Document
false--12-31Q120200000896841falsefalsefalse9580001453000100033340003090000<div style="font-family:Times New Roman;font-size:10pt;"><div style="line-height:120%;text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">The following table sets forth the activity in the product warranty accrual account for the </font><font style="font-family:inherit;font-size:10pt;">three months ended</font><font style="font-family:inherit;font-size:10pt;"> </font><font style="font-family:inherit;font-size:10pt;">March&#160;31, 2020</font><font style="font-family:inherit;font-size:10pt;"> and </font><font style="font-family:Times New Roman;font-size:10pt;color:#000000;text-decoration:none;">2019</font><font style="font-family:inherit;font-size:10pt;"> (in thousands):</font></div><div style="line-height:120%;text-align:left;font-size:10pt;"><div style="padding-left:0px;text-indent:0px;line-height:normal;padding-top:10px;"><table cellpadding="0" cellspacing="0" style="font-family:Times New Roman;font-size:10pt;width:100%;border-collapse:collapse;text-align:left;"><tr><td colspan="8" rowspan="1"></td></tr><tr><td style="width:71%;" rowspan="1" colspan="1"></td><td style="width:1%;" rowspan="1" colspan="1"></td><td style="width:12%;" rowspan="1" colspan="1"></td><td style="width:1%;" rowspan="1" colspan="1"></td><td style="width:1%;" rowspan="1" colspan="1"></td><td style="width:1%;" rowspan="1" colspan="1"></td><td style="width:12%;" rowspan="1" colspan="1"></td><td style="width:1%;" rowspan="1" colspan="1"></td></tr><tr><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="7" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1"><div style="text-align:center;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;font-weight:bold;">Three Months Ended March 31,</font></div></td></tr><tr><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="3" style="vertical-align:bottom;border-bottom:1px solid #000000;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;border-top:1px solid #000000;" rowspan="1"><div style="text-align:center;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;font-weight:bold;">2020</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="3" style="vertical-align:bottom;border-bottom:1px solid #000000;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;border-top:1px solid #000000;" rowspan="1"><div style="text-align:center;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;font-weight:bold;">2019</font></div></td></tr><tr><td style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">Accrual balance at beginning of year</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;background-color:#cceeff;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">$</font></div></td><td style="vertical-align:bottom;background-color:#cceeff;padding-top:2px;padding-bottom:2px;" rowspan="1" colspan="1"><div style="text-align:right;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">1,337</font></div></td><td style="vertical-align:bottom;background-color:#cceeff;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td><td style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;background-color:#cceeff;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">$</font></div></td><td style="vertical-align:bottom;background-color:#cceeff;padding-top:2px;padding-bottom:2px;" rowspan="1" colspan="1"><div style="text-align:right;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">1,706</font></div></td><td style="vertical-align:bottom;background-color:#cceeff;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td></tr><tr><td style="vertical-align:bottom;padding-left:28px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">Accruals for product warranties</font></div></td><td colspan="2" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1"><div style="text-align:right;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">384</font></div></td><td style="vertical-align:bottom;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="2" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1"><div style="text-align:right;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">227</font></div></td><td style="vertical-align:bottom;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td></tr><tr><td style="vertical-align:bottom;background-color:#cceeff;padding-left:28px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">Costs of warranty claims</font></div></td><td colspan="2" style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1"><div style="text-align:right;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">(357</font></div></td><td style="vertical-align:bottom;background-color:#cceeff;padding-right:2px;padding-top:2px;padding-bottom:2px;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">)</font></div></td><td style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="2" style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1"><div style="text-align:right;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">(338</font></div></td><td style="vertical-align:bottom;background-color:#cceeff;padding-right:2px;padding-top:2px;padding-bottom:2px;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">)</font></div></td></tr><tr><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">Accrual balance at end of period</font></div></td><td style="vertical-align:bottom;border-bottom:3px double #000000;padding-left:2px;padding-top:2px;padding-bottom:2px;border-top:1px solid #000000;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">$</font></div></td><td style="vertical-align:bottom;border-bottom:3px double #000000;padding-top:2px;padding-bottom:2px;border-top:1px solid #000000;" rowspan="1" colspan="1"><div style="text-align:right;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">1,364</font></div></td><td style="vertical-align:bottom;border-bottom:3px double #000000;border-top:1px solid #000000;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td style="vertical-align:bottom;border-bottom:3px double #000000;padding-left:2px;padding-top:2px;padding-bottom:2px;border-top:1px solid #000000;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">$</font></div></td><td style="vertical-align:bottom;border-bottom:3px double #000000;padding-top:2px;padding-bottom:2px;border-top:1px solid #000000;" rowspan="1" colspan="1"><div style="text-align:right;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">1,595</font></div></td><td style="vertical-align:bottom;border-bottom:3px double #000000;border-top:1px solid #000000;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td></tr></table></div></div><div style="line-height:120%;text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></div> 0000896841 2020-01-01 2020-03-31 0000896841 2020-05-04 0000896841 2019-01-01 2019-03-31 0000896841 us-gaap:ServiceMember 2020-01-01 2020-03-31 0000896841 us-gaap:ServiceMember 2019-01-01 2019-03-31 0000896841 us-gaap:ProductMember 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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 March 31, 2020
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 May 4, 2020, was 43,697,846.




AVID TECHNOLOGY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2020

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:

the effects that the COVID-19 pandemic and its related consequences may have on the national and global economy and on our business and operations, revenues, cash flows and profitability, and capital resources;

our ability to successfully implement our strategy, including our cost saving measures and other actions implemented in response to the COVID-19 pandemic;

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 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;

the anticipated performance of our products;

our ability to maintain adequate supplies of products and components, including through sole-source supply arrangements;

our plans to repatriate 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;

seasonal factors;

fluctuations in foreign exchange and interest rates;





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

our ability to protect and enforce our intellectual property rights;

the expected availability of cash to fund our business and our ability to maintain adequate liquidity and capital resources, generally and in the wake of the COVID-19 pandemic; and

worldwide political uncertainty, in particular the risk that the United States may withdraw from or materially modify international trade agreements.

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 Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019, in Part II, Item 1A of this Quarterly Report on Form 10-Q, 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, Avid NEXIS, AirSpeed, FastServe, 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,
 
2020
 
2019
Net revenues:
 
 
 
Products
$
34,711

 
$
54,396

Services
51,742

 
48,923

Total net revenues
86,453

 
103,319



 

Cost of revenues:
 
 
 
Products
20,962

 
27,600

Services
12,340

 
12,487

Amortization of intangible assets

 
1,950

Total cost of revenues
33,302

 
42,037

Gross profit
53,151

 
61,282



 

Operating expenses:
 
 
 
Research and development
15,425

 
16,285

Marketing and selling
25,289

 
24,878

General and administrative
12,744

 
13,788

Amortization of intangible assets

 
363

Restructuring costs, net
145

 
558

Total operating expenses
53,603

 
55,872




 


Operating (loss) income
(452
)
 
5,410




 


Interest and other expense, net
(5,283
)
 
(5,185
)
(Loss) income before income taxes
(5,735
)
 
225

Provision for income taxes
122

 
438

Net loss
$
(5,857
)
 
$
(213
)

 
 
 
Net loss per common share – basic and diluted
$(0.14)
 
$(0.01)

 
 
 
Weighted-average common shares outstanding – basic and diluted
43,254

 
42,046

   
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,
 
2020
 
2019
Net loss
$
(5,857
)
 
$
(213
)
 
 
 
 
Other comprehensive loss:
 
 
 
Foreign currency translation adjustments
(815
)
 
(548
)
 
 
 
 
Comprehensive loss
$
(6,672
)
 
$
(761
)
   
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,
2020

December 31,
2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
81,182


$
69,085

Restricted cash
1,663


1,663

Accounts receivable, net of allowances of $1,453 and $958 at March 31, 2020 and December 31, 2019, respectively.
59,965


73,773

Inventories
32,601


29,166

Prepaid expenses
10,101


9,425

Contract assets
22,162


19,494

Other current assets
7,147


6,125

Total current assets
214,821


208,731

Property and equipment, net
18,873


19,580

Goodwill
32,643


32,643

Right of use assets
29,002


29,747

Long-term deferred tax assets, net
7,640


7,479

Other long-term assets
5,456


6,113

Total assets
$
308,435


$
304,293

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
34,989


$
39,888

Accrued compensation and benefits
19,185


19,524

Accrued expenses and other current liabilities
33,044


36,759

Income taxes payable
1,964


1,945

Short-term debt
31,400


30,554

Deferred revenue
82,441


83,589

Total current liabilities
203,023


212,259

Long-term debt
220,426


199,034

Long-term deferred revenue
12,971


14,312

Long-term lease liabilities
28,063


28,127

Other long-term liabilities
5,414


5,646

Total liabilities
469,897


459,378

 
 
 
 
Commitments and contingencies (Note 7)

 

 
 
 
 
Stockholders’ deficit:



Common stock
434


430

Additional paid-in capital
1,028,115


1,027,824

Accumulated deficit
(1,185,266
)

(1,179,409
)
Accumulated other comprehensive loss
(4,745
)

(3,930
)
Total stockholders’ deficit
(161,462
)

(155,085
)
Total liabilities and stockholders’ deficit
$
308,435


$
304,293

   
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 March 31, 2020
 
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, 2020
43,150


 
430

1,027,824

(1,179,409
)

(3,930
)
(155,085
)
 
 
 
 
 
 
 
 
 
 
Stock issued pursuant to employee stock plans
398


 
4

(1,818
)



(1,814
)
 
 
 
 
 
 
 
 
 
 
Stock-based compensation


 

2,109




2,109

 
 
 
 
 
 
 
 
 
 
Net loss


 


(5,857
)


(5,857
)
 
 
 
 
 
 
 
 
 
 
Other comprehensive loss


 




(815
)
(815
)
 
 
 
 
 
 
 
 
 
 
Balances at March 31, 2020
43,548


 
434

1,028,115

(1,185,266
)

(4,745
)
(161,462
)

Three Months Ended March 31, 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

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
)

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,
 
2020
 
2019
Cash flows from operating activities:
 

 
Net loss
$
(5,857
)

$
(213
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 

 
Depreciation and amortization
2,142


4,740

Allowance for (recovery from) doubtful accounts
497


(9
)
Stock-based compensation expense
2,109


1,738

Non-cash interest expense
2,820


3,359

Unrealized foreign currency transaction losses (gains)
51


(586
)
Benefit from deferred taxes
(207
)

(1
)
Changes in operating assets and liabilities:
 

 
Accounts receivable
13,311


6,444

Inventories
(3,435
)

(1,372
)
Prepaid expenses and other assets
(1,631
)

(3,861
)
Accounts payable
(4,858
)

(810
)
Accrued expenses, compensation and benefits and other liabilities
(5,323
)

(2,837
)
Income taxes payable
40


261

Deferred revenue and contract assets
(5,264
)

(477
)
Net cash (used in) provided by operating activities
(5,605
)

6,376



 

Cash flows from investing activities:
 

 
Purchases of property and equipment
(1,479
)

(1,767
)
Net cash used in investing activities
(1,479
)

(1,767
)




Cash flows from financing activities:
 

 
Proceeds from revolving line of credit
22,000



Repayment of debt
(351
)

(3,928
)
Proceeds from the issuance of common stock under employee stock plans


309

Common stock repurchases for tax withholdings for net settlement of equity awards
(1,818
)

(1,690
)
Partial unwind capped call cash receipt

 
(22
)
Net cash provided by (used in) financing activities
19,831


(5,331
)






Effect of exchange rate changes on cash, cash equivalents and restricted cash
(402
)

(55
)
Net increase (decrease) in cash, cash equivalents and restricted cash
12,345


(777
)
Cash, cash equivalents and restricted cash at beginning of period
72,575


68,094

Cash, cash equivalents and restricted cash at end of period
$
84,920


$
67,317

Supplemental information:





Cash and cash equivalents
$
81,182


$
55,326

Restricted cash
1,663


9,020

Restricted cash included in other long-term assets
2,075


2,971

Total cash, cash equivalents and restricted cash shown in the statement of cash flows
$
84,920


$
67,317

 
 
 
 
Cash paid for income taxes
$
391

 
$
203

Cash paid for interest
$
4,450

 
$
2,041

  
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, 2019 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, 2019 in our Annual Report on Form 10-K for the year ended December 31, 2019, 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, 2019.

The consolidated results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2020. The Company’s results of operations are affected by economic conditions, including macroeconomic conditions and levels of business and consumer confidence. The impact that the recent COVID-19 pandemic will have on the Company’s consolidated results of operations and financial condition is uncertain. The Company is actively managing its business to respond to this health crisis and will continue to evaluate the nature and extent of the impact. While the duration and severity of the COVID-19 pandemic, and resulting economic impacts, are highly uncertain, we expect that our business operations and results of operations, including our net revenues, earnings and cash flows, will be adversely impacted by these developments for at least the balance of 2020. To address expected reductions in net revenues and cash flows, we have already taken steps to reduce our discretionary spending and reduce payroll costs, including through temporary employee furloughs and pay cuts.  We may be required to take additional remedial steps, depending on the duration and severity of the pandemic and its impact on our operations and cash flows, which could include, among other things (and where allowed by the lenders), (i) further cost reductions, (ii) seeking replacement financing, (iii) raising funds through the issuance of additional equity or debt securities or the incurrence of additional borrowings, (iv) disposing of certain assets or businesses, or (v) applying for various programs that have been implemented by the U.S. government in response to the COVID-19 pandemic. Such remedial actions, which may not be available on favorable terms or at all, could have a material adverse impact on our business including non-compliance with our financial covenants with our lenders which, in the event management is not able to obtain a waiver or amendment, may result in an event of default under the financing agreement, which could permit acceleration of the outstanding indebtedness and require us to repay such indebtedness before the scheduled due date. If an event of default were to occur, we might not have sufficient funds available to make the payments required. If we are unable to repay amounts owed, the lenders may be entitled to foreclose on and sell substantially all of our assets, which secure our borrowings.

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

6



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

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

On January 1, 2019, we adopted 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, both of which are material to our consolidated balance sheet. 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.

Recent Accounting Pronouncements To Be Adopted

In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 is intended to enhance and simplify aspects of the income tax accounting guidance in ASC 740 as part of the FASB's simplification initiative. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2020 with early adoption permitted. The Company is currently evaluating the impact this guidance may have on its consolidated financial statements and related disclosures.

In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 is intended to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This guidance is effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this guidance may have on its consolidated financial statements and related disclosures.

2.
NET LOSS PER SHARE

Net loss per common share is presented for both basic loss per share (“Basic EPS”) and diluted loss 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 March 31, 2020 and 2019.

7



 
March 31, 2020
 
March 31, 2019
Options
465

 
772

Non-vested restricted stock units
3,069

 
2,881

Anti-dilutive potential common shares
3,534

 
3,653



On June 15, 2015, we issued $125.0 million aggregate principal amount of our 2.00% convertible senior notes due 2020 (the “Notes”) in an offering conducted in accordance with Rule 144A under the Securities Act of 1933 (the “Securities Act”). 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 March 31, 2020 and 2019 were less than the conversion price, 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, 2020 and December 31, 2019, 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,
2020
 
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
$
813

 
$
207

 
$
606

 
$


 
 
 
Fair Value Measurements at Reporting Date Using
 
December 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
$
1,156

 
$
338

 
$
818

 
$



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, 2020, the net carrying amount of the Notes was $28.6 million, and the fair value of the Notes was approximately $27.8 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, 2020
 
December 31, 2019
Raw materials
$
8,358

 
$
9,036

Work in process
398

 
371

Finished goods
23,845

 
19,759

Total
$
32,601

 
$
29,166



As of March 31, 2020 and December 31, 2019, finished goods inventory included $1.8 million and $1.5 million, respectively, associated with products shipped to customers and deferred labor costs for arrangements where revenue recognition had not yet commenced.

5.
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, 2020. Our leases have remaining terms ranging from less than one year to eight 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 March 31, 2020 and December 31, 2019.

The weighted-average remaining lease term of our operating leases is 6.9 years as of March 31, 2020. Lease costs for minimum lease payments is recognized on a straight-line basis over the lease term. Our total lease costs were $2.6 million and $2.5 million for the three months ended March 31, 2020 and March 31, 2019 respectively. Related cash payments were $2.6 million and $2.4 million for the three months ended March 31, 2020 and March 31, 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.


9



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 March 31, 2020 (in thousands):
Year Ending December 31,
Operating Leases
2020 (excluding three months ended March 31, 2020)
$
6,235

2021
6,148

2022
5,384

2023
4,519

2024
4,402

Thereafter
15,340

Total future minimum lease payments
$
42,028

Less effects of discounting
(7,847
)
Total lease liabilities
$
34,181

 
 
Reported as of March 31, 2020
 
Accrued expenses and other current liabilities
$
6,118

Long-term lease liabilities
28,063

Total lease liabilities
$
34,181




6.
OTHER LONG-TERM LIABILITIES

Other long-term liabilities consisted of the following (in thousands):
 
March 31, 2020
 
December 31, 2019
Deferred compensation
5,087

 
5,186

Other
327

 
460

   Total
$
5,414

 
$
5,646




7.
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 $12.8 million of products and services pursuant to this agreement as of March 31, 2020.

We entered into a long-term agreement to purchase a variety of information technology solutions from a third party in the second quarter of 2020, which included an unconditional commitment to purchase a minimum of $32.2 million of products and services over the initial five years of the agreement.

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, 2020, 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

10



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 $0.6 million in the aggregate, as well as letters of credit totaling $2.1 million that otherwise support our ongoing operations. These letters of credit have various terms and expire during 2020 and beyond, while some of the letters of credit may automatically renew based on the terms of the underlying agreements.

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 March 31, 2020.

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 executive’s employment agreement. On April 16, 2019 we received an additional notice again alleging we breached the former executive’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.

At March 31, 2020 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.

11



The following table sets forth the activity in the product warranty accrual account for the three months ended March 31, 2020 and 2019 (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Accrual balance at beginning of year
$
1,337

 
$
1,706

Accruals for product warranties
384

 
227

Costs of warranty claims
(357
)
 
(338
)
Accrual balance at end of period
$
1,364

 
$
1,595


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

8.
RESTRUCTURING COSTS AND ACCRUALS

During the three months ended March 31, 2020 and March 31, 2019, we recorded restructuring charges of $0.1 million and $0.6 million, respectively, for employee severance cost adjustments.
Restructuring Summary

The following table sets forth restructuring expenses recognized for the three months ended March 31, 2020 and 2019 (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Employee
$
145

 
$
535

Facility

 
5

Total facility and employee charges
145

 
540

Other

 
18

Total restructuring charges, net
$
145

 
$
558



The following table sets forth the activity in the restructuring accruals for the three months ended March 31, 2020 (in thousands):
 
Employee
Accrual balance as of December 31, 2019
$
155

Restructuring charges and revisions
145

Cash payments
(110
)
Accrual balance as of March 31, 2020
$
190

Less: current portion
190

Long-term accrual balance as of March 31, 2020
$



The employee restructuring accrual at March 31, 2020 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, 2020.

On January 1, 2019, we had facilities restructuring accruals of $0.1 million included in the caption “accrued expenses and other current liabilities” and $0.2 million included in the caption “other long-term liabilities," which were reclassified upon the adoption of ASC 842 to the right of use asset account.


12



9.
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, 2020 and 2019 (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Products and solutions net revenues
$
34,711

 
$
54,396

Subscription services
13,958

 
9,282

Support services
31,794

 
32,019

Professional services, training and other services
5,990

 
7,622

Total net revenues
$
86,453

 
$
103,319


The following table sets forth our revenues by geographic region for the three months ended March 31, 2020 and 2019 (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Revenues:
 
 
 
United States
$
36,090

 
$
39,479

Other Americas
5,450

 
6,801

Europe, Middle East and Africa
33,235

 
37,153

Asia-Pacific
11,678

 
19,886

Total net revenues
$
86,453

 
$
103,319



Contract Asset

Contract asset activity for the three months ended March 31, 2020 was as follows (in thousands):
 
March 31, 2020
Contract asset at January 1, 2020
$
19,494

Revenue in excess of billings
7,878

Customer billings
(5,210
)
Contract asset at March 31, 2020
$
22,162

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

Contract asset, current portion
$
22,162



Deferred Revenue

Deferred revenue activity for the three months ended March 31, 2020 was as follows (in thousands):

13



 
March 31, 2020
Deferred revenue at January 1, 2020
$
97,901

Billings deferred
28,687

Recognition of prior deferred revenue
(31,176
)
Deferred revenue at March 31, 2020
$
95,412



A summary of the significant performance obligations included in deferred revenue as of March 31, 2020 is as follows (in thousands):
 
March 31, 2020
Product
$
5,311

Subscription
1,501

Support contracts
73,465

Implied PCS
10,769

Professional services, training and other
4,366

Deferred revenue at March 31, 2020
$
95,412



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 $10.8 million attributable to Implied PCS recorded in deferred revenue as of March 31, 2020. We expect to recognize revenue for these remaining performance obligations of $3.7 million for the remainder of 2020 and $3.2 million, $1.9 million, $1.1 million and $0.6 million for the years ended December 31, 2021, 2022, 2023, and 2024, respectively.

As of March 31, 2020, we had approximately $59.4 million of transaction price allocated to remaining performance obligations for certain enterprise agreements that have not yet been fully invoiced. Approximately $56.7 million of these performance obligations were unbilled as of March 31, 2020. 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 $59.4 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



10.
LONG-TERM DEBT AND CREDIT AGREEMENT

Long-term debt consisted of the following (in thousands):
 
March 31, 2020
 
December 31, 2019
Term Loan, net of unamortized debt issuance costs of $3,090 at March 31, 2020 and $3,334 at December 31, 2019
$
200,031

 
$
200,105

Notes, net of unamortized original issue discount and debt issuance costs of $312 at March 31, 2020 and $680 at December 31, 2019
28,555

 
28,187

Revolving credit facility
22,000

 

Other long-term debt
1,240

 
1,296

    Total debt
251,826

 
229,588

Less: current portion
31,400

 
30,554

Total long-term debt
$
220,426

 
$
199,034



The following table summarizes the contractual maturities of our borrowing obligations as of March 31, 2020 (in thousands):

Fiscal Year
Term Loan
 
Revolving Credit Facility
 
Notes
 
Other Long-Term Debt
 
Total
2020
$
1,913

 
$

 
$
28,867

 
$
102

 
$
30,881

2021
4,781

 

 

 
144

 
4,925

2022
6,375

 

 

 
154

 
6,529

2023
190,052

 
22,000

 

 
165

 
212,217

2024

 

 

 
177

 
177

Thereafter

 

 

 
499

 
499

Total before unamortized discount
203,120

 
22,000

 
28,867

 
1,241

 
255,228

Less: unamortized discount and issuance costs
3,090

 

 
312

 

 
3,402

Less: current portion of long-term debt
2,709

 

 
28,555

 
136

 
31,400

Total long-term debt
$
197,321

 
$
22,000

 
$

 
$
1,105

 
$
220,426



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. 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, 2020 was $0.5 million, 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.


15



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.

On April 11, 2019, we announced the commencement of a cash tender offer (the “Offer”) for any and all of our outstanding Notes. On May 9, 2019, as of the expiration of the Offer, Notes with an aggregate principal amount of $74.0 million were validly tendered. We accepted for purchase all Notes that were validly tendered at the expiration of the Offer at a purchase price equal to $982.50 per $1,000 principal amount of Notes, and settled the Offer on May 13, 2019 for $72.7 million in cash. We repurchased 73,986 Notes, recorded $74.0 million extinguishment of debt, $0.6 million of equity reacquisition, and $2.9 million loss on the extinguishment of debt. In connection with the Offer, the number of options under the Capped Call was reduced to 28,867 to mirror the remaining principal outstanding for the Notes, and an immaterial partial unwind cash payment was received in May 2019.

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.

On April 8, 2019, we entered into an amendment to the Financing Agreement. The amendment provided for an additional delayed draw term loan commitment in the aggregate principal amount of $100.0 million (the “Delayed Draw Funds”) for the purpose of funding the purchase of a portion of Notes in the Offer described above. On May 2, 2019, we received the Delayed Draw Funds under the Financing Agreement. We used $72.7 million of the Delayed Draw Funds for the purchase of a portion of our Notes, $0.6 million for the Notes interest payment, and $6.0 million for the payment of refinancing fees. On June 18, 2019, we repaid $20.7 million of the Delayed Draw Funds. The $79.3 million Delayed Draw Funds borrowed and that remain outstanding will mature on May 10, 2023 under the terms of the Financing Agreement. The amendment also modified the covenant that requires us to maintain a leverage ratio (defined to mean the ratio of (a) the sum of indebtedness under the Term Loan and Credit Facility and non-cash collateralized letters of credit to (b) consolidated EBITDA under the Term Loan and Credit Facility) based on the level of availability of our Credit Facility plus unrestricted cash on-hand.

The Financing Agreement amendment effective April 8, 2019 was accounted for as a debt modification, and therefore, $1.6 million of the refinancing fees paid directly to the Lenders was recorded as deferred debt issuance costs, and $4.4 million of the refinancing fees paid to the third parties was expensed. We recorded $4.2 million of interest expense on the Term Loan during the three months ended March 31, 2020. There was $22.0 million outstanding under the Credit Facility as of March 31, 2020. There is no prepayment penalty on the Credit Facility. We recognized $0.1 million of interest expense related to the Facility during the three months ended March 31, 2020. We were in compliance with the Financing Agreement covenants as of March 31, 2020.


16



11. 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, 2020 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, 2020
565,000


565,000

$7.57
 
 
Granted



$
 
 
Exercised
(100,000
)

(100,000
)
$7.66
 
 
Forfeited or canceled



$
 
 
Options outstanding at March 31, 2020
465,000


465,000

$7.56
1.17
$
Options vested at March 31, 2020 or expected to vest
 
 
465,000

$7.56
1.17
$
Options exercisable at March 31, 2020
 
 
465,000

$7.56
1.17
$


Information with respect to our non-vested restricted stock units for the three months ended March 31, 2020 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, 2020
2,087,933

554,265

2,642,198

$6.40
 
 
Granted
555,523

578,316

1,133,839

$6.46
 
 
Vested
(333,743
)
(328,673
)
(662,416
)
$5.58
 
 
Forfeited
(44,750
)

(44,750
)
$7.54
 
 
Non-vested at March 31, 2020
2,264,963

803,908

3,068,871

$6.58
1.25
$20,623
Expected to vest
 
 
3,068,871

$6.58
1.25
$20,623


Stock-based compensation was included in the following captions in our condensed consolidated statements of operations for the three months ended March 31, 2020 and 2019 (in thousands):
 
Three Months Ended March 31,
 
2020

2019
Cost of products revenues
$
102

 
$
51

Cost of services revenues
98

 
18

Research and development expenses
294

 
195

Marketing and selling expenses
441

 
294

General and administrative expenses
1,174

 
1,180

 
$
2,109

 
$
1,738



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 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 editing and post production process for television.

Operations Overview

Our strategy for connecting creative professionals and media enterprises with audiences in a powerful, efficient, collaborative, and profitable way leverages our creative software tools, including ProTools for audio and MediaComposer for video, and 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 an innovative and influential media technology community. It represents thousands of organizations and over 33,000 professionals from all levels of the industry including 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 and provide 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 by March 31, 2020, had approximately 218,000 paid subscriptions. These licensing options offer choices in pricing and deployment to suit our customers’ needs. Our subscription offerings to date have primarily been sold to creative professionals, though we expect to increase subscription sales to media enterprises going forward 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.

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 biased towards non-personnel costs to reduce the overall cost structure while still investing in key areas that will drive growth. We have also revamped our supply chain and logistics, and in 2019 completed our move to a lean model that leverages a new supplier and distribution network. We are optimizing our go-to-market

18



strategy, simplifying 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, 2020 and 2019 is as follows (in thousands):

 
Three Months Ended March 31,
 
2020
 
2019
Software licenses
$
19,331

 
$
17,412

Maintenance
31,794

 
32,019

Software licenses and maintenance
51,125

 
49,431

% of total revenue
59
%
 
48
%
Integrated solutions
29,338

 
46,265

Professional services & training
5,990

 
7,623

Total revenue
$
86,453

 
$
103,319


Impact of COVID-19 on Our Business

We have operations in a number of countries, which exposes us to risks associated with public health crises such as the novel coronavirus (COVID-19) that was declared a pandemic by the World Health Organization. COVID-19 adversely impacted our business operations and results of operations for the first quarter of 2020, as described in more detail under the Results of Operations below. We expect the evolving COVID-19 pandemic to continue to have an adverse impact on our business and results of operations, as the ongoing pandemic is likely to continue to depress economic activity and reduce the demand for our products and services, as well as disrupt supply chains. Although the duration and severity of the COVID-19 pandemic, and resulting economic impacts, are highly uncertain, we expect that our business operations and results of operations, including our net revenues, earnings and cash flows, will be adversely impacted for at least the balance of 2020. These economic impacts are the result of, but not limited to,:

the postponement or cancellation of film and television productions, major sporting events, and music festivals;
delays in purchasing and projects by our enterprise customers and channel partners;
disruption to the supply chain caused by distribution and other logistical issues, including disruptions arising from government restrictions; and
decreased productivity due to travel ban, work-from-home policies or shelter-in-place orders.

We are focused on navigating these recent challenges presented by COVID-19 through preserving our liquidity and managing our cash flow through taking preemptive action to enhance our ability to meet our short-term liquidity needs. Such actions include, but are not limited to, reducing our discretionary spending, revisiting our investment strategies, and reducing payroll costs, including through temporary employee furloughs and pay cuts. We may be required to take additional steps to preserve our liquidity depending on the duration and severity of the pandemic and its impact on our operations and cash flows.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We base our estimates and judgments on historical experience and various other factors we believe to be reasonable under the circumstances, the results of which form the basis for judgments about the carrying values of assets and liabilities and the amounts of revenues and expenses. Actual results may differ from these estimates.

We believe that our critical accounting policies and estimates are those related to revenue recognition and allowances for sales returns and exchanges, discount rates used for lease liabilities, stock-based compensation, income tax assets and liabilities, and restructuring charges and accruals. We believe these policies and estimates are critical because they most significantly affect the portrayal of our financial condition and results of operations and involve our most complex and subjective estimates and judgments. A discussion of our critical accounting policies and estimates may be found in our Annual Report on Form 10-K for

19



the year ended December 31, 2019 in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Policies and Estimates” and below. There have been no significant changes to the identification of the accounting policies and estimates that are deemed critical.

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

Leases

We have operating leases for facilities and certain equipment in North America, Europe, and Asia. Our 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 commencement date. As our leases generally do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. An average incremental borrowing rate of 6% as of January 1, 2019, the adoption date of ASC 842, was used for our leases that commenced prior to that date. We determined that the rate of 6% is appropriate for our operating leases after we considered an estimated incremental borrowing rate provided by our bank, the interest rate of our Term Loan, and the terms and geographic locations of our facilities. See Note 5 for further discussion on our leases.


RESULTS OF OPERATIONS

The following table sets forth certain items from our condensed consolidated statements of operations as a percentage of net revenues for the three months ended March 31, 2020 and 2019:

20



 
Three Months Ended March 31,
 
2020
 
2019
Net revenues:
 
 
 
Product
40.2
 %
 
52.6
 %
Services
59.8
 %
 
47.4
 %
Total net revenues
100.0
 %
 
100.0
 %
Cost of revenues
38.5
 %
 
40.7
 %
Gross margin
61.5
 %
 
59.3
 %
Operating expenses:
 
 
 
Research and development
17.8
 %
 
15.8
 %
Marketing and selling
29.3
 %
 
24.1
 %
General and administrative
14.7
 %
 
13.3
 %
Amortization of intangible assets
 %
 
0.4
 %
Restructuring costs, net
0.2
 %
 
0.5
 %
Total operating expenses
62.0
 %
 
54.1
 %
Operating (loss) income
(0.5
)%
 
5.2
 %
Interest and other expense, net
(6.1
)%
 
(5.0
)%
(Loss) income before income taxes
(6.6
)%
 
0.2
 %
Provision for income taxes
0.1
 %
 
0.4
 %
Net loss
(6.7
)%
 
(0.2
)%

Net Revenues

Our net revenues are derived mainly from sales of products and solutions for digital media content production, management and distribution, and related professional services and maintenance contracts. We also sell individual licenses for our software products through our webstore. We commonly sell large, complex solutions to our customers that, due to their strategic nature, have long lead times where the timing of order execution and fulfillment can be difficult to predict. In addition, the rapid evolution of the media industry is changing our customers’ needs, businesses, and revenue models, which is influencing their short-term and long-term purchasing decisions. As a result of these factors, the timing and amount of product revenue recognized each quarter related to these large orders, as well as the services associated with them, can fluctuate from quarter to quarter and cause significant volatility in our quarterly operating results. For a discussion of these factors, see the risk factors discussed in Part I - Item 1A under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019.

Net Revenues for the Three Months Ended March 31, 2020 and 2019
(dollars in thousands)
 
2020
 
Change
 
2019
 
Net Revenues
 
$
 
%
 
Net Revenues
Products and solutions
34,711

 
(19,685
)
 
(36.2)%
 
54,396

Services
51,742

 
2,819

 
5.8%
 
48,923

Total net revenues
$
86,453

 
$
(16,866
)
 
(16.3)%
 
$
103,319



21



The following table sets forth the percentage of our net revenues attributable to geographic regions for the three months ended March 31, 2020 and 2019:
 
Three Months Ended March 31,
 
2020
 
2019
United States
42%
 
38%
Other Americas
6%
 
7%
Europe, Middle East and Africa
38%
 
36%
Asia-Pacific
14%
 
19%

Products and Solutions Revenues

Our products and solutions revenues are derived primarily from sales of our storage and workflow solutions, media management solutions, video creative tools, digital audio software and workstation solutions, and our control surfaces, consoles, and live-sound systems. Products and solutions revenues decreased $19.7 million, or 36.2%, for the three months ended March 31, 2020, compared to the same period in 2019. The decrease for the three months ended March 31, 2020 was primarily due to lower sales as a result of COVID-19.

Services Revenues

Services revenues are derived primarily from maintenance contracts, as well as professional services and training. Services revenues increased $2.8 million, or 5.8%, for the three months ended March 31, 2020, compared to the same period in 2019. The increase for the three months ended March 31, 2020 was primarily due to strong growth in our subscription services, partially offset by lower professional services revenue as delivery was limited due to COVID-19.

Cost of Revenues, Gross Profit and Gross Margin Percentage

Cost of revenues consists primarily of costs associated with:
  
procurement of components and finished goods;
assembly, testing and distribution of finished products;
warehousing;
customer support related to maintenance;
royalties for third-party software and hardware included in our products;
amortization of technology; and
providing professional services and training.

Amortization of technology represents the amortization of developed technology assets acquired as part of acquisitions.

Costs of Revenues and Gross Profit for the Three Months Ended March 31, 2020 and 2019
(dollars in thousands)
 
2020
 
Change
 
2019
 
Costs
 
$
 
%
 
Costs
Products
$
20,962

 
$
(6,638
)
 
(24.1)%
 
$
27,600

Services
12,340

 
(147
)
 
(1.2)%
 
12,487

Amortization of intangible assets

 
(1,950
)
 
(100.0)%
 
1,950

    Total cost of revenues
$
33,302

 
$
(8,735
)
 
(20.8)%
 
$
42,037

 
 
 
 
 
 
 
 
Gross profit
$
53,151

 
$