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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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:  1-36254
__________________
Avid Technology, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
04-2977748
 
(State or other jurisdiction of incorporation or organization)
 
(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
__________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, $.01 par value
 
AVID
 
Nasdaq Global Select Market
Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes 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
o
Accelerated Filer
x
Non-accelerated filer  
o
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
The number of shares outstanding of the registrant’s Common Stock, as of November 4, 2019, was 43,049,179.




AVID TECHNOLOGY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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;

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;

any benefits and synergies from, and the 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 and the US-China trade relationship;

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 repay our remaining outstanding convertible notes when they come due in June 2020;

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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Net revenues:
 
 
 
 
 
 
 
Products
$
42,911

 
$
52,133

 
$
147,633


$
144,922

Services
50,550

 
51,913

 
147,848


155,676

Total net revenues
93,461

 
104,046

 
295,481


300,598



 

 



Cost of revenues:
 
 
 
 



Products
23,877

 
27,042

 
79,535


79,684

Services
11,726

 
14,443

 
36,408


42,414

Amortization of intangible assets

 
1,950

 
3,738


5,850

Total cost of revenues
35,603

 
43,435

 
119,681


127,948

Gross profit
57,858

 
60,611

 
175,800


172,650



 

 



Operating expenses:
 
 
 
 



Research and development
14,860

 
15,873

 
46,325


47,543

Marketing and selling
22,334

 
23,461

 
73,341


77,352

General and administrative
12,034

 
13,660

 
38,543


41,656

Amortization of intangible assets

 
363

 
695


1,089

Restructuring costs, net
229

 
226

 
518


3,401

Total operating expenses
49,457

 
53,583

 
159,422


171,041




 


 





Operating income
8,401

 
7,028

 
16,378


1,609




 


 





Interest and other expense, net
(5,519
)
 
(5,725
)
 
(23,994
)

(17,362
)
Income (loss) before income taxes
2,882

 
1,303

 
(7,616
)

(15,753
)
(Benefit from) provision for income taxes
(283
)
 
425

 
155


824

Net income (loss)
$
3,165

 
$
878

 
$
(7,771
)

$
(16,577
)

 
 
 
 
 
 
 
Net income (loss) per common share – basic and diluted
$0.07
 
$0.02
 
$(0.18)

$(0.40)

 
 
 
 
 
 
 
Weighted-average common shares outstanding – basic
42,913

 
41,792

 
42,510


41,596

Weighted-average common shares outstanding – diluted
43,674

 
42,226

 
42,510

 
41,596

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

1



AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Net income (loss)
$
3,165

 
$
878

 
$
(7,771
)
 
$
(16,577
)
 
 
 
 
 
 
 
 
Other comprehensive (loss) income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(764
)
 
86

 
(602
)
 
(970
)
 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
2,401

 
$
964

 
$
(8,373
)
 
$
(17,547
)
   
The accompanying notes are an integral part of the condensed consolidated financial statements.



2



AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, unaudited)
 
September 30,
2019

December 31,
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
52,289


$
56,103

Restricted cash
1,664


8,500

Accounts receivable, net of allowances of $598 and $1,339 at September 30, 2019 and December 31, 2018, respectively.
53,718


67,754

Inventories
32,168


32,956

Prepaid expenses
13,140


8,853

Contract assets
14,418


16,513

Other current assets
6,559


5,917

Total current assets
173,956


196,596

Property and equipment, net
20,140


21,582

Intangible assets, net


4,432

Goodwill
32,643


32,643

Right of use assets
31,467



Long-term deferred tax assets, net
2,006


1,158

Other long-term assets
6,009


9,432

Total assets
$
266,221


$
265,843

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
35,554


$
39,239

Accrued compensation and benefits
16,601


21,967

Accrued expenses and other current liabilities
36,531


37,547

Income taxes payable
2,170


1,853

Short-term debt
29,705


1,405

Deferred revenue
71,224


85,662

Total current liabilities
191,785


187,673

Long-term debt
199,593


220,590

Long-term deferred revenue
13,757


13,939

Long-term lease liabilities
28,930



Other long-term liabilities
5,081


10,302

Total liabilities
439,146


432,504

 
 
 
 
Commitments and contingencies (Note 8)

 

 
 
 
 
Stockholders’ deficit:



Common stock
429


423

Additional paid-in capital
1,025,796


1,028,924

Accumulated deficit
(1,194,781
)

(1,187,010
)
Treasury stock at cost


(5,231
)
Accumulated other comprehensive loss
(4,369
)

(3,767
)
Total stockholders’ deficit
(172,925
)

(166,661
)
Total liabilities and stockholders’ deficit
$
266,221


$
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)

Three Months Ended September 30, 2019
 
Shares of
Common Stock
 
 
Additional
 
 
Accumulated
Other
Total
 
Outstanding
In
Treasury
 
Common
Stock
Paid-in
Capital
Accumulated
Deficit
Treasury
Stock
Comprehensive
Income (Loss)
Stockholders’
Deficit
Balances at June 30, 2019
42,720


 
427

1,025,301

(1,197,946
)

(3,605
)
(175,823
)
 
 
 
 
 
 
 
 
 
 
Stock issued pursuant to employee stock plans
287


 
2

(1,550
)



(1,548
)
 
 
 
 
 
 
 
 
 
 
Stock-based compensation


 

2,045




2,045

 
 
 
 
 
 
 
 
 
 
Net loss


 


3,165



3,165

 
 
 
 
 
 
 
 
 
 
Other comprehensive loss


 




(764
)
(764
)
 
 
 
 
 
 
 
 
 
 
Balances at September 30, 2019
43,007


 
429

1,025,796

(1,194,781
)

(4,369
)
(172,925
)

Three Months Ended September 30, 2018
 
Shares of
Common Stock
 
 
Additional
 
 
Accumulated
Other
Total
 
Outstanding
In
Treasury
 
Common
Stock
Paid-in
Capital
Accumulated
Deficit
Treasury
Stock
Comprehensive
Income (Loss)
Stockholders’
Deficit
Balances at June 30, 2018
42,339

(617
)
 
423

1,028,334

(1,193,791
)
(8,358
)
(3,482
)
(176,874
)
 
 
 
 
 
 
 
 
 
 
Stock issued pursuant to employee stock plans

108

 

(1,946
)

1,642


(304
)
 
 
 
 
 
 
 
 
 
 
Stock-based compensation


 

2,076




2,076

 
 
 
 
 
 
 
 
 
 
Net loss


 


878



878

 
 
 
 
 
 
 
 
 
 
Other comprehensive loss


 




86

86

 
 
 
 
 
 
 
 
 
 
Partial retirement of convertible senior notes conversion feature


 

(1
)



(1
)
 
 
 
 
 
 
 
 
 
 
Partial unwind capped call cash receipt


 

4




4

 
 
 
 
 
 
 
 
 
 
Balances at September 30, 2018
42,339

(509
)
 
423

1,028,467

(1,192,913
)
(6,716
)
(3,396
)
(174,135
)


4



Nine Months Ended September 30, 2019
 
Shares of
Common Stock
 
 
Additional
 
 
Accumulated
Other
Total
 
Outstanding
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
668

391

 
6

(8,366
)

5,231


(3,129
)
 
 
 
 
 
 
 
 
 
 
Stock-based compensation


 

5,788




5,788

 
 
 
 
 
 
 
 
 
 
Net loss


 


(7,771
)


(7,771
)
 
 
 
 
 
 
 
 
 
 
Other comprehensive loss


 




(602
)
(602
)
 
 
 
 
 
 
 
 
 
 
Partial retirement of convertible senior notes conversion feature


 

(577
)



(577
)
 
 
 
 
 
 
 
 
 
 
Partial unwind capped call cash receipt


 

27




27

 
 
 
 
 
 
 
 
 
 
Balances at September 30, 2019
43,007


 
429

1,025,796

(1,194,781
)

(4,369
)
(172,925
)

Nine Months Ended September 30, 2018
 
Shares of
Common Stock
 
 
Additional
 
 
Accumulated
Other
Total
 
Outstanding
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
)
 
 
 
 
 
 
 
 
 
 
Stock issued pursuant to employee stock plans

474

 

(11,655
)

10,956


(699
)
 
 
 
 
 
 
 
 
 
 
Stock-based compensation


 

4,331




4,331

 
 
 
 
 
 
 
 
 
 
Net loss


 


(16,577
)


(16,577
)
 
 
 
 
 
 
 
 
 
 
Other comprehensive loss


 




(970
)
(970
)
 
 
 
 
 
 
 
 
 
 
Partial retirement of convertible senior notes conversion feature


 

(23
)



(23
)
 
 
 
 
 
 
 
 
 
 
Partial unwind capped call cash receipt


 

6




6

 
 
 
 
 
 
 
 
 
 
Adoption of Topic 606


 


108,367



108,367

 
 
 
 
 
 
 
 
 
 
Balances at September 30, 2018
42,339

(509
)
 
423

1,028,467

(1,192,913
)
(6,716
)
(3,396
)
(174,135
)

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


5



AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
 
Nine Months Ended
 
September 30,
 
2019
 
2018
Cash flows from operating activities:
 

 
Net loss
$
(7,771
)

$
(16,577
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 

 
Depreciation and amortization
11,469


15,905

Recovery from doubtful accounts
(156
)

61

Stock-based compensation expense
5,788


4,331

Non-cash provision for restructuring


1,083

Non-cash interest expense
7,054


8,697

Loss on extinguishment of debt
2,878

 

Unrealized foreign currency transaction losses (gains)
237


(794
)
(Benefit from) provision for deferred taxes
(886
)

6

Changes in operating assets and liabilities:
 

 
Accounts receivable
14,192


10,129

Inventories
788


294

Prepaid expenses and other assets
(3,526
)

3,724

Accounts payable
(3,661
)

3,467

Accrued expenses, compensation and benefits and other liabilities
(13,035
)

(12,453
)
Income taxes payable
372


423

Deferred revenue and contract assets
(12,631
)

(22,544
)
Net cash provided by (used in) operating activities
1,112


(4,248
)


 

Cash flows from investing activities:
 

 
Purchases of property and equipment
(5,629
)

(7,540
)
Increase in other long-term assets


(25
)
Net cash used in investing activities
(5,629
)

(7,565
)




Cash flows from financing activities:
 

 
Proceeds from long-term debt
79,286


22,688

Repayment of debt
(1,113
)

(7,808
)
Payments for repurchase of outstanding notes
(76,269
)
 

Proceeds from the issuance of common stock under employee stock plans
309


266

Common stock repurchases for tax withholdings for net settlement of equity awards
(3,444
)

(957
)
Partial unwind capped call cash receipt
27

 

Payments for credit facility issuance costs
(5,979
)


Net cash (used in) provided by financing activities
(7,183
)

14,189







Effect of exchange rate changes on cash, cash equivalents and restricted cash
(615
)

(358
)
Net (decrease) increase in cash, cash equivalents and restricted cash
(12,315
)

2,018

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


60,433

Cash, cash equivalents and restricted cash at end of period
$
55,779


$
62,451

Supplemental information:





Cash and cash equivalents
$
52,289


$
50,460

Restricted cash
1,664


8,500

Restricted cash included in other long-term assets
1,826


3,491

Total cash, cash equivalents and restricted cash shown in the statement of cash flows
$
55,779


$
62,451

 
 
 
 
Cash paid (refunded) for income taxes
$
941

 
$
(2,268
)
Cash paid for interest
$
7,780

 
$
9,024

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

6



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.

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) collectibility 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.

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 effect of applying ASC 842 as a cumulative-effect adjustment to retained earnings as of January 1, 2019 is immaterial.


7



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 share 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.

The following table sets forth (in thousands) potential common shares that were considered anti-dilutive securities at September 30, 2019 and 2018.
 
September 30, 2019
 
September 30, 2018
Options
594

 
916

Non-vested restricted stock units
2,699

 
3,009

Anti-dilutive potential common shares
3,293

 
3,925



We issued our 2.00% senior convertible notes due 2020 (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 prices as of September 30, 2019 and 2018 were 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.


8



3.
FAIR VALUE MEASUREMENTS

Assets Measured at Fair Value on a Recurring Basis

We measure deferred compensation investments on a recurring basis. As of September 30, 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
 
September 30,
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
$
1,366

 
$
321

 
$
1,044

 
$


 
 
 
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 September 30, 2019, the net carrying amount of the Notes was $27.8 million, and the fair value of the Notes was approximately $28.3 million based on open market trading activity, which constitutes a Level 1 input in the fair value hierarchy.

4.
INVENTORIES

Inventories consisted of the following (in thousands):
 
September 30, 2019
 
December 31, 2018
Raw materials
$
10,590

 
$
10,520

Work in process
390

 
527

Finished goods
21,188

 
21,909

Total
$
32,168

 
$
32,956



As of September 30, 2019 and December 31, 2018, finished goods inventory included $1.5 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.


9



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):
 
September 30, 2019
 
December 31, 2018
 
 Gross
 
Accumulated Amortization
 
 Net
 
 Gross
 
Accumulated Amortization
 
Net
Completed technologies and patents
$
58,150

 
$
(58,150
)
 
$

 
$
58,246

 
$
(54,508
)
 
$
3,738

Customer relationships
54,689

 
(54,689
)
 

 
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
$
119,096

 
$
(119,096
)
 
$

 
$
119,489

 
$
(115,057
)
 
$
4,432

As of June 30, 2019, intangible assets were fully amortized. Amortization expense related to intangible assets in the aggregate was $2.3 million for the three months ended September 30, 2018 and $4.4 million and $6.9 million for the nine months ended September 30, 2019 and 2018, respectively.

The acquisition of Orad in 2015 resulted in goodwill of $32.6 million as of September 30, 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 September 30, 2019. Our leases have remaining terms ranging from less than one year to nine 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 “Right of use assets,” “Accrued expenses and other current liabilities,” and “Long-term lease liabilities” on our condensed consolidated balance sheets as of September 30, 2019.

The weighted-average remaining lease term of our operating leases is 7.0 years as of September 30, 2019. Lease costs for minimum lease payments is recognized on a straight-line basis over the lease term. Our total lease costs were $2.4 million and $7.2 million for the three and nine months ended September 30, 2019, respectively, and related cash payments were $2.4 million and $7.3 million for the three and nine months ended September 30, 2019, respectively. 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 are 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.


10



The table below reconciles the undiscounted future minimum lease payments under non-cancelable leases with terms of more than one year to the total lease liabilities recognized on the condensed consolidated balance sheets as of September 30, 2019 (in thousands):
Year Ending December 31,
Operating Leases
2019 (excluding nine months ended September 30, 2019)
$
2,382

2020
8,448

2021
5,928

2022
5,177

2023
4,301

Thereafter
19,076

Total future minimum lease payments
$
45,312

Less effects of discounting
(8,771
)
Total lease liabilities
$
36,541

 
 
Reported as of September 30, 2019
 
Accrued expenses and other current liabilities
$
7,611

Long-term lease liabilities
28,930

Total lease liabilities
$
36,541



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



7.
OTHER LONG-TERM LIABILITIES

Other long-term liabilities consisted of the following (in thousands):
 
September 30, 2019
 
December 31, 2018
Deferred rent
$

 
$
5,122

Accrued restructuring
125

 
188

Deferred compensation
4,596

 
4,992

Other
360

 

   Total
$
5,081

 
$
10,302



Upon the adoption of ASC 842 on January 1, 2019, $5.1 million of deferred rent liabilities was reclassified 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 September 30, 2019.


11



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 $8.8 million of products and services pursuant to this agreement as of September 30, 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 September 30, 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 $1.6 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 former sole-source suppliers in February 2018. The supplier was eligible to draw on the letter of credit in the event that we were insolvent or unable to pay on our purchase orders for certain key hardware components of our products. The letter of credit was terminated as we have exited our relationship with this contract manufacturer and $8.5 million of restricted cash that was pledged as collateral was returned to us in July 2019.

Substantially 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 September 30, 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. We have since been in communications with our former Chairman and Chief Executive Officer’s counsel. 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.

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At September 30, 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 nine months ended September 30, 2019 and 2018 (in thousands):
 
Nine Months Ended September 30,
 
2019
 
2018
Accrual balance at beginning of year
$
1,706

 
$
2,545

Accruals for product warranties
732

 
1,612

Costs of warranty claims
(1,016
)
 
(1,802
)
Accrual balance at end of period
$
1,422

 
$
2,355


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.

During the three and nine months ended September 30, 2019, we recorded restructuring charges of $0.2 million and $0.5 million for employee severance cost adjustments, respectively.

During the three and nine months ended September 30, 2018, we recorded restructuring charges of $0.2 million and $3.4 million, respectively. The restructuring charges for the nine months ended September 30, 2018 included $1.7 million of severance costs adjustments, $0.2 million facility restructuring accrual adjustments resulting from the consolidation of our facilities in Burlington, Massachusetts, and $1.1 million of leasehold improvement write-off.


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Restructuring Summary

The following table sets forth restructuring expenses recognized for the three and nine months ended September 30, 2019 and 2018 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Employee
$
202

 
$
879

 
$
473

 
$
1,734

Facility

 
(895
)
 
5

 
177

Total facility and employee charges
202

 
(16
)
 
478

 
1,911

Other
27

 
242

 
40

 
1,490

Total restructuring charges, net
$
229

 
$
226

 
$
518

 
$
3,401



The following table sets forth the activity in the restructuring accruals for the nine months ended September 30, 2019 (in thousands):
 
Employee
 
Facility
 
Total
Accrual balance as of December 31, 2018
$
2,541

 
$
318

 
$
2,859

Restructuring charges and revisions
473

 
5

 
478

Accretion

 
14

 
14

Cash payments
(2,702
)
 
(118
)
 
(2,820
)
Foreign exchange impact on ending balance
(22