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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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:  1-36254
__________________
Avid Technology, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
 
04-2977748
(I.R.S. Employer
Identification No.)
 
75 Network Drive
Burlington, Massachusetts  01803
(Address of Principal Executive Offices, Including Zip Code)

(978) 640-6789
(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 under the Exchange Act.
 
Large Accelerated Filer ¨
Non-accelerated Filer ¨

 
Accelerated Filer x
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 under the Exchange Act).  Yes ¨   No x

Securities registered pursuant to Section 12(b) of the Exchange Act:
 
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
 
Common Stock,
$.01
par value
 
AVID
 
Nasdaq Global Select Market
The number of shares outstanding of the registrant’s Common Stock, as of May 1, 2019, was 42,415,714.




AVID TECHNOLOGY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019

TABLE OF CONTENTS
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Form 10-Q”) includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained in this Form 10-Q that relate to future results or events are forward-looking statements. Forward-looking statements may be identified by use of forward-looking words, such as “anticipate,” “believe,” “confidence,” “could,” “estimate,” “expect,” “feel,” “intend,” “may,” “plan,” “should,” “seek,” “will” and “would,” or similar expressions.

Forward-looking statements may involve subjects relating to, among others, the following:

our ability to successfully implement our strategy, including our cost saving strategies;

the anticipated trends and developments in our markets and the success of our products in these markets;

our ability to develop, market and sell new products and services;

our business strategies and market positioning;

our ability to achieve our goal of expanding our market positions;

our ability to accelerate growth of our Cloud-enabled platform;

anticipated trends relating to our sales, financial condition or results of operations, including our shift to a recurring revenue model and complex enterprise sales with long sales cycles;

the expected timing of recognition of revenue backlog as revenue, and the timing of recognition of revenues from subscription offerings;

our ability to successfully consummate acquisitions or investment transactions and successfully integrate acquired businesses;

our anticipated benefits and synergies from, and the anticipated financial impact of, any acquired business;

the anticipated performance of our products;

changes in inventory levels;

plans regarding repatriation of foreign earnings;

the outcome, impact, costs and expenses of any litigation or government inquiries to which we are or become subject;

the effect of the continuing worldwide macroeconomic uncertainty on our business and results of operations, including Brexit;

our compliance with covenants contained in the agreements governing our indebtedness;

our ability to service our debt and meet the obligations thereunder, including our ability to satisfy our conversion and repurchase obligations under our convertible notes due 2020;

our ability to refinance our convertible notes due 2020 through our pending tender offer or other means;

seasonal factors;

fluctuations in foreign exchange and interest rates;





the risk of restatement of our financial statements;

estimated asset and liability values and amortization of our intangible assets;

our capital resources and the adequacy thereof; and

worldwide political uncertainty, in particular the risk that the United States may withdraw from or materially modify NAFTA or other international trade agreements, and the effects of such actions on our supply chain, results of operations and financial condition.

Actual results and events in future periods may differ materially from those expressed or implied by forward-looking statements in this Form 10-Q. There are a number of factors that could cause actual events or results to differ materially from those indicated or implied by forward-looking statements, many of which are beyond our control, including the risk factors discussed herein and in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018, in Part II and in other documents we file from time to time with the U.S. Securities and Exchange Commission (“SEC”). In addition, the forward-looking statements contained in this Form 10-Q represent our estimates only as of the date of this filing and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update these forward-looking statements in the future, we specifically disclaim any obligation to do so, whether to reflect actual results, changes in assumptions, changes in other factors affecting such forward-looking statements or otherwise.

We own or have rights to trademarks and service marks that we use in connection with the operation of our business.  “Avid” is a trademark of Avid Technology, Inc.  Other trademarks, logos, and slogans registered or used by us and our subsidiaries in the United States and other countries include, but are not limited to, the following: Avid NEXIS, AirSpeed, EUCON, MediaCentral, Media Composer, Pro Tools and Sibelius. Other trademarks appearing in this Form 10-Q are the property of their respective owners.






PART I - FINANCIAL INFORMATION

ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data, unaudited)
 
Three Months Ended
 
March 31,
 
2019
 
2018
Net revenues:
 
 
 
Products
$
54,396

 
$
46,410

Services
48,923

 
51,527

Total net revenues
103,319

 
97,937



 

Cost of revenues:
 
 
 
Products
27,600

 
26,295

Services
12,487

 
13,985

Amortization of intangible assets
1,950

 
1,950

Total cost of revenues
42,037

 
42,230

Gross profit
61,282

 
55,707



 

Operating expenses:
 
 
 
Research and development
16,285

 
15,685

Marketing and selling
24,878

 
26,132

General and administrative
13,788

 
13,955

Amortization of intangible assets
363

 
363

Restructuring costs, net
558

 
2,907

Total operating expenses
55,872

 
59,042




 


Operating income (loss)
5,410

 
(3,335
)



 


Interest and other expense, net
(5,185
)
 
(5,359
)
Income (loss) before income taxes
225

 
(8,694
)
Provision for income taxes
438

 
255

Net loss
$
(213
)
 
$
(8,949
)

 
 
 
Net loss per common share – basic and diluted
$(0.01)
 
$(0.22)

 
 
 
Weighted-average common shares outstanding – basic and diluted
42,046

 
41,404

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

1



AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands, unaudited)
 
Three Months Ended
 
March 31,
 
2019
 
2018
Net loss
$
(213
)
 
$
(8,949
)
 
 
 
 
Other comprehensive (loss) income:
 
 
 
Foreign currency translation adjustments
(548
)
 
1,148

 
 
 
 
Comprehensive loss
$
(761
)
 
$
(7,801
)
   
The accompanying notes are an integral part of the condensed consolidated financial statements.



2



AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, unaudited)
 
March 31,
2019

December 31,
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
55,326


$
56,103

Restricted cash
9,020


8,500

Accounts receivable, net of allowances of $1,339 and $1,339 at March 31, 2019 and December 31, 2018, respectively.
61,318


67,754

Inventories
34,328


32,956

Prepaid expenses
11,985


8,853

Contract assets
18,677


16,513

Other current assets
6,685


5,917

Total current assets
197,339


196,596

Property and equipment, net
20,918


21,582

Intangible assets, net
2,120


4,432

Goodwill
32,643


32,643

Right of use assets
36,031



Long-term deferred tax assets, net
1,163


1,158

Other long-term assets
9,456


9,432

Total assets
$
299,670


$
265,843

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
38,438


$
39,239

Accrued compensation and benefits
24,727


21,967

Accrued expenses and other current liabilities
41,402


37,547

Income taxes payable
2,088


1,853

Short-term debt
1,405


1,405

Deferred revenue
87,927


85,662

Total current liabilities
195,987


187,673

Long-term debt
218,201


220,590

Long-term deferred revenue
13,361


13,939

Long-term lease liabilities
33,817



Other long-term liabilities
5,391


10,302

Total liabilities
466,757


432,504

 
 
 
 
Commitments and contingencies (Note 8)

 

 
 
 
 
Stockholders’ deficit:



Common stock
423


423

Additional paid-in capital
1,024,028


1,028,924

Accumulated deficit
(1,187,223
)

(1,187,010
)
Treasury stock at cost


(5,231
)
Accumulated other comprehensive loss
(4,315
)

(3,767
)
Total stockholders’ deficit
(167,087
)

(166,661
)
Total liabilities and stockholders’ deficit
$
299,670


$
265,843

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


3



AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
(in thousands, unaudited)

 
Shares of
Common Stock
 
 
Additional
 
 
Accumulated
Other
Total
 
Issued
In
Treasury
 
Common
Stock
Paid-in
Capital
Accumulated
Deficit
Treasury
Stock
Comprehensive
Income (Loss)
Stockholders’
Deficit
Balances at January 1, 2019
42,339

(391
)
 
423

1,028,924

(1,187,010
)
(5,231
)
(3,767
)
(166,661
)
 
 
 
 
 
 
 
 
 
 
Stock issued pursuant to employee stock plans


391

 
 
(6,612
)
 
5,231

 
(1,381
)
 
 
 
 
 
 
 
 
 
 
Stock-based compensation
 
 
 
 
1,738

 
 
 
1,738

 
 
 
 
 
 
 
 
 
 
Net loss
 
 
 
 
 
(213
)
 
 
(213
)
 
 
 
 
 
 
 
 
 
 
Other comprehensive loss
 
 
 
 
 
 
 
(548
)
(548
)
 
 
 
 
 
 
 
 
 
 
Partial retirement of convertible senior notes conversion feature
 
 
 
 
(23
)
 
 
 
(23
)
 
 
 
 
 
 
 
 
 
 
Partial unwind capped call cash receipt
 
 
 
 
1

 
 
 
1

 
 
 
 
 
 
 
 
 
 
Balances at March 31, 2019
42,339


 
423

1,024,028

(1,187,223
)

(4,315
)
(167,087
)

 
Shares of
Common Stock
 
 
Additional
 
 
Accumulated
Other
Total
 
Issued
In
Treasury
 
Common
Stock
Paid-in
Capital
Accumulated
Deficit
Treasury
Stock
Comprehensive
Income (Loss)
Stockholders’
Deficit
Balances at January 1, 2018
42,339

(983
)
 
423

1,035,808

(1,284,703
)
(17,672
)
(2,426
)
(268,570
)
 
 
 
 
 
 
 
 
 
 
Cumulative-effect adjustment due to adoption of ASC Topic 606

 
 
 
 
 
104,550

 
 
104,550

 
 
 
 
 
 
 
 
 
 
Stock issued pursuant to employee stock plans
 
127

 
 
(3,649
)
 
3,158

 
(491
)
 
 
 
 
 
 
 
 
 
 
Stock-based compensation
 
 
 
 
703

 
 
 
703

 
 
 
 
 
 
 
 
 
 
Net loss
 
 
 
 
 
(8,949
)
 
 
(8,949
)
 
 
 
 
 
 
 
 
 
 
Other comprehensive loss
 
 
 
 
 
 
 
1,148

1,148

 
 
 
 
 
 
 
 
 
 
Partial retirement of convertible senior notes conversion feature
 
 
 
 
(22
)
 
 
 
(22
)
 
 
 
 
 
 
 
 
 
 
Partial unwind capped call cash receipt
 
 
 
 
2

 
 
 
2

 
 
 
 
 
 
 
 
 
 
Balances at March 31, 2018
42,339

(856
)
 
423

1,032,842

(1,189,102
)
(14,514
)
(1,278
)
(171,629
)

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


4



AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
 
Three Months Ended
 
March 31,
 
2019
 
2018
Cash flows from operating activities:
 

 
Net loss
$
(213
)

$
(8,949
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
Depreciation and amortization
4,740


5,674

(Recovery from) provision for doubtful accounts
(9
)

57

Stock-based compensation expense
1,738


703

Non-cash interest expense
3,359


3,546

Unrealized foreign currency transaction (gains) losses
(586
)

1,323

Benefit from deferred taxes
(1
)

(2
)
Changes in operating assets and liabilities:
 

 
Accounts receivable
6,444


8,596

Inventories
(1,372
)

(482
)
Prepaid expenses and other assets
(3,861
)

(396
)
Accounts payable
(810
)

(2,112
)
Accrued expenses, compensation and benefits and other liabilities
(2,837
)

(1,355
)
Income taxes payable
261


190

Deferred revenue and contract assets
(477
)

(1,423
)
Net cash provided by operating activities
6,376


5,370



 

Cash flows from investing activities:
 

 
Purchases of property and equipment
(1,767
)

(2,080
)
Increase in other long-term assets


(8
)
Net cash used in investing activities
(1,767
)

(2,088
)




Cash flows from financing activities:
 

 
Repayment of debt
(3,928
)

(3,212
)
Proceeds from the issuance of common stock under employee stock plans
309


6

Common stock repurchases for tax withholdings for net settlement of equity awards
(1,690
)

(497
)
Partial retirement of the Notes conversion feature and capped call option unwind
(22
)
 
(20
)
Net cash used in financing activities
(5,331
)

(3,723
)






Effect of exchange rate changes on cash, cash equivalents and restricted cash
(55
)

15

Net decrease in cash, cash equivalents and restricted cash
(777
)

(426
)
Cash, cash equivalents and restricted cash at beginning of period
68,094


60,433

Cash, cash equivalents and restricted cash at end of period
$
67,317


$
60,007

Supplemental information:





Cash and cash equivalents
$
55,326


$
48,016

Restricted cash
9,020


8,500

Restricted cash included in other long-term assets
2,971


3,491

Total cash, cash equivalents and restricted cash shown in the statement of cash flows
$
67,317


$
60,007

 
 
 
 
Cash paid (refunded) for income taxes
$
203

 
$
(2,469
)
Cash paid for interest
$
2,041

 
$
1,919

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


5



AVID TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.
FINANCIAL INFORMATION

The accompanying condensed consolidated financial statements include the accounts of Avid Technology, Inc. and its wholly owned subsidiaries (collectively, “we” or “our”). These financial statements are unaudited. However, in the opinion of management, the condensed consolidated financial statements reflect all normal and recurring adjustments necessary for their fair statement. Interim results are not necessarily indicative of results expected for any other interim period or a full year. We prepared the accompanying unaudited condensed consolidated financial statements in accordance with the instructions for Form 10-Q and, therefore, include all information and footnotes necessary for a complete presentation of operations, comprehensive income (loss), financial position, changes in stockholders’ deficit and cash flows in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying condensed consolidated balance sheet as of December 31, 2018 was derived from our audited consolidated financial statements and does not include all disclosures required by U.S. GAAP for annual financial statements. We filed audited consolidated financial statements as of and for the year ended December 31, 2018 in our Annual Report on Form 10-K for the year ended December 31, 2018, which included information and footnotes necessary for such presentation. The financial statements contained in this Form 10-Q should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2018.

Our preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from our estimates.

Subsequent Events

On April 8, 2019, we entered into an amendment to our existing agreement (the “Financing Agreement”) with Cerberus Business Finance, LLC, as collateral and administrative agent, and the lenders party thereto. The amendment provides for an additional delayed draw term loan commitment in the aggregate principal amount of $100 million (the “Delayed Draw Funds”), which may be used to fund the purchase of our 2.00% Senior Convertible Notes due 2020 (the “Notes”). On May 2, 2019, we received the Delayed Draw Funds under the Financing Agreement. The Delayed Draw Funds will remain available to us to purchase Notes for a period of 90 calendar days. At the end of such 90-day period, any remaining Delayed Draw Funds that have not been used to purchase Notes must be repaid and no further funds will be available to borrow under the commitment. Any Delayed Draw Funds drawn and used to fund the purchase of the Notes will mature on May 10, 2023, the current maturity date under the Financing Agreement. Under the terms of the amendment, interest accrues on the Delay Draw Funds and the existing outstanding borrowings under the Financing Agreement at a rate of either the LIBOR Rate (as defined in the Financing Agreement) plus 6.25% or a Reference Rate (as defined in the Financing Agreement) plus 5.25%, at our option.

For a more detailed description of the amendment, see our Form 8-K filed with the Securities and Exchange Commission on April 11, 2019.

Significant Accounting Policies - Revenue Recognition

We enter into contracts with customers that include various combinations of products and services, which are typically capable of being distinct and are accounted for as separate performance obligations. We account for a contract when (i) it has approval and commitment from both parties, (ii) the rights of the parties have been identified, (iii) payment terms have been identified, (iv) the contract has commercial substance and (v) collectability is probable. We recognize revenue upon transfer of control of promised products or services to customers, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts, in an amount that reflects the consideration we expect to receive in exchange for those products or services.



6



We often enter into contractual arrangements that have multiple performance obligations, one or more of which may be delivered subsequent to the delivery of other performance obligations. These arrangements may include a combination of products, support, training and professional services. We allocate the transaction price of the arrangement based on the relative estimated standalone selling price of each distinct performance obligation.

See Note 10 for disaggregated revenue schedules and further discussion on revenue and deferred revenue performance obligations and the timing of revenue recognition.

Recently Adopted Accounting Pronouncements

On January 1, 2019, we adopted ASC Topic 842, Leases (“ASC 842”) using the modified retrospective transition approach, as provided by ASU No. 2018-11, Leases - Targeted Improvements (“ASU 2018-11”). We elected the package of practical expedients permitted under the transition guidance. Results for reporting periods beginning after January 1, 2019 are presented under ASC 842, while prior periods have not been adjusted and continue to be reported in accordance with our historic accounting under previous U.S. GAAP. The primary impact of ASC 842 is that substantially all of our leases are recognized on the balance sheet, by recording right-of-use assets and short-term and long-term lease liabilities. The new standard does not have a material impact on our consolidated statement of operations and cash flows, and the effects of applying ASC 842 as a cumulative-effect adjustment to retained earnings as of January 1, 2019 is immaterial.

A summary of the changes to balance sheet line items that resulted from the adoption of ASC 842 as of January 1, 2019 is as follows (in thousands):

 
As of January 1, 2019
 
As Previously Reported
 
Impact of Adoption of Topic 842
 
As Adjusted
Assets:
 
 
 
 
 
Property and equipment, net
$
21,582

 
$
256

 
$
21,838

Right of use assets
$

 
$
37,749

 
$
37,749

 
 
 

 

Liabilities:
 
 
 
 
 
Accrued expenses and other current liabilities
$
37,547

 
$
6,957

 
$
44,504

Long-term lease liabilities

 
35,694

 
35,694

Other long-term liabilities
$
10,302

 
$
(4,646
)
 
$
5,656




In accordance with guidance provided by the SEC staff, as of March 31, 2019, we began complying with expanded disclosure requirements under applicable SEC rules regarding the analysis of changes in stockholders' equity for interim financial statements.

2.
NET INCOME PER SHARE

Net (loss) income per common share is presented for both basic (loss) income per share (“Basic EPS”) and diluted (loss) income per share (“Diluted EPS”). Basic EPS is based on the weighted-average number of common shares outstanding during the period. Diluted EPS is based on the weighted-average number of common shares and common shares equivalents outstanding during the period.

The potential common shares that were considered anti-dilutive securities were excluded from the diluted earnings per share calculations for the relevant periods either because the sum of the exercise price per share and the unrecognized compensation cost per share was greater than the average market price of our common stock for the relevant periods, or because they were considered contingently issuable. The contingently issuable potential common shares result from certain stock options and restricted stock units granted to our employees that vest based on performance conditions, market conditions, or a combination of performance and market conditions.

When there is a loss from continuing operations, potential common shares should not be included in the computation of Diluted EPS because the exercise or conversion of any potential shares increases the number of shares in the denominator

7



and results in a lower loss per share. Therefore, all outstanding stock options and restricted stock units at March 31, 2019 and 2018 are anti-dilutive and not included in the EPS calculation. The following table sets forth (in thousands) potential common shares that were considered anti-dilutive securities at March 31, 2019 and 2018.
 
March 31, 2019
 
March 31, 2018
Options
772

 
2,262

Non-vested restricted stock units
2,881

 
3,172

Anti-dilutive potential common shares
3,653

 
5,434



We issued the Notes on June 15, 2015. The Notes are convertible into cash, shares of our common stock or a combination of cash and shares of common stock, at our election, based on an initial conversion rate, subject to adjustment. In connection with the offering of the Notes, we entered into a capped call transaction, or Capped Call, with a third party. We use the treasury stock method in computing the dilutive impact of the Notes. The Notes are convertible into shares of our common stock but our stock price as of March 31, 2019 and 2018 was less than the conversion price of $21.94 per share, and, therefore, the Notes are excluded from Diluted EPS. The Capped Call is not reflected in diluted net income per share as it will always be anti-dilutive.

3.
FAIR VALUE MEASUREMENTS

Assets Measured at Fair Value on a Recurring Basis

We measure deferred compensation investments on a recurring basis. As of March 31, 2019 and December 31, 2018, our deferred compensation investments were classified as either Level 1 or Level 2 in the fair value hierarchy. Assets valued using quoted market prices in active markets and classified as Level 1 are money market and mutual funds. Assets valued based on other observable inputs and classified as Level 2 are insurance contracts.

The following tables summarize our deferred compensation investments measured at fair value on a recurring basis (in thousands):
 
 
 
Fair Value Measurements at Reporting Date Using
 
March 31,
2019
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Financial assets:
 
 
 
 
 
 
 
Deferred compensation assets
$
1,430

 
$
312

 
$
1,118

 
$


 
 
 
Fair Value Measurements at Reporting Date Using
 
December 31, 2018
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Financial assets:
 
 
 
 
 
 
 
Deferred compensation assets
$
1,372

 
$
386

 
$
986

 
$



Financial Instruments Not Recorded at Fair Value

The carrying amounts of our other financial assets and liabilities including cash, accounts receivable, accounts payable and accrued liabilities approximate their respective fair values because of the relatively short period of time between their origination and their expected realization or settlement. As of March 31, 2019, the net carrying amount of the Notes was $95.6 million, and the fair value of the Notes was approximately $96.7 million based on open market trading activity, which constitutes a Level 1 input in the fair value hierarchy.

8




4.
INVENTORIES

Inventories consisted of the following (in thousands):
 
March 31, 2019
 
December 31, 2018
Raw materials
$
11,253

 
$
10,520

Work in process
486

 
527

Finished goods
22,589

 
21,909

Total
$
34,328

 
$
32,956



As of March 31, 2019 and December 31, 2018, finished goods inventory included $2.0 million and $2.1 million, respectively, associated with products shipped to customers and deferred labor costs for arrangements where revenue recognition had not yet commenced.

5.
INTANGIBLE ASSETS AND GOODWILL

Amortizing identifiable intangible assets related to our acquisitions or capitalized costs of internally developed or externally purchased software that form the basis for our products consisted of the following (in thousands):
 
March 31, 2019
 
December 31, 2018
 
 Gross
 
Accumulated Amortization
 
 Net
 
 Gross
 
Accumulated Amortization
 
Net
Completed technologies and patents
$
58,212

 
$
(56,424
)
 
$
1,788

 
$
58,246

 
$
(54,508
)
 
$
3,738

Customer relationships
54,947

 
(54,615
)
 
332

 
54,986

 
(54,292
)
 
694

Trade names
1,346

 
(1,346
)
 

 
1,346

 
(1,346
)
 

Capitalized software costs
4,911

 
(4,911
)
 

 
4,911

 
(4,911
)
 

Total
$
119,416

 
$
(117,296
)
 
$
2,120

 
$
119,489

 
$
(115,057
)
 
$
4,432

Amortization expense related to intangible assets in the aggregate was $2.3 million for the three months ended March 31, 2019 and 2018. We expect amortization of intangible assets to be $2.1 million for the remainder of 2019.

The acquisition of Orad in 2015 resulted in goodwill of $32.6 million as of March 31, 2019 and December 31, 2018.

6.    LEASES

We have entered into a number of facility leases to support our research and development activities, sales operations and other corporate and administrative functions in North America, Europe, and Asia, which qualify as operating leases under U.S. GAAP. We also have a limited number of equipment leases that also qualify as operating leases. We determine if contracts with vendors represent a lease or have a lease component under U.S. GAAP at contract inception. We do not have any finance leases as of March 31, 2019. Our leases have remaining terms of one year to ten years. Some of our leases include options to extend or terminate the lease prior to the end of the agreed upon lease term. For purposes of calculating lease liabilities, lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise such options.

Operating lease right of use assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the lease commencement date. As our leases generally do not provide an implicit rate, we use an estimated incremental borrowing rate in determining the present value of future payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular location and currency environment. We used an average incremental borrowing rate of 6% as of January 1, 2019, the adoption date of ASC 842, for our leases that commenced prior to that date. The operating leases are included in the caption “Right of use assets”,

9



“Accrued expenses and other current liabilities”, and “Long-term lease liabilities” on our condensed consolidated balance sheets as of March 31, 2019.

The weighted-average remaining lease term of our operating leases is 7.1 years as of March 31, 2019. Lease costs for minimum lease payments is recognized on a straight-line basis over the lease term. Our total lease costs were $2.5 million and related cash payments were $2.4 million for the three months ended March 31, 2019. Lease costs are included within research and development, marketing and selling, and general and administrative lines on the condensed consolidated statements of operations, and the related cash payments were included in the operating cash flows on the condensed consolidated statements of cash flows. Short-term lease costs, variable lease costs and sublease income are not material.

The table below reconciles the undiscounted future minimum lease payments under non-cancellable leases with terms of more than one year to the total lease liabilities recognized on the condensed consolidated balance sheets as of March 31, 2019 (in thousands):
Year Ending December 31,
Operating Leases
2019 (excluding three months ended March 31, 2019)
$
7,301

2020
8,877

2021
6,298

2022
5,533

2023
4,309

Thereafter
19,034

Total future minimum lease payments
$
51,352

Less effects of discounting
(10,083
)
Total lease liabilities

$
41,269

 
 
Reported as of March 31, 2019
 
Accrued expenses and other current liabilities
$
7,452

Long-term lease liabilities
33,817

Total lease liabilities

$
41,269



The future minimum lease commitments under non-cancelable leases at December 31, 2018 were as follows (in thousands):
Year Ending December 31,
 
2019
$
11,225

2020
9,784

2021
6,850

2022
5,982

2023
4,754

Thereafter
20,040

Total
$
58,635




10



7.
OTHER LONG-TERM LIABILITIES

Other long-term liabilities consisted of the following (in thousands):
 
March 31, 2019
 
December 31, 2018
Deferred rent
$

 
$
5,122

Accrued restructuring
159

 
188

Deferred compensation
4,839

 
4,992

Other
393

 

   Total
$
5,391

 
$
10,302



As disclosed in Note 1, $5.1 million of deferred rent liabilities was reclassified upon the adoption of ASC 842 on January 1, 2019 as we recorded our leases in the caption “Right of use assets”, “Accrued expenses and other current liabilities”, and “Long-term lease liabilities” on our condensed consolidated balance sheets as of March 31, 2019.

8.
COMMITMENTS AND CONTINGENCIES

Commitments

We entered into a long-term agreement to purchase a variety of information technology solutions from a third party in the second quarter of 2017, which included an unconditional commitment to purchase a minimum of $12.8 million of products and services over the initial three years of the agreement. We have purchased $6.1 million of products and services pursuant to this agreement as of March 31, 2019.

We have letters of credit that are used as security deposits in connection with our leased Burlington, Massachusetts office space. In the event of default on the underlying leases, the landlords would, at March 31, 2019, be eligible to draw against the letters of credit to a maximum of $1.3 million in the aggregate. The letters of credit are subject to aggregate reductions provided that we are not in default under the underlying leases and meet certain financial performance conditions. In no case will the letters of credit amounts for the Burlington leases be reduced to below $1.2 million in the aggregate throughout the lease periods.

We also have letters of credit in connection with security deposits for other facility leases totaling $1.0 million in the aggregate, as well as letters of credit totaling $1.4 million that otherwise support our ongoing operations. These letters of credit have various terms and expire during 2019 and beyond, while some of the letters of credit may automatically renew based on the terms of the underlying agreements.

We issued a letter of credit totaling $8.5 million to one of our sole-source suppliers in February 2018. The supplier is eligible to draw on the letter of credit in the event that we are insolvent or unable to pay on our purchase orders for certain key hardware components of our product. The letter of credit has been extended through February 2020 and may automatically renew based on the terms of the underlying agreement.

Virtually all of our letters of credit are collateralized by restricted cash included in the caption “Restricted cash” and “Other long-term assets” on our condensed consolidated balance sheets as of March 31, 2019.

Contingencies

Our industry is characterized by the existence of a large number of patents and frequent claims and litigation regarding patent and other intellectual property rights. In addition to the legal proceedings described above, we are involved in legal proceedings from time to time arising from the normal course of business activities, including claims of alleged infringement of intellectual property rights and contractual, commercial, employee relations, product or service performance, or other matters. We do not believe these matters will have a material adverse effect on our financial position or results of operations. However, the outcome of legal proceedings and claims brought against us is subject to significant uncertainty. Therefore, our financial position or results of operations may be negatively affected by the unfavorable
resolution of one or more of these proceedings for the period in which a matter is resolved. Our results could be materially adversely affected if we are accused of, or found to be, infringing third parties’ intellectual property rights.

Following the termination of our former Chairman and Chief Executive Officer on February 25, 2018, we received a notice alleging that we breached the former employee’s employment agreement. On April 16, 2019 we received an additional notice again alleging we breached the former employee’s employment agreement. While we intend to defend any claim vigorously, when and if a claim is actually filed, we are currently unable to estimate an amount or range of any reasonably possible losses that could occur as a result of this matter.

We consider all claims on a quarterly basis and based on known facts assess whether potential losses are considered reasonably possible, probable and estimable. Based upon this assessment, we then evaluate disclosure requirements and whether to accrue for such claims in our condensed consolidated financial statements. We record a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case.

At March 31, 2019 and as of the date of filing of these condensed consolidated financial statements, we believe that, other than as set forth in this note, no provision for liability nor disclosure is required related to any claims because: (a) there is no reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claim, (b) a reasonably possible loss or range of loss cannot be estimated; or (c) such estimate is immaterial.

Additionally, we provide indemnification to certain customers for losses incurred in connection with intellectual property infringement claims brought by third parties with respect to our products. These indemnification provisions generally offer perpetual coverage for infringement claims based upon the products covered by the agreement and the maximum potential amount of future payments we could be required to make under these indemnification provisions is theoretically unlimited.  To date, we have not incurred material costs related to these indemnification provisions; accordingly, we believe the estimated fair value of these indemnification provisions is immaterial. Further, certain of our arrangements with customers include clauses whereby we may be subject to penalties for failure to meet certain performance obligations; however, we have not recorded any related material penalties to date.

We provide warranties on externally sourced and internally developed hardware. For internally developed hardware, and in cases where the warranty granted to customers for externally sourced hardware is greater than that provided by the manufacturer, we record an accrual for the related liability based on historical trends and actual material and labor costs. The following table sets forth the activity in the product warranty accrual account for the three months ended March 31, 2019 and 2018 (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Accrual balance at beginning of year
$
1,706

 
$
2,545

Accruals for product warranties
227

 
505

Costs of warranty claims
(338
)
 
(568
)
Accrual balance at end of period
$
1,595

 
$
2,482


The warranty accrual is included in the caption “accrued expenses and other current liabilities” in our condensed consolidated balance sheet.

9.
RESTRUCTURING COSTS AND ACCRUALS

In February 2016, we committed to a cost efficiency program that encompassed a series of measures intended to allow us to more efficiently operate in a leaner, more directed cost structure. These included reductions in our workforce, consolidation of facilities, transfers of certain business processes to lower cost regions, and reductions in other third-party services costs.


11



During the three months ended March 31, 2019, we recorded restructuring charges of $0.6 million related to employee severance cost adjustments.

During the three months ended March 31, 2018, we recorded restructuring charges of $2.9 million, of which $2.7 million related to facility restructuring cost adjustments and $0.2 million related to employee severance cost adjustments.
Restructuring Summary

The following table sets forth restructuring expenses recognized for the three months ended March 31, 2019 and 2018 (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Employee
$
535

 
$
168

Facility
5

 
2,690

Total facility and employee charges
540

 
2,858

Other
18

 
49

Total restructuring charges, net
$
558

 
$
2,907



The following table sets forth the activity in the restructuring accruals for the three months ended March 31, 2019 (in thousands):
 
Employee
 
Facility
 
Total
Accrual balance as of December 31, 2018
$
2,541

 
$
318

 
$
2,859

Restructuring charges and revisions
535

 
5

 
540

Accretion

 
4

 
4

Cash payments
(1,398
)
 
(39
)
 
(1,437
)
Foreign exchange impact on ending balance
(12
)
 
1

 
(11
)
Accrual balance as of March 31, 2019
$
1,666

 
$
289

 
$
1,955

Less: current portion
1,666

 
130

 
1,796

Long-term accrual balance as of March 31, 2019
$

 
$
159

 
$
159


The employee restructuring accrual at March 31, 2019 represents severance costs to former employees that will be paid out within 12 months, and is, therefore, included in the caption “accrued expenses and other current liabilities” in our condensed consolidated balance sheets as of March 31, 2019.

The facility restructuring accrual at March 31, 2019 represents contractual lease payments, net of actual or estimated sublease income, on space vacated as part of our restructuring actions. The leases, and payments against the amounts accrued, extend through 2026 unless we are able to negotiate earlier terminations. Of the total facility restructuring balance, $0.1 million is included in the caption “accrued expenses and other current liabilities” and $0.2 million is included in the caption “other long-term liabilities” in our condensed consolidated balance sheet as of March 31, 2019.

10.
REVENUE

Disaggregated Revenue and Geography Information

Through the evaluation of the discrete financial information that is regularly reviewed by the chief operating decision makers (our chief executive officer and chief financial officer), we have determined that we have one reportable segment. The following table is a summary of our revenues by type for the three months ended March 31, 2019 and 2018 (in thousands):

12



 
Three Months Ended March 31,
 
2019
 
2018
Products and solutions net revenues
54,396

 
46,410

Subscription services
9,282

 
8,465

Support services
32,019

 
33,760

Professional services, training and other services
7,622

 
9,302

Total net revenues
$
103,319

 
$
97,937


The following table sets forth our revenues by geographic region for the three months ended March 31, 2019 and 2018 (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Revenues:
 
 
 
United States
$
39,479

 
$
37,548

Other Americas
6,801

 
6,386

Europe, Middle East and Africa
37,153

 
40,763

Asia-Pacific
19,886

 
13,240

Total net revenues
$
103,319

 
$
97,937



Contract Asset

Contract asset activity for the three months ended March 31, 2019 was as follows (in thousands):
 
March 31, 2019
Contract asset at January 1, 2019
$
16,513

Revenue in excess of billings
7,086

Customer billings
(4,922
)
Contract asset at March 31, 2019

$
18,677

Less: long-term portion (recorded in other long-term assets)

Contract asset, current portion
$
18,677



Deferred Revenue

Deferred revenue activity for the three months ended March 31, 2019 was as follows (in thousands):
 
March 31, 2019
Deferred revenue at January 1, 2019
$
99,601

Billings deferred
30,369

Recognition of prior deferred revenue
(28,682
)
Deferred revenue at March 31, 2019
$
101,288



A summary of the significant performance obligations included in deferred revenue as of March 31, 2019 is as follows (in thousands):

13



 
March 31, 2019
Product
$
8,470

Subscription
993

Support Contracts
74,464

Implied PCS
15,237

Professional services, training and other
2,124

Deferred revenue at March 31, 2019
$
101,288



Remaining Performance Obligations

For transaction prices allocated to remaining performance obligations, we apply practical expedients and do not disclose quantitative or qualitative information for remaining performance obligations (i) that have original expected durations of one year or less and (ii) where we recognize revenue equal to what we have the right to invoice and that amount corresponds directly with the value to the customer of our performance to date.

Historically, for many of our products, we had an ongoing practice of making when-and-if-available software updates available to customers free of charge for a period of time after initial sales to customers. The expectation created by this practice of providing free Software Updates represents an implied obligation of a form of post-contract customer support (“Implied PCS”) which represents a performance obligation. While we have ceased providing Implied PCS on new product offerings, we continue to provide Implied PCS for older products that were predominately sold in prior years. Revenue attributable to Implied PCS performance obligations is recognized over time on a ratable basis over the period that Implied PCS is expected to be provided, which is typically six years. We have remaining performance obligations of $15.2 million attributable to Implied PCS recorded in deferred revenue as of March 31, 2019. We expect to recognize revenue for these remaining performance obligations of $5.0 million for the remainder of 2019 and $4.8 million, $2.9 million, $1.5 million and $1.0 million for the years ended December 31, 2020, 2021, 2022, and 2023, respectively.

As of March 31, 2019, we had approximately $57.6 million of transaction price allocated to remaining performance obligations for certain enterprise agreements that have not yet been fully invoiced. Approximately $55.3 million of these performance obligations were unbilled as of March 31, 2019. Remaining performance obligations represent obligations we must deliver for specific products and services in the future where there is not yet an enforceable right to invoice the customer. Our remaining performance obligations do not include contractually committed minimum purchases that are common in our strategic purchase agreements with resellers since our specific obligations to deliver products or services is not yet known, as customers may satisfy such commitments by purchasing an unknown combination of current or future product offerings. While the timing of fulfilling individual performance obligations under the contracts can vary dramatically based on customer requirements, we expect to recognize the $57.6 million in roughly equal installments through 2026.

Remaining performance obligation estimates are subject to change and are affected by several factors, including terminations due to contract breach, contract amendments and changes in the expected timing of delivery.


14



11.
LONG-TERM DEBT AND CREDIT AGREEMENT

Long-term debt consisted of the following (in thousands):
 
March 31, 2019
 
December 31, 2018
Term Loan, net of unamortized debt issuance costs of $2,465 at March 31, 2019 and $2,613 at December 31, 2018
$
122,641

 
$
122,811

Notes, net of unamortized original issue discount and debt issuance costs of $7,283 at March 31, 2019 and $9,022 at December 31, 2018, respectively
95,570

 
97,731

Other long-term debt
1,395

 
1,453

    Total debt
219,606

 
221,995

Less: current portion
1,405

 
1,405

Total long-term debt
$
218,201

 
$
220,590



The following table summarizes the maturities of our borrowing obligations as of March 31, 2019 (in thousands):

Fiscal Year
Term Loan
 
Notes
 
Other Long-Term Debt
 
Total
2019
$
956

 
$

 
$
97

 
$
1,053

2020
2,231

 
102,853

 
137

 
105,221

2021
4,781

 

 
147

 
4,928

2022
6,375

 

 
157

 
6,532

2023
110,763

 

 
168

 
110,931

Thereafter

 

 
689

 
689

Total before unamortized discount
125,106

 
102,853

 
1,395

 
229,354

Less: unamortized discount and issuance costs
2,465

 
7,283

 

 
9,748

Less: current portion of long-term debt
1,275

 

 
130

 
1,405

Total long-term debt
$
121,366

 
$
95,570

 
$
1,265

 
$
218,201


2.00% Convertible Senior Notes due 2020

On June 15, 2015, we issued $125.0 million aggregate principal amount of our Notes in an offering conducted in accordance with Rule 144A under the Securities Act of 1933. The Notes pay interest semi-annually on June 15 and December 15 of each year at an annual rate of 2.00% and mature on June 15, 2020, unless earlier repurchased or converted in accordance with their terms prior to such date. Total interest expense for the three months ended March 31, 2019 and 2018 was $1.9 million and $2.2 million, respectively, reflecting the coupon and accretion of the discount.

During 2017, we purchased 2,000 of our 125,000 outstanding Notes and settled $2.0 million of the Notes for $1.7 million in cash. We recorded $2.0 million extinguishment of debt, an immaterial amount of equity reacquisition, and an immaterial loss on the extinguishment of debt.

During 2018, we purchased an additional 16,247 of our 123,000 outstanding Notes and settled another $16.2 million of the Notes for $14.7 million in cash. We recorded $16.2 million extinguishment of debt, an immaterial amount of equity reacquisition, and an immaterial gain on the extinguishment of debt.

On January 22, 2019, we purchased an additional 3,900 of our 106,753 outstanding Notes and settled another $3.9 million of the Notes for $3.6 million in cash. We recorded $3.9 million extinguishment of debt, an immaterial amount of equity reacquisition, and an immaterial gain on the extinguishment of debt.


15



Term Loan and Credit Facility

On February 26, 2016, we entered into a Financing Agreement (the “Financing Agreement”) with Cerberus Business Finance, LLC, as collateral and administrative agent, and the lenders party thereto (the “Lenders”). The Lenders originally agreed to provide us with (a) a term loan in the aggregate principal amount of $100.0 million (the “Term Loan”), and (b) a revolving credit facility (the “Credit Facility”) of up to a maximum of $5.0 million in borrowings outstanding at any time. We granted a security interest on substantially all of our assets to secure the obligations under the Term Loan and the Credit Facility. The Term Loan requires us to use 50% of excess cash flow, as defined in the Financing Agreement, to repay outstanding principal of the loans under the Financing Agreement. The Financing Agreement contains customary representations and warranties, covenants, mandatory prepayments, and events of default under which our payment obligations may be accelerated.

On November 9, 2017, we entered into an amendment and borrowed an additional $15.0 million term loan and increased the amount available under the Credit Facility by $5.0 million.

On May 10, 2018, we entered into an amendment to the Financing Agreement, which extended the maturity of the Financing Agreement to May 2023, and increased the Term Loan by $22.7 million and the amount available under the Credit Facility by $12.5 million, for an aggregate amount available of $22.5 million. Under the terms of the amendment, aggregate quarterly principal repayments beginning September 30, 2018 through June 30, 2020 will be $318,750, then from July 1, 2020 through June 30, 2021 equal to $796,875, finally from July 1, 2021 through May 10, 2023 equal to $1,593,750.

There were no amounts outstanding under the Credit Facility as of March 31, 2019. We were in compliance with the Financing Agreement covenants as of March 31, 2019. We recorded $2.9 million and $2.3 million of interest expenses on the Term Loan for the three months ended March 31, 2019 and 2018, respectively.

On April 8, 2019, we entered into an amendment to the Financing Agreement. The amendment provides for an additional delayed draw term loan commitment in the aggregate principal amount of $100 million (the “Delayed Draw Funds”), which may be used to fund the purchase of our Notes. On May 2, 2019, we received the Delayed Draw Funds under the Financing Agreement. The Delayed Draw Funds will remain available to us to purchase Notes for a period of 90 calendar days. At the end of such 90-day period, any remaining Delayed Draw Funds that have not been used to purchase Notes must be repaid and no further funds will be available to borrow under the commitment. Any Delayed Draw Funds drawn and used to fund the purchase of the Notes will mature on May 10, 2023, the current maturity date under the Financing Agreement. Under the terms of the amendment, interest accrues on the Delay Draw Funds and the existing outstanding borrowings under the Financing Agreement at a rate of either the LIBOR Rate (as defined in the Financing Agreement) plus 6.25% or a Reference Rate (as defined in the Financing Agreement) plus 5.25%, at our option. The amendment also modified the covenant that requires us to maintain a leverage ratio based on the level of availability plus unrestricted cash on-hand. For a more detailed description of the amendment, see our Form 8-K filed with the Securities and Exchange Commission on April 11, 2019.

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12.    STOCKHOLDERS’ EQUITY

Stock-Based Compensation

Information with respect to option shares granted under all of our stock incentive plans for the three months ended March 31, 2019 was as follows:
 
Time-Based Shares
Performance-Based Shares
Total Shares
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic
Value
(in thousands)
Options outstanding at January 1, 2019
891,892


891,892

$8.46
 
 
Granted



$
 
 
Exercised
(41,250
)

(41,250
)
$7.34
 
 
Forfeited or canceled
(78,804
)

(78,804
)
$10.82
 
 
Options outstanding at March 31, 2019
771,838


771,838

$8.28
1.52
$18
Options vested at March 31, 2019 or expected to vest
 
 
771,838

$8.28
1.52
$18
Options exercisable at March 31, 2019
 
 
771,838

$8.28
1.52
$18


Information with respect to our non-vested restricted stock units for the three months ended March 31, 2019 was as follows:
 
Non-Vested Restricted Stock Units
 
Time-Based Shares
Performance-Based Shares
Total Shares
Weighted-
Average
Grant-Date
Fair Value
Weighted-
Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic
Value
(in thousands)
Non-vested at January 1, 2019
1,978,676

966,143

2,944,819

$4.91
 
 
Granted
434,147

411,043

845,190

$6.54
 
 
Vested
(221,555
)
(467,923
)
(689,478
)
$4.99
 
 
Forfeited
(79,639
)
(139,414
)
(219,053
)
$4.67
 
 
Non-vested at March 31, 2019
2,111,629

769,849

2,881,478

$5.39
1.25
$21,438
Expected to vest
 
 
2,682,950

$5.52
1.25
$19,961


Stock-based compensation was included in the following captions in our condensed consolidated statements of operations for the three months ended March 31, 2019 and 2018 (in thousands):
 
Three Months Ended March 31,
 
2019

2018
Cost of products revenues
$
51

 
$
19

Cost of services revenues
18

 
34

Research and development expenses
195

 
152

Marketing and selling expenses
294

 
360

General and administrative expenses
1,180

 
138

 
$
1,738

 
$
703



17



ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXECUTIVE OVERVIEW

Business Overview

We develop, market, sell, and support software and integrated solutions for video and audio content creation, management and distribution. We are a leading technology provider that powers the media and entertainment industry. We do this by providing an open and efficient platform for digital media, along with a comprehensive set of tools and workflow solutions. Our solutions are used in production and post-production facilities; film studios; network, affiliate, independent and cable television stations; recording studios; live-sound performance venues; advertising agencies; government and educational institutions; corporate communications departments; and by independent video and audio creative professionals, as well as aspiring professionals. Projects produced using our tools, platform and ecosystem include feature films, television programming, live events, news broadcasts, sports productions, commercials, music, video and other digital media content. With over one million creative users and thousands of enterprise clients relying on our technology platforms and solutions around the world, Avid enables the industry to thrive in today’s connected media and entertainment world.

Our mission is to empower media creators with innovative technology and collaborative tools to entertain, inform, educate and enlighten the world. Our clients rely on Avid to create the most prestigious and award-winning feature films, music recordings, television shows, live concerts, sporting events and news broadcasts. Avid has been honored for technological innovation with 16 Emmy Awards, one Grammy Award, two Oscars and the first ever America Cinema Editors Technical Excellence Award. In 2018, Avid was named the recipient of the prestigious Philo T. Farnsworth Award by the Television Academy, to honor Avid’s 30 years of continuous, transformative technology innovations, including products that have improved and accelerated the entire editing and post production process for television. Our creative tools and workflow solutions were used in all 2019 Oscar nominated films for Best Film Editing, Best Sound Editing, Best Sound Mixing, and Best Picture.

Operations Overview

Our strategy for connecting creative professionals and media enterprises with audiences in a powerful, efficient, collaborative, and profitable way leverages our Avid MediaCentral Platform - the open, extensible, and customizable foundation that streamlines and simplifies content workflows by integrating all Avid or third-party products and services that run on top of it. The platform provides secure and protected access, and enables fast and easy creation, delivery and monetization of content.

We work to ensure that we are meeting customer needs, staying ahead of industry trends and investing in the right areas through a close and interactive relationship with our customer base. The Avid Customer Association was established to be the world’s most innovative and influential media technology community representing thousands of organizations and over 27,000 professionals from all levels of the industry including the industry’s most inspirational and award-winning thought leaders, innovators and storytellers. The Avid Customer Association fosters collaboration between Avid, its customers and other industry colleagues to help shape our product offerings as well as providing a means to shape our industry together.

A key element of our strategy is our transition to a recurring revenue-based model, through a combination of subscription offerings and long-term agreements. We started offering subscription licensing options for some of our products and solutions in 2014, and had approximately 137,000 paying subscribers at the end of the first quarter of 2019. These licensing options offer choices in pricing and deployment to suit our customers’ needs. While our subscription offerings to date have primarily been sold to creative professionals, going forward, we expect to increase subscription sales to media enterprises as we expand offerings and move through customer upgrade cycles, which we expect will further increase recurring revenue on a longer-term basis. Our long-term agreements are comprised of multi-year agreements with large media enterprise customers to provide specified products and services, including SaaS offerings, and channel partners and resellers to purchase minimum amounts of products and service over a specified period of time. We believe our strategy to increase recurring revenue will continue to increase our visibility of revenue and cash flows in future periods.

Another key aspect of our strategy has been to implement programs to increase operational efficiencies and reduce costs. We are making significant changes in business operations to better support the company’s strategy and overall performance. We have implemented a number of spending control initiatives with an emphasis on non-personnel costs to reduce the overall cost structure while still investing in key areas that will drive growth. We are also revamping our supply chain and logistics, moving to a lean model that leverages a new supplier and distribution network. We are optimizing our go-to-market strategy, simplifying

18



our strategy to address specific customer markets to help maximize our commercial success, which we expect will improve effectiveness, while increasing efficiency and driving growth of our pipeline and ultimately revenue.

A summary of our revenue sources for the three months ended March 31, 2019 and 2018 is as follows (in thousands):

 
Three Months Ended March 31,
 
2019
 
2018
Software licenses
$
17,412

 
$
17,147

Maintenance
32,019

 
33,771

Software licenses and maintenance
49,431

 
50,918

% of total revenue
48
%
 
52
%