019 and December 31, 2018, the Company had $4.2 million and $2.0 million, respectively, of deferred commissions. For the three and six months ended June 30, 2019, the Company recognized $0.8 million and $1.8 million, respectively, in commissions expense. For the three and six months ended June 30, 2018, the Company recognized $1.5 million and $2.6 million, respectively, in commissions expense.
The Company’s remaining performance obligations reflect the deliverables within contracts with customers that will have revenue recognized in a future period (this may also be referred to as backlog). Due to the nature of the Company’s business and the size of individual transactions, forecasting the timing and total amount of revenue recognition is subject to significant uncertainties. As of June 30, 2019, the Company has an aggregate of $639 million in remaining performance obligations stemming from a mixture of system contracts with their related service obligations and other service obligations. Included in this balance are $0.2 million in losses resulting from hedged foreign currency transactions, which offset the related increase in revenue from currency fluctuations. These losses will be reclassified from accumulated other comprehensive income to revenue in the period the related transactions are recognized as revenue. These obligations are anticipated to be recognized as revenue over approximately the next six years. The Company estimates that about 60% of these obligations are expected to be recognized as revenue in the next 18 months, with the remainder thereafter. The Company’s previously announced contract to build the Frontier exascale system for the Oak Ridge National Laboratory, which is valued in excess of $500 million, is not included in the amounts above as it is subject to a Go/No-Go provision and is therefore not considered a performance obligation.
The Company’s revenue is presented on a disaggregated basis in “Note 13-Segment Information” in the Notes to Condensed Consolidated Financial Statements in this quarterly report on Form 10-Q.


13



Note 3— Fair Value Measurement
Based on the observability of the inputs used in the valuation techniques used to determine the fair value of certain financial assets and liabilities, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values.
In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. The following table presents information about the Company’s financial assets that have been measured at fair value as of June 30, 2019, and indicates the level within the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands):
Description
 
Fair Value
as of
June 30,
2019
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
Assets:
 
 
 
 
 
 
Cash, cash equivalents and restricted cash
 
$
165,152

 
$
165,152

 
$

Foreign currency exchange contracts (1)
 
2,400

 

 
2,400

  Assets measured at fair value at June 30, 2019
 
$
167,552

 
$
165,152

 
$
2,400

Liabilities:
 
 
 
 
 
 
Foreign currency exchange contracts (2)
 
111

 
$

 
111

  Liabilities measured at fair value at June 30, 2019
 
$
111

 
$

 
$
111


(1)
Included in “Prepaid expenses and other current assets” and “Other non-current assets” on the Company’s Condensed Consolidated Balance Sheets.
(2)
Included in “Other accrued liabilities” and “Other non-current liabilities” on the Company’s Consolidated Balance Sheets.
Foreign Currency Derivatives
The Company may enter into foreign currency derivatives to hedge future cash receipts on certain sales transactions that are payable in foreign currencies.
As of June 30, 2019 and December 31, 2018, the Company had outstanding foreign currency exchange contracts that were designated and accounted for as cash flow hedges of anticipated future cash receipts on sales contracts payable in foreign currencies. The outstanding notional amounts were approximately (in millions):
 
 
June 30,
2019
 
December 31, 2018
Canadian Dollars (CAD)
 
6.5

 
54.4

Japanese Yen (JPY)
 
711.5

 

Singapore Dollars (SGD)
 
1.8

 


The Company had hedged foreign currency exposure related to these designated cash flow hedges of approximately $12.9 million as of June 30, 2019 and $41.6 million as of December 31, 2018.

14



As of June 30, 2019 and December 31, 2018, the Company had outstanding foreign currency exchange contracts that had been dedesignated for the purposes of hedge accounting treatment. The Company dedesignates cash flow hedges when the receivable related to the hedged cash flow is recorded. The outstanding notional amounts were approximately (in millions):
 
June 30,
2019
 
December 31, 2018
British Pounds (GBP)
13.1

 
24.8

Canadian Dollars (CAD)
47.9

 

Korean Won (KRW)

 
4,446.5

Singapore Dollars (SGD)

 
2.0


The foreign currency exposure related to these contracts was approximately $55.8 million as of June 30, 2019 and $40.6 million as of December 31, 2018. Unrealized gains or losses related to these dedesignated contracts are recorded in other expense in the Condensed Consolidated Statements of Operations and are generally offset by foreign currency adjustments on related receivables. These foreign currency exchange contracts are considered to be economic hedges.
Cash receipts associated with the foreign currency exchange contracts are expected to be received from 2019 through 2022, during which time the revenue on the associated sales contracts is expected to be recognized, or in the case of receivables denominated in a foreign currency, the receivables balances will be collected. Any gain or loss on hedged foreign currency will be recognized at the time of customer acceptance, or in the case of receivables denominated in a foreign currency, over the period during which hedged receivables denominated in a foreign currency are outstanding.
Fair values of derivative instruments designated as cash flow hedges (in thousands):
Balance Sheet Location
 
Fair Value
as of
June 30,
2019
 
Fair Value
as of
December 31,
2018
Prepaid expenses and other current assets
 
$

 
$
1,296

Other non-current assets
 

 
137

Other accrued liabilities
 
(62
)
 

Other non-current liabilities
 
(6
)
 

Total fair value of derivative instruments designated as cash flow hedges
 
$
(68
)
 
$
1,433

Fair values of derivative instruments not designated as cash flow hedges (in thousands):
Balance Sheet Location
 
Fair Value
as of
June 30,
2019
 
Fair Value
as of
December 31,
2018
Prepaid expenses and other current assets
 
$
1,941

 
$
1,894

Other non-current assets
 
459

 
1,242

Accrued and other liabilities
 
(43
)
 
(63
)
Total fair value of derivative instruments not designated as cash flow hedges
 
$
2,357

 
$
3,073



15



The following table shows the impact on product revenue of foreign currency exchange contracts that were designated as cash flow hedges (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
Total amounts of product revenue presented in the condensed consolidated statement of operations in which the effects of cash flow hedges are recorded
 
$
29,924

 
$
83,379

 
$
64,082

 
127,833

Amount of gain (loss) recognized in other comprehensive income included in the assessment of effectiveness
 
(171
)
 
2,939

 
(1,020
)
 
2,183

Amount of loss reclassified from accumulated other comprehensive income to product revenue
 
(143
)
 
(633
)
 
(143
)
 
(1,109
)
Amount excluded from effectiveness testing recognized as an increase in product revenue based on changes in fair value
 
63

 

 
119

 

Amount excluded from effectiveness testing recognized in earnings based on an amortization approach
 
6

 

 
6

 


The following table shows the impact on other expense of losses on foreign currency exchange contracts that were not designated as cash flow hedges. These amounts increased other income for all periods presented (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
Other income, net
 
$
442

 
$
3,501

 
$
16

 
$
1,590


Note 4— Accumulated Other Comprehensive Income
The following table shows the impact on product revenue of reclassification adjustments from accumulated other comprehensive income resulting from hedged foreign currency transactions recorded by the Company for the three and six months ended June 30, 2019 and 2018 (in thousands). The reclassification adjustments decreased product revenue for the three and six months ended June 30, 2019 and 2018.
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
Gross of tax reclassifications
 
$
(143
)
 
$
(633
)
 
$
(143
)
 
$
(1,109
)
Net of tax reclassifications
 
$
(143
)
 
$
(633
)
 
$
(143
)
 
$
(1,109
)


The following tables show the changes in accumulated other comprehensive income by component for the three and six months ended June 30, 2019 and 2018 (in thousands):
Three Months Ended June 30, 2019
 
 
Foreign Currency Translation Adjustments
 
Unrealized Gain on Cash Flow Hedges
 
Accumulated Other Comprehensive Income
Beginning balance
 
$
1,024

 
$
1,331

 
$
2,355

Current-period change, net of tax
 
(52
)
 
(769
)
 
(821
)
Ending balance
 
$
972

 
$
562

 
$
1,534

 
 
 
 
 
 
 
Income tax expense (benefit) associated with current-period change
 
$

 
$

 
$


16



Three Months Ended June 30, 2018
 
 
Unrealized Loss on Investments
 
Foreign Currency Translation Adjustments
 
Unrealized Gain (Loss) on Cash Flow Hedges
 
Accumulated Other Comprehensive Income
Beginning balance
 
$
(9
)
 
$
1,637

 
$
(1,445
)
 
183

Current-period change, net of tax
 
9

 
(1,185
)
 
2,939

 
1,763

Ending balance
 
$

 
$
452

 
$
1,494

 
$
1,946

 
 
 
 
 
 
 
 
 
Income tax expense (benefit) associated with current-period change
 
$

 
$

 
$

 
$

Six Months Ended June 30, 2019
 
 
Foreign Currency Translation Adjustments
 
Unrealized Gain on Cash Flow Hedges
 
Accumulated Other Comprehensive Income
Beginning balance
 
$
606

 
$
2,602

 
$
3,208

Current-period change, net of tax
 
156

 
(1,618
)
 
(1,462
)
Reclassification of stranded tax effects resulting from adoption of ASU 2018-02
 
210

 
(422
)
 
(212
)
Ending balance
 
$
972

 
$
562

 
$
1,534

 
 
 
 
 
 
 
Income tax expense (benefit) associated with current-period change
 
$

 
$

 
$

Six Months Ended June 30, 2018
 
 
Unrealized Loss on Investments
 
Foreign Currency Translation Adjustments
 
Unrealized Gain (Loss) on Cash Flow Hedges
 
Accumulated Other Comprehensive Income
Beginning balance
 
$
(7
)
 
$
1,611

 
$
(689
)
 
$
915

Current-period change, net of tax
 
7

 
(1,159
)
 
2,183

 
1,031

Ending balance
 
$

 
$
452

 
$
1,494

 
$
1,946

 
 
 
 
 
 
 
 
 
Income tax expense (benefit) associated with current-period change
 
$

 
$

 
$

 
$



Note 5— Loss Per Share ("EPS")
Basic EPS is computed by dividing net loss available to common shareholders by the weighted average number of common shares, excluding unvested restricted stock, outstanding during the period. Diluted EPS is computed by dividing net loss available to common shareholders by the weighted average number of common and potential common shares outstanding during the period, which includes the additional dilution related to conversion of stock options, unvested restricted stock and unvested restricted stock units as computed under the treasury stock method.
For the three and six months ended June 30, 2019 and 2018, outstanding stock options, unvested restricted stock and unvested restricted stock units were antidilutive because of the net losses and, as such, their effect has not been included in the calculation of diluted EPS. For the three and six months ended June 30, 2019, potential gross common shares of 3.1 million, were antidilutive and not included in computing diluted EPS. For the three and six months ended June 30, 2018, potential gross common shares of and 3.0 million, were antidilutive and not included in computing diluted EPS. An additional 0.5 million performance vesting restricted stock and performance vesting restricted stock units were excluded from the computation of potential common shares for each of the three and six months ended June 30, 2019 and 2018, because the conditions for vesting had not been met as of the balance sheet date.

17



Note 6— Accounts and Other Receivables, Net
Net accounts and other receivables consisted of the following (in thousands):
 
 
June 30,
2019
 
December 31, 2018
Trade accounts receivable
 
$
49,285

 
$
63,414

Current contract assets
 
4,003

 
4,391

Advance billings
 
2,924

 
1,832

Short-term investment in sales-type lease
 
12,607

 
12,462

Other receivables
 
7,699

 
6,708

 
 
76,518

 
88,807

Allowance for doubtful accounts
 
(17
)
 
(988
)
Accounts and other receivables, net
 
$
76,501

 
$
87,819


Contract assets represent amounts where the Company has recognized revenue in advance of the contractual billing terms. Advance billings represent billings made based on contractual terms for which revenue has not been recognized.
As of June 30, 2019 and December 31, 2018, accounts receivable included $12.0 million and $25.6 million, respectively, that resulted from sales to the U.S. government and system acquisitions primarily funded by the U.S. government (“U.S. Government”). Of these amounts, $2.4 million and $1.5 million were unbilled and included in contract assets as of June 30, 2019 and December 31, 2018, respectively, based upon contractual billing arrangements with these customers. As of June 30, 2019, two non-U.S. Government customer accounted for 35% of total accounts and other receivables. As of December 31, 2018, two non-U.S. Government customers accounted for 28% of total accounts and other receivables.

Note 7— Leases
The Company leases certain equipment and facilities used in operations under operating leases in its normal course of business. The Company’s leases have remaining lease terms of 1 to 11 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within 1 to 5 years. The exercise of these options is at the Company’s sole discretion. The Company has not included these options to extend or terminate in its calculation of right-of-use assets or lease liabilities as it is not reasonably certain to exercise these options.
The Company’s lease agreements do not contain any residual value guarantees, material restrictions or covenants.
Operating lease cost for the three and six months ended June 30, 2019 was $1.9 million and $3.7 million, respectively.
The Company has elected the practical expedient for short-term leases. Operating lease cost for the Company’s short-term leases for the three and six months ended June 30, 2019 was immaterial.
Supplemental cash flow information related to operating leases for the three and six months ended June 30, 2019 was as follows (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2019
Cash paid for amounts included in the measurement of operating lease liabilities:
 
$
2,081

 
$
4,119

Operating right-of-use assets obtained in exchange for lease obligations:
 
$
116

 
$
465



18



Supplemental balance sheet information related to operating leases as of June 30, 2019 was as follows (in thousands, except lease term and discount rate):
 
 
June 30,
2019
Operating lease right-of-use assets
 
$
32,656

 
 
 
Current portion of operating lease liabilities, included in accrued and other liabilities
 
$
4,664

Long-term operating lease liabilities
 
39,845

Total operating lease liabilities
 
$
44,509

 
 
 
Weighted average remaining lease term (in years):
 
8.72

Weighted average discount rate (1):
 
6.76
%
(1)
Where the Company could not determine the rate inherent in the lease, its incremental borrowing rate was calculated using LIBOR plus a spread for similar companies.
As of June 30, 2019, maturities of operating lease liabilities were as follows (in thousands):
2019 (less than 1 year)
 
$
4,143

2020
 
8,184

2021
 
7,979

2022
 
7,628

2023
 
6,731

Thereafter
 
30,046

Total lease payments
 
64,711

Less: interest
 
(20,202
)
Present value of lease liabilities
 
$
44,509


Sales-type Lease
The Company has a sales-type lease with one non-U.S. Government customer, under which it receives quarterly payments over the term of the lease, which expires in September 2020. The lease is denominated in British Pounds and the Company has entered into certain foreign currency exchange contracts that act as an economic hedge for the foreign currency exposure associated with this arrangement.
Interest income for the sales-type lease for the three and six months ended June 30, 2019 was $0.1 million and $0.3 million, respectively.
The following table shows the components of the net investment in the sales-type lease as of June 30, 2019 and December 31, 2018 (in thousands):
 
 
June 30,
2019
 
December 31, 2018
Total minimum lease payments to be received
 
$
18,169

 
$
25,543

Less: executory costs
 
(2,123
)
 
(2,985
)
Net minimum lease payments receivable
 
16,046

 
22,558

Less: unearned income
 
(242
)
 
(510
)
Net investment in sales-type lease
 
15,804

 
22,048

Less: long-term investment in sales-type lease included in other non-current assets
 
(3,197
)
 
(9,586
)
Investment in sales-type lease included in accounts and other receivables
 
$
12,607

 
$
12,462



19



As of June 30, 2019, minimum lease payments related to our sales-type lease for each of the succeeding two fiscal years are as follows (in thousands):
2019 (less than 1 year)
 
$
7,274

2020
 
10,895

Total minimum lease payments to be received
 
$
18,169



Note 8— Inventory
Inventory consisted of the following (in thousands):
 
 
June 30,
2019
 
December 31, 2018