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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, 2021
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)
Delaware04-2977748
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
75 Network Drive
BurlingtonMassachusetts01803
   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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $.01 par valueAVIDNasdaq 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 April 30, 2021, was 45,193,579.



AVID TECHNOLOGY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2021

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 business strategies and market positioning;

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

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

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

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

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

the anticipated performance of our products;

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

our plans regarding repatriation of foreign earnings;

the outcome, impact, costs, and expenses of pending litigation or any new litigation or government inquiries to which we may 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;

the effect of seasonal changes in demand for our products and services;

fluctuations in foreign exchange and interest rates;



the risk of restatement of our financial statements;

estimated asset and liability values;

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, 2020, 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.    UNAUDITED FINANCIAL STATEMENTS

AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data, unaudited)
Three Months Ended
 March 31,
 20212020
Net revenues:  
Products$33,267 $34,711 
Services61,097 51,742 
Total net revenues94,364 86,453 
Cost of revenues:  
Products19,493 20,962 
Services13,455 12,340 
Total cost of revenues32,948 33,302 
Gross profit61,416 53,151 
Operating expenses:  
Research and development15,417 15,425 
Marketing and selling20,744 25,289 
General and administrative13,635 12,744 
Restructuring costs, net1,074 145 
Total operating expenses50,870 53,603 
Operating income (loss)10,546 (452)
Interest and other expense, net(5,673)(5,283)
Income (loss) before income taxes4,873 (5,735)
Provision for income taxes482 122 
Net income (loss)$4,391 $(5,857)
Net income (loss) per common share – basic and diluted$0.10$(0.14)
Weighted-average common shares outstanding – basic44,559 43,254 
Weighted-average common shares outstanding – diluted46,204 43,254 
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
 March 31,
 20212020
Net income (loss)$4,391 $(5,857)
Other comprehensive loss:
Foreign currency translation adjustments(1,457)(815)
Comprehensive income (loss)$2,934 $(6,672)
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,
2021
December 31,
2020
ASSETS  
Current assets:  
Cash and cash equivalents$55,624 $79,899 
Restricted cash
1,422 1,422 
Accounts receivable, net of allowances of $1,522 and $1,478 at March 31, 2021 and December 31, 2020, respectively58,831 78,614 
Inventories27,616 26,568 
Prepaid expenses7,308 6,044 
Contract assets21,955 18,579 
Other current assets2,274 2,366 
Total current assets175,030 213,492 
Property and equipment, net15,931 16,814 
Goodwill32,643 32,643 
Right of use assets27,538 29,430 
Deferred tax assets, net6,299 6,801 
Other long-term assets5,544 5,958 
Total assets$262,985 $305,138 
LIABILITIES AND STOCKHOLDERS’ DEFICIT  
Current liabilities:  
Accounts payable$19,220 $21,823 
Accrued compensation and benefits25,675 29,105 
Accrued expenses and other current liabilities35,088 42,264 
Income taxes payable1,405 1,664 
Short-term debt9,156 4,941 
Deferred revenue86,172 87,974 
Total current liabilities176,716 187,771 
Long-term debt175,125 202,759 
Long-term deferred revenue11,334 11,284 
Long-term lease liabilities26,913 28,462 
Other long-term liabilities7,471 7,786 
Total liabilities397,559 438,062 
Commitments and contingencies (Note 7)
Stockholders’ deficit:
Common stock
448 442 
Additional paid-in capital1,032,068 1,036,658 
Accumulated deficit(1,163,956)(1,168,347)
Accumulated other comprehensive loss(3,134)(1,677)
Total stockholders’ deficit(134,574)(132,924)
Total liabilities and stockholders’ deficit$262,985 $305,138 
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, 2021
 Shares of
Common Stock
 Additional Accumulated
Other
Total
 OutstandingCommon
Stock
Paid-in
Capital
Accumulated
Deficit
Comprehensive
Loss
Stockholders’
Deficit
Balances at January 1, 202144,420 442 1,036,658 (1,168,347)(1,677)(132,924)
Stock issued pursuant to employee stock plans592 6 (7,712)— — (7,706)
Stock-based compensation— — 3,122 — — 3,122 
Net income— — — 4,391 — 4,391 
Other comprehensive loss— — — — (1,457)(1,457)
Balances at March 31, 202145,012 448 1,032,068 (1,163,956)(3,134)(134,574)

Three Months Ended March 31, 2020
 Shares of
Common Stock
 Additional Accumulated
Other
Total
 OutstandingCommon
Stock
Paid-in
Capital
Accumulated
Deficit
Comprehensive
Loss
Stockholders’
Deficit
Balances at January 1, 202043,150 430 1,027,824 (1,179,409)(3,930)(155,085)
Stock issued pursuant to employee stock plans398 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, 202043,548 434 1,028,115 (1,185,266)(4,745)(161,462)

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,
 20212020
Cash flows from operating activities:  
Net income (loss)$4,391 $(5,857)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:  
Depreciation and amortization2,119 2,142 
Allowance for doubtful accounts83 497 
Stock-based compensation expense3,122 2,109 
Non-cash provision for restructuring912  
Non-cash interest expense129 2,820 
Loss on extinguishment of debt2,579  
Unrealized foreign currency transaction (gains) losses(1,432)51 
Benefit from (provision for) deferred taxes501 (207)
Changes in operating assets and liabilities:  
Accounts receivable19,702 13,311 
Inventories(1,048)(3,435)
Prepaid expenses and other assets(866)(1,631)
Accounts payable(2,604)(4,858)
Accrued expenses, compensation and benefits and other liabilities(9,887)(5,323)
Income taxes payable(259)40 
Deferred revenue and contract assets(5,129)(5,264)
Net cash provided by (used in) operating activities12,313 (5,605)
Cash flows from investing activities:  
Purchases of property and equipment(1,254)(1,479)
Net cash used in investing activities(1,254)(1,479)
Cash flows from financing activities:  
Proceeds from revolving line of credit 22,000 
Proceeds from long-term debt180,000  
Repayment of debt(203,554)(351)
Common stock repurchases for tax withholdings for net settlement of equity awards(7,706)(1,818)
Prepayment penalty on extinguishment of debt(1,169) 
Payments for credit facility issuance costs(2,574) 
Net cash (used in) provided by financing activities(35,003)19,831 
Effect of exchange rate changes on cash, cash equivalents and restricted cash(332)(402)
Net (decrease) increase in cash, cash equivalents and restricted cash(24,276)12,345 
Cash, cash equivalents and restricted cash at beginning of period83,638 72,575 
Cash, cash equivalents and restricted cash at end of period$59,362 $84,920 
Supplemental information:
Cash and cash equivalents$55,624 $81,182 
Restricted cash1,422 1,663 
Restricted cash included in other long-term assets2,316 2,075 
Total cash, cash equivalents and restricted cash shown in the statement of cash flows$59,362 $84,920 
Cash paid for income taxes$281 $391 
Cash paid for interest$3,630 $4,450 
The accompanying notes are an integral part of the condensed consolidated financial statements.
5


AVID TECHNOLOGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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, 2020 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, 2020 in our Annual Report on Form 10-K for the year ended December 31, 2020, 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, 2020.

The consolidated results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2021. The Company’s results of operations are affected by economic conditions, including macroeconomic conditions and levels of business and consumer confidence.

The novel coronavirus (COVID-19) pandemic, together with the measures implemented or recommended by governmental authorities and private organizations in response to the pandemic, has had a material adverse impact to the Company's business, operating results and financial condition primarily due to reduced demand for our products and services which has led to lower net revenues.

The Company began experiencing a significant decline in international and domestic demand due to COVID-19 by the end of the first quarter of 2020, and this reduction in demand continued through the balance of 2020. These economic impacts were the result of, but not limited to:

the postponement or cancellation of film and television productions, major sporting events, and live music events;
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 restrictions, work-from-home policies or shelter-in-place orders.

Our results for the first quarter began to show a gradual recovery towards pre-pandemic spending levels with the continuing positive signs of recovery from the impacts of the COVID-19 pandemic driven by vaccination and government stimulus programs, particularly in the US. At the same time, certain international countries around the globe continue to face challenges with renewed lockdowns and travel restrictions and there remains uncertainty relating to the ongoing spread and severity of the virus. While we are encouraged by the trends we saw in the first quarter, to the extent that the pandemic continues to have negative impacts on economies, our results could be affected and uneven. Consequently, we will continue to evaluate our financial position in light of future developments, particularly those relating to COVID-19.

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.
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Significant Accounting Policies - Revenue Recognition

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

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, maintenance, 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, 2021, we adopted 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. Our adoption of ASU 2019-12 did not have a material impact on our consolidated financial statements.

Recent Accounting Pronouncements To Be Adopted

In March 2020, the Financial Accounting Standards Board (“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 INCOME (LOSS) PER SHARE

Net income (loss) per common share is presented for both basic income (loss) per share (“Basic EPS”) and diluted income (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.

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The following table sets forth (in thousands) potential common shares that were considered anti-dilutive securities at March 31, 2021 and 2020:
 March 31, 2021March 31, 2020
Options 465 
Non-vested restricted stock units1,040 3,069 
Anti-dilutive potential common shares1,040 3,534 

The following table sets forth (in thousands) the basic and diluted weighted common shares outstanding for the three months ended March 31, 2021:

Weighted common shares outstanding - basic44,559 
Net effect of common stock equivalents1,645 
Weighted common shares outstanding - diluted46,204 


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, 2021 and December 31, 2020, 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,
2021
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$371 $97 $274 $ 
  Fair Value Measurements at Reporting Date Using
 December 31, 2020Quoted 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$522 $282 $240 $ 

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.

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4.    INVENTORIES

Inventories consisted of the following (in thousands):
 March 31, 2021December 31, 2020
Raw materials$8,126 $8,223 
Work in process320 353 
Finished goods19,170 17,992 
Total$27,616 $26,568 

As of March 31, 2021 and December 31, 2020, finished goods inventory included $1.1 million and $1.2 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 qualify as either operating or finance leases. We determine if contracts with vendors represent a lease or have a lease component under U.S. GAAP at contract inception. 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. As of March 31, 2021, the weighted average incremental borrowing rate was 6.0% and the weighted average remaining lease term was 6.3 years.

Finance 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. Each lease agreement provides an implicit discount rate used to determine the present value of future payments. As of March 31, 2021, the weighted-average discount rate was 2.3% and the weighted average remaining lease term was 2.5 years.

Lease costs for minimum lease payments is recognized on a straight-line basis over the lease term. Our total operating lease costs were $1.9 million and $2.6 million for the three months ended March 31, 2021 and March 31, 2020, respectively. Related cash payments were $2.1 million and $2.6 million for the three months ended March 31, 2021 and March 31, 2020, respectively. Operating 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. Finance lease costs, short-term lease costs, variable lease costs, and sublease income are not material.

The table below reconciles the undiscounted future minimum lease payments for operating and finance leases 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, 2021 (in thousands):
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Year Ending December 31,Operating LeasesFinance Leases
2021 (excluding three months ended March 31, 2021)$5,530 $252 
20226,478 255 
20235,560 230 
20244,917  
20255,041  
Thereafter11,709  
Total future minimum lease payments$39,235 $737 
Less effects of discounting(6,929)(19)
Total lease liabilities$32,306 $718 

Supplemental balance sheet information related to leases was as follows (in thousands):

Operating Leases
March 31, 2021
Right of use assets$27,538 
Accrued expenses and other current liabilities(5,393)
Long-term lease liabilities(26,913)
     Total lease liabilities$(32,306)


Finance Leases
March 31, 2021
Other assets$614 
Accrued expenses and other current liabilities(266)
Other long-term liabilities(452)
     Total lease liabilities$(718)

6.    OTHER LONG-TERM LIABILITIES

Other long-term liabilities consisted of the following (in thousands):
 March 31, 2021December 31, 2020
Deferred compensation$5,533 5,818 
Finance lease liabilities452 472 
Other long-term liabilities1,486 1,496 
   Total$7,471 $7,786 


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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 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 purchased $5.1 million of products and services pursuant to this agreement as of March 31, 2021.

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, 2021, be eligible to draw against the letters of credit to a maximum of $0.7 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 $0.7 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 $1.6 million that otherwise support our ongoing operations. These letters of credit have various terms and expire during 2021 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, 2021.

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 below, 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.

On July 14, 2020, we sent a notice to a customer demanding sums that we believe are due to Avid pursuant to a contract. On October 7, 2020, the customer sent a notice to us denying any legal liability and demanding payment for breach of contract resulting from various alleged delays by us. 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 related to 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 March 31, 2021 and as of the date of filing of these condensed consolidated financial statements, we believe that, other than as set forth in this note, no provision for liability nor disclosure is required related to any claims because: (a) there is no reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claim, (b) a reasonably possible loss or range of loss cannot be estimated, or (c) such estimate is immaterial.

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

We provide warranties on externally sourced and internally developed hardware. For internally developed hardware, and in cases where the warranty granted to customers for externally sourced hardware is greater than that provided by the manufacturer, we record an accrual for the related liability based on historical trends and actual material and labor costs. The following table sets forth the activity in the product warranty accrual account for the three months ended March 31, 2021 and 2020 (in thousands):
Three Months Ended March 31,
20212020
Accrual balance at beginning of period$1,095 $1,337 
Accruals for product warranties466 384 
Costs of warranty claims(374)(357)
Accrual balance at end of period$1,187 $1,364 

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

In October 2020, we committed to a restructuring plan in order to undergo a strategic reorganization of our business. The strategic reorganization involved significant changes in business operations to better support our strategy and overall performance. The restructuring plan related to our strategic reorganization is expected to be substantially completed in 2021.

During the three months ended March 31, 2021, we recorded restructuring charges of $1.1 million for employee severance costs related to approximately 23 positions eliminated during the first quarter of 2021.

During the three months ended March 31, 2020, we recorded restructuring charges of $0.1 million for employee severance cost adjustments.

The following table sets forth the activity in the restructuring accruals for the three months ended March 31, 2021 (in thousands):
 Employee
Accrual balance as of December 31, 2020$3,687 
Restructuring charges and revisions 912 
Cash payments(2,438)
Foreign exchange impact on ending balance(36)
Accrual balance as of March 31, 2021$2,125 
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The employee restructuring accrual at March 31, 2021 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, 2021.


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, 2021 and 2020 (in thousands):
Three Months Ended March 31,
 20212020
Products and solutions net revenues$33,267 $34,711 
Subscription services24,868 13,958 
Maintenance29,852 31,794 
Professional services, training and other services6,377 5,990 
Total net revenues$94,364 $86,453 

The following table sets forth our revenues by geographic region for the three months ended March 31, 2021 and 2020 (in thousands):
Three Months Ended March 31,
 20212020
Revenues:  
United States$39,471 $36,090 
Other Americas5,179 5,450 
Europe, Middle East and Africa36,523 33,235 
Asia-Pacific13,191 11,678 
Total net revenues$94,364 $86,453 

Contract Asset

Contract asset activity for the three months ended March 31, 2021 and 2020 was as follows (in thousands):
March 31, 2021March 31, 2020
Contract asset at beginning of year$18,579 $19,494 
Revenue in excess of billings14,395 7,878 
Customer billings(11,019)(5,210)
Contract asset at end of period$21,955 $22,162 





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Deferred Revenue

Deferred revenue activity for the three months ended March 31, 2021 and 2020 was as follows (in thousands):
March 31, 2021March 31, 2020
Deferred revenue at beginning of period$99,259 $97,901 
Billings deferred31,132 28,687 
Recognition of prior deferred revenue(32,885)(31,176)
Deferred revenue at end of period$97,506 $95,412 

A summary of the significant performance obligations included in deferred revenue is as follows (in thousands):
March 31, 2021
Product$6,852 
Subscription5,718 
Maintenance contracts75,174 
Implied PCS7,652 
Professional services, training and other2,110 
Deferred revenue at March 31, 2021
$97,506 

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 $7.7 million attributable to Implied PCS recorded in deferred revenue as of March 31, 2021. We expect to recognize revenue for these remaining performance obligations of $2.5 million for the remainder of 2021 and $2.1 million, $1.4 million, $0.9 million and $0.5 million for the years ending December 31, 2022, 2023, 2024, and 2025, respectively, and $0.3 million thereafter.

As of March 31, 2021, we had approximately $49.5 million of transaction price allocated to remaining performance obligations for certain enterprise agreements that have not yet been fully invoiced. Approximately $44.2 million of these performance obligations were unbilled as of March 31, 2021. 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 $49.5 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.

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10.    LONG-TERM DEBT AND CREDIT AGREEMENT

Long-term debt consisted of the following (in thousands):
March 31, 2021December 31, 2020
Term Loan, net of unamortized issuance costs and debt discount of $2,445 and $2,579 at March 31, 2021 and December 31, 2020, respectively$175,305 $198,629 
PPP Loan7,800 7,800 
Other long-term debt1,176 1,271 
    Total debt184,281 207,700 
Less: current portion9,156 4,941 
Total long-term debt$175,125 $202,759 

The following table summarizes the contractual maturities of our borrowing obligations as of March 31, 2021 (in thousands):
Fiscal YearCredit AgreementPPP LoanOther Long-Term DebtTotal
2021$6,750  116 $6,866 
20229,000 7,800 164 16,964 
202313,500  176 13,676 
202418,000  188 18,188 
202518,000  202 18,202 
Thereafter112,500  330 112,830 
Total before unamortized discount
177,750 7,800 1,176 186,726 
Less: unamortized discount and issuance costs2,445   2,445 
Less: current portion of long-term debt
9,000  156 9,156 
Total long-term debt$166,305 $7,800 $1,020 $175,125 

Credit Agreement

On January 5, 2021, the Company entered into a Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. as collateral and administrative agent, and a syndicate of banks, as lenders thereunder (the “Lenders”). Pursuant to the Credit Agreement, the Lenders agreed to provide the Company with (a) a term loan in the aggregate principal amount of $180.0 million (the “Term Loan”) and (b) a revolving credit facility (the “Credit Facility”) of up to a maximum of $70.0 million in borrowings outstanding at any time. The Credit Facility, which was undrawn at closing, can be used for working capital, other general corporate purposes and for other permitted uses. The proceeds from the Term Loan, plus available cash on hand, were used to repay outstanding borrowings of $201 million under the Company’s prior financing agreement with Cerberus Business Finance, LLC( the “Financing Agreement”), which was then terminated. As a result of this termination, the Company incurred a loss on extinguishment of debt of $3.7 million as a result of writing off $2.6 million of remaining unamortized issuance costs as well as a $1.1 million prepayment penalty.

The Term Loan has an initial interest rate of LIBOR plus an applicable margin of 3.00%, with a 0.25% LIBOR floor. The applicable margin on the Term Loan and the Credit Facility ranges from 2.00% to 3.25%, depending on leverage. The effective interest rate for the period was 3.25%.

The Term Loan requires quarterly principal payments commencing in March 2021 equal to 5.0% of the original principal amount of the Term Loan in years 1 and 2, 7.5% of the original principal amount of the Term Loan in year 3, and 10% of the original principal amount of the Term Loan in years 4 and 5, with the remaining aggregate principal amount due at maturity.
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The Company granted a security interest on substantially all of their assets to secure the obligations under the Credit Facility and the Term Loan.

The Credit Agreement contains two financial covenants: (i) a requirement to maintain a total net leverage ratio, as defined in the Credit Agreement, of no more than 4.00 to 1.00 through June 30, 2021, with step downs thereafter, and (ii) a requirement to maintain a fixed charge covenant ratio, as defined in the Credit Agreement, of no less than 1.20 to 1.00. Both the Term Loan and the revolving Credit Facility mature on January 5, 2026. We were in compliance with the Credit Agreement covenants as of March 31, 2021.

In association with the Credit Agreement, the Company incurred $2.5 million of issuance discounts and an immaterial amount of issuance costs. The Term Loan discount and issuance costs will be amortized over the five year life of the Credit Agreement. We recorded $1.4 million of interest expense on the Term Loan during three months ended March 31, 2021. As of March 31, 2021, there were no amounts drawn under the Credit Facility.

PPP Loan

On May 11, 2020, the Company received $7.8 million of proceeds in connection with its incurrence of a loan under the Paycheck Protection Program (“PPP”) which was created through the Coronavirus Aid, Relief, and Economic Act (“CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). The application for these funds requires the Company to, in good faith, certify that the economic uncertainty at the time of application made the loan request necessary to support the ongoing operations of the Company. This certification further required the Company to take into account its then-current business activity and ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on its future adherence to the forgiveness criteria. The loan has a fixed interest rate of 1% and matures on May 11, 2022. Interest payments are deferred until a forgiveness decision is returned by the SBA. We recognized an immaterial amount of interest expense related to the loan during the three months ended March 31, 2021.

Pursuant to the CARES Act and implementing rules and regulations, the Company has applied to the SBA for the full amount of the PPP loan to be forgiven. The Company has used the proceeds of the PPP loan for purposes consistent with the PPP. While the Company currently believes that its use of the loan proceeds will meet the conditions for forgiveness of the loan, the Company cannot assure that it will be eligible for forgiveness of the loan, in whole or in part. Any PPP loan balance remaining following forgiveness by the SBA will be fully repaid on or before the maturity date of the loan.

11. STOCKHOLDERS’ EQUITY

Stock-Based Compensation

Information with respect to the Company’s option shares granted under all of our stock incentive plans for the three months ended March 31, 2021 was as follows:
 Total Number of OptionsWeighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic
Value
(in thousands)
Options outstanding at January 1, 2021246,000 $7.48  
Granted $  
Exercised(235,000)$7.47  
Forfeited or canceled $  
Options outstanding at March 31, 202111,000 $7.700.38$148
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Information with respect to the Company’s non-vested restricted stock units for the three months ended March 31, 2021 was as follows:
 Number of Restricted Stock UnitsWeighted-
Average
Grant-Date
Fair Value
Weighted-
Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic
Value
(in thousands)
Shares Retained to Cover Statutory Minimum Withholding Taxes
Non-vested at January 1, 20212,114,879 $7.01  — 
Granted201,259 21.80  — 
Vested(327,110)6.17  (130,552)
Forfeited(19,692)7.37  — 
Outstanding at March 31, 20211,969,336 $8.650.79$41,553

Information with respect to the Company’s non-vested performance-based restricted stock units for the three months ended March 31, 2021 was as follows:
 Number of Performance-based Restricted Stock UnitsWeighted-
Average
Grant-Date
Fair Value
Weighted-
Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic
Value
(in thousands)
Shares Retained to Cover Statutory Minimum Withholding Taxes
Non-vested at January 1, 2021653,428 $6.74  — 
Granted397,048 15.07  — 
Vested(471,112)5.81  (196,703)
Forfeited   — 
Non-vested at March 31, 2021579,364 $13.201.55$12,225


Stock-based compensation was included in the following captions in the Company’s condensed consolidated statements of operations for the three months ended March 31, 2021 and 2020 (in thousands):
Three Months Ended March 31,
 20212020
Share-based compensation expense by type:
Time-based Restricted Stock Units$2,437 $1,567 
Performance-based Restricted Stock Units$656 $516 
ESPP$29 $26 
Total share-based compensation expense$3,122 $2,109 

Three Months Ended March 31,
 20212020
Cost of products revenues$142 $102 
Cost of services revenues298 98 
Research and development expenses521 294 
Marketing and selling expenses602 441 
General and administrative expenses1,559 1,174 
Total share-based compensation expense$3,122 $2,109 
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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’s products and solutions 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 18 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 Pro Tools for audio and Media Composer for video, and our 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 30,000 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. As of March 31, 2021, we had approximately 324,000 paid subscriptions. These licensing options offer choices in pricing and deployment to suit our customers’ needs. Our subscription offerings to date have mostly been sold to creative professionals, although in the third quarter of 2020 we introduced subscription offerings for our enterprise software solutions. 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 are optimizing our go-to-market 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.
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A summary of our revenue sources for the three months ended March 31, 2021 and 2020 is as follows (in thousands):
Three Months Ended March 31,
20212020
Subscriptions$24,868 $13,958 
Maintenance29,852 31,794 
Subscriptions and Maintenance54,720 45,752 
Perpetual Licenses7,0585,372
Software Licenses and Maintenance61,778 51,124 
Integrated solutions26,209 29,339 
Professional services & training6,377 5,990 
Total revenue$94,364 $86,453 

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 year ended 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 live music events;
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 restrictions, work-from-home policies or shelter-in-place orders.

Our results for the first quarter began to show a gradual recovery towards pre-pandemic spending levels with the continuing positive signs of recovery from the impacts of the COVID-19 pandemic driven by vaccination and government stimulus programs, particularly in the US. At the same time, certain international countries around the globe continue to face challenges with renewed lockdowns and travel restrictions and there remains uncertainty relating to the ongoing spread and severity of the virus. While we are encouraged by the trends we saw in the first quarter, to the extent that the pandemic continues to have negative impacts on economies, our results could be affected and uneven. 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. For further discussion of these issues, see “Liquidity and Capital Resources” below.

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 the year ended December 31, 2020 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.
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Revenue Recognition

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

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, maintenance, 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 “Revenue” of our Notes to Condensed Consolidated Financial Statements under Part 1, Item 1 of this Form 10-Q 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 prior credit facility, and the terms and geographic locations of our facilities.

See Note 5 “Leases” of our Notes to Condensed Consolidated Financial Statements under Part 1, Item 1 of this Form 10-Q for further discussion on our leases.

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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, 2021 and 2020:
 Three Months Ended March 31,
 20212020
Net revenues:  
Product35.3 %40.2 %
Services64.7 %59.8 %
Total net revenues100.0 %100.0 %
Cost of revenues34.9 %38.5 %
Gross margin65.1 %61.5 %
Operating expenses:  
Research and development16.3 %17.8 %
Marketing and selling22.0 %29.3 %
General and administrative14.5 %14.7 %
Restructuring costs, net1.1 %0.2 %
Total operating expenses53.9 %62.0 %
Operating income (loss)11.2 %(0.5)%
Interest and other expense, net(6.0)%(6.1)%
Income (loss) before income taxes5.2 %(6.6)%
Provision for (benefit from) income taxes0.5 %0.1 %
Net income (loss)4.7 %(6.7)%

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, 2020.
Net Revenues for the Three Months Ended March 31, 2021 and 2020
(dollars in thousands)
2021Change2020
 Net Revenues$%Net Revenues
Products and solutions$33,267 $(1,444)(4.2)%$34,711 
Services61,097 9,355 18.1%51,742 
Total net revenues$94,364 $7,911 9.2%$86,453 


Net Revenues for the Nine Months Ended September 30, 2020 and 2019

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The following table sets forth the percentage of our net revenues attributable to geographic regions for the three months ended March 31, 2021 and 2020:
Three Months Ended March 31,
20212020
United States42%42%
Other Americas5%6%
Europe, Middle East and Africa39%38%
Asia-Pacific14%14%

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 $1.4 million, or 4.2%, for the three months ended March 31, 2021, compared to the same period in 2020. The decrease for the three months ended March 31, 2021 was primarily due to lower sales as a result of COVID-19, which negatively impacted products and solutions revenues for the reasons discussed above under “Executive Overview – Impact of COVID-19 on Our Business.”

Services Revenues

Services revenues are derived primarily from maintenance contracts, subscription services, and professional services and training. Services revenues increased $9.4 million, or 18.1%, for the three months ended March 31, 2021, compared to the same period in 2020. This increase was primarily due to strong growth in our subscription services, partially offset by lower professional services revenue due to the negative effects of 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; and
providing professional services and training.

Costs of Revenues and Gross Profit

Costs of Revenues and Gross Profit for the Three Months Ended March 31, 2021 and 2020
(dollars in thousands)
2021Change2020
 Costs$%Costs
Products$19,493 $(1,469)(7.0)%$20,962 
Services13,455 1,115 9.0%12,340 
    Total cost of revenues$32,948 $(354)(1.1)%$33,302 
Gross profit$61,416 $8,265 15.6%$53,151 





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Gross Margin Percentage

Gross margin percentage, which is net revenues less costs of revenues divided by net revenues, fluctuates based on factors such as the mix of products sold, the cost and proportion of third-party hardware and software included in the systems sold, the offering of product upgrades, price discounts and other sales-promotion programs, the distribution channels through which products are sold, the timing of new product introductions, sales of aftermarket hardware products, and currency exchange-rate fluctuations. 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, 2020.

Our gross margin percentage for the three months ended March 31, 2021 increased to 65.1% from 61.5% for the three months ended March 31, 2020, compared to the same period in 2020. This increase was primarily due to subscription offerings representing a greater portion of revenues, partially offset by lower gross margin percentage in all other areas of the business due to lower volumes.