UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________FORM 10-Q
FORM 10-Q
(Mark One)
(Mark One)
x☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
For the quarterly period ended September 30, 2017
OR
¨☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
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:
Delaware
(State or Other JurisdictionTitle of
Incorporation or Organization)
each class		 
04-2977748
(I.R.S. Employer
Identification No.)
Trading Symbol(s)		 Name of each exchange on which registered
Common Stock, $.01 par valueAVIDNasdaq Global Select Market
75 Network Drive
Burlington, Massachusetts  01803
(Address of Principal Executive Offices, Including Zip Code)

(978) 640-6789
(Registrant’s Telephone Number, Including Area Code)
__________________
Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No ¨

Indicate by check mark whether the registrant has submitted and posted on its corporate Web site, if any,electronically, every Interactive Data File required to be submitted and posted 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 and post 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 ofunder the Exchange Act.
Large accelerated fileroAccelerated Filerx
Non-accelerated filer  oSmaller reporting company☐
 
Large Accelerated Filer ¨
Non-accelerated Filer ¨
(Do not check if smaller reporting company)
Accelerated Filer x
Smaller Reporting Company ¨
Emerging growth company¨
☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 ofunder the Exchange Act).  
Yes ¨☐   No x

The number of shares outstanding of the registrant’s Common Stock, par value $0.01, as of November 6, 2017May 4, 2020, was 41,186,120.43,697,846.





AVID TECHNOLOGY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017MARCH 31, 2020


TABLE OF CONTENTS
 Page
PART I.
FINANCIAL INFORMATION
 
   
ITEM 1.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017March 31, 2020 and 20162019
1
 
Condensed Consolidated Statements of Comprehensive Income (Loss)Loss for the three and nine months ended September 30, 2017March 31, 2020 and 20162019
2
 
Condensed Consolidated Balance Sheets as of September 30, 2017March 31, 2020 and December 31, 20162019
3
 
Condensed Consolidated Statements of Cash FlowsChanges in Stockholders’ Deficit for the ninethree months ended September 30, 2017March 31, 2020 and 20162019
4
 
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019
5
Notes to Unaudited Condensed Consolidated Financial Statements
56
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2018
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
3528
ITEM 4.
CONTROLS AND PROCEDURES
3528
   
PART II.
OTHER INFORMATION
 
   
ITEM 1.
LEGAL PROCEEDINGS
3730
ITEM 1A.
RISK FACTORS
3730
ITEM 6.
EXHIBITS
3732
   
SIGNATUREINDEX TO EXHIBITS
3933
  
INDEX TO EXHIBITSSIGNATURE
3834





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”“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 Avid Everywhere strategic plan and other strategic initiatives,strategy, including our cost saving strategies;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 elongatedlong 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, including Orad Hi-Tech Ltd (“Orad”), into our operations;businesses;
our anticipated benefits and synergies from, and the anticipated financial impact of, any acquired business (including Orad);
the anticipated performance of our products;
changes in inventory levels;
our ability to maintain adequate supplies of products and components, including through sole-source supply arrangements;

our plans regarding repatriation ofto 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 ability to accelerate growth of our Cloud-enabled Avid Everywhere platform;
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;
the effects of seasonality on our revenues and results of operations;
seasonal factors;

fluctuations in foreign exchange and interest rates;
our ability to effectively mitigate and remediate the material weakness in our internal control over financial reporting, and the expected timing thereof;
the risk of restatement of our financial statements;

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 adequacy thereof;wake of the COVID-19 pandemic; and

worldwide political uncertainty, in particular the risk that the United States may withdraw from or materially modify NAFTA or other 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, 2016,2019, 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“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, Everywhere, Avid NEXIS, AirSpeed, EUCON, iNEWS, Interplay,FastServe, MediaCentral, Mbox, Media Composer, NewsCutter, Nitris, Pro Tools, Sibelius and Symphony.Sibelius. Other trademarks appearing in this Form 10-Q are the property of their respective owners.








PART I - FINANCIAL INFORMATION


ITEM 1.CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data, unaudited)
 Three Months Ended Nine Months Ended
 September 30, September 30,
 2017 2016 2017 2016
Net revenues:       
Products$54,319
 $63,740
 $152,980
 $223,841
Services50,946
 55,279
 158,765
 172,794
Total net revenues105,265
 119,019
 311,745
 396,635

       
Cost of revenues:       
Products29,485
 26,793
 80,478
 82,405
Services13,472
 14,885
 41,747
 45,126
Amortization of intangible assets1,950
 1,950
 5,850
 5,850
Total cost of revenues44,907
 43,628
 128,075
 133,381
Gross profit60,358
 75,391
 183,670
 263,254

       
Operating expenses:       
Research and development16,025
 19,953
 51,904
 62,791
Marketing and selling25,652
 27,231
 80,481
 89,027
General and administrative15,193
 13,822
 43,268
 48,359
Amortization of intangible assets362
 567
 1,088
 2,135
Restructuring (recoveries) costs, net(582) 5,314
 6,464
 7,878
Total operating expenses56,650
 66,887
 183,205
 210,190

       
Operating income3,708
 8,504
 465
 53,064

       
Interest and other expense, net(4,701) (4,707) (13,465) (14,049)
(Loss) income before income taxes(993) 3,797
 (13,000) 39,015
Benefit from income taxes(1,065) (5,321) (326) (3,983)
Net income (loss)$72
 $9,118
 $(12,674) $42,998

       
Net income (loss) per common share – basic$0.00 $0.23 $(0.31) $1.08
Net income (loss) per common share – diluted$0.00 $0.23 $(0.31) $1.08

       
Weighted-average common shares outstanding – basic41,133
 40,194
 40,954
 39,814
Weighted-average common shares outstanding – diluted41,355
 40,476
 40,954
 39,950
The accompanying notes are an integral part of the condensed consolidated financial statements.


AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, unaudited)
 Three Months Ended Nine Months Ended
 September 30, September 30,
 2017 2016 2017 2016
Net income (loss)$72
 $9,118
 $(12,674) $42,998
        
Other comprehensive income (loss):       
Foreign currency translation adjustments2,014
 155
 6,803
 2,613
        
Comprehensive income (loss)$2,086
 $9,273
 $(5,871) $45,611
 Three Months Ended
 March 31,
 2020 2019
Net revenues:   
Products$34,711
 $54,396
Services51,742
 48,923
Total net revenues86,453
 103,319


 
Cost of revenues:   
Products20,962
 27,600
Services12,340
 12,487
Amortization of intangible assets—
 1,950
Total cost of revenues33,302
 42,037
Gross profit53,151
 61,282


 
Operating expenses:   
Research and development15,425
 16,285
Marketing and selling25,289
 24,878
General and administrative12,744
 13,788
Amortization of intangible assets—
 363
Restructuring costs, net145
 558
Total operating expenses53,603
 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 taxes122
 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 diluted43,254
 42,046
   
The accompanying notes are an integral part of the condensed consolidated financial statements.






AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETSSTATEMENTS OF COMPREHENSIVE LOSS
(in thousands, unaudited)
 September 30,
2017
December 31,
2016
ASSETS   
Current assets:   
Cash and cash equivalents$44,094
 $44,948
Accounts receivable, net of allowances of $10,494 and $8,618 at September 30, 2017 and December 31, 2016, respectively40,864
 43,520
Inventories41,160
 50,701
Prepaid expenses8,537
 6,031
Other current assets9,925
 5,805
Total current assets144,580
 151,005
Property and equipment, net23,273
 30,146
Intangible assets, net15,995
 22,932
Goodwill32,643
 32,643
Long-term deferred tax assets, net1,355
 1,245
Other long-term assets7,404
 11,610
Total assets$225,250
 $249,581
    
LIABILITIES AND STOCKHOLDERS’ DEFICIT   
Current liabilities:   
Accounts payable$28,620
 $26,435
Accrued compensation and benefits32,734
 25,387
Accrued expenses and other current liabilities32,848
 34,088
Income taxes payable806
 1,012
Short-term debt5,072
 5,000
Deferred revenues122,475
 146,014
Total current liabilities222,555
 237,936
Long-term debt191,300
 188,795
Long-term deferred tax liabilities, net—
 913
Long-term deferred revenues72,091
 79,670
Other long-term liabilities9,726
 12,178
Total liabilities495,672
 519,492
    
Commitments and contingencies (Note 7)
 
    
Stockholders’ deficit:   
Common stock423
 423
Additional paid-in capital1,038,308
 1,043,063
Accumulated deficit(1,283,822) (1,271,148)
Treasury stock at cost(22,238) (32,353)
Accumulated other comprehensive loss(3,093) (9,896)
Total stockholders’ deficit(270,422) (269,911)
Total liabilities and stockholders’ deficit$225,250
 $249,581
 Three Months Ended
 March 31,
 2020 2019
Net loss$(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.







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 cash1,663

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
Inventories32,601

29,166
Prepaid expenses10,101

9,425
Contract assets22,162

19,494
Other current assets7,147

6,125
Total current assets214,821

208,731
Property and equipment, net18,873

19,580
Goodwill32,643

32,643
Right of use assets29,002

29,747
Long-term deferred tax assets, net7,640

7,479
Other long-term assets5,456

6,113
Total assets$308,435

$304,293
    
LIABILITIES AND STOCKHOLDERS’ DEFICIT   
Current liabilities:   
Accounts payable$34,989

$39,888
Accrued compensation and benefits19,185

19,524
Accrued expenses and other current liabilities33,044

36,759
Income taxes payable1,964

1,945
Short-term debt31,400

30,554
Deferred revenue82,441

83,589
Total current liabilities203,023

212,259
Long-term debt220,426

199,034
Long-term deferred revenue12,971

14,312
Long-term lease liabilities28,063

28,127
Other long-term liabilities5,414

5,646
Total liabilities469,897

459,378
    
Commitments and contingencies (Note 7)

 

    
Stockholders’ deficit:


Common stock434

430
Additional paid-in capital1,028,115

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.


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, 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)

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, 201942,339
(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, 201942,339
—
 423
1,024,028
(1,187,223)—
(4,315)(167,087)

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



AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
Nine Months EndedThree Months Ended
September 30,March 31,
2017 20162020 2019
Cash flows from operating activities:    
 
Net (loss) income$(12,674)
$42,998
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: 
 
Net loss$(5,857)
$(213)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: 
 
Depreciation and amortization16,932

19,169
2,142

4,740
(Recovery) provision for doubtful accounts(158)
890
Allowance for (recovery from) doubtful accounts497

(9)
Stock-based compensation expense5,874

6,116
2,109

1,738
Non-cash provision for restructuring3,191
 1,137
Non-cash interest expense7,255

7,935
2,820

3,359
Unrealized foreign currency transaction losses6,885

2,021
Unrealized foreign currency transaction losses (gains)51

(586)
Benefit from deferred taxes(925)
(5,187)(207)
(1)
Changes in operating assets and liabilities: 
  
 
Accounts receivable2,877

17,057
13,311

6,444
Inventories9,542

(7,561)(3,435)
(1,372)
Prepaid expenses and other assets(3,958)
(1,493)(1,631)
(3,861)
Accounts payable2,065

(19,627)(4,858)
(810)
Accrued expenses, compensation and benefits and other liabilities543

(4,384)(5,323)
(2,837)
Income taxes payable(161)
347
40

261
Deferred revenues(31,185)
(108,343)
Net cash provided by (used in) operating activities6,103

(48,925)
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(6,125)
(9,681)(1,479)
(1,767)
Increase in other long-term assets(24)
(17)
Decrease (increase) in restricted cash1,790

(4,544)
Net cash used in investing activities(4,359)
(14,242)(1,479)
(1,767)
   


Cash flows from financing activities: 
  
 
Proceeds from long-term debt912

100,000
Proceeds from revolving line of credit22,000

—
Repayment of debt(3,750)
(2,500)(351)
(3,928)
Proceeds from the issuance of common stock under employee stock plans219

5,914
—

309
Common stock repurchases for tax withholdings for net settlement of equity awards(732)
(803)(1,818)
(1,690)
Proceeds from revolving credit facilities—

25,000
Payments on revolving credit facilities—

(30,000)
Payments for credit facility issuance costs—

(5,020)
Net cash (used in) provided by financing activities(3,351)
92,591
Partial unwind capped call cash receipt—
 (22)
Net cash provided by (used in) financing activities19,831

(5,331)
   




Effect of exchange rate changes on cash and cash equivalents753

391
Net (decrease) increase in cash and cash equivalents(854)
29,815
Cash and cash equivalents at beginning of period44,948

17,902
Cash and cash equivalents at end of period$44,094

$47,717
Effect of exchange rate changes on cash, cash equivalents and restricted cash(402)
(55)
Net increase (decrease) in cash, cash equivalents and restricted cash12,345

(777)
Cash, cash equivalents and restricted cash at beginning of period72,575

68,094
Cash, cash equivalents and restricted cash at end of period$84,920

$67,317
Supplemental information:   




Cash paid for income taxes, net of refunds$463
 $1,678
Cash and cash equivalents$81,182

$55,326
Restricted cash1,663

9,020
Restricted cash included in other long-term assets2,075

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 interest7,406
 5,767
$4,450
 $2,041
  
The accompanying notes are an integral part of the condensed consolidated financial statements.




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, “Avid”“we” or the “Company”“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. TheWe prepared the accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes necessary for a complete presentation of operations, comprehensive income (loss), financial position, changes in stockholders’ deficit, and cash flows of the Company 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, 20162019 was derived from the Company’sour audited consolidated financial statements and does not include all disclosures required by U.S. GAAP for annual financial statements. The CompanyWe filed audited consolidated financial statements as of and for the year ended December 31, 20162019 in itsour Annual Report on Form 10-K for the year ended December 31, 2016,2019, 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 the Company’sour Annual Report on Form 10-K for the year ended December 31, 20162019.


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 the Company’sour estimates.

The Company has generally funded operations in recent years through the use of existing cash balances, supplemented from time to time with the proceeds of long-term debt and borrowings under its credit facilities. The Company’s principal sources of liquidity include cash and cash equivalents totaling $44.1 million as of September 30, 2017.

In February 2016, the Company committed to a cost efficiency program that encompassed a series of measures intended to allow the Company to more efficiently operate in a leaner, more directed cost structure. These measures included reductions in the Company’s workforce, consolidation of facilities, transfers of certain business processes to lower cost regions and reductions in other third-party service costs. The cost efficiency program was substantially complete as of June 30, 2017.

In connection with the cost efficiency program, on February 26, 2016, the Company entered into a Financing Agreement (the “Financing Agreement”) with the lenders party thereto (the “Lenders”). Pursuant to the Financing Agreement, the Company entered into a term loan in the original aggregate principal amount of $100.0 million. The Financing Agreement also originally provided the Company with the ability to draw up to a maximum of $5.0 million in revolving credit. All outstanding loans under the Financing Agreement will become due and payable in February 2021, or in May 2020 if the $125.0 million in outstanding principal of 2.00% convertible senior notes due June 15, 2020 (the “Notes”) has not been repaid or refinanced by such time.

The Financing Agreement contains customary representations and warranties, covenants, mandatory prepayments, and events of default under which the Company’s payment obligations may be accelerated. On March 14, 2017 (the “Amendment No. 1 Effective Date”), the Company entered into an amendment (the “First Amendment”) to the Financing Agreement. The First Amendment modified the covenant requiring the Company to maintain a Leverage Ratio (defined to mean the ratio of (a) total funded indebtedness to (b) consolidated EBITDA) such that following the Amendment No. 1 Effective Date, the Company is required to maintain a Leverage Ratio of no greater than 3.50:1.00 for the four quarters ended March 31, 2017, 4.20:1.00 for the four quarters ended June 30, 2017, 4.75:1.00 for the four quarters ended September 30, 2017, 4.80:1.00 for the four quarters ending December 31, 2017, 4:40:1.00 for each of the four quarters ending March 31, 2018 through March 31, 2019, respectively, and thereafter declining over time from 3.50:1.00 to 2.50:1.00. Following the Amendment No. 1 Effective Date, interest accrues on outstanding borrowings under the credit facility and the term loan (each as defined in the Financing Agreement) at a rate of either the LIBOR Rate (as defined in


the Financing Agreement) plus 7.25% or a Reference Rate (as defined in the Financing Agreement) plus 6.25%, at the option of the Company. As of September 30, 2017, the Company was in compliance with the Financing Agreement covenants.

On November 9, 2017 (the “Amendment No. 2 Effective Date”), the Company entered into an amendment (the “Second Amendment”) to the Financing Agreement. The Second Amendment extended an additional $15.0 million term loan to the Company, thereby increasing the aggregate principal amount of the term loan to $115.0 million. The Second Amendment also increased the amount of available revolving credit by $5.0 million to an aggregate amount of $10.0 million. The additional $15.0 million term loan must be repaid in quarterly principal payments of $187,500 commencing in March 2018. The Second Amendment also granted the Company the ability to use up to $15.0 million to purchase Notes and modified the definition of consolidated EBITDA used in the Leverage Ratio calculation to adjust for expected changes in deferred revenue due to the adoption of Accounting Standards Codification (“ASC”) Topic 606, the new revenue recognition guidance.

The Company’s ability to satisfy the Leverage Ratio covenant in the future is dependent on its ability to maintain bookings and billings at or above levels experienced over the last 12 months. In recent quarters, the Company has experienced volatility in bookings and billings resulting from, among other things, (i) its transition towards subscription and recurring revenue streams and the resulting decline in traditional upfront product sales, (ii) volatility in currency rates and in particular the U.S. dollar against the Euro, (iii) significant changes and trends in the media industry and the impact they have had on the Company’s customers and (iv) the impact of new and anticipated product launches and features. In addition to the impact of new bookings and billings, U.S. GAAP revenues recognized as the result of the existence of Implied Maintenance Release PCS (as defined below) will be significantly lower in the remainder of 2017, as compared to 2016 periods, which will have an adverse impact on the Company’s Leverage Ratio.

In the event bookings and billings in future quarters are lower than the Company currently anticipates, the Company may be forced to take remedial actions 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, or (iv) disposing of certain assets or businesses. Such remedial actions, which may not be available on favorable terms or at all, could have a material adverse impact on the Company’s business. If the Company is not in compliance with the Leverage Ratio and is unable to obtain an amendment or waiver, such noncompliance may result in an event of default under the Financing Agreement, which could permit acceleration of the outstanding indebtedness under the Financing Agreement and require the Company to repay such indebtedness before the scheduled due date. If an event of default were to occur, the Company might not have sufficient funds available to make the payments required. If the Company is unable to repay amounts owed, the lenders may be entitled to foreclose on and sell substantially all of the Company’s assets, which secure its borrowings under the Financing Agreement.

On January 26, 2017, the Company entered into an exclusive distributor agreement (the “Distributor Agreement”) with Beijing Jetsen Technology Co., Ltd. (“Jetsen”), pursuant to which Jetsen became the exclusive distributor for Avid products and services in the greater China region. The Distributor Agreement has a five-year term, and Jetsen is required to make at least $75.8 million of aggregate purchases under the agreement over the first three years. At the same time, the Company also entered into a securities purchase agreement (the “Securities Purchase Agreement”), with Jetsen, pursuant to which it agreed to sell to Jetsen shares of Avid common stock. In June 2017, Avid and Jetsen amended the Securities Purchase Agreement. Under the amended terms, Jetsen will invest $18.2 million in Avid, in return for a minority stake in the Company of between 4.5% and 8.9% of Avid outstanding common stock on a fully diluted basis. The closing of the investment is subject to closing conditions, including China regulatory approvals. In the event regulatory approval is not obtained in the fourth quarter of 2017, either party may elect to terminate the Securities Purchase Agreement for any reason. The exact number of shares to be issued and sold at closing will be determined by reference to the trading price of Avid common stock before closing.



The Company’s cash requirements vary depending on factors such as the growth of its business, changes in working capital, and capital expenditures. Management expects to operate the business and execute its strategic initiatives principally with funds generated from operations, remaining net proceeds from the term loan borrowings under the Financing Agreement and draw up to a maximum of $10.0 million under the Financing Agreement’s revolving credit facility. Management anticipates that the Company will have sufficient internal and external sources of liquidity to fund operations and anticipated working capital and other expected cash needs for at least the next 12 months, as well as for the foreseeable future.

Subsequent Events

The Company evaluated subsequent events through the date of issuance of these financial statements and, except for the subsequent events disclosed above and in Note 7 and Note 10, no subsequent events required recognition or disclosure in these financial statements.


Significant Accounting Policies - Revenue Recognition


GeneralWe 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

The Company commences revenue recognition when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collection is reasonably assured. Generally, the products the Company sells do not require significant production, modification or customization. Installation of the Company’s products is generally routine, consists of implementation and configuration and does not have to be performed by the Company.

At the time of a sales transaction, the Company makes an assessment of the collectability of the amount due from the customer. Revenues are recognized only if it is reasonably assured that collection will occur. When making this assessment, the Company considers customer credit-worthiness and historical payment experience. If it is determined from the outset of the arrangement that collection is not reasonably assured, revenues are recognized on a cash basis, provided that all other revenue recognition criteria are satisfied. At the outset of the arrangement, the Company also assesses whether the fee associated with the order is fixed or determinable and free of contingencies or significant uncertainties. When assessing whether the fee is fixed or determinable, the Company considers the payment terms of the transaction,underlying contracts, in an amount that reflects the Company’s collection experienceconsideration we expect to receive in similar transactions and the Company’s involvement, if any, in third-party financing transactions, among other factors. If the fee is not fixed or determinable, revenues are recognized only as payments become due from the customer, provided that all other revenue recognition criteria are met. If a significant portion of the fee is due after the Company’s normal payment terms, the Company evaluates whether the Company has sufficient history of successfully collecting past transactions with similar terms without offering concessions. If that collection history is sufficient, revenue recognition commences, upon delivery of the products, assuming all other revenue recognition criteria are satisfied. If the Company was to make different judgments or assumptions about any of these matters, it could cause a material increase or decrease in the amount of revenues reported in a particular period.

The Company often receives multiple purchase orders or contracts from a single customer or a group of related customers that are evaluated to determine if they are, in effect, part of a single arrangement. In situations when the Company has concluded that two or more orders with the same customer are so closely related that they are, in effect, parts of a single arrangement, the Company accountsexchange for those orders as a single arrangement for revenue recognition purposes. In other circumstances, when the Company has concluded that twoproducts or more orders with the same customer are independent buying decisions, such as an earlier purchase of a product and a subsequent purchase of a software upgrade or maintenance contract, the Company accounts for those orders as separate arrangements for revenue recognition purposes.services.


For many of its products, the Company has had an ongoing practice of making available, at no charge to customers, minor feature and compatibility enhancements as well as bug fixes on a when-and-if-available basis (collectively “Software Updates”), for a period of time after initial sales to end users. The implicit obligation to make such Software Updates available to customers over a period of time represents implied post-contract customer support, which is deemed to be a deliverable in each arrangement and is accounted for as a separate element (“Implied Maintenance Release PCS”).

Over the last two years, in connection with a strategic initiative to increase support and other recurring revenue streams, the Company has taken a number of steps to eliminate the longstanding practice of providing Implied Maintenance Release


PCS for many of its products, including Media Composer, Pro Tools and Sibelius product lines. In the third quarter and fourth quarter of 2015, respectively, the Company concluded that Implied Maintenance Release PCS for its Media Composer and Sibelius product lines had ceased. In the first quarter of 2016, in connection with the release of Cloud Collaboration in Pro Tools version 12.5, which was an undelivered feature that had prevented the Company from recognizing any revenue related to new Pro Tools 12 software sales as it represented a specified upgrade right for which vendor specific objective evidence (“VSOE”) of fair value was not available,the Company concluded that Implied Maintenance Release PCS for Pro Tools 12 product lines had also ended. As a result of the conclusion that Implied Maintenance Release PCS on Pro Tools 12 has ended, revenue and net income in the first quarter of 2016 increased approximately $11.1 million, reflecting the recognition of orders received after the launch of Pro Tools 12 that would have qualified for earlier recognition using the residual method of accounting.  In addition, the elimination of Implied Maintenance Release PCS also resulted in the accelerated recognition of maintenance and product revenues that were previously being recognized on a ratable basis over a much longer expected period of Implied Maintenance Release PCS rather than the contractual maintenance period. The reduction in the estimated amortization period of transactions being recognized on a ratable basis resulted in an additional $12.0 million and $33.7 million of revenue during the three and nine months ended September 30, 2016, respectively.

The Company entersWe often enter into certain contractual arrangements that have multiple elements,performance obligations, one or more of which may be delivered subsequent to the delivery of other elements.performance obligations. These multiple-deliverable arrangements may include a combination of products, support, training, and professional services and Implied Maintenance Release PCS. For these multiple-element arrangements,services. We allocate the Company allocates revenue to each deliverabletransaction price of the arrangement based on the relative selling prices of the deliverables. In such circumstances, the Company first determines theestimated standalone selling price of each deliverable baseddistinct performance obligation.

See Note 9 for disaggregated revenue schedules and further discussion on (i) VSOE of fair value if that exists, (ii) third-party evidence of selling price (“TPE”), when VSOE does not exist, or (iii) best estimate of the selling price (“BESP”), when neither VSOE nor TPE exists. Revenue is then allocated to the non-software deliverables as a grouprevenue and to the software deliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the selling price hierarchy. The Company’s process for determining BESP for deliverables for which VSOE or TPE does not exist involves significant management judgment. In determining BESP, the Company considers a number of data points, including:
the pricing established by management when setting prices for deliverables that are intended to be sold on a standalone basis;
contractually stated prices for deliverables that are intended to be sold on a standalone basis;
the pricing of standalone sales that may not qualify as VSOE of fair value due to limited volumes or variation in prices; and
other pricing factors, such as the geographical region in which the products are sold and expected discounts based on the customer size and type.

In determining a BESP for Implied Maintenance Release PCS, which the Company does not sell separately, the Company considers (i) the service period for the Implied Maintenance Release PCS, (ii) the differential in value of the Implied Maintenance Release PCS deliverable compared to a full support contract, (iii) the likely list price that would have resulted from the Company’s established pricing practices had the deliverable been offered separately and (iv) the prices a customer would likely be willing to pay.

The Company estimates the service period of Implied Maintenance Release PCS based on the length of time the product version purchased by the customer is planned to be supported with Software Updates. If facts and circumstances indicate that the original service period of Implied Maintenance Release PCS for a product has changed significantly after original revenue recognition has commenced, the Company will modify the remaining estimated service period accordingly and recognize the then-remaining deferred revenue balance over the revised service period.

The Company has established VSOE of fair value for some of the Company’s professional services, training and support offerings. The Company’s policy for establishing VSOE of fair value consists of evaluating standalone sales to determine if a substantial portion of the transactions fall within a reasonable range. If a sufficient volume of standalone sales existperformance obligations and the standalone pricing for a substantial portiontiming of the transactions falls within a reasonable range, management concludes that VSOE of fair value exists.revenue recognition.



Recent Accounting Pronouncements

In accordance with Accounting Standards Update (“ASU”) No. 2009-14, the Company excludes from the scope of software revenue recognition requirements the Company’s sales of tangible products that contain both software and non-software components that function together to deliver the essential functionality of the tangible products. The Company adopted ASU No. 2009-13 and ASU No. 2009-14 prospectively on January 1, 2011 for new and materially modified arrangements originating after December 31, 2010.

Prior to the Company’s adoption of ASU No. 2009-14, the Company primarily recognized revenues using the revenue recognition criteria of Accounting Standards Codification (“ASC”) Subtopic 985-605, Software-Revenue Recognition. As a result of the Company’s adoption of ASU No. 2009-14 on January 1, 2011, a majority of the Company’s products are now considered non-software elements under U.S. GAAP, which excludes them from the scope of ASC Subtopic 985-605 and includes them within the scope of ASC Topic 605, Revenue Recognition. Because the Company had not been able to establish VSOE of fair value for Implied Maintenance Release PCS, as described further below, substantially all revenue arrangements prior to January 1, 2011 were recognized on a ratable basis over the service period of Implied Maintenance Release PCS. Subsequent to January 1, 2011 and the adoption of ASU No. 2009-14, the Company determines a relative selling price for all elements of the arrangement through the use of BESP, as VSOE and TPE are typically not available, resulting in revenue recognition upon delivery of arrangement consideration attributable to product revenue, provided all other criteria for revenue recognition are met, and revenue recognition of Implied Maintenance Release PCS and other service and support elements over time as services are rendered.

Revenue Recognition of Non-Software Deliverables

Revenue from products that are considered non-software deliverables is recognized upon delivery of the product to the customer. Products are considered delivered to the customer once they have been shipped and title and risk of loss has been transferred. For most of the Company’s product sales, these criteria are met at the time the product is shipped. Revenue from support that is considered a non-software deliverable is initially deferred and is recognized ratably over the contractual period of the arrangement, which is generally 12 months. Professional services and training services are typically sold to customers on a time and materials basis. Revenue from professional services and training services that are considered non-software deliverables is recognized for these deliverables as services are provided to the customer. Revenue for Implied Maintenance Release PCS that is considered a non-software deliverable is recognized ratably over the service period of Implied Maintenance Release PCS, which ranges from one to eight years.

Revenue Recognition of Software Deliverables

The Company recognizes the following types of elements sold using software revenue recognition guidance: (i) software products and software upgrades, when the software sold in a customer arrangement is more than incidental to the arrangement as a whole and the product does not contain hardware that functions with the software to provide essential functionality, (ii) initial support contracts where the underlying product being supported is considered to be a software deliverable, (iii) support contract renewals and (iv) professional services and training that relate to deliverables considered to be software deliverables. Because the Company does not have VSOE of the fair value of its software products, the Company is permitted to account for its typical customer arrangements that include multiple elements using the residual method. Under the residual method, the VSOE of fair value of the undelivered elements (which could include support, professional services or training, or any combination thereof) is deferred and the remaining portion of the total arrangement fee is recognized as revenue for the delivered elements. If evidence of the VSOE of fair value of one or more undelivered elements does not exist, revenues are deferred and recognized when delivery of those elements occurs or when VSOE of fair value can be established. VSOE of fair value is typically based on the price charged when the element is sold separately to customers. The Company is unable to use the residual method to recognize revenues for some arrangements that include products that are software deliverables under U.S. GAAP since VSOE of fair value does not exist for Implied Maintenance Release PCS elements, which are included in some of the Company’s arrangements.

For software products that include Implied Maintenance Release PCS, an element for which VSOE of fair value does not exist, revenue for the entire arrangement fee, which could include combinations of product, professional services, training and support, is recognized ratably as a group over the longest service period of any deliverable in the arrangement, with recognition commencing on the date delivery has occurred for all deliverables in the arrangement (or begins to occur in the case of professional services, training and support). Standalone sales of support contracts are recognized ratably over the service period of the product being supported.



From time to time, the Company offers certain customers free upgrades or specified future products or enhancements. When a software deliverable arrangement contains an Implied Maintenance Release PCS deliverable, revenue recognition of the entire arrangement will only commence when any free upgrades or specified future products or enhancements have been delivered, assuming all other products in the arrangement have been delivered and all services, if any, have commenced.


Recently Adopted Accounting PronouncementPronouncements


InOn January 2017,1, 2019, we adopted ASC 842 using the FASB issued Accounting Standards Update (ASU)modified retrospective transition approach, as provided by ASU No. 2017-04, Simplifying2018-11, Leases - Targeted Improvements (“ASU 2018-11”). We elected the Testpackage of practical expedients permitted under the transition guidance. Results for Goodwill Impairment. The guidance simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The revised guidance will be applied prospectively, and is effective for calendar year-end SEC filers in 2020. Early adoption is permitted for annual and interim goodwill impairment testing datesperiods beginning after January 1, 2017. The Company adopted the revised guidance during the first quarter of 2017. The adoption of ASU 2017-04 had no immediate impact on the Company’s condensed consolidated financial statements upon adoption, however, it could impact the calculation of goodwill impairments in future periods.

Recent Accounting Pronouncements2019 are presented under ASC 842, while prior periods have not been adjusted and continue to be Adoptedreported in accordance with our historic accounting under previous U.S. GAAP.


In May, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 is the final updated standard on revenue recognition. The standard supersedes the most current revenue recognition guidance, including industry-specific guidance. The new revenue recognition guidance becomes effective for the Company on January 1, 2018, and early adoption as of January 1, 2017 is permitted.

Subsequently, the FASB has issued the following standards related to ASU No. 2014-09: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations; ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; and ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The Company must adopt ASU No. 2016-08, ASU No. 2016-10 and ASU No. 2016-12 with ASU No. 2014-09 (collectively, the “new revenue standards”). 

Entities have the option of using either a full retrospective or a modified approach to adopt the new revenue standards. The Company expects to elect the modified transition method and, while the Company is still in the process of evaluating theprimary impact of this new accounting standard, it expects the impact will be significant. The adoption will result in a significant cumulative reduction in deferred revenue as of January 1, 2018 because the Company will no longer require VSOE of fair value to recognize software deliverables with Implied Maintenance Release PCS upon delivery. Upon adoption of ASC 606, the Company expects to recognize a greater proportion of revenue upon delivery of its products, whereas some of the Company’s current product sales are initially recorded in deferred revenue and recognized over a long period of time (as described in detail in the “Significant Accounting Policies - Revenue Recognition” section above). Accordingly, the Company’s operating results may become more volatile as a result of the adoption.

On February 25, 2016, the FASB issued ASU No. 2016-02, Leases (Topic (842). The guidance requires an entity to recognize virtually842 is that substantially all of theirour leases are recognized on the balance sheet, by recording a right-of-use assetassets and short-term and long-term lease liability.liabilities, both of which are material to our consolidated balance sheet. The new guidance becomes effective forstandard does not have a material impact on our consolidated statement of operations and cash flows, and the Company oneffect of applying ASC 842 as a cumulative-effect adjustment to retained earnings as of January 1, 2019 and early adoption is permitted upon issuance. The Company is evaluatingimmaterial.

Recent Accounting Pronouncements To Be Adopted

In December 2019, the potential impact of adopting this standard on its financial statements, as well as the timing of its adoption of the standard.

In August 2016, the FASBFinancial Accounting Standards Board (“FASB”) issued ASU No. 2016-15, Statement of Cash Flow (Topic 230). The guidance reduces diversity in how certain cash receipts and cash payments are presented and classified in2019-12, Simplifying the Statements of Cash Flows. Certain of ASU No. 2016-15 requirements are as follows: (i) cash paymentsAccounting for debt prepayment or debt extinguishment costs should be classified as cash outflows for financing activities, (ii) contingent consideration payments made soon after a business combination should be classified as cash outflows for investing activities and cash payment made thereafter should be classified as cash outflows for financing up to the amount of the contingent consideration liability recognized at the


acquisition date with any excess classified as operating activities, (iii) cash proceeds from the settlement of insurance claims should be classified on the basis of the nature of the loss, (iv) cash proceeds from the settlement of Corporate-Owned Life Insurance (“COLI”) Policies should be classified as cash inflows from investing activities and cash payments for premiums on COLI policies may be classified as cash outflows for investing activities, operating activities, or a combination of investing and operating activities and (v) cash paid to a tax authority by an employer when withholding shares from an employee's award for tax-withholding purposes should be classified as cash outflows for financing activities. The new guidance becomes effective for the Company on January 1, 2018, and early adoption is permitted upon issuance. The Company is currently evaluating the potential impact of adopting this standard on its financial statements, as well as the timing of its adoption of the standard.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740)(“ASU 2019-12”). The guidance requires companiesASU 2019-12 is intended to recognizeenhance and simplify aspects of the income tax effectsaccounting guidance in ASC 740 as part of intercompany sales and transfers of assets, other than inventory, in the income statement as income tax expense (or benefit) in the period in which the transfer occurs. The newFASB's simplification initiative. This guidance becomesis effective for the Company on January 1, 2018,fiscal years and interim periods within those years beginning after December 15, 2020 with early adoption is permitted upon issuance.permitted. The Company is currently evaluating the impact of the adoption of ASU No. 2016-16this guidance may have on its consolidated financial statements as well as timing of its adoption of the standard.and related disclosures.


In November 2016,March 2020, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The guidance requires companies to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, companies will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, a reconciliation2020-04, Facilitation of the totals in the statementEffects of cash flowsReference 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 captions into the balance sheetexpected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This guidance is required. The new guidance becomes effective forbeginning on March 12, 2020, and the Company on January 1, 2018, and early adoption is permitted upon issuance.may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the potential impact of adopting this standardguidance may have on its consolidated financial statements as well as the timing of its adoption of the standard.and related disclosures.


2.NET INCOMELOSS PER SHARE


Net incomeloss per common share is presented for both basic incomeloss per share (“Basic EPS”) and diluted incomeloss 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 the Company’sour common stock for the relevant period,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 the Company’sour employees that vest based on performance conditions, market conditions, or a combination of performance and market conditions.


The following table sets forth (in thousands) potential common shares that were considered anti-dilutive securities at September 30, 2017March 31, 2020 and for the nine months ended September 30, 2016.2019.


 March 31, 2020 March 31, 2019
Options465
 772
Non-vested restricted stock units3,069
 2,881
Anti-dilutive potential common shares3,534
 3,653

 September 30, 2017 September 30, 2016
Options2,334
 3,939
Non-vested restricted stock units3,289
 687
Anti-dilutive potential common shares5,623
 4,626


On June 15, 2015, the Companywe issued $125.0 million aggregate principal amount of itsour 2.00% Convertible Senior Notesconvertible 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 the Company’sour common stock, or a combination of cash and shares of common stock, at the Company’sour election, based on an initial conversion rate, subject to adjustment. In connection with the offering of the Notes, the Companywe entered into a capped call transaction, or Capped Call, with a third party. The Company usesWe use the treasury stock method in computing the dilutive impact of the Notes. The Notes are convertible into


shares of the Company’sour common stock but the Company’sour stock price wasprices as of March 31, 2020 and 2019 were less than the conversion price, as of September 30, 2017, 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


The Company measuresWe measure deferred compensation investments on a recurring basis. As of September 30, 2017March 31, 2020 and December 31, 2016, the Company’s2019, 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 the Company’sour deferred compensation investments measured at fair value on a recurring basis (in thousands):
  Fair Value Measurements at Reporting Date Using  Fair Value Measurements at Reporting Date Using
September 30,
2017		 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
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$1,838
 $460
 $1,378
 $—
$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
 $—

   Fair Value Measurements at Reporting Date Using
 December 31, 2016 
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$2,035
 $493
 $1,542
 $—


Financial Instruments Not Recorded at Fair Value


The carrying amounts of the Company’sour other financial assets and liabilities including cash, accounts receivable, accounts payable, and accrued liabilities approximate their respective fair values because of the relatively short period of time between their origination and their expected realization or settlement. As of September 30, 2017,March 31, 2020, the net carrying amount of the Notes was $106.1$28.6 million, and the fair value of the Notes was approximately $95.1$27.8 million based on open market trading activity, which constitutes a Level 1 input in the fair value hierarchy.




4.INVENTORIES


Inventories consisted of the following (in thousands):
 March 31, 2020 December 31, 2019
Raw materials$8,358
 $9,036
Work in process398
 371
Finished goods23,845
 19,759
Total$32,601
 $29,166

 September 30, 2017 December 31, 2016
Raw materials$11,518
 $10,481
Work in process300
 291
Finished goods29,342
 39,929
Total$41,160
 $50,701




As of September 30, 2017March 31, 2020 and December 31, 20162019, finished goods inventory included $9.51.8 million and $8.61.5 million, respectively, associated with products shipped to customers and deferred labor costs for arrangements where revenue recognition had not yet commenced.


5.INTANGIBLE ASSETS AND GOODWILLLEASES


Amortizing identifiable intangible assets relatedWe 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 Company’s acquisitions or capitalized costs of internally developed or externally purchased software that form the basis for the Company’s products consistedend of the following (in thousands):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.

 September 30, 2017 December 31, 2016
 
 Gross
 Accumulated Amortization 
 Net
 
 Gross
 Accumulated Amortization Net
Completed technologies and patents$58,562
 $(45,074) $13,488
 $57,994
 $(38,657) $19,337
Customer relationships54,906
 (52,399) 2,507
 54,597
 (51,002) 3,595
Trade names1,346
 (1,346) —
 1,346
 (1,346) —
Capitalized software costs4,911
 (4,911) —
 4,911
 (4,911) —
Total$119,725
 $(103,730) $15,995
 $118,848
 $(95,916) $22,932
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.

Amortization expense related to all intangible assets inThe 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 aggregate was $2.3lease term. Our total lease costs were $2.6 million and $2.5 million respectively, for the three months ended September 30, 2017March 31, 2020 and 2016, and $6.9March 31, 2019 respectively. Related cash payments were $2.6 million and $8.0$2.4 million respectively, for the ninethree months ended September 30, 2017March 31, 2020 and 2016. The Company expects amortizationMarch 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 acquired intangible assets to be $2.3 million foroperations, and the remainderrelated cash payments are included in the operating cash flows on the condensed consolidated statements of 2017, $9.3 million in 2018cash flows. Short-term lease costs, variable lease costs, and $4.4 million in 2019.sublease income are not material.



The acquisitiontable below reconciles the undiscounted future minimum lease payments under non-cancelable leases with terms of Orad in 2015 resulted in goodwill of $32.6 millionmore than one year to the total lease liabilities recognized on the condensed consolidated balance sheets as of September 30, 2017 and DecemberMarch 31, 2016.2020 (in thousands):

Year Ending December 31,Operating Leases
2020 (excluding three months ended March 31, 2020)$6,235
20216,148
20225,384
20234,519
20244,402
Thereafter15,340
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 liabilities28,063
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 compensation5,087
 5,186
Other327
 460
   Total$5,414
 $5,646

 September 30, 2017 December 31, 2016
Deferred rent$3,292
 $5,458
Accrued restructuring843
 1,256
Deferred compensation5,591
 5,464
   Total$9,726
 $12,178



7.COMMITMENTS AND CONTINGENCIES


Commitments


The CompanyWe 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-year termthree 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.


The Company hasWe have letters of credit that are used as security deposits in connection with the Company’sour leased Burlington, Massachusetts office space. In the event of default on the underlying leases, the landlords would, at September 30, 2017,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 the Company isthat we are not in default under the underlying leases and meetsmeet certain financial performance conditions. In no


case will the letters of credit amounts for the Burlington leases be reduced to below $1.2 million in the aggregate throughout the lease periods, all of which extend to May 2020.periods.


The CompanyWe also hashave letters of credit in connection with security deposits for other facility leases totaling $1.1$0.6 million in the aggregate, as well as letters of credit totaling $1.2$2.1 million that otherwise support itsour ongoing operations. These letters


of credit have various terms and expire during 20172020 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


The Company’sOur 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, the Company isabove, 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. The Company doesWe do not believe these matters will have a material adverse effect on the Company’sour financial position or results of operations. However, the outcome of legal proceedings and claims brought against the Companyus is subject to significant uncertainty. Therefore, the Company’sour 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. The Company’sOur results could be materially adversely affected if the Company iswe 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 October 30, 2017April 16, 2019 we received an additional notice again alleging we breached the Company entered into settlementformer executive’s employment agreement. We have since been in communications with our former Chairman and patent cross-licensing agreements with Harmonic Inc. (“Harmonic”), ending its patent infringement litigation against Harmonic which commenced in 2011. Under the terms of the agreements, Harmonic will pay the Company $6.0 million. The first payment of $2.5 million was made on October 24, 2017; the remaining $3.5 million will be paid in two installments of $1.5 millionChief Executive Officer’s counsel. While we intend to defend any claim vigorously, when and $2.0 million in 2019 and 2020, respectively. The Company will record a gain associated with the settlement of past patent infringements in the fourth quarter of 2017.

In November 2016, a purported securities class action lawsuit was filed in the U.S. District Court for the District of Massachusetts (Mohanty v. Avid Technology, Inc. et al., No. 16-cv-12336) against the Company and certain of its executive officers seeking unspecified damages and other relief on behalf of a purported class of purchasers of the Company’s common stock between August 4, 2016 and November 9, 2016, inclusive. The complaint purported to stateif a claim for violationis actually filed, we are currently unable to estimate an amount or range of federal securities lawsany reasonably possible losses that could occur as a result of alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“the Exchange Act”) and Rule 10b-5 promulgated thereunder. The complaint’s allegations relate generally to the Company’s disclosure surrounding the level of implementation of the Company’s Avid NEXIS solution product offerings. On February 7, 2017, the Court appointed a lead plaintiff and counsel in thethis matter. On June 14, 2017, the Company moved to dismiss the action. On July 31, 2017, the lead plaintiff filed an opposition to the Company’s motion to dismiss, and on August 21, 2017, the Company filed its reply brief. On October 13, 2017, after a mediation, the parties reached an agreement in principle to settle this litigation. The Company expects the majority of the settlement to be funded by its insurers. Finalization of the settlement is subject to a number of conditions, including execution of definitive documentation and approval by the court.


The Company considersWe consider all claims on a quarterly basis and based on known facts assessesassess whether potential losses are considered reasonably possible, probable, and estimable. Based upon this assessment, the Companywe then evaluatesevaluate disclosure requirements and whether to accrue for such claims in itsour condensed consolidated financial statements. The Company recordsWe 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 September 30, 2017March 31, 2020 and as of the date of filing of these condensed consolidated financial statements, the Company believeswe 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;estimated, or (c) such estimate is immaterial.


Additionally, the Company provideswe provide indemnification to certain customers for losses incurred in connection with intellectual property infringement claims brought by third parties with respect to the Company’sour 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 the Companywe could be required to make under these indemnification provisions is theoretically unlimited.  To date, the Company haswe have not incurred material costs related to these indemnification provisions; accordingly, the Company believeswe believe the estimated fair value of these indemnification provisions


is immaterial. Further, certain of the Company’sour arrangements with customers include clauses whereby the Companywe may be subject to penalties for failure to meet certain performance obligations; however, the Company haswe have not recorded any related material penalties to date.


The Company providesWe 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, the Company recordswe 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 ninethree months ended September 30, 2017March 31, 2020 and 20162019 (in thousands):
Nine Months Ended September 30,Three Months Ended March 31,
2017 20162020 2019
Accrual balance at beginning of year$2,518
 $2,234
$1,337
 $1,706
Accruals for product warranties1,872
 1,992
384
 227
Costs of warranty claims(1,897) (1,872)(357) (338)
Accrual balance at end of period$2,493
 $2,354
$1,364
 $1,595


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


8.RESTRUCTURING COSTS AND ACCRUALS


In February 2016, the Company committed to a restructuring plan that encompassed a series of measures intended to allow the Company to more efficiently operate in a leaner, more directed cost structure. These included reductions in the Company’s workforce, consolidation of facilities, transfers of certain business processes to lower cost regions, and reductions in other third-party services costs. The cost efficiency program was substantially complete as of June 30, 2017.

During the three and nine months ended September 30, 2017, the Company recorded recoveries of $0.6 millionMarch 31, 2020 and restructuring charges of $6.5 million, respectively. The restructuring charges for the nine months ended September 30, 2017 included $1.0 million for the severance costs and estimate adjustments related to approximately 64 terminated employees and $5.4 million for the closure of certain excess facility space, including $3.2 million of leasehold improvement write-offs and $0.8 million adjustments related to sublease assumptions associated with prior abandoned facilities.

During the three and nine months ended September 30, 2016, the CompanyMarch 31, 2019, we recorded restructuring charges of $5.3$0.1 million and restructuring charges of $7.9$0.6 million, respectively. During the nine months ended September 30, 2016, the Company recorded restructuring charges of $5.0 millionrespectively, for theemployee severance costs and estimate adjustments related to approximately 123 terminated employees and $2.9 million for the closure of certain excess facility space, including $1.1 million of leasehold improvement write-offs, and $0.8 million adjustments related to sublease assumptions associated with prior abandoned facilities.


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 charges145
 540
Other—
 18
Total restructuring charges, net$145
 $558


The following table sets forth the activity in the restructuring accruals for the ninethree months ended September 30, 2017March 31, 2020 (in thousands):
 Employee
Accrual balance as of December 31, 2019$155
Restructuring charges and revisions145
Cash payments(110)
Accrual balance as of March 31, 2020$190
Less: current portion190
Long-term accrual balance as of March 31, 2020$—

 
Employee-
Related
 Facilities/Other-Related Total
Accrual balance as of December 31, 2016$7,018
 $3,093
 $10,111
New restructuring charges – operating expenses1,930
 1,485
 3,415
Revisions of estimated liabilities(902) 760
 (142)
Non-cash write-offs—
 3,191
 3,191
Accretion—
 278
 278
Cash payments(5,479) (2,970) (8,449)
Foreign exchange impact on ending balance(46) 15
 (31)
Accrual balance as of September 30, 2017$2,521
 $5,852
 $8,373


The employee-related accrualsemployee restructuring accrual at September 30, 2017 representMarch 31, 2020 represents severance costs to former employees that will be paid out within 12 months, and are,is, therefore, included in the caption “accrued expenses and other current liabilities” in the Company’sour condensed consolidated balance sheets.sheets as of March 31, 2020.


The facilities/other-relatedOn January 1, 2019, we had facilities restructuring accruals at September 30, 2017 represent contractual lease payments, net of estimated sublease income, on space vacated as part of the Company’s restructuring actions. The leases, and payments against the amounts accrued, extend through December 2021 unless the Company is able to negotiate earlier terminations. Of the total facilities/other-related balance, $1.9$0.1 million is included in the caption “accrued expenses and other current liabilities”, $0.8 and $0.2 million is included in the caption “other long-term liabilities”, and $3.2 millionliabilities," which were reclassified upon the adoption of fixedASC 842 to the right of use asset write-off is reflected in the caption “property and equipment, net” in the Company’s condensed consolidated balance sheet as of September 30, 2017.account.




9.PRODUCT AND GEOGRAPHIC INFORMATIONREVENUE


The Company, throughDisaggregated Revenue and Geography Information

Through the evaluation of the discrete financial information that is regularly reviewed by the chief operating decision makers (the Company’s(our chief executive officer and chief financial officer), haswe have determined that the Company has onewe have 1 reportable segment.

The following table is a summary of the Company’sour revenues by type for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 (in thousands):
 Three Months Ended March 31,
 2020 2019
Products and solutions net revenues$34,711
 $54,396
Subscription services13,958
 9,282
Support services31,794
 32,019
Professional services, training and other services5,990
 7,622
Total net revenues$86,453
 $103,319
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Video products and solutions net revenues$27,058
 $39,182
 $82,585
 $118,252
Audio products and solutions net revenues27,261
 24,558
 70,395
 105,589
Products and solutions net revenues54,319
 63,740
 152,980
 223,841
Services net revenues50,946
 55,279
 158,765
 172,794
Total net revenues$105,265
 $119,019
 $311,745
 $396,635




The following table sets forth the Company’sour revenues by geographic region for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 (in thousands):
 Three Months Ended March 31,
 2020 2019
Revenues:   
United States$36,090
 $39,479
Other Americas5,450
 6,801
Europe, Middle East and Africa33,235
 37,153
Asia-Pacific11,678
 19,886
Total net revenues$86,453
 $103,319

 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Revenues:       
United States$38,624
 $45,982
 $121,309
 $145,384
Other Americas7,377
 9,702
 20,581
 30,674
Europe, Middle East and Africa41,526
 44,524
 121,647
 159,243
Asia-Pacific17,738
 18,811
 48,208
 61,334
Total net revenues$105,265
 $119,019
 $311,745
 $396,635

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 billings7,878
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):


 March 31, 2020
Deferred revenue at January 1, 2020$97,901
Billings deferred28,687
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
Subscription1,501
Support contracts73,465
Implied PCS10,769
Professional services, training and other4,366
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.



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, 201928,555
 28,187
Revolving credit facility22,000
 —
Other long-term debt1,240
 1,296
    Total debt251,826
 229,588
Less: current portion31,400
 30,554
Total long-term debt$220,426
 $199,034

 September 30, 2017 December 31, 2016
Term Loan, net of unamortized debt issuance costs of $3,144 at September 30, 2017 and $4,042 at December 31, 2016$89,356
 $92,208
Notes, net of unamortized original issue discount and debt issuance costs of $18,896 at September 30, 2017 and $23,413 at December 31, 2016, respectively106,104
 101,587
Other long-term debt912
 —
    Total debt196,372
 193,795
Less: current portion5,072
 5,000
Total long-term debt$191,300
 $188,795


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

Fiscal YearTerm Loan Revolving Credit Facility Notes Other Long-Term Debt Total
2020$1,913
 $—
 $28,867
 $102
 $30,881
20214,781
 —
 —
 144
 4,925
20226,375
 —
 —
 154
 6,529
2023190,052
 22,000
 —
 165
 212,217
2024—
 —
 —
 177
 177
Thereafter—
 —
 —
 499
 499
Total before unamortized discount203,120
 22,000
 28,867
 1,241
 255,228
Less: unamortized discount and issuance costs3,090
 —
 312
 —
 3,402
Less: current portion of long-term debt2,709
 —
 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, the Companywe issued $125.0 million aggregate principal amount of itsour Notes in an offering conducted in accordance with Rule 144A under the Securities Act of 1933.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 convertedrepurchased or repurchasedconverted in accordance with their terms prior to such date. Total interest expense for the ninethree months ended September 30, 2017 and 2016March 31, 2020 was $6.4$0.5 million, and $6.1 million, respectively, reflecting the coupon and accretion of the discount.

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

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



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

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, the Companywe entered into a financing agreement (the “Financing Agreement”) with Cerberus Business Finance, LLC, as collateral and administrative agent, and the Financing Agreement with the Lenders. Pursuant to the Financing Agreement, thelenders party thereto (the “Lenders”). The Lenders originally agreed to provide the Companyus 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. All outstanding loans under the Financing Agreement will become due and payable on the earlier of February 26, 2021 and the date that is 30 days prior to June 15, 2020 if the $125.0 million in outstanding principal of the Notes has not been repaid or refinanced by such time. The CompanyWe granted a security interest on substantially all of itsour assets to secure the obligations under the Credit FacilityTerm Loan and the Term Loan. The Company borrowed the full amount of the Term Loan, or $100.0 million, as of the closing date of the Financing Agreement, and there were no amounts outstanding under the Credit Facility as of September 30, 2017.

The Company may prepay all or any portion of the Term Loan prior to its stated maturity, subject to the payment of certain fees based on the amount repaid.Facility. The Term Loan requires quarterly principal payments of $1.25 million, which commenced in June 2016. The Term Loan also requires the Companyus 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 the Company’sour payment obligations may be accelerated.

On March 14,November 9, 2017, (the “Amendment No. 1 Effective Date”), the Companywe entered into an amendment (the “First 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 First Amendmentamendment 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 requiring the Companythat requires us to maintain a Leverage Ratioleverage ratio (defined to mean the ratio of (a) total fundedthe sum of indebtedness under the Term Loan and Credit Facility and non-cash collateralized letters of credit to (b) consolidated EBITDA) such that followingEBITDA under the Amendment No. 1 Effective Date,Term Loan and Credit Facility) based on the Company is required to maintainlevel of availability of our Credit Facility plus unrestricted cash on-hand.

The Financing Agreement amendment effective April 8, 2019 was accounted for as a Leverage Ratio of no greater than 3.50:1.00 for the four quarters ended March 31, 2017, 4.20:1.00 for the four quarters ended June 30, 2017, 4.75:1.00 for the four quarters ended September 30, 2017, 4.80:1.00 for the four quarters ending December 31, 2017, 4:40:1.00 for eachdebt modification, and therefore, $1.6 million of the four quarters ending March 31, 2018 through March 31, 2019, respectively,refinancing fees paid directly to the Lenders was recorded as deferred debt issuance costs, and thereafter declining over time from 3.50:1.00 to 2.50:1.00. Following the Amendment No. 1 Effective Date, interest accrues on outstanding borrowings under the credit facility and the term loan (each as defined in the Financing Agreement) at a rate of either the LIBOR Rate (as defined in the Financing Agreement) plus 7.25% or a Reference Rate (as defined in the Financing Agreement) plus 6.25%, at the option$4.4 million of the Company. The Companyrefinancing fees paid to the third parties was expensed. We recorded $5.9 million and $4.6$4.2 million of interest expense on the Term Loan forduring the ninethree months ended September 30, 2017 and 2016, respectively. AsMarch 31, 2020. There was $22.0 million outstanding under the Credit Facility as of September 30, 2017,March 31, 2020. There is no prepayment penalty on the Company wasCredit 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.covenants as of March 31, 2020.

On November 9, 2017 (the “Amendment No. 2 Effective Date”), the Company entered into an amendment (the “Second Amendment”) to the Financing Agreement. The Second Amendment extended an additional $15.0 million term loan to the Company, thereby increasing the aggregate principal amount of the term loan to $115.0 million. The Second Amendment also increased the amount of available revolving credit by $5.0 million to an aggregate amount of $10.0 million. The additional $15.0 million term loan must be repaid in quarterly principal payments of $187,500 commencing in March 2018. The Second Amendment also granted the Company the ability to use up to $15.0 million to purchase Notes and modified the definition of consolidated EBITDA used in the Leverage Ratio calculation to adjust for expected changes in deferred revenue due to the adoption of ASC 606.




11. STOCKHOLDERS’ EQUITY


Stock-Based Compensation


Information with respect to option shares granted under all the Company’sof our stock incentive plans for the ninethree months ended September 30, 2017March 31, 2020 was as follows:
 Time-Based SharesPerformance-Based SharesTotal Shares
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic
Value
(in thousands)
Options outstanding at January 1, 2020565,000
—
565,000
$7.57  
Granted—
—
—
$—  
Exercised(100,000)—
(100,000)$7.66  
Forfeited or canceled—
—
—
$—  
Options outstanding at March 31, 2020465,000
—
465,000
$7.561.17$—
Options vested at March 31, 2020 or expected to vest  465,000
$7.561.17$—
Options exercisable at March 31, 2020  465,000
$7.561.17$—

 Time-Based SharesPerformance-Based SharesTotal Shares
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic
Value
(in thousands)
Options outstanding at January 1, 20172,847,502
—
2,847,502
$10.43  
Granted—
—
—
$—  
Exercised—
—
—
$—  
Forfeited or canceled(513,285)—
(513,285)$13.49  
Options outstanding at September 30, 20172,334,217
—
2,334,217
$9.752.51$—
Options vested at September 30, 2017 or expected to vest  2,334,217
$9.752.51$—
Options exercisable at September 30, 2017  2,315,467
$9.772.51$—




Information with respect to the Company’sour non-vested restricted stock units for the ninethree months ended September 30, 2017March 31, 2020 was as follows:
 Non-Vested Restricted Stock Units
 Time-Based SharesPerformance-Based SharesTotal Shares
Weighted-
Average
Grant-Date
Fair Value
Weighted-
Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic
Value
(in thousands)
Non-vested at January 1, 20202,087,933
554,265
2,642,198
$6.40  
Granted555,523
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, 20202,264,963
803,908
3,068,871
$6.581.25$20,623
Expected to vest  3,068,871
$6.581.25$20,623

 Non-Vested Restricted Stock Units
 Time-Based SharesPerformance-Based SharesTotal Shares
Weighted-
Average
Grant-Date
Fair Value
Weighted-
Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic
Value
(in thousands)
Non-vested at January 1, 20171,513,098
642,683
2,155,781
$6.85  
Granted1,130,596
639,703
1,770,299
$4.61  
Vested(538,384)—
(538,384)$7.84  
Forfeited(70,142)(28,276)(98,418)$6.17  
Non-vested at September 30, 20172,035,168
1,254,110
3,289,278
$5.160.86$14,900
Expected to vest  2,674,871
$5.080.86$12,117


Stock-based compensation was included in the following captions in the Company’sour condensed consolidated statements of operations for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 (in thousands):
 Three Months Ended March 31,
 2020
2019
Cost of products revenues$102
 $51
Cost of services revenues98
 18
Research and development expenses294
 195
Marketing and selling expenses441
 294
General and administrative expenses1,174
 1,180
 $2,109
 $1,738


 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Cost of products revenues$14
 $12
 $39
 $43
Cost of services revenues49
 145
 508
 445
Research and development expenses222
 73
 474
 222
Marketing and selling expenses582
 547
 1,375
 1,508
General and administrative expenses1,614
 951
 3,478
 3,898
 $2,481
 $1,728
 $5,874
 $6,116



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 hardwareintegrated solutions for digital mediavideo and audio content production,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, that enable the creation, distribution and optimization of audio and video content. Digital media are video, audio or graphic elements in which the image, sound or picture is recorded and stored as digital values, as opposed to analog or tape-based signals.solutions. Our productssolutions 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 productstools, 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 create the most powerfulempower media creators with innovative technology and collaborative media network that enables the creation, distributiontools to entertain, inform, educate, and monetization of the most inspiring content inenlighten the world. Guided by ourOur clients rely on Avid Everywhere strategic vision, we strive to deliver the industry’s most open, tightly integrated and efficient platform for media, connecting content creation with collaboration, asset protection, distribution and consumption of media in the world - from the mostcreate prestigious and award-winning feature films, music recordings, and television shows, to live concerts, sporting events, and news broadcasts. We haveAvid has been honored over time for our technological innovation with 1516 Emmy Awards, one Grammy Award, two Oscars, and the first ever America Cinema Editors Technical Excellence Award. Our solutions were used in all 2017 Oscar nominated films for Best Picture, Best Film Editing and Best Original Song. Every 2017 Grammy nominee for RecordIn 2018, Avid was named the recipient of the Yearprestigious 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 Album of The Year relied on our music creation solutions powered by our MediaCentral Platform.accelerated the editing and post production process for television.


Operations Overview


Our strategy is built on three pillars, Avid Everywhere, The Avid Advantage and the Avid Customer Association, (“ACA”). Avid Everywhere is our strategic vision for connecting creative professionals and media organizationsenterprises with their audiences in a more powerful, efficient, collaborative, and profitable way. Central to the Avid Everywhere vision is theway leverages our creative software tools, including ProTools for audio and MediaComposer for video, and Avid MediaCentral Platform an- the open, extensible, and customizable foundation that streamlines and simplifies content workflows by integrating all Avid or third partythird-party products and services that run on top of it. The platform provides secure and protected access, whichand 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 creation and delivery of content faster and easierright areas through a set of modular application suitesclose and new public and private marketplaces, that together, represent an open, integrated and flexible production and distribution environment for the media industry.interactive relationship with our customer base. The Avid Advantage complements Avid Everywhere by offering a new standard in service, supportCustomer Association was established to be an innovative and education to enable our customers to derive more efficiencyinfluential media technology community. It represents thousands of organizations and over 33,000 professionals from their Avid investment. Finally,all levels of the ACA is an association of dedicated media community visionaries,industry including inspirational and award-winning thought leaders, innovators, and users designed to provide essential strategic leadership to the media industry, facilitatestorytellers. The Avid Customer Association fosters collaboration between Avid, and key industry leaders and visionaries, and strengthen relationships between ourits customers, and us. This preeminent client and user community helpsother industry colleagues to help shape our collective future.product offerings and provide a means to shape our industry together.


AnotherA key element of our strategy is our transition to a recurring revenue-based model through a combination of subscription or recurring revenue based model.offerings and long-term agreements. We started offering cloud-based subscription licensing options for some of our products and solutions in 2014 and by March 31, 2020, had more than 84,000 paying cloud-enabled subscribers in the third quarter of 2017, a 69% increase from the third quarter of 2016.approximately 218,000 paid subscriptions. These licensing options offer choicechoices in pricing and deployment to suit our customers’ needsneeds. 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 are expected tomove through customer upgrade cycles, which we expect will further increase recurring revenue on a longer termlonger-term basis. However, duringOur 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 transitionstrategy 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 recurringlean model that leverages a new supplier and distribution network. 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.


A summary of our revenue model,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
Maintenance31,794
 32,019
Software licenses and maintenance51,125
 49,431
% of total revenue59% 48%
Integrated solutions29,338
 46,265
Professional services & training5,990
 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 revenue, deferred revenue,business operations and results of operations, including our net revenues, earnings and cash flow from operationsflows, will be adversely affected as an increasing portionimpacted 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 total revenue is recognized ratably rather than up front,enterprise customers and as new product offeringschannel 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 sold at a wider variety of price points.

In April 2017, we entered into a strategic alliance agreement with Microsoft Corporationfocused on navigating these recent challenges presented by COVID-19 through preserving our liquidity and managing our cash flow through taking preemptive action to developenhance 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 market cloud-based solutionsreducing payroll costs, including through temporary employee furloughs and cloud services aimed atpay cuts. We may be required to take additional steps to preserve our liquidity depending on the mediaduration and entertainment industry. As partseverity of the agreement, we have chosen Microsoft Azure aspandemic and its impact on our preferred cloud hosting platform,operations and will develop and launch a range of Software-as-a-Service (“SaaS”) and Platform-as-a-Service (PaaS) offerings powered by the Avid MediaCentral Platform.cash flows.

As a complement to our core strategy, we continue to review and implement programs throughout the Company to reduce costs, increase operational efficiencies, align talent and enhance our business, including the cost efficiency program announced in


February 2016. The cost efficiency program encompassed a series of measures intended to allow us to more efficiently operate in a leaner, more directed cost structure. These measures included reductions in our workforce, consolidation of facilities, transfers of certain business processes to lower cost regions and reductions in other third-party services costs. The cost efficiency program was substantially complete as of June 30, 2017.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES


Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.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;exchanges, discount rates used for lease liabilities, stock-based compensation;compensation, income tax assets and liabilities;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, 20162019 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, nor have there been any significant changes to the policies applied or methodologies used by management to measure the critical accounting estimates.critical.


Revenue Recognition

General

We commence revenue recognition when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collection is reasonably assured. Generally, the products we sell do not require significant production, modification or customization. Installation of our products is generally routine, consists of implementation and configuration and does not have to be performed by us.

At the time of a sales transaction, we make an assessment of the collectability of the amount due from the customer. Revenues are recognized only if it is reasonably assured that collection will occur. When making this assessment, we consider customer credit-worthiness and historical payment experience. If it is determined from the outset of the arrangement that collection is not reasonably assured, revenues are recognized on a cash basis, provided that all other revenue recognition criteria are satisfied. At the outset of the arrangement, we also assess whether the fee associated with the order is fixed or determinable and free of contingencies or significant uncertainties. When assessing whether the fee is fixed or determinable, we consider the payment terms of the transaction, our collection experience in similar transactions without making concessions and our involvement, if any, in third-party financing transactions, among other factors. If the fee is not fixed or determinable, revenues are recognized only as payments become due from the customer, provided that all other revenue recognition criteria are met. If a significant portion of the fee is due after our normal payment terms, we evaluate whether we have sufficient history of successfully collecting past transactions with similar terms without offering concessions. If that collection history is sufficient, revenue recognition commences, upon delivery of the products, assuming all other revenue recognition criteria are satisfied. If we were to make different judgments or assumptions about any of these matters, it could cause a material increase or decrease in the amount of revenues reported in a particular period.

We often receive multiple purchase orders or contracts from a single customer or a group of related customers that are evaluated to determine if they are, in effect, part of a single arrangement. In situations when we have concluded that two or more orders with the same customer are so closely related that they are, in effect, parts of a single arrangement, we account for those orders as a single arrangement for revenue recognition purposes. In other circumstances, when we have concluded that two or more orders with the same customer are independent buying decisions, such as an earlier purchase of a product and a subsequent purchase of a software upgrade or maintenance contract, we account for those orders as separate arrangements for revenue recognition purposes.



For many of our products, we have had an ongoing practice of making available, at no charge to customers, minor feature and compatibility enhancements as well as bug fixes on a when-and-if-available basis (collectively the “Software Updates”) for a period of time after initial sales to end users. The implicit obligation to make such Software Updates available to customers over a period of time represents implied post-contract customer support, which is deemed to be a deliverable in each arrangement and is accounted for as a separate element, or Implied Maintenance Release PCS.

Over the last two years, in connection with a strategic initiative to increase support and other recurring revenue streams, we have taken a number of steps to eliminate the longstanding practice of providing Implied Maintenance Release PCS for many of our products, including our Media Composer, Pro Tools and Sibelius product lines. In the third quarter and fourth quarter of 2015, respectively, we concluded that Implied Maintenance Release PCS for our Media Composer and Sibelius product lines had ceased. In the first quarter of 2016, in connection with the release of Cloud Collaboration in Pro Tools version 12.5, which was an undelivered feature that had prevented us from recognizing any revenue related to new Pro Tools 12 software sales as it represented a specified upgrade right for which vendor specific objective evidence or (“VSOE”) of fair value was not available, we concluded that Implied Maintenance Release PCS for our Pro Tools 12 product lines had also ended. As a result of the conclusion that Implied Maintenance Release PCS on Pro Tools 12 has ended, revenue and net income in the first quarter of 2016 increased approximately $11.1 million, reflecting the recognition of orders received after the launch of Pro Tools 12 that would have qualified for earlier recognition using the residual method of accounting.  In addition, the elimination of Implied Maintenance Release PCS also resulted in the accelerated recognition of maintenance and product revenues that were previously being recognized on a ratable basis over a much longer expected period of Implied Maintenance Release PCS rather than the contractual maintenance period. The reduction in the estimated amortization period of transactions being recognized on a ratable basis resulted in an additional $12.0 million and $33.7 million of revenue during the three and nine months ended September 30, 2016, respectively.

Management will continue to evaluate the judgment of whether Implied Maintenance Release PCS exists on each product line and version. Since the remaining products that contain Implied Maintenance Release PCS largely consist of products that fall under the non-software revenue recognition guidance, where management defers a small portion of revenue based on the best estimated selling price of Implied Maintenance Release PCS rather than the entire order value as required for transactions that fall under software revenue recognition guidance, any further determinations that Implied Maintenance Release PCS no longer exists for other product lines will be unlikely to result in a significant impact to the financial statements in any future periods.

As a result of the conclusion that Implied Maintenance Release PCS no longer exists for Pro Tools 12, prospective revenue recognition on new product orders will be recognized upfront, assuming all other revenue recognition criteria are met and VSOE of fair value exists for all undelivered elements. The cessation of Implied Maintenance Release PCS for Pro Tools and other products subject to software revenue recognition guidance, in addition to the initial impact of immediately recognizing revenue related to orders that would have qualified for earlier recognition using the residual method of accounting, resulted in increased revenue throughout 2016 as the elimination of Implied Maintenance Release PCS also results in the accelerated recognition of preexisting maintenance and product revenues that still do not qualify for the residual method of accounting but are now being recognized on an accelerated basis over a shorter remaining contractual maintenance period as compared to (i) the previous model of being recognized over a longer expected period of Implied Maintenance Release PCS and (ii) the prospective model of recognizing revenue ratably over a longer original contractual maintenance support period. As a result of the compressed recognition period for these prior transactions and longer recognition of the respective renewals, we expect significant decreases in revenues related to impacted product lines in 2017 as recognition from old contracts is completed and new contracts are recognized over a traditional maintenance period.


We enter into certaincontracts 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 elements,performance obligations, one or more of which may be delivered subsequent to the delivery of other elements.performance obligations. These multiple-deliverable arrangements may include a combination of products, support, training, and professional services and Implied Maintenance Release PCS. For these multiple-element arrangements, weservices. We allocate revenue to each deliverablethe transaction price of the arrangement based on the relative selling prices of the deliverables. In such circumstances, we first determine theestimated standalone selling price of each deliverable baseddistinct performance obligation.

See Note 9 for disaggregated revenue schedules and further discussion on (i) VSOE of fair value if that exists, (ii) third-party evidence of selling price, or TPE, when VSOE does not exist; or (iii) best estimate of the selling price or (“BESP”) when neither VSOE nor TPE exists. Revenue is then allocated to the non-software deliverables as a grouprevenue and to the software deliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the selling price hierarchy. Our process for determining BESP for deliverables for which VSOE or TPE does not exist involves significant management judgment. In determining BESP, we consider a number of data points, including:
the pricing established by management when setting prices for deliverables that are intended to be sold on a standalone basis;


contractually stated prices for deliverables that are intended to be sold on a standalone basis;
the pricing of standalone sales that may not qualify as VSOE of fair value due to limited volumes or variation in prices; and
other pricing factors, such as the geographical region in which the products are sold and expected discounts based on the customer size and type.

In determining a BESP for Implied Maintenance Release PCS, which we do not sell separately, we consider (i) the service period for the Implied Maintenance Release PCS, (ii) the differential in value of the Implied Maintenance Release PCS deliverable compared to a full support contract, (iii) the likely list price that would have resulted from our established pricing practices had the deliverable been offered separately and (iv) the prices a customer would likely be willing to pay.

We estimate the service period of Implied Maintenance Release PCS based on the length of time the product version purchased by the customer is planned to be supported with Software Updates. If facts and circumstances indicate that the original service period of Implied Maintenance Release PCS for a product has changed significantly after original revenue recognition has commenced, we will modify the remaining estimated service period accordingly and recognize the then-remaining deferred revenue balance over the revised service period.

We have established VSOE of fair value for all professional servicesperformance obligations and training and for some of our support offerings. Our policy for establishing VSOE of fair value consists of evaluating standalone sales to determine if a substantial portion of the transactions fall within a reasonable range. If a sufficient volume of standalone sales exist and the standalone pricing for a substantial portion of the transactions falls within a reasonable range, management concludes that VSOE of fair value exists.

In accordance with Accounting Standards Update, or ASU, No. 2009-14, we exclude from the scope of software revenue recognition requirements our sales of tangible products that contain both software and non-software components that function together to deliver the essential functionality of the tangible products. We adopted ASU No. 2009-13 and ASU No. 2009-14 prospectively on January 1, 2011 for new and materially modified arrangements originating after December 31, 2010.

Prior to our adoption of ASU No. 2009-14, we primarily recognized revenues using the revenue recognition criteria of Accounting Standards Codification, or ASC, Subtopic 985-605, Software-Revenue Recognition. As a result of our adoption of ASU No. 2009-14 on January 1, 2011, a majority of our products are now considered non-software elements under U.S. GAAP, which excludes them from the scope of ASC Subtopic 985-605 and includes them within the scope of ASC Topic 605, Revenue Recognition. Because we had not been able to establish VSOE of fair value for Implied Maintenance Release PCS, as described further below, substantially all revenue arrangements prior to January 1, 2011 were recognized on a ratable basis over the service period of Implied Maintenance Release PCS. Subsequent to January 1, 2011 and the adoption of ASU No. 2009-14, we determine a relative selling price for all elements of the arrangement through the use of BESP, as VSOE and TPE are typically not available, resulting in revenue recognition upon delivery of arrangement consideration attributable to product revenue, provided all other criteria for revenue recognition are met, and revenue recognition of Implied Maintenance Release PCS and other service and support elements over time as services are rendered.

The timing of revenue recognition of customer arrangements follows a number of different accounting models determined by the characteristics of the arrangement, and that timing can vary significantly from the timing of related cash payments due from customers. One significant factor affecting the timing of revenue recognition is the determination of whether each deliverable in the arrangement is considered to be a software deliverable or a non-software deliverable. For transactions occurring after January 1, 2011, our revenue recognition policies have generally resulted in the recognition of approximately 70% of billings as revenue in the year of billing, and prior to January 1, 2011, the previously applied revenue recognition policies resulted in the recognition of approximately 30% of billings as revenue in the year of billing. We expect this trend to continue in future periods.recognition.


Revenue Recognition of Non-Software DeliverablesLeases

Revenue from products that are considered non-software deliverables is recognized upon delivery of the product to the customer. Products are considered delivered to the customer once they have been shipped and title and risk of loss has been transferred. For most of our product sales, these criteria are met at the time the product is shipped. Revenue from support that is considered a non-software deliverable is initially deferred and is recognized ratably over the contractual period of the arrangement, which is generally 12 months. Professional services and training services are typically sold to customers on a time and materials basis. Revenue from professional services and training services that are considered non-software deliverables is recognized for these deliverables as services are provided to the customer. Revenue for Implied Maintenance Release PCS that is considered a non-


software deliverable is recognized ratably over the service period of Implied Maintenance Release PCS, which ranges from one to eight years.

Revenue Recognition of Software Deliverables


We recognizehave 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 following types of elements sold using software revenue recognition guidance: (i) software products and software upgrades, when the software sold in a customer arrangement is more than incidental to the arrangement as a whole and the product does not contain hardware that functions with the software to provide essential functionality, (ii) initial support contracts where the underlying product being supported is considered to be a software deliverable, (iii) support contract renewals and (iv) professional services and training that relate to deliverables considered to be software deliverables. Because we do not have VSOE of the fair value of our software products, we are permitted to account for our typical customer arrangements that include multiple elements using the residual method. Under the residual method, the VSOE of fairpresent value of the undelivered elements (which could include support, professional services or training, or any combination thereof) is deferred andfuture minimum lease payments over the remaining portion of the total arrangement fee is recognized as revenue for the delivered elements. If evidence of the VSOE of fair value of one or more undelivered elements doeslease term at commencement date. As our leases generally do not exist, revenues are deferred and recognized when delivery of those elements occurs or when VSOE of fair value can be established. VSOE of fair value is typicallyprovide an implicit rate, we use our incremental borrowing rate based on the price charged wheninformation available at commencement date in determining the elementpresent 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 sold separately to customers. We are unable to useappropriate for our operating leases after we considered an estimated incremental borrowing rate provided by our bank, the residual method to recognize revenues for some arrangements that include products that are software deliverables under U.S. GAAP since VSOE of fair value does not exist for Implied Maintenance Release PCS elements, which are included in someinterest rate of our arrangements.Term Loan, and the terms and geographic locations of our facilities. See Note 5 for further discussion on our leases.


For software products that include Implied Maintenance Release PCS, an element for which VSOE of fair value does not exist, revenue for the entire arrangement fee, which could include combinations of product, professional services, training and support, is recognized ratably as a group over the longest service period of any deliverable in the arrangement, with recognition commencing on the date delivery has occurred for all deliverables in the arrangement (or begins to occur in the case of professional services, training and support). Standalone sales of support contracts are recognized ratably over the service period of the product being supported.

From time to time, we offer certain customers free upgrades or specified future products or enhancements. When a software deliverable arrangement contains an Implied Maintenance Release PCS deliverable, revenue recognition of the entire arrangement will only commence when any free upgrades or specified future products or enhancements have been delivered, assuming all other products in the arrangement have been delivered and all services, if any, have commenced.




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 and nine months ended September 30, 2017March 31, 2020 and 2016:2019:


Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31,
2017 2016 2017 20162020 2019
Net revenues:          
Product51.6 % 53.6 % 49.1 % 56.4 %40.2 % 52.6 %
Services48.4 % 46.4 % 50.9 % 43.6 %59.8 % 47.4 %
Total net revenues100.0 % 100.0 % 100.0 % 100.0 %100.0 % 100.0 %
Cost of revenues42.7 % 36.7 % 41.1 % 33.6 %38.5 % 40.7 %
Gross margin57.3 % 63.3 % 58.9 % 66.4 %61.5 % 59.3 %
Operating expenses:          
Research and development15.2 % 16.8 % 16.6 % 15.8 %17.8 % 15.8 %
Marketing and selling24.4 % 22.9 % 25.8 % 22.4 %29.3 % 24.1 %
General and administrative14.4 % 11.6 % 13.9 % 12.2 %14.7 % 13.3 %
Amortization of intangible assets0.3 % 0.5 % 0.4 % 0.5 %— % 0.4 %
Restructuring costs, net(0.6)% 4.5 % 2.1 % 2.0 %0.2 % 0.5 %
Total operating expenses53.7 % 56.3 % 58.8 % 52.9 %62.0 % 54.1 %
Operating income3.6 % 7.0 % 0.1 % 13.5 %
Operating (loss) income(0.5)% 5.2 %
Interest and other expense, net(4.5)% (4.0)% (4.3)% (3.5)%(6.1)% (5.0)%
(Loss) income before income taxes(0.9)% 3.0 % (4.2)% 10.0 %(6.6)% 0.2 %
Benefit from income taxes(1.0)% (4.5)% (0.1)% (1.0)%
Net income (loss)0.1 % 7.5 % (4.1)% 11.0 %
Provision for income taxes0.1 % 0.4 %
Net loss(6.7)% (0.2)%


Net Revenues


Our net revenues are derived mainly from sales of video and audio hardware and software 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, 2016.2019.


Net Revenues for the Three Months Ended September 30, 2017 and 2016
Net Revenues for the Three Months Ended March 31, 2020 and 2019Net Revenues for the Three Months Ended March 31, 2020 and 2019
(dollars in thousands)
2017 Change 20162020 Change 2019
Net Revenues $ % Net RevenuesNet Revenues $ % Net Revenues
Video products and solutions$27,058
 $(12,124) (30.9)% $39,182
Audio products and solutions27,261
 2,703
 11.0% 24,558
Products and solutions54,319
 (9,421) (14.8)% 63,740
34,711
 (19,685) (36.2)% 54,396
Services50,946
 (4,333) (7.8)% 55,279
51,742
 2,819
 5.8% 48,923
Total net revenues$105,265
 $(13,754) (11.6)% $119,019
$86,453
 $(16,866) (16.3)% $103,319




Net Revenues for the Nine Months Ended September 30, 2017 and 2016
(dollars in thousands)
 2017 Change 2016
 Net Revenues $ % Net Revenues
Video products and solutions$82,585
 $(35,667) (30.2)% $118,252
Audio products and solutions70,395
 (35,194) (33.3)% 105,589
Products and solutions152,980
 (70,861) (31.7)% 223,841
Services158,765
 (14,029) (8.1)% 172,794
Total net revenues$311,745
 $(84,890) (21.4)% $396,635


The following table sets forth the percentage of our net revenues attributable to geographic regions for the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31,
2017 2016 2017 20162020 2019
United States37% 39% 39% 37%42% 38%
Other Americas7% 8% 7% 8%6% 7%
Europe, Middle East and Africa39% 37% 39% 40%38% 36%
Asia-Pacific17% 16% 15% 15%14% 19%


Video Products and Solutions Revenues


VideoOur products and solutions revenues are derived primarily from sales of our storage and workflow solutions, our media management solutions, and our video creative tools. Video products and solutions revenues decreased $12.1 million, or 30.9%, for the three months ended September 30, 2017, and decreased $35.7 million, or 30.2%, for the nine months ended September 30, 2017 compared to the same periods in 2016. The decrease in video revenues was primarily due to lower amortization of deferred revenues attributable to transactions executed on or before December 31, 2010. As a result of our adoption of ASU No. 2009-13 and ASU No. 2009-14 on January 1, 2011, many of our product orders now qualify for upfront revenue recognition; however, prior to adoption of this accounting guidance, the same orders required ratable recognition over periods of up to eight years. Deferred revenue associated with transactions executed prior to the adoption of ASU No. 2009-13 and ASU No. 2009-14 was largely amortized in 2016.
Audio Products and Solutions Revenues

Audio products and solutions revenues are derived primarily from sales of ourtools, digital audio software and workstation solutions, and our control surfaces, consoles, and live-sound systems. Audio productsProducts and solutions revenues increased $2.7decreased $19.7 million, or 11.0%36.2%, for the three months ended September 30, 2017, and decreased $35.2 million, or 33.3%, for the nine months ended September 30, 2017,March 31, 2020, compared to the same periodsperiod in 2016.2019. The increasedecrease for the three months ended September 30, 2017March 31, 2020 was primarily due to strengthenedlower sales of our Pro Tools and control surface products. The decrease in audio revenues for the nine months ended September 30, 2017 was primarily due to the accelerated revenue recognition of Pro Tools 12 during the nine months ended September 30, 2016 as a result of the cessation of Implied Maintenance Release PCS for Pro Tools. The decrease during the period was also due to the previously discussed lower amortization of deferred revenues attributable to transactions executed on or before December 31, 2010.COVID-19.


Services Revenues


Services revenues are derived primarily from maintenance contracts, as well as professional services and training. Services revenues decreased $4.3increased $2.8 million, or 7.8%5.8%, for the three months ended September 30, 2017, and decreased $14.0 million, or 8.1%, for the nine months ended September 30, 2017,March 31, 2020, compared to the same periodsperiod in 2016.2019. The decrease was primarily due to the accelerated revenue recognition of maintenance contracts and increasing conversion rates of new maintenance contracts into revenue during the three and nine months ended September 30, 2016 as the result of the determination that Implied Maintenance Release PCS on Pro Tools 12 no longer existed duringincrease for the three months ended March 31, 2016. The previously discussed2020 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.


amortization of deferred revenues attributable to transactions executed on or before December 31, 2010 also contributed to the decreases.


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 September 30, 2017 and 2016
Costs of Revenues and Gross Profit for the Three Months Ended March 31, 2020 and 2019Costs of Revenues and Gross Profit for the Three Months Ended March 31, 2020 and 2019
(dollars in thousands)
2017 Change 20162020 Change 2019
Costs $ % CostsCosts $ % Costs
Products$29,485
 $2,692
 10.0% $26,793
$20,962
 $(6,638) (24.1)% $27,600
Services13,472
 (1,413) (9.5)% 14,885
12,340
 (147) (1.2)% 12,487
Amortization of intangible assets1,950
 —
 —% 1,950
—
 (1,950) (100.0)% 1,950
Total cost of revenues$44,907
 $1,279
 2.9% $43,628
$33,302
 $(8,735) (20.8)% $42,037
          
Gross profit$60,358
 $(15,033) (19.9)% $75,391
$53,151
 $(8,131) (13.3)% $61,282





Costs of Revenues and Gross Profit for the Nine Months Ended September 30, 2017 and 2016
(dollars in thousands)
 2017 Change 2016
 Costs $ % Costs
Products$80,478
 $(1,927) (2.3)% $82,405
Services41,747
 (3,379) (7.5)% 45,126
Amortization of intangible assets5,850
 —
 —% 5,850
    Total cost of revenues$128,075
 $(5,306) (4.0)% $133,381
        
Gross profit$183,670
 $(79,584) (30.2)% $263,254




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, such as disk drives 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, 2016. 2019.

Our total gross margin percentage for the three months ended September 30, 2017 decreasedMarch 31, 2020 increased to 57.3%61.5% from 63.3%59.3% for the same period in 2016, and for the nine months ended September 30, 2017 decreased to 58.9% from 66.4% for the same period in 2016. The decreases were2019. This increase was primarily due to the decreased revenue from our products and services as discussed above, partiallysubscription margin improvement, offset by cost savings resulting from our programslower gross margin percentage in all other areas of the business due to reduce costs and increase operational efficiencies.

lower volumes.
Gross Margin % for the Three Months Ended September 30, 2017 and 2016
Gross Margin % for the Three Months Ended March 31, 2020 and 2019Gross Margin % for the Three Months Ended March 31, 2020 and 2019
2017 Gross
Margin %
 Change 
2016 Gross
Margin %
2020 Gross
Margin %
 Change 
2019 Gross
Margin %
Products45.7% (12.3)% 58.0%39.6% (9.7)% 49.3%
Services73.6% 0.5% 73.1%76.2% 1.7% 74.5%
Total57.3% (6.0)% 63.3%61.5% 2.2% 59.3%

Gross Margin % for the Nine Months Ended September 30, 2017 and 2016
 
2017 Gross
Margin %
 Change 
2016 Gross
Margin %
Products47.4% (15.8)% 63.2%
Services73.7% (0.2)% 73.9%
Total58.9% (7.5)% 66.4%


Operating Expenses and Operating Income (Loss)


Operating Expenses and Operating Income for the Three Months Ended September 30, 2017 and 2016
Operating Expenses and Operating Income (Loss) for the Three Months Ended March 31, 2020 and 2019Operating Expenses and Operating Income (Loss) for the Three Months Ended March 31, 2020 and 2019
(dollars in thousands)
2017 Change 20162020 Change 2019
Expenses $ % ExpensesExpenses $��% Expenses
Research and development$16,025
 $(3,928) (19.7)% $19,953
$15,425
 $(860) (5.3)% $16,285
Marketing and selling25,652
 (1,579) (5.8)% 27,231
25,289
 411
 1.7% 24,878
General and administrative15,193
 1,371
 9.9% 13,822
12,744
 (1,044) (7.6)% 13,788
Amortization of intangible assets362
 (205) (36.2)% 567
—
 (363) (100.0)% 363
Restructuring costs, net(582) (5,896) (111.0)% 5,314
145
 (413) (74.0)% 558
Total operating expenses$56,650
 $(10,237) (15.3)% $66,887
$53,603
 $(2,269) (4.1)% $55,872
          
Operating income$3,708
 $(4,796) (56.4)% $8,504
Operating (loss) income$(452) $(5,862) (108.4)% $5,410



Operating Expenses and Operating Income for the Nine Months Ended September 30, 2017 and 2016
(dollars in thousands)
 2017 Change 2016
 Expenses $ % Expenses
Research and development$51,904
 $(10,887) (17.3)% $62,791
Marketing and selling80,481
 (8,546) (9.6)% 89,027
General and administrative43,268
 (5,091) (10.5)% 48,359
Amortization of intangible assets1,088
 (1,047) (49.0)% 2,135
Restructuring costs, net6,464
 (1,414) (17.9)% 7,878
Total operating expenses$183,205
 $(26,985) (12.8)% $210,190
        
Operating income$465
 $(52,599) (99.1)% $53,064


Research and Development Expenses


Research and development (“R&D”) expenses include costs associated with the development of new products and the enhancement of existing products, and consist primarily of employee compensation and benefits;benefits, facilities costs; depreciation;costs, depreciation, costs for consulting and temporary employees;employees, and prototype and other development expenses. R&D expenses decreased $3.9$0.9 million, or 19.7%5.3%, for the three months ended September 30, 2017, and decreased $10.9 million, or 17.3%, for the nine months ended September 30, 2017,March 31, 2020, compared to the same periodsperiod in 2016.2019. The table below provides further details regarding the changes in components of R&D expenses.



Change in R&D Expenses for the Three Months Ended September 30, 2017 and 2016
Change in R&D Expenses for the Three Months Ended March 31, 2020 and 2019Change in R&D Expenses for the Three Months Ended March 31, 2020 and 2019
(dollars in thousands)
2017 Decrease
From 2016
2020 Increase (Decrease)
From 2019
$ %$ %
Personnel-related$(2,371) (21.1)%$(813) (7.8)%
Facilities and information technology(799) (19.3)%(264) (8.6)%
Consulting and outside services(588) (16.6)%78
 14.0 %
Other(170) (16.5)%139
 26.2 %
Total research and development expenses decrease$(3,928) (19.7)%
Total R&D expenses decrease$(860) (5.3)%

Change in R&D Expenses for the Nine Months Ended September 30, 2017 and 2016
(dollars in thousands)
 
2017 Decrease
From 2016
 $ %
Personnel-related$(6,701) (18.8)%
Consulting and outside services(1,715) (15.3)%
Facilities and information technology(1,634) (13.3)%
Computer hardware and supplies(422) (31.1)%
Other(415) (17.3)%
Total research and development expenses decrease$(10,887) (17.3)%




The decreasesdecrease in all R&D expense categoriespersonnel-related expenses for the three and nine months ended September 30, 2017,March 31, 2020, compared to the same periodsperiod in 2016, were2019, was primarily due to a decrease in incentive-based compensation accrual and reduced travel and expenses as a result of COVID-19. The decrease in facilities and information technology expenses for the three months ended March 31, 2020, compared to the same period in 2019, was primarily due to our programs to increase operational efficiencies and reduce costs. The increase in consulting and outside services for 2020 compared to 2019 was primarily the result of increased webstore fees due to higher transactions on our cost efficiency program.webstore. 


Marketing and Selling Expenses


Marketing and selling expenses consist primarily of employee compensation and benefits for selling, marketing and pre-sales customer support personnel; commissions;personnel, commissions, travel expenses;expenses, advertising and promotional expenses;expenses, web design costs, and facilities costs. Marketing and selling expenses decreased $1.6increased $0.4 million, or 5.8%1.7%, for the three months ended September 30, 2017, and decreased $8.5 million, or 9.6%, for the nine months ended September 30, 2017,March 31, 2020, compared to the same periodsperiod in 2016.2019. The table below provides further details regarding the changes in components of marketing and selling expenses.
 
Change in Marketing and Selling Expenses for the Three Months Ended September 30, 2017 and 2016
(dollars in thousands)
 
2017 (Decrease) Increase
From 2016
 $ %
Foreign exchange losses$1,076
 194.9 %
Personnel-related(997) (5.8)%
Advertising and promotion(539) (28.0)%
Bad debt(467) (89.2)%
Facilities and information technology(416) (8.6)%
Consulting and outside services(406) (28.1)%
Other170
 20.9 %
Total marketing and selling expenses decrease$(1,579) (5.8)%
Change in Marketing and Selling Expenses for the Three Months Ended March 31, 2020 and 2019
(dollars in thousands)
 2020 Increase (Decrease) From 2019
 $ %
Personnel-related$(464) (1.9)%
Advertising and promotions(278) (23.8)%
Foreign exchange (gains) and losses457
 3,126.4 %
Other696
 3.0 %
Total marketing and selling expenses increase$411
 1.7 %

Change in Marketing and Selling Expenses for the Nine Months Ended September 30, 2017 and 2016
(dollars in thousands)
 
2017 (Decrease) Increase
From 2016
 $ %
Personnel-related$(6,648) (11.9)%
Foreign exchange losses2,990
 164.6 %
Consulting and outside services(2,406) (39.7)%
Advertising and promotion(1,566) (19.7)%
Bad debt(1,048) (117.8)%
Other132
 0.8 %
Total marketing and selling expenses decrease$(8,546) (9.6)%


The decreasesdecrease in personnel-related consulting and outside services,expenses and advertising and promotionpromotions expenses for the three and nine months ended September 30, 2017,March 31, 2020, compared to the same period in 2019, were primarily the result of our programs to increase operational efficiencies and reduce costs and reduced travel and expenses as a result of COVID-19. The increase in foreign exchange translations for the three months ended March 31, 2020, compared to the same periods in 2016, were primarily the result of our cost efficiency program. The decreases in bad debt expense for the three and nine months ended September 30, 2017, compared to the same periods in 2016, were2019, was due to high bad debt reserve set up during 2016 and no additional reserve required in 2017. During the three and nine months ended September 30, 2017, netmore foreign exchange losses (specifically, resultingresulted from foreign currency denominated transactions and the revaluation of foreign currency denominated assets and liabilities), which are includedliabilities. The change was primarily due to the euro-dollar exchange rate volatility. The decrease in marketingadvertising and sellingpromotions expenses were $1.6 million and $4.8 million, respectively,for 2020 compared to loss2019 was primarily the result of $0.6 millionour programs to increase operational efficiencies and $1.8 million, respectively, during the three and nine months ended September 30, 2016.reduce costs.


General and Administrative Expenses


General and administrative (“G&A”) expenses consist primarily of employee compensation and benefits for administrative, executive, finance and legal personnel;personnel, audit, legal and strategic consulting fees;fees, and insurance, information systems and


facilities costs. Information systems and facilities costs reported within general and administrative expenses are net of allocations to other expenses categories. G&A expenses increased $1.4decreased $1.0 million, or 9.9%7.6%, for the three months ended September 30, 2017, and decreased $5.1 million, or 10.5%, for the nine months ended September 30, 2017, March 31, 2020,


compared to the same periodsperiod in 2016.2019. The table below provides further details regarding the changes in components of G&A expenses.


Change in G&A Expenses for the Three Months Ended September 30, 2017 and 2016
Change in G&A Expenses for the Three Months Ended March 31, 2020 and 2019Change in G&A Expenses for the Three Months Ended March 31, 2020 and 2019
(dollars in thousands)
2017 Increase (Decrease)
From 2016
2020 Decrease
From 2019
$ %$ %
Personnel-related$(495) (8.0)%
Consulting and outside services$1,551
 44.2 %(206) (4.8)%
Other(180) (1.8)%(343) (10.6)%
Total general and administrative expenses decrease$1,371
 9.9 %
Total G&A expenses decrease$(1,044) (7.6)%

Change in G&A Expenses for the Nine Months Ended September 30, 2017 and 2016
(dollars in thousands)
 
2017 Decrease
From 2016
 $ %
Personnel-related$(3,893) (17.0)%
Facilities and information technology(611) (8.2)%
Consulting and outside services(327) (2.3)%
Other(260) (6.9)%
Total general and administrative expenses decrease$(5,091) (10.5)%


The decreasesdecrease in all G&A expense categoriespersonnel-related expenses for the ninethree months ended September 30, 2017,March 31, 2020, compared to the same period in 2016, were2019, was primarily the result of our cost efficiency program.spending control initiatives, a decrease in incentive-based compensation accrual, and reduced travel and expenses as a result of COVID-19. The increasedecrease in consulting and outside services for the three months ended September 30, 2017,March 31, 2020, compared to the same period in 2016,2019, was primarily due to increasedlower audit and legal professional fees related to class actions and settlements.fees.


Benefit fromProvision for Income Taxes

Benefit from Income Taxes for the Three Months Ended September 30, 2017 and 2016
(dollars in thousands)
 2017 Change 2016
   $ %  
Benefit from income taxes$(1,065) $4,256
 (80.0)% $(5,321)
Provision for Income Taxes for the Three Months Ended March 31, 2020 and 2019
(dollars in thousands)
 2020 Change 2019
   $ %  
Provision for income taxes$122
 $(316) (72.1)% $438


Benefit from Income Taxes for the Nine Months Ended September 30, 2017 and 2016
(dollars in thousands)
 2017 Change 2016
   $ %  
Benefit from income taxes$(326) $3,657
 (91.8)% $(3,983)

We had a tax benefit of 2.5% and (10.2)%, respectively, as a percentage of loss orThe decrease in our income before tax for the nine months ended September 30, 2017 and 2016. The $3.7 million increase in the tax provision for the nine month periodthree months ended September 30, 2017 is primarily relatedMarch 31, 2020 compared to the 2016same period in 2019 was primarily driven by an overall reduction in pre-tax income and a related $0.3 million deferred tax benefit for an uncertain tax position related to the foreign implications arising from changesrecognized in revenue recognition, which was not present in the 2017 period. Thisour Irish branch. The Irish benefit was $5.2 millionpartially offset by a deferred tax provision in our German subsidiary and $3.2 million in the three and


nine month periods of 2016, respectively. Changesother changes in the jurisdictional mix of earnings partially offset the increase in the three-month period and slightly augmented the increase in the nine-month period, respectively.earnings. No benefit was provided for the tax loss generated in the United States due to a full valuation on the deferred tax asset. In addition, the estimated annual effective tax rate excluded the United States because the earnings could not be reliably estimated due to anticipated marginal profitability.its pre-tax loss position.


The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted in the United States on March 27, 2020. The CARES Act includes several income tax provisions such as net operating loss (“NOL”) carryback and carryforward benefits and other tax deduction benefits. As noted previously, the U.S. deferred tax asset has a full valuation; accordingly these NOL and other benefit provisions had no impact on our financial statements for the period ended March 31, 2020. The CARES Act accelerates the alternative minimum tax (“AMT”) credit refund originally enacted by the Tax Cut and Jobs Act in 2017. Accordingly, we have reclassified our $0.4 million receivable related to the AMT credit refund from long-term assets to current assets at March 31, 2020.

LIQUIDITY AND CAPITAL RESOURCES


Liquidity and Sources of Cash


Our principal sources of liquidity include cash and cash equivalents totaling $81.2 million as of March 31, 2020. We have generally funded operations in recent years through the use of existing cash balances, supplemented from time to time with the proceeds of long-term debt and borrowings under our credit facilities. Our principal sources of liquidity include cash and cash equivalents totaling $44.1 million as of September 30, 2017.


In February 2016, we committed to a cost efficiency program that encompassed a series of measures intended to allow us to more efficiently operate in a leaner, more directed cost structure. These measures included reductions in our workforce, consolidation of facilities, transfers of certain business processes to lower cost regions and reductions in other third-party services costs. The cost efficiency program was substantially complete as of June 30, 2017.

In connection with the cost efficiency program, on February 26, 2016,On April 8, 2019, we entered into the Financing Agreement with the Lenders. Pursuantan amendment to the Financing Agreement, we entered into aAgreement. The amendment provided for an additional delayed draw term loan commitment in the original aggregate principal amount of $100.0 million. The Financing Agreement also originally provided us withmillion (the “Delayed Draw Funds”) for the ability


purpose of funding the purchase of a portion of Notes in the Offer described in Note 10 to draw up to a maximum of $5.0 millionour financial statements in revolving credit. All outstanding loansItem 1 above. On May 2, 2019, we received the Delayed Draw Funds under the Financing Agreement will become due and payable in February 2021, or in May 2020 if the $125.0Agreement. We used $72.7 million in outstanding principal of the Delayed Draw Funds for the purchase of a portion of our Notes, has not been$0.6 million for the Notes interest payment, and $6.0 million for the payment of refinancing fees. On June 18, 2019, we repaid or refinanced by such time.

$20.7 million of the Delayed Draw Funds. The Financing Agreement contains customary representations$79.3 million Delayed Draw Funds borrowed and warranties, covenants, mandatory prepayments, and eventsthat remain outstanding will mature on May 10, 2023 under the terms of default under which our payment obligations may be accelerated. On March 14, 2017, we entered into the First Amendment to our Financing Agreement. The First Amendment modifiesamendment also modified the covenant requiringthat requires us to maintain a Leverage Ratioleverage ratio (defined to mean the ratio of (a) total fundedthe sum of indebtedness under the Term Loan and Credit Facility and non-cash collateralized letters of credit to (b) consolidated EBITDA) such that followingEBITDA under the Amendment No. 1 Effective Date, we are required to keep a LeverageTerm Loan and Credit Facility) based on the level of availability of our Credit Facility plus unrestricted cash on-hand (the “Leverage Ratio Covenant”). As of no greater than 3.50:1.00 for the four quarters ended March 31, 2017, 4.20:1.00 for the four quarters ended June 30, 2017, 4.75:1.00 for the four quarters ended September 30, 2017, 4.80:1.00 for the four quarters ending December 31, 2017, 4:40:1.00 for each of the four quarters ending March 31, 2018 through March 31, 2019, respectively, and thereafter declining over time from 3.50:1.00 to 2.50:1.00. Following the Amendment No. 1 Effective Date, interest accrues on outstanding borrowings under the credit facility and the term loan (each as defined in the Financing Agreement) at a rate of either the LIBOR Rate (as defined in the Financing Agreement) plus 7.25% or a Reference Rate (as defined in the Financing Agreement) plus 6.25%, at the option of Avid. As of September 30, 2017,2020, we were in compliance with the Financing Agreement covenants.

On November 9, 2017 (the “Amendment No. 2 Effective Date”), we entered into the Second Amendment toall covenants under the Financing Agreement. The Second Amendment extended an additional $15.0

After completing the Offer, we have $28.9 million term loanof principal payments remaining on the Notes, which mature on June 15, 2020. We plan to repay the Company, thereby increasing the aggregate principal amount of the term loan to $115.0 million. The Second Amendment also increased the amount ofNotes in cash when they come due through available liquidity, which includes (i) cash on hand, and (ii) borrowings under our $22.5 million revolving credit by $5.0facility, of which we have drawn down $22.0 million to an aggregate amountas of $10.0 million. The additional $15.0 million term loan must be repaid in quarterly principal payments of $187,500 commencing in March 2018. The Second Amendment also granted us the ability to use up to $15.0 million to purchase Notes and modified the definition of consolidated EBITDA used in the Leverage Ratio calculation to adjust for expected changes in deferred revenue due to the adoption of ASC 606.31, 2020.


Our ability to satisfy the Leverage Ratio covenantCovenant in the future is dependent on our ability to maintain bookings and billingsprofitability at or above levels experienced over the last 12 months. In recent quarters, we have experienced volatility in bookings and billingsrevenues resulting from, among other things, (i) our transition towards subscription and recurring revenue streams and the resulting decline in traditional upfront product sales, (ii) volatility in currency rates and in particular the U.S. dollar against the Euro, (iii) significantdramatic changes and trends in the media industry and the impact they have hadit has on our customers, and (iv)(iii) the impact of new and anticipated product launches and features. In addition tofeatures, (iv) volatility in currency rates, and (v) in the impact of new bookings and billings, U.S. GAAP revenues recognized asmost recent quarter, the resulteconomic impacts of the existenceCOVID-19 pandemic. If revenues were to decrease from the levels of Implied Maintenance Release PCSthe last twelve months, we would need to reduce expenses to maintain the required level of profitability. In light of the COVID-19 pandemic, we are closely monitoring our covenant compliance going forward.

As discussed above, 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 significantly loweradversely 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 remainderduration and severity of 2017, as compared to 2016 periods, which will have an adversethe pandemic and its impact on our Leverage Ratio.



In the event bookingsoperations and billings in future quarters are lower than we currently anticipate, we may be forced to take remedial actionscash flows, which could include, among other things (and where allowed by the Lenders)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, or (iv) disposing of certain assets or businesses.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. If we are not in compliance with the Leverage Ratio Covenant and are unable to obtain an amendment or waiver, such noncompliance may result in an event of default under the Financing Agreement, which could permit acceleration of the outstanding indebtedness under the Financing Agreement 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 Lenderslenders may be entitled to foreclose on and sell substantially all of our assets, which secure our borrowings under the Financing Agreement.


On January 26, 2017, we entered into an exclusive distributor agreement, or the Distributor Agreement, with Beijing Jetsen Technology Co., Ltd., or Jetsen, pursuant to which Jetsen became the exclusive distributor for Avid products and services in the greater China region. The Distributor Agreement has a five-year term, and Jetsen is required to make at least $75.8 million of aggregate purchases under the agreement over the first three years. At the same time, we also entered into a securities purchase agreement, or the Securities Purchase Agreement, with Jetsen, pursuant to which we agreed to sell to Jetsen shares of Avid common stock. In June 2017, we and Jetsen amended the Securities Purchase Agreement. Under the amended terms, Jetsen will invest $18.2 million in Avid, in return for a minority stake in Avid of between 4.5% and 8.9% of Avid outstanding common stock on a fully diluted basis. The closing of the investment is subject to closing conditions, including China regulatory approvals. In the event regulatory approval is not obtained in the fourth quarter of 2017, either party may elect to terminate the Securities Purchase Agreement for any reason. The exact number of shares to be issued and sold at closing will be determined by reference to the trading price of Avid common stock before closing.

Our cash requirements vary depending on factors such as the growth of ourthe business, changes in working capital, capital expenditures, and capital expenditures.obligations under our cost efficiency program. We must repay the remaining amount due under the Notes of $28.9 million on June 15, 2020, the maturity date. We expect to operatefund such amount and meet our other obligations in connection with the operation of our business and executethe execution of our strategic initiatives principally with funds generated from operations, remaining net proceeds from the term loan borrowings under the Financing Agreement, and drawdraws of up to a maximum of $10.0$22.5 million under the Financing Agreement’s revolving credit facility.facility, which, as stated above, we have drawn down $22.0 million as of March 31, 2020. We anticipate that we will have sufficient internal and external sources of liquidity to fund operations and anticipated working capital and other expected cash needs for at least the next 12 months as well as for the foreseeable future.We also believe that our financial resources will allow us to manage the anticipated impact of COVID-19 on our business operations for the foreseeable future, which could include reductions in revenue and delays in payments from customers and partners. The challenges posed by COVID-19 on our business are expected to evolve rapidly. Consequently, we will continue to evaluate our financial position in light of future developments, particularly those relating to COVID-19.



Cash Flows


The following table summarizes our cash flows for the periods presented (in thousands):
 Nine Months Ended September 30,
 2017 2016
Net cash provided by (used in) operating activities$6,103
 $(48,925)
Net cash used in investing activities(4,359) (14,242)
Net cash (used in) provided by financing activities(3,351) 92,591
Effect of foreign currency exchange rates on cash and cash equivalents753
 391
Net (decrease) increase in cash and cash equivalents$(854) $29,815
 Three Months Ended March 31,
 2020 2019
Net cash (used in) provided by operating activities$(5,605) $6,376
Net cash used in investing activities(1,479) (1,767)
Net cash provided by (used in) financing activities19,831
 (5,331)
Effect of foreign currency exchange rates on cash, cash equivalents and restricted cash(402) (55)
Net increase (decrease) in cash, cash equivalents and restricted cash$12,345
 $(777)


Cash Flows from Operating Activities


Cash provided byused in operating activities aggregated $6.1$5.6 million for the ninethree months ended September 30, 2017.March 31, 2020. The significant improvementdecrease in cash provided by operations compared to the ninethree months ended September 30, 2016March 31, 2019 was primarily attributable to (i) significantly lower operating expenses as the result of our cost efficiency program, (ii) significantly lower inventory purchases due to improved inventory management, (iii) severancedecreased revenues and other restructuring related payments during the nine months ended September 30, 2016 that did not reoccur at the same levelsa change in the 2017 period, and (iv) the timing of annual bonus payments, which were paid in the second quarter in 2016 and in the fourth quarter in 2017.working capital.


Cash Flows from Investing Activities


For the ninethree months ended September 30, 2017,March 31, 2020, net cash flows used in investing activities reflected $6.1$1.5 million used for the purchase of property and equipment, and $1.8 million of cash released from the cash collateral for our letters of credit.equipment. Our


purchases of property and equipment largely consist of computer hardware and software to support R&D activities and information systems.


Cash Flows from Financing Activities


For the ninethree months ended September 30, 2017,March 31, 2020, net cash flows used inprovided by financing activities were primarily the principal paymentresult of the Term Loan.borrowing made on our revolving credit facility.


RECENT ACCOUNTING PRONOUNCEMENTS


Recently Adopted Accounting PronouncementPronouncementsand Recent Accounting Pronouncements To Be Adopted


Our recently adopted and to be adopted accounting pronouncements are set forth in Note 1 “Financial Information” of our Notes to Condensed Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.





ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK


Foreign Currency Exchange Risk


We have significant international operations and derive more than half of our revenues from customers outside the United States. This business is, for the most part, transacted through international subsidiaries and generally in the currency of the end-user customers. Therefore, we are exposed to the changes in foreign currency exchange rates that could adversely affect our revenues, net income, and cash flow.


DuringWe recorded a net foreign exchange loss of $0.5 million and an immaterial net gain for the ninethree months ended September 30, 2017March 31, 2020 and 2016, we recorded net2019, respectively. The foreign exchange losses of $4.8 million and $1.8 million, respectively, that resulted from foreign currency denominated transactions and the revaluation of foreign currency denominated assets and liabilities.


A hypothetical change of 10% in appreciation or depreciation of foreign currency exchange rates from the quoted foreign currency exchange rates as of September 30, 2017March 31, 2020, would not have a significant impact on our financial position, results of operations, or cash flows.


Interest Rate Risk


On February 26, 2016, weWe borrowed $100.0 million under the Term Loan on February 26, 2016, and borrowed an additional $15.0 million and $22.7 million under the Term Loan on November 9, 2017.2017 and May 10, 2018, respectively. We also maintain a revolving Credit Facility that allows us to borrow up to $22.5 million, of which we have borrowed $22.0 million. On March 14, 2017 (the “Amendment No. 1 Effective Date”),April 8, 2019, we entered into an amendment (the “First Amendment”) to the Financing Agreement, withwhich provides for an additional delayed draw term loan commitment in the lenders party thereto. Followingaggregate principal amount of $100.0 million (the “Delayed Draw Funds”). Under the Amendment No.1 Effective Date,terms of the amendment effective April 8, 2019, interest accrues on the Delayed Draw Funds, outstanding borrowings under the credit facilityTerm Loan and the term loan (each as defined in the Financing Agreement)Credit Facility at a rate of either the LIBOR Rate (as defined in the Financing Agreement) plus 7.25%6.25% or a Reference Rate (as defined in the Financing Agreement) plus 6.25%5.25%, at our option. We also maintain a revolving Credit Facility that allows us to borrow up to $10.0 million. A hypothetical 10% increase or decrease in interest rates paid on outstanding borrowings under the Financing Agreement would not have a material impact on our financial position, results of operations or cash flows.


On June 15, 2015, we issued $125.0 million aggregate principal amount of our Notes pursuant to the terms of an indenture.
We purchased $2.0 million of our Notes during 2017, $16.2 million during 2018, $3.9 million on January 22, 2019, and an additional $74.0 million through a cash tender offer on May 13, 2019. The Notes pay interest semi-annually on June 15 and December 15 of each year, beginning on December 15, 2015, at an annual rate of 2.00% and mature on June 15, 2020 unless earlier convertedrepurchased or repurchasedconverted in accordance with their terms prior to such date. The fair value of the Notes is dependent on the price and volatility of our common stock as well as movements in interest rates. The fair value of our common stock and interest rate changes affect the fair value of the Notes, but do not impact our financial position, cash flows, or results of operations due to the fixed nature of the debt obligations.



ITEM 4.CONTROLS AND PROCEDURES


Evaluation of Disclosure Controls and Procedures


Our management, with the participation and supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified under SEC rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.



Our management, including the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2017.March 31, 2020. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our management concluded that, as of September 30, 2017March 31, 2020, these disclosure controls and procedures were not effective at thea reasonable assurance level as a result of the material weakness in our internal controls over financial reporting, due to theassurance.


ineffective controls over licensing and provisioning of software described in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2016. As discussed below, our internal control over financial reporting is an integral part of our disclosure controls and procedures.


Changes in Internal Control over Financial Reporting


Under applicable SEC rules (Exchange Act Rules 13a-15(c) and 15d-15(c)) management is required to evaluate anyThere were no changes in our internal control over financial reporting during the quarterly period ended March 31, 2020, that occurred during each fiscal quarter thathave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting. As discussed in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2016, we have undertaken remedial actions to address the material weakness in our internal control over financial reporting over the licensing and provisioning of software by enhancing the design of our controls to now require our development team to formalize and sign-off testing procedures currently in place to ensure documentation is sufficient for compliance purposes. Our enhanced controls were operational for the three months ended September 30, 2017, however, the material weakness cannot be considered remediated until (i) the control has operated for a sufficient period of time and (ii) management has concluded, through testing, that the control is operating effectively. We expect that the material weakness will be remediated in the fourth quarter of 2017.


Inherent Limitation on the Effectiveness of Internal Controls


The effectiveness of any system of internal control over financial reporting is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting can only provide reasonable, not absolute, assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure that such improvements will be sufficient to provide us with effective internal control over financial reporting.







PART II - OTHER INFORMATION


ITEM 1.LEGAL PROCEEDINGS


See Note 7 “Contingencies”“Commitments and Contingencies” of our Notes to Condensed Consolidated Financial Statements regarding our legal proceedings. Aside from the disclosure below, there have been no material developments from the disclosures contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2019.


In November 2016, a purported securities class action lawsuit was filed in the U.S. District Court for the District of Massachusetts (Mohanty v. Avid Technology, Inc. et al., No. 16-cv-12336) against us and certain executive officers seeking unspecified damages and other relief on behalf of a purported class of purchasers of our common stock between August 4, 2016 and November 9, 2016, inclusive. The complaint purported to state a claim for violation of federal securities laws as a result of alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“the Exchange Act”) and Rule 10b-5 promulgated thereunder. The complaint’s allegations relate generally to our disclosure surrounding the level of implementation of our Avid NEXIS solution product offerings. On February 7, 2017, the Court appointed a lead plaintiff and counsel in the matter. On June 14, 2017, we moved to dismiss the action. On July 31, 2017, the lead plaintiff filed an opposition to our motion to dismiss, and on August 21, 2017, we filed its reply brief. On October 13, 2017, after a mediation, the parties reached an agreement in principle to settle this litigation. We expect the majority of the settlement to be funded by our insurers. Finalization of the settlement is subject to a number of conditions, including execution of definitive documentation and approval by the court.


ITEM 1A.RISK FACTORS


Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described in Part I - Item 1A under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 20162019 in addition to the other information included in this Form 10-Q before making an investment decision regarding our common stock. If any of these risks actually occurs, our business, financial condition, or operating results would likely suffer, possibly materially, the trading price of our common stock could decline, and you could lose part or all of your investment.
There has been no material change to the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2019 with the exception of the following risk factors:

The outbreak of the novel coronavirus (“COVID-19”) and actions taken in response to it have adversely affected our business and are likely to continue to adversely affect our business, financial condition and results of operations.

The COVID-19 pandemic is causing worldwide concern and economic disruption, and has led to federal, state and local governments enacting various restrictions in an attempt to limit the spread of the virus. This has included the declaration of states of emergency across the globe, and widespread school and business closings affecting a large number of countries. It has also prompted limitations on social or public gatherings and other social distancing measures, such as office closures, shelter in place orders, working remotely, travel restrictions and quarantines, some of which continue in effect in many cities and countries.

In these challenging and dynamic circumstances, Avid is working to protect its employees and the public, maintain business continuity and sustain its operations. We have also taken, and may take in the future, further actions as required by government authorities or that we determine are in the best interests of our employees, customers, manufacturers, and suppliers that diminish our ability to promote our products and services, and deliver required on-site professional services, including on-site support to our customers and users and could negatively impact our business and results of operations.

The COVID-19 pandemic has significantly increased economic and demand uncertainty. The current outbreak and continued spread of COVID-19 has caused an economic slowdown, and it is possible that it could cause a global recession. This economic downturn has already caused a recent decline in the media, entertainment, and sports industries which may, in turn, reduce demand for our products and services, possibly significantly, including delays in purchasing and projects by our enterprise customers and channel partners. Additionally, the provision of on-site professional service may be impossible for a prolonged period of time, further impacting our business.

The COVID-19 pandemic has also begun to have an adverse impact on our operations and supply chain, and these adverse impacts are likely to continue during the pandemic. We could experience interruptions as a result of employees or other key personnel of manufacturers, ours or those of third parties, becoming infected. It also could be as a result of preventive and precautionary measures that governments and we and other businesses, including our third-party manufacturers, are taking, such as border closures, prolonged quarantines, and other travel restrictions. For example, we do not know if all of our manufacturers will be able to continue producing materials for us or may be shut down. Any of above circumstances will negatively impact the ability of third parties on which we rely to manufacture our products or their components and our ability to perform critical functions, which could significantly hamper our ability to supply our products to our customers. If we encounter delays or difficulties in the manufacturing process that disrupt our ability to supply our


products, we may not be able to satisfy customer demand or we may experience a product stock-out, which would likely have a material adverse effect on our business.

If the pandemic continues and economic conditions worsen, we expect to experience additional adverse impacts on our operations and revenues and our collections of accounts receivable, which adverse impacts may be material. To address our liquidity, we are exploring several options, including various programs that have been implemented by the U.S. government in response to the COVID-19 pandemic. However, there can be no assurance that we will obtain any funds from these programs. We have also implemented cost reduction measures, including halting all but essential travel spending, reducing discretionary spending, deferring certain investments, and reducing our payroll expenses. Such cost reductions may not be sufficient and additionally may harm our ability to offer, promote, and deliver products and services at the level expected by our customers and partners.

Further, the continued spread of COVID-19 has led to disruption and volatility in the global capital markets, which increases the cost of capital and adversely impacts access to capital. If we experience further deterioration in demand and our cash flows from operations decrease, we may require additional funding and may not be able to obtain such funding on favorable terms, or at all.

The degree to which COVID-19 impacts our results going forward will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of COVID-19, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Any of the foregoing factors, or other cascading effects of the COVID-19 pandemic that are not currently foreseeable, could materially increase our costs, negatively impact our business and damage our results of operations and our liquidity position, possibly to a significant degree.

Failure of our information systems or those of third parties or breaches of data security could cause significant harm to our business.

Our systems and processes involve the storage and transmission of proprietary information and sensitive or confidential data, including personal information of employees, customers, and others. In addition, we rely on information systems controlled by third parties. Information system failures, network disruptions, and system and data security breaches, manipulation, destruction, or leakage, whether intentional or accidental, could impair our ability to provide services to our customers or otherwise harm our ability to conduct our business. Any such failures, disruptions or breaches could also impede the development, manufacture or shipment of products, interrupt or delay processing of transactions and reporting financial results, result in theft or misuse of our intellectual property or other assets, or result in the unintentional disclosure of personal, proprietary, sensitive, or confidential information of employees, customers, and others. With our development of Avid MediaCentral Platform, public and private marketplaces and cloud-based offerings, our and our customer’s data and financial and proprietary information could become more susceptible to such failures and data breaches. In addition, the need for substantial numbers of our employees to work remotely, such as due to the COVID-19 pandemic, could create additional data security risks.

Information system failures or unauthorized access could be caused by our failure to adequately maintain and enhance our systems and networks, external theft or attack, misconduct by our employees, contractors, vendors, or external bad actors, or many other causes such as power failures, earthquakes, fire, or other natural disasters. Cyber threats are constantly evolving, increasing the difficulty of detecting and successfully defending against them. We may have no current capability to detect certain vulnerabilities, which may allow them to persist in the environment over long periods of time. Cyber threats can have cascading impacts that unfold with increasing speed across our internal networks and systems and those of our partners and customers.

Any information system failures or unauthorized access to our network or systems could expose us, our customers, or the individuals affected to a risk of loss or misuse of this information, resulting in litigation and potential liability for us. In addition, we could incur substantial remediation costs, including costs associated with repairing our information systems, implementing further data protection measures, engaging third-party experts and consultants, and increased insurance premiums. In addition, significant or repeated reductions in the performance, reliability, security, or availability of our information systems and network infrastructure could significantly harm our brand and reputation and ability to attract and retain existing and potential users, customers, advertisers, and content providers.



ITEM 6.EXHIBITS


The list of exhibits, which are filed or furnished with this Form 10-Q or are incorporated herein by reference, is set forth in the Exhibit Index immediately preceding the exhibits and is incorporated herein by reference.






EXHIBIT INDEX


      Incorporated by Reference
Exhibit
No.
 Description 
Filed with
this Form
10-Q
 
Form or
Schedule
 
SEC Filing
Date
 
SEC File
Number
10.1
Amendment #1 to Employment Agreement between Avid Technology, Inc. and Jeff Rosica, Dated April 1, 2020
X
10.2
Amendment #1 to Employment Agreement between Avid Technology, Inc. and Kenneth Gayron, Dated April 1, 2020
X
10.3
Amendment #1 to Employment Agreement between Avid Technology, Inc. and Jason Duva, Dated April 1, 2020
X
10.4
Amendment to Contract of Employment between Avid Technology Europe Limited and Tom Cordiner Dated April 1, 2020
X
31.1 
Certification of Principal Executive Officer pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 X      
31.2 
Certification of Principal Financial Officer pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 X      
32.1 
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 X      
*101.INS XBRLeXtensible Business Reporting Language (XBRL) Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. X      
*101.SCH XBRL Taxonomy Extension Schema Document X      
*101.CAL XBRL Taxonomy Calculation Linkbase Document X      
*101.DEF XBRL Taxonomy Definition Linkbase Document X      
*101.LAB XBRL Taxonomy Label Linkbase Document X      
*101.PRE XBRL Taxonomy Presentation Linkbase Document X      
__________________________
*Pursuant to Rule 406T of Regulation S-T, XBRL (Extensible Business Reporting Language) information is deemed not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934 and otherwise is not subject to liability under these sections.








SIGNATURE




Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




  AVID TECHNOLOGY, INC.
  (Registrant)
    
Date:November 9, 2017May 7, 2020By: /s/ Brian E. AgleKenneth Gayron 
  Name:Brian E. AgleKenneth Gayron  
  Title:SeniorExecutive Vice President and Chief Financial Officer 




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