UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-Q
 (Mark One)  
 xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
 For the quarterly period ended March 31, 20182019 
 OR 
 ¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
 For the transition period from __________ to __________ 
Commission File Number:  1-36254
__________________
Avid Technology, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
 
04-2977748
(I.R.S. Employer
Identification No.)
 
75 Network Drive
Burlington, Massachusetts  01803
(Address of Principal Executive Offices, Including Zip Code)


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


Indicate by check mark whether the registrant has submitted 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 under the Exchange Act.
 
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 under the Exchange Act).  Yes ¨   No x


Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock,$.01par valueAVIDNasdaq Global Select Market
The number of shares outstanding of the registrant’s Common Stock, par value $0.01, as of May 7, 20181, 2019, was 41,501,929.42,415,714.






AVID TECHNOLOGY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 20182019


TABLE OF CONTENTS
 Page
 
   
 
 
 
 
 
 
   
 
   
   
   





CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS


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


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


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


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


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


our business strategies and market positioning;


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


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

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


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


the anticipated performance of our products;


changes in inventory levels;


plans regarding repatriation of foreign earnings;


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


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

our ability to accelerate growth of our Cloud-enabled 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;


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

seasonal factors;


fluctuations in foreign exchange and interest rates;



the risk of restatement of our financial statements;




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


our capital resources and the adequacy thereof; and


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


Actual results and events in future periods may differ materially from those expressed or implied by forward-looking statements in this Form 10-Q. There are a number of factors that could cause actual events or results to differ materially from those indicated or implied by forward-looking statements, many of which are beyond our control, including the risk factors discussed herein and in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017,2018, in Part II and in other documents we file from time to time with the U.S. Securities and Exchange Commission (“SEC”). In addition, the forward-looking statements contained in this Form 10-Q represent our estimates only as of the date of this filing and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update these forward-looking statements in the future, we specifically disclaim any obligation to do so, whether to reflect actual results, changes in assumptions, changes in other factors affecting such forward-looking statements or otherwise.


We own or have rights to trademarks and service marks that we use in connection with the operation of our business.  Avid“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, 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 EndedThree Months Ended
March 31,March 31,
2018 20172019 2018
Net revenues:      
Products$46,410
 $51,006
$54,396
 $46,410
Services51,527
 53,101
48,923
 51,527
Total net revenues97,937
 104,107
103,319
 97,937

   
 
Cost of revenues:      
Products26,295
 24,504
27,600
 26,295
Services13,985
 14,094
12,487
 13,985
Amortization of intangible assets1,950
 1,950
1,950
 1,950
Total cost of revenues42,230
 40,548
42,037
 42,230
Gross profit55,707
 63,559
61,282
 55,707

   
 
Operating expenses:      
Research and development15,685
 18,888
16,285
 15,685
Marketing and selling26,132
 25,811
24,878
 26,132
General and administrative13,955
 14,431
13,788
 13,955
Amortization of intangible assets363
 363
363
 363
Restructuring costs, net2,907
 983
558
 2,907
Total operating expenses59,042
 60,476
55,872
 59,042

   

 

Operating (loss) income(3,335) 3,083
Operating income (loss)5,410
 (3,335)

   

 

Interest and other expense, net(5,359) (4,846)(5,185) (5,359)
Loss before income taxes(8,694) (1,763)
Income (loss) before income taxes225
 (8,694)
Provision for income taxes255
 152
438
 255
Net loss$(8,949) $(1,915)$(213) $(8,949)

      
Net loss per common share – basic and diluted$(0.22) $(0.05)$(0.01) $(0.22)

      
Weighted-average common shares outstanding – basic41,404
 40,772
Weighted-average common shares outstanding – diluted41,404
 40,772
Weighted-average common shares outstanding – basic and diluted42,046
 41,404
   
The accompanying notes are an integral part of the condensed consolidated financial statements.




AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands, unaudited)
Three Months EndedThree Months Ended
March 31,March 31,
2018 20172019 2018
Net loss$(8,949) $(1,915)$(213) $(8,949)
      
Other comprehensive income:   
Other comprehensive (loss) income:   
Foreign currency translation adjustments1,148
 1,850
(548) 1,148
      
Comprehensive loss$(7,801) $(65)$(761) $(7,801)
   
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,
2018

December 31,
2017
March 31,
2019

December 31,
2018
ASSETS      
Current assets:      
Cash and cash equivalents$48,016
 $57,223
$55,326

$56,103
Restricted cash8,500
 
9,020

8,500
Accounts receivable, net of allowances of $1,268 and $11,142 at March 31, 2018 and December 31, 2017, respectively (Note 1)52,532
 40,134
Accounts receivable, net of allowances of $1,339 and $1,339 at March 31, 2019 and December 31, 2018, respectively.61,318

67,754
Inventories32,887
 38,421
34,328

32,956
Prepaid expenses10,827
 8,208
11,985

8,853
Contract assets11,756
 
18,677

16,513
Other current assets8,259
 10,341
6,685

5,917
Total current assets172,777
 154,327
197,339

196,596
Property and equipment, net20,663
 21,903
20,918

21,582
Intangible assets, net11,370
 13,682
2,120

4,432
Goodwill32,643
 32,643
32,643

32,643
Right of use assets36,031


Long-term deferred tax assets, net1,354
 1,318
1,163

1,158
Other long-term assets11,974
 10,811
9,456

9,432
Total assets$250,781
 $234,684
$299,670

$265,843
      
LIABILITIES AND STOCKHOLDERS’ DEFICIT      
Current liabilities:      
Accounts payable$28,077
 $30,160
$38,438

$39,239
Accrued compensation and benefits24,400
 25,466
24,727

21,967
Accrued expenses and other current liabilities42,928
 31,549
41,402

37,547
Income taxes payable1,978
 1,815
2,088

1,853
Short-term debt5,883
 5,906
1,405

1,405
Deferred revenue89,420
 121,184
87,927

85,662
Total current liabilities192,686
 216,080
195,987

187,673
Long-term debt203,252
 204,498
218,201

220,590
Long-term deferred revenue16,953
 73,429
13,361

13,939
Long-term lease liabilities33,817


Other long-term liabilities9,520
 9,247
5,391

10,302
Total liabilities422,411
 503,254
466,757

432,504
      
Commitments and contingencies (Note 7)
 
Commitments and contingencies (Note 8)

 

      
Stockholders’ deficit:
  


Common stock423
 423
423

423
Additional paid-in capital1,032,842
 1,035,808
1,024,028

1,028,924
Accumulated deficit(1,189,102) (1,284,703)(1,187,223)
(1,187,010)
Treasury stock at cost(14,515) (17,672)

(5,231)
Accumulated other comprehensive loss(1,278) (2,426)(4,315)
(3,767)
Total stockholders’ deficit(171,630) (268,570)(167,087)
(166,661)
Total liabilities and stockholders’ deficit$250,781
 $234,684
$299,670

$265,843
   
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)

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

 
Shares of
Common Stock
  Additional  
Accumulated
Other
Total
 Issued
In
Treasury
 
Common
Stock
Paid-in
Capital
Accumulated
Deficit
Treasury
Stock
Comprehensive
Income (Loss)
Stockholders’
Deficit
Balances at January 1, 201842,339
(983) 423
1,035,808
(1,284,703)(17,672)(2,426)(268,570)
          
Cumulative-effect adjustment due to adoption of ASC Topic 606

     104,550
  104,550
          
Stock issued pursuant to employee stock plans 127
  (3,649) 3,158
 (491)
          
Stock-based compensation    703
   703
          
Net loss     (8,949)  (8,949)
          
Other comprehensive loss       1,148
1,148
          
Partial retirement of convertible senior notes conversion feature    (22)   (22)
          
Partial unwind capped call cash receipt    2
   2
          
Balances at March 31, 201842,339
(856) 423
1,032,842
(1,189,102)(14,514)(1,278)(171,629)

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



AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
Three Months EndedThree Months Ended
March 31,March 31,
2018 
2017 (1)
2019 2018
Cash flows from operating activities:    
 
Net loss$(8,949)
$(1,915)$(213)
$(8,949)
Adjustments to reconcile net loss to net cash provided by operating activities: 
  
 
Depreciation and amortization5,674

5,815
4,740

5,674
Provision (recovery) for doubtful accounts57

(110)
(Recovery from) provision for doubtful accounts(9)
57
Stock-based compensation expense703

1,411
1,738

703
Non-cash interest expense3,546

3,131
3,359

3,546
Unrealized foreign currency transaction losses1,323

1,722
Unrealized foreign currency transaction (gains) losses(586)
1,323
Benefit from deferred taxes(2)
(374)(1)
(2)
Changes in operating assets and liabilities: 
  
 
Accounts receivable8,596

14
6,444

8,596
Inventories(482)
1,573
(1,372)
(482)
Prepaid expenses and other assets(396)
(5,850)(3,861)
(396)
Accounts payable(2,112)
2,388
(810)
(2,112)
Accrued expenses, compensation and benefits and other liabilities(1,355)
(1,773)(2,837)
(1,355)
Income taxes payable190

164
261

190
Deferred revenue(1,423)
(2,662)
Deferred revenue and contract assets(477)
(1,423)
Net cash provided by operating activities5,370

3,534
6,376

5,370


 

 
Cash flows from investing activities: 
  
 
Purchases of property and equipment(2,080)
(1,729)(1,767)
(2,080)
Increase in other long-term assets(8)
(7)

(8)
Net cash used in investing activities(2,088)
(1,736)(1,767)
(2,088)







Cash flows from financing activities: 
  
 
Repayment of debt(3,212)
(1,250)(3,928)
(3,212)
Proceeds from the issuance of common stock under employee stock plans6

2
309

6
Common stock repurchases for tax withholdings for net settlement of equity awards(497)
(372)(1,690)
(497)
Partial retirement of the Notes conversion feature and capped call option unwind(22) (20)
Net cash used in financing activities(3,703)
(1,620)(5,331)
(3,723)











Effect of exchange rate changes on cash, cash equivalents and restricted cash(5)
188
(55)
15
Net (decrease) increase in cash, cash equivalents and restricted cash(426)
366
Net decrease in cash, cash equivalents and restricted cash(777)
(426)
Cash, cash equivalents and restricted cash at beginning of period60,433

49,948
68,094

60,433
Cash, cash equivalents and restricted cash at end of period$60,007

$50,314
$67,317

$60,007
Supplemental information:   




Cash and cash equivalents$48,016
 $47,014
$55,326

$48,016
Restricted cash8,500
 
9,020

8,500
Restricted cash included in other long-term assets3,491
 3,300
2,971

3,491
Total cash, cash equivalents and restricted cash shown in the statement of cash flows$60,007
 $50,314
$67,317

$60,007
      
Cash (refunded) paid for income taxes(2,469) 19
Cash paid (refunded) for income taxes$203
 $(2,469)
Cash paid for interest$1,919
 $1,665
$2,041
 $1,919
  
The accompanying notes are an integral part of the condensed consolidated financial statements.


(1) The Condensed Consolidated Statement of Cash Flows for the quarter ended March 31, 2017 has been revised to reflect the adoption, on January 1, 2018, of ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The Condensed Consolidated Statements of Cash Flows reflects the changes during the periods in the total of cash, cash equivalents, and restricted cash. Therefore, restricted cash activity is included with cash when reconciling the beginning-of-period and end-of-period total amounts shown. Refer to Note 1 for further discussion.





AVID TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1.FINANCIAL INFORMATION


The accompanying condensed consolidated financial statements include the accounts of Avid Technology, Inc. and its wholly owned subsidiaries (collectively, “we” or “our”). These financial statements are unaudited. However, in the opinion of management, the condensed consolidated financial statements reflect all normal and recurring adjustments necessary for their fair statement. Interim results are not necessarily indicative of results expected for any other interim period or a full year. We prepared the accompanying unaudited condensed consolidated financial statements in accordance with the instructions for Form 10-Q and, therefore, include all information and footnotes necessary for a complete presentation of operations, comprehensive income (loss), financial position, changes in stockholders’ deficit and cash flows in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying condensed consolidated balance sheet as of December 31, 20172018 was derived from the our audited consolidated financial statements and does not include all disclosures required by U.S. GAAP for annual financial statements. We filed audited consolidated financial statements as of and for the year ended December 31, 20172018 in our Annual Report on Form 10-K for the year ended December 31, 2017,2018, which included information and footnotes necessary for such presentation. The financial statements contained in this Form 10-Q should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 20172018.


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


Subsequent Events


On May 10, 2018 (the “Amendment No. 4 Effective Date”),April 8, 2019, we entered into an amendment to our existing agreement (the “Fourth Amendment”“Financing Agreement”) with Cerberus Business Finance, LLC, as collateral and administrative agent, and the lenders party thereto. The amendment provides for an additional delayed draw term loan commitment in the aggregate principal amount of $100 million (the “Delayed Draw Funds”), which may be used to fund the purchase of our 2.00% Senior Convertible Notes due 2020 (the “Notes”). On May 2, 2019, we received the Delayed Draw Funds under the Financing Agreement. The Fourth Amendment extendedDelayed Draw Funds will remain available to us to purchase Notes for a period of 90 calendar days. At the maturityend of such 90-day period, any remaining Delayed Draw Funds that have not been used to purchase Notes must be repaid and no further funds will be available to borrow under the commitment. Any Delayed Draw Funds drawn and used to fund the purchase of the Notes will mature on May 10, 2023, the current maturity date under the Financing Agreement to May 2023 and increased the term and revolving facilities by an aggregate of $35.0 million. In addition, underAgreement. Under the terms of the Fourth Amendment,amendment, interest accrues on the facility is subject to lower annual feesDelay Draw Funds and interest rates, hasthe existing outstanding borrowings under the Financing Agreement at a reduced principal amortization schedulerate of either the LIBOR Rate (as defined in the Financing Agreement) plus 6.25% or a Reference Rate (as defined in the Financing Agreement) plus 5.25%, at our option.

For a more detailed description of the amendment, see our Form 8-K filed with the Securities and no longer includes a springing repayment feature related to the maturity of our Notes due in June 2020.Exchange Commission on April 11, 2019.

We evaluated subsequent events through the date of issuance of these financial statements and, other than the event disclosed above, no other subsequent events required recognition or disclosure in these financial statements.


Significant Accounting Policies - Revenue Recognition


We enter into contracts with customers that include various combinations of products and services, which are typically capable of being distinct and are accounted for as separate performance obligations. The Company accountsWe 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) collectibilitycollectability 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.



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


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




Our processSee Note 10 for determining SSP for each performance obligation involves significant management judgment. In determining SSP, we maximize observable inputsdisaggregated revenue schedules and consider a number of data points, including:
the pricing of standalone sales (in the instances where available);
the pricing established by management when setting prices for deliverables that are intended to be soldfurther discussion on a standalone basis;
contractually stated prices for deliverables that are intended to be sold on a standalone basis;
other pricing factors, such as the geographical region in which the products are soldrevenue and expected discounts based on the customer size and type.

Determining SSP fordeferred revenue performance obligations which we never sell separately also requires significant judgment. In estimating the SSP, we consider the likely price that would have resulted from established pricing practices had the deliverable been offered separately and the prices a customer would likely be willing to pay.timing of revenue recognition.

We only include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.  We reduce transaction prices for estimated returns and other allowances that represent variable consideration under ASC 606, which we estimate based on historical return experience and other relevant factors, and record a corresponding refund liability as a component of accrued expenses and other current liabilities.  Other forms of contingent revenue or variable consideration are infrequent.

While not a common practice for us, in the event we grant the customer the option to acquire additional products or services in an arrangement, we consider if the option provides a material right to the customer that it would not receive without entering into the contract (e.g., an incremental discount compared to the range of discounts typically given for similar products or services).  If a material right is deemed to exist, we account for the option as a distinct performance obligation and recognize revenue when those future products or services are transferred or when the option expires.

We also record as revenue all amounts billed to customers for shipping and handling costs and record the actual shipping costs as a component of cost of revenues. Reimbursements received from customers for out-of-pocket expenses are recorded as revenues, with related costs recorded as cost of revenues. We present revenues net of any taxes collected from customers and remitted to government authorities.

We apply the practical expedient to not adjust the transaction price for the effects of a significant financing component when we expect that the period between when we transfer a good or service to a customer and when the customer pays for that good or service will be one year or less.  Payments under our contracts are typically due within in a short period from when our performance obligations are satisfied.

We apply the practical expedient for the deferral of sales commissions and other contract acquisition costs, which are expensed as incurred, where the amortization period would be one year or less.


Recently Adopted Accounting Pronouncements


On January 1, 2018,2019, we adopted Accounting Standards CodificationASC Topic 842, Leases (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”842”), using the modified retrospective method applied to contracts not completedtransition approach, as provided by ASU No. 2018-11, Leases - Targeted Improvements (“ASU 2018-11”). We elected the package of January 1, 2018.practical expedients permitted under the transition guidance. Results for reporting periods beginning after January 1, 20182019 are presented under ASC 606,842, while prior period amounts areperiods have not been adjusted and continue to be reported in accordance with our historic accounting under ASC 605. We recorded a net reduction to opening accumulated deficit of approximately $105 million as of January 1, 2018 due to the cumulative impact of adopting ASC 606.previous U.S. GAAP. The primary impact of ASC 606 that resulted in a significant decrease in deferred revenue842 is that vendor specific objective evidencesubstantially all of fair valueour leases are recognized on the balance sheet, by recording right-of-use assets and short-term and long-term lease liabilities. The new standard does not have a material impact on our consolidated statement of operations and cash flows, and the effects of applying ASC 842 as a cumulative-effect adjustment to retained earnings as of January 1, 2019 is no longer required to recognize revenue for distinct software products upon delivery, which allows recognition upon delivery rather than on a ratable basis over a period of time.immaterial.


A summary of the changes to balance sheet line items that resulted from the adoption of ASC 606842 as of January 1, 20182019 is as follows (in thousands):




 As of January 1, 2019
 As Previously Reported Impact of Adoption of Topic 842 As Adjusted
Assets:     
Property and equipment, net$21,582
 $256
 $21,838
Right of use assets$
 $37,749
 $37,749
   
 
Liabilities:     
Accrued expenses and other current liabilities$37,547
 $6,957
 $44,504
Long-term lease liabilities
 35,694
 35,694
Other long-term liabilities$10,302
 $(4,646) $5,656

 As of January 1, 2018
 As Previously Reported 
Impact of Adoption of Topic 606 (5)
 As Adjusted
Assets:     
Accounts receivable, net(1)
$40,134
 $21,088
 $61,222
Contract assets(2)

 6,579
 6,579
Inventory(3)
38,421
 (5,716) 32,705
Other long-term assets10,811
 865
 11,676
Total assets$234,684
 $22,816
 $257,500
Liabilities:     
Accrued expenses and other current liabilities (1)
$31,549
 $11,139
 $42,688
Deferred revenue (current portion) (4)
121,184
 (37,794) 83,390
Long-term deferred revenue (4)
73,429
 (55,079) 18,350
Total liabilities$503,254
 $(81,734) $421,520
Stockholders’ deficit:     
Accumulated deficit(1,284,703) 104,550
 (1,180,153)
Total stockholders’ deficit$(268,570) $104,550
 $(164,020)



(1)
The increase in accounts receivable and accrued expenses and other current liabilities is due to the reclassification of allowances for sales returns, rebates and other adjustments to selling prices that are considered variable consideration under ASC 606 and are now presented as a liability on our balance sheet. Accounts receivable also increased due to advanced contractual support billings now being recorded on a gross basis in accounts receivable when it is due, rather than being net against corresponding unamortized deferred revenue.
(2)
For subscription contracts, we are now required under ASC 606 to record contract assets for annual and multi-year subscriptions that are billed monthly, resulting in an increase in contract assets at the date of adoption. In addition, some of our enterprise agreements have fixed payment schedules whereas the timing of the fulfillment of performance obligations under the contracts can vary, which can result in the fulfillment of performance obligations exceeding contract billings, which also results in contract assets.
(3)
The reduction is due to inventory and deferred costs that were directly attributable to deferred revenue transactions that were reduced or eliminated due to the adoption of ASC 606 (as described in footnote 4 below), necessitating the elimination of corresponding inventory and deferred costs associated with those deferred revenue transactions.
(4)
The reduction is primarily attributable to the elimination of the requirement to have vendor specific objective evidence of fair value for undelivered elements that existed under ASC 605, the prior applicable accounting guidance, for software products, which no longer precludes revenue recognition under ASC 606.
(5) See Note 9 for a further description ofIn accordance with guidance provided by the components of revenue and related performance obligations under ASC 606 that resulted in cumulative changes to balance sheet accounts as a result of the adoption of ASC 606.

The adoption of Topic 606, as compared to legacy GAAP required for revenue recognition, did not have a significant impact on revenue or net loss for the three months ended March 31, 2018.  The impact of ASC 606 to balance sheet line itemsSEC staff, as of March 31, 2018, after reflecting the opening balance sheet adjustments described in detail above, was not material. There was no tax impact associated2019, we began complying with the adoption because our deferred tax assets related to deferred revenue have a full valuation allowance.

In March 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”), No. 2018-05, Amendments toexpanded disclosure requirements under applicable SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (“SAB”) No. 118. The guidance amends SEC paragraphs in ASC 740, Income Taxes, to reflect and codify SAB No. 118, which provides guidance for companies that are not able to complete their accounting for the income tax effects of the Tax Cuts and Jobs Act in the period of enactment.  The ASU became effective upon issuance. We had applied SAB 118 upon the original issuance in December, 2017 prior to the codification in ASC 740. See discussion belowrules regarding the statusanalysis of our accounting for the impacts of the Tax Cuts and Jobs Act (TCJA).

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was signed into law. The TCJA changed many aspects of U.S. corporate income taxation and included reduction of the corporate income tax rate from 35% to 21% , implementation of a territorial tax system and imposition of a tax on deemed repatriated earnings of foreign subsidiaries. The TCJA was effective


as of December 31, 2017 and at that time we made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. As of March 31, 2018, we have not completed our accounting for the tax effects of the TCJA nor have we recorded any adjustments during the quarter ended March 31, 2018. We will continue to assess our provision for income taxes as future guidance is issued, but do not currently anticipate significant revisions will be necessary. Any such revisions will be treated in accordance with the one year measurement period guidance outlined in Staff Accounting Bulletin No. 118. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the TCJA. The accounting is expected to be complete within the one year measurement period particularly after the 2017 U.S. corporate income tax return is filed in 2018.

In August 2016, the 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 in the Statements of Cash Flows. Certain of ASU No. 2016-15 requirements are as follows: (i) cash paymentsstockholders' equity 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, or 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. We adopted the guidance on January 1, 2018. The adoption of ASU 2016-15 had no material impact on our consolidatedinterim financial statements.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740). The guidance requires companies to recognize the income tax effects 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. We adopted the guidance on January 1, 2018. The adoption of ASU 2016-16 had no impact on our consolidated financial statements.

In November 2016, 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 reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet is required. We adopted the guidance on January 1, 2018. The adoption of ASU 2016-18 had no material impact on our consolidated financial statements. Restricted cash amounts, presented within the statements of financial position and cash flows, are cash collateralized letters of credit that are used as security deposits in connection with our facility leases and operations.

Recent Accounting Pronouncements to be Adopted

On February 25, 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance requires an entity to recognize virtually all of their leases on the balance sheet, by recording a right-of-use asset and lease liability. The new guidance becomes effective for us on January 1, 2019, and early adoption is permitted upon issuance. We are currently evaluating the impact of this guidance on our consolidated financial statements and have compiled an initial inventory of our leases. These leases are primarily related to office space in the United States and foreign locations and are currently classified as operating leases under generally accepted accounting principles.


2.NET INCOME PER SHARE


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


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

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


and results in a lower loss per share. Therefore, all outstanding stock options and restricted stock units at March 31, 2019 and 2018 are anti-dilutive and not included in the EPS calculation. The following table sets forth (in thousands) potential common shares that were considered anti-dilutive securities at March 31, 20182019 and 2017.2018.
 March 31, 2019 March 31, 2018
Options772
 2,262
Non-vested restricted stock units2,881
 3,172
Anti-dilutive potential common shares3,653
 5,434

 March 31, 2018 March 31, 2017
Options2,262
 2,654
Non-vested restricted stock units3,172
 2,613
Anti-dilutive potential common shares5,434
 5,267


OnWe issued the Notes on June 15, 2015, we issued $125.0 million aggregate principal amount of our 2.00% Convertible Senior Notes due 2020, or the Notes.2015. The Notes are convertible into cash, shares of our common stock or a combination of cash and shares of common stock, at our election, based on an initial conversion rate, subject to adjustment. In connection with the offering of the Notes, we entered into a capped call transaction, or Capped Call, with a third party. We use the treasury stock method in computing the dilutive impact of the Notes. The Notes are convertible into shares of our common stock but our stock price as of March 31, 2019 and 2018 was less than the conversion price as of March 31, 2018 and 2017,$21.94 per share, and, therefore, the Notes are excluded from Diluted EPS. The Capped Call is not reflected in diluted net income per share as it will always be anti-dilutive.




3.FAIR VALUE MEASUREMENTS


Assets Measured at Fair Value on a Recurring Basis


We measure deferred compensation investments on a recurring basis. As of March 31, 20182019 and December 31, 2017,2018, our deferred compensation investments were classified as either Level 1 or Level 2 in the fair value hierarchy. Assets valued using quoted market prices in active markets and classified as Level 1 are money market and mutual funds. Assets valued based on other observable inputs and classified as Level 2 are insurance contracts.


The following tables summarize our deferred compensation investments measured at fair value on a recurring basis (in thousands):
  Fair Value Measurements at Reporting Date Using  Fair Value Measurements at Reporting Date Using
March 31,
2018
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
March 31,
2019
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Financial assets:              
Deferred compensation assets$1,647
 $389
 $1,258
 $
$1,430
 $312
 $1,118
 $


   Fair Value Measurements at Reporting Date Using
 December 31, 2018 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Financial assets:       
Deferred compensation assets$1,372
 $386
 $986
 $

   Fair Value Measurements at Reporting Date Using
 December 31, 2017 
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$1,743
 $484
 $1,259
 $


Financial Instruments Not Recorded at Fair Value


The carrying amounts of our other financial assets and liabilities including cash, accounts receivable, accounts payable and accrued liabilities approximate their respective fair values because of the relatively short period of time between their origination and their expected realization or settlement. As of March 31, 2018,2019, the net carrying amount of the Notes was $105.8$95.6 million, and the fair value of the Notes was approximately $100.9$96.7 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, 2019 December 31, 2018
Raw materials$11,253
 $10,520
Work in process486
 527
Finished goods22,589
 21,909
Total$34,328
 $32,956

 March 31, 2018 December 31, 2017
Raw materials$11,447
 $11,217
Work in process391
 397
Finished goods21,049
 26,807
Total$32,887
 $38,421


As of March 31, 20182019 and December 31, 20172018, finished goods inventory included $2.72.0 million and $8.22.1 million, respectively, associated with products shipped to customers and deferred labor costs for arrangements where revenue recognition had not yet commenced. As discussed in Note 1, $5.7 million of inventory was eliminated upon the adoption of


ASC 606 on January 1, 2018 as such inventory was directly attributable to deferred revenue transactions that were also eliminated upon adoption.


5.INTANGIBLE ASSETS AND GOODWILL


Amortizing identifiable intangible assets related to our acquisitions or capitalized costs of internally developed or externally purchased software that form the basis for our products consisted of the following (in thousands):
March 31, 2018 December 31, 2017March 31, 2019 December 31, 2018
 Gross
 Accumulated Amortization 
 Net
 
 Gross
 Accumulated Amortization Net
 Gross
 Accumulated Amortization 
 Net
 
 Gross
 Accumulated Amortization Net
Completed technologies and patents$58,648
 $(49,061) $9,587
 $58,609
 $(47,072) $11,537
$58,212
 $(56,424) $1,788
 $58,246
 $(54,508) $3,738
Customer relationships55,003
 (53,220) 1,783
 54,946
 (52,801) 2,145
54,947
 (54,615) 332
 54,986
 (54,292) 694
Trade names1,346
 (1,346) 
 1,346
 (1,346) 
1,346
 (1,346) 
 1,346
 (1,346) 
Capitalized software costs4,911
 (4,911) 
 4,911
 (4,911) 
4,911
 (4,911) 
 4,911
 (4,911) 
Total$119,908
 $(108,538) $11,370
 $119,812
 $(106,130) $13,682
$119,416
 $(117,296) $2,120
 $119,489
 $(115,057) $4,432
Amortization expense related to all intangible assets in the aggregate was $2.3 million and $2.3 million, respectively, for the three months ended March 31, 20182019 and 2017.2018. We expect amortization of acquired intangible assets to be $6.92.1 million for the remainder of 2018 and $4.4 million in 2019.2019.


The acquisition of Orad in 2015 resulted in goodwill of $32.6 million as of March 31, 20182019 and December 31, 2017.2018.

6.    LEASES

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

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


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

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

The table below reconciles the undiscounted future minimum lease payments under non-cancellable leases with terms of more than one year to the total lease liabilities recognized on the condensed consolidated balance sheets as of March 31, 2019 (in thousands):
Year Ending December 31,Operating Leases
2019 (excluding three months ended March 31, 2019)$7,301
20208,877
20216,298
20225,533
20234,309
Thereafter19,034
Total future minimum lease payments$51,352
Less effects of discounting(10,083)
Total lease liabilities

$41,269
  
Reported as of March 31, 2019 
Accrued expenses and other current liabilities$7,452
Long-term lease liabilities33,817
Total lease liabilities

$41,269


The future minimum lease commitments under non-cancelable leases at December 31, 2018 were as follows (in thousands):
Year Ending December 31, 
2019$11,225
20209,784
20216,850
20225,982
20234,754
Thereafter20,040
Total$58,635




6.7.OTHER LONG-TERM LIABILITIES


Other long-term liabilities consisted of the following (in thousands):
 March 31, 2019 December 31, 2018
Deferred rent$
 $5,122
Accrued restructuring159
 188
Deferred compensation4,839
 4,992
Other393
 
   Total$5,391
 $10,302

 March 31, 2018 December 31, 2017
Deferred rent$1,894
 $2,970
Accrued restructuring1,992
 731
Deferred compensation5,634
 5,546
   Total$9,520
 $9,247


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

7.8.COMMITMENTS AND CONTINGENCIES


Commitments


We entered into a long-term agreement to purchase a variety of information technology solutions from a third party in the second quarter of 2017, which included an unconditional commitment to purchase a minimum of $12.8 million of products and services over the initial three-year termthree years of the agreement. We have purchased $2.3$6.1 million of products and services pursuant to this agreement as of March 31, 2018 to develop Azure certified solutions.2019.


We have letters of credit that are used as security deposits in connection with our leased Burlington, Massachusetts office space. In the event of default on the underlying leases, the landlords would, at March 31, 2018,2019, be eligible to draw against the letters of credit to a maximum of $1.3 million in the aggregate. The letters of credit are subject to aggregate reductions provided that we are not in default under the underlying leases and meet certain financial performance conditions. In no case will the letters of credit amounts for the Burlington leases be reduced to below $1.2 million in the aggregate throughout the lease periods, all of which extend to May 2020.periods.


We also have letters of credit in connection with security deposits for other facility leases totaling $1.1$1.0 million in the aggregate, as well as letters of credit totaling $1.4 million that otherwise support our ongoing operations. These letters of


credit have various terms and expire during 20182019 and beyond, while some of the letters of credit may automatically renew based on the terms of the underlying agreements.


We issued a letter of credit totaling $8.5 million to one of our sole-source suppliers in the first quarter ofFebruary 2018. The supplier is eligible to draw on the letter of credit in the event that we are insolvent or unable to pay on our purchase orders for certain key hardware components of our product. The letter of credit is valid for one year from issuance date,has been extended through February 6th, 2018,2020 and may automatically renew based on the terms of the underlying agreement.


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

Contingencies


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

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 of our 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 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 our 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.


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


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


At March 31, 20182019 and as of the date of filing of these condensed consolidated financial statements, we believe that, other than as set forth in this note, no provision for liability nor disclosure is required related to any claims because: (a) there is no reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claim, (b) a reasonably possible loss or range of loss cannot be estimated; or (c) such estimate is immaterial.


Additionally, we provide indemnification to certain customers for losses incurred in connection with intellectual property infringement claims brought by third parties with respect to our products. These indemnification provisions generally offer perpetual coverage for infringement claims based upon the products covered by the agreement and the maximum potential amount of future payments we could be required to make under these indemnification provisions is theoretically unlimited.  To date, we have not incurred material costs related to these indemnification provisions; accordingly, we believe the


estimated fair value of these indemnification provisions is immaterial. Further, certain of our arrangements with customers include clauses whereby we may be subject to penalties for failure to meet certain performance obligations; however, we have not recorded any related material penalties to date.


We provide warranties on externally sourced and internally developed hardware. For internally developed hardware, and in cases where the warranty granted to customers for externally sourced hardware is greater than that provided by the manufacturer, we record an accrual for the related liability based on historical trends and actual material and labor costs. The following table sets forth the activity in the product warranty accrual account for the three months ended March 31, 20182019 and 20172018 (in thousands):
Three Months Ended March 31,Three Months Ended March 31,
2018 20172019 2018
Accrual balance at beginning of year$2,545
 $2,518
$1,706
 $2,545
Accruals for product warranties505
 806
227
 505
Costs of warranty claims(568) (634)(338) (568)
Accrual balance at end of period$2,482
 $2,690
$1,595
 $2,482


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


8.9.RESTRUCTURING COSTS AND ACCRUALS


In February 2016, we committed to a restructuring plancost efficiency program that encompassed a series of measures intended to allow us to more efficiently operate in a leaner, more directed cost structure. These included reductions in our workforce, consolidation of facilities, transfers of certain business processes to lower cost regions, and reductions in other third-party services costs. The cost efficiency program was substantially complete as of December 31, 2017.


In April 2018, we determined that
During the estimated sublease rentals for the partially abandoned facilities in Burlington, Massachusetts, can no longer be reasonably obtained because of our plan to recapture the darkened space and the unlikelihood of sublet given the leases will terminate in two years. As a result, we recorded $2.7 million of facility restructuring costs adjustments during the quarterthree months ended March 31, 2018. In addition, we recorded $0.2 million of severance costs adjustments during the quarter ended March 31, 2018.

During the quarter ended March 31, 2017,2019, we recorded restructuring charges of $1.3$0.6 million related to employee severance costs forcost adjustments.

During the eliminationthree months ended March 31, 2018, we recorded restructuring charges of an additional 44 positions worldwide, and recoveries$2.9 million, of $0.5which $2.7 million related to severance estimatefacility restructuring cost adjustments and $0.2 million for the partial closure of Pinewood Studios facilities in Iver Heath, United Kingdom.



related to employee severance cost adjustments.
Restructuring Summary


The following table sets forth restructuring expenses recognized for the three months ended March 31, 20182019 and 20172018 (in thousands):
 Three Months Ended March 31,
 2019 2018
Employee$535
 $168
Facility5
 2,690
Total facility and employee charges540
 2,858
Other18
 49
Total restructuring charges, net$558
 $2,907

 Three Months Ended March 31,
 2018 2017
Employee$168
 $676
Facility2,690
 259
Total facility and employee charges2,858
 935
Other49
 48
Total restructuring charges, net$2,907
 $983


The following table sets forth the activity in the restructuring accruals for the three months ended March 31, 20182019 (in thousands):
Employee Facility TotalEmployee Facility Total
Accrual balance as of December 31, 2017$1,998
 $2,479
 $4,477
Accrual balance as of December 31, 2018$2,541
 $318
 $2,859
Restructuring charges and revisions168
 2,690
 2,858
535
 5
 540
Accretion
 55
 55

 4
 4
Cash payments(1,184) (1,043) (2,227)(1,398) (39) (1,437)
Foreign exchange impact on ending balance14
 
 14
(12) 1
 (11)
Accrual balance as of March 31, 2018$996
 $4,181
 $5,177
Accrual balance as of March 31, 2019$1,666
 $289
 $1,955
Less: current portion996
 2,189
 3,185
1,666
 130
 1,796
Long-term accrual balance as of March 31, 2018$
 $1,992
 $1,992
Long-term accrual balance as of March 31, 2019$
 $159
 $159


The employee restructuring accrual at March 31, 20182019 represents severance costs to former employees that will be paid out within 12 months, and is, therefore, included in the caption “accrued expenses and other current liabilities” in our condensed consolidated balance sheets as of March 31, 2018.2019.


The facility restructuring accrual at March 31, 20182019 represents contractual lease payments, net of actual or estimated sublease income, on space vacated as part of our restructuring actions. The leases, and payments against the amounts accrued, extend through 2026 unless we are able to negotiate earlier terminations. Of the total facility restructuring balance, $2.20.1 million is included in the caption “accrued expenses and other current liabilities” and $2.00.2 million is included in the caption “other long-term liabilities” in our condensed consolidated balance sheet as of March 31, 20182019.


9.10.REVENUE

Disaggregated Revenue and Geography Information

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


 Three Months Ended March 31,
 2019 2018
Products and solutions net revenues54,396
 46,410
Subscription services9,282
 8,465
Support services32,019
 33,760
Professional services, training and other services7,622
 9,302
Total net revenues$103,319
 $97,937

The following table sets forth our revenues by geographic region for the three months ended March 31, 2019 and 2018 (in thousands):
 Three Months Ended March 31,
 2019 2018
Revenues:   
United States$39,479
 $37,548
Other Americas6,801
 6,386
Europe, Middle East and Africa37,153
 40,763
Asia-Pacific19,886
 13,240
Total net revenues$103,319
 $97,937


Contract Asset

Contract asset activity for the three months ended March 31, 2019 was as follows (in thousands):
 March 31, 2019
Contract asset at January 1, 2019$16,513
Revenue in excess of billings7,086
Customer billings(4,922)
Contract asset at March 31, 2019

$18,677
Less: long-term portion (recorded in other long-term assets)
Contract asset, current portion$18,677


Deferred Revenue Components and

Deferred revenue activity for the three months ended March 31, 2019 was as follows (in thousands):
 March 31, 2019
Deferred revenue at January 1, 2019$99,601
Billings deferred30,369
Recognition of prior deferred revenue(28,682)
Deferred revenue at March 31, 2019$101,288


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


 March 31, 2019
Product$8,470
Subscription993
Support Contracts74,464
Implied PCS15,237
Professional services, training and other2,124
Deferred revenue at March 31, 2019$101,288


Remaining Performance Obligations


Video ProductsFor transaction prices allocated to remaining performance obligations, we apply practical expedients and Solutions

We offer a wide rangedo not disclose quantitative or qualitative information for remaining performance obligations (i) that have original expected durations of video productsone year or less and solutions from sales of storage(ii) where we recognize revenue equal to what we have the right to invoice and workflow solutions, our media management solutions and our video creative tools, which include our Media Composer, NEXIS, Airspeed, Maestro and Media Central product lines that consist of software licenses or integrated hardware and software solutions. We sell these products to customers under a contract or signed quote and payment terms are generally 30 to 60 days from delivery. Each individual product sold to a customer represents a distinct performance obligation for us and revenue is recognized atamount corresponds directly with the point in time when control of the product transfers, which is typically when the product is shippedvalue to the customer or, in the case of certain software licenses, when the software license term commences and is accessible by the customer.



Audio Products and Solutions

We offer a wide range of audio products and solutions from sales of digital audio software and workstation solutions and our control surfaces, consoles and live-sound systems, which include our Pro Tools, Pro Tools HD, Pro Tools | S6, VENUE | S6L and Sibelius product lines that consist of software licenses or integrated hardware and software solutions. We sell these products to customers under a contract or signed quote and payment terms are generally 30 to 60 days from delivery. Each individual product sold to a customer represents a distinct performance obligation for us and revenue is recognized at the point in time when control of the product transfers, which is typically when the product is shipped to the customer or, in the case of certain software licenses, when the software license term commences and is accessible by the customer.

Subscription Services

We offer subscription versions of many of our software products with monthly, annual and multi-year terms. While we are beginningperformance to offer subscription versions for most of our product portfolio in connection with our cloud strategy, current subscription sales primarily consist of our Media Composer, Pro Tools and Sibelius offerings. We sell these products to customers under standard terms and conditions and payment is due upfront, except for webstore transactions which are billed monthly. Contract assets for annual and multi-year subscriptions billed monthly are recorded on our balance sheet upon customer commitment. Subscription services have several performance obligations, including a right to use the software and stand-ready performance obligations to (i) provide unspecified bug fixes and software enhancements, or Software Updates, and (ii) call support when and if needed. The estimated SSP of the right to use the licensed software is recognized at a point in time once control has been transferred and the customer has the ability to access the software. Stand-ready performance obligations related to Software Updates and call support are satisfied over time and revenue is recognized ratably over the term of the subscription.date.

Support Services

We offer support contracts, which are typically annual, for our video and audio products. Support contracts for individual products are sold bundled with initial product offerings or as renewals once initial contracts have lapsed. Support contracts are also sold on an enterprise basis where a customer purchases support for all Avid products owned. Support contracts are provided under our standard terms and conditions and payment is due in advance of the support being provided. Support contracts include stand-ready performance obligations to provide (i) Software Updates, (ii) call support and (iii) hardware maintenance. Support contract performance obligations are satisfied over time and revenue is recognized ratably over the term of the support contract.


Historically, for many of our products, we had an ongoing practice of making when-and-if-available Software Updatessoftware 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.

Professional Services, Training and Other

We sell a variety of professional services, training and other services that complement product and support offerings. Professional services consist primarily of standard configuration, commissioning (i.e., setting up equipment purchased) and on-air support (i.e., monitoring a customer’s production environment available during initial system go-live, live sporting events, etc.) and providing customization services for some of our products. We also offer training and certification programs for many of our products and workflows. Other revenues include shipping and handling charges and reimbursable travel expenses. We sell professional services, training and other services under contracts, signed quote and, for larger projects, statements of work that outline the customer’s specifications and requirements. Services are primarily sold on a time and materials basis, however, fixed fee arrangements are also executed from time to time. Payments are generally billed upon completion of the service or, for larger projects, on an installment basis as services are rendered. While the nature of service deliverables can vary significantly, each service deliverable generally represents a distinct


performance obligation and revenue is recognized over time, typically in proportion of the total hours incurred as a percentage of total estimated hours required to complete the project.

Enterprise Agreements

From time to time, we enter into enterprise wide agreements whereby the customer agrees to purchase specified products and services from us over an extended period of time, often for a single fixed contractual price. For such agreements, management identifies each performance obligation in the contract and allocates the total contract price to each performance obligation based on relative estimated SSP. Once the transaction price is allocated to individualhave remaining performance obligations the components are recognized in the respective categories of revenue above consistent with the timing of the recognition of performance obligations described therein.

Disaggregated Revenue and Geography Information

Through the evaluation of the discrete financial information that is regularly reviewed by the chief operating decision makers (our chief executive officer and chief financial officer), we have determined that the Company has one reportable segment. The following table is a summary of our revenues by type for the three months ended March 31, 2018 and 2017 (in thousands):

 Three Months Ended March 31,
 2018 
2017(1)
Video products and solutions net revenues$31,574
 $28,821
Audio products and solutions net revenues14,836
 22,185
Products and solutions net revenues46,410
 51,006
Subscription services8,465
 3,721
Support services33,760
 41,886
Professional services, training and other services9,302
 7,494
Services net revenues51,527
 53,101
Total net revenues$97,937
 $104,107

The following table sets forth our revenues by geographic region for the three months ended March 31, 2018 and 2017 (in thousands):
 Three Months Ended March 31,
 2018 
2017(1)
Revenues:   
United States$37,548
 $36,780
Other Americas6,386
 6,791
Europe, Middle East and Africa40,763
 42,135
Asia-Pacific13,240
 18,401
Total net revenues$97,937
 $104,107

(1) As a result of our adoption of ASC 606 effective January 1, 2018 using the modified retrospective method, prior period amounts have not been adjusted$15.2 million attributable to conform with ASC 606 and therefore may not be comparable.

Contract Asset
Contract asset activity for the three months ended March 31, 2018 was as follows (in thousands):


 March 31, 2018
Contract asset at January 1, 2018$6,579
Revenue in excess of billings7,281
Customer billings(2,104)
Contract asset at March 31, 2018$11,756

The increase in contract assets during the three months ended March 31, 2018 is due to (i) continued growth in our subscription offerings and (ii) the timing of payments due under our enterprise network agreements which predominately are payable annually whereas performance obligations are fulfilled on a continuous basis.

Deferred Revenue
Deferred revenue activity for the three months ended March 31, 2018 was as follows (in thousands):
 March 31, 2018
Deferred revenue at January 1, 2018$101,740
Billings deferred38,117
Recognition of prior deferred revenue(33,484)
Deferred revenue at March 31, 2018$106,373

A summary of the significant performance obligations includedImplied PCS recorded in deferred revenue as of March 31, 2018 is as follows (in thousands):
 March 31, 2018
Product$9,917
Subscription580
Support Contracts73,027
Implied PCS21,280
Professional services, training and other1,569
Deferred revenue at March 31, 2018$106,373

2019. We expect deferredto recognize revenue recorded as of March 31, 2018 will be recorded as revenue within the next 12 months, except for Implied PCSthese remaining performance obligations of $5.0 million for the remainder of 2019 and long-term support agreements. We expect $6$4.8 million, $5$2.9 million, $3$1.5 million and $1$1.0 million of Implied PCS deferred revenue recorded as of March 31, 2018 will be recognized as revenue for the years ended December 31, 2019, 2020, 2021, 2022, and 2022,2023, respectively. We expect $2 million and $1

As of March 31, 2019, we had approximately $57.6 million of long-term support deferred revenue recordedtransaction price allocated to remaining performance obligations for certain enterprise agreements that have not yet been fully invoiced. Approximately $55.3 million of these performance obligations were unbilled as of March 31, 2018 will be recognized2019. Remaining performance obligations represent obligations we must deliver for specific products and services in the years ended December 31, 2019future where there is not yet an enforceable right to invoice the customer. Our remaining performance obligations do not include contractually committed minimum purchases that are common in our strategic purchase agreements with resellers since our specific obligations to deliver products or services is not yet known, as customers may satisfy such commitments by purchasing an unknown combination of current or future product offerings. While the timing of fulfilling individual performance obligations under the contracts can vary dramatically based on customer requirements, we expect to recognize the $57.6 million in roughly equal installments through 2026.

Remaining performance obligation estimates are subject to change and 2020 respectively.are affected by several factors, including terminations due to contract breach, contract amendments and changes in the expected timing of delivery.







10.11.LONG-TERM DEBT AND CREDIT AGREEMENT


Long-term debt consisted of the following (in thousands):
 March 31, 2019 December 31, 2018
Term Loan, net of unamortized debt issuance costs of $2,465 at March 31, 2019 and $2,613 at December 31, 2018$122,641
 $122,811
Notes, net of unamortized original issue discount and debt issuance costs of $7,283 at March 31, 2019 and $9,022 at December 31, 2018, respectively95,570
 97,731
Other long-term debt1,395
 1,453
    Total debt219,606
 221,995
Less: current portion1,405
 1,405
Total long-term debt$218,201
 $220,590

 March 31, 2018 December 31, 2017
Term Loan, net of unamortized debt issuance costs of $3,130 at March 31, 2018 and $3,499 at December 31, 2017$101,682
 $102,751
Notes, net of unamortized original issue discount and debt issuance costs of $15,209 at March 31, 2018 and $17,026 at December 31, 2017, respectively105,791
 105,974
Other long-term debt1,662
 1,679
    Total debt209,135
 210,404
Less: current portion5,883
 5,906
Total long-term debt$203,252
 $204,498


The following table summarizes the maturities of our borrowing obligations as of March 31, 20182019 (in thousands):


Fiscal YearTerm Loan Notes Other Long-Term Debt TotalTerm Loan Notes Other Long-Term Debt Total
2018$4,313
 $
 $98
 $4,411
20195,750
 
 140
 5,890
$956
 $
 $97
 $1,053
20205,750
 121,000
 150
 126,900
2,231
 102,853
 137
 105,221
202188,999
 
 161
 89,160
4,781
 
 147
 4,928
2022
 
 172
 172
6,375
 
 157
 6,532
2023110,763
 
 168
 110,931
Thereafter
 
 941
 941

 
 689
 689
Total before unamortized discount104,812
 121,000
 1,662
 227,474
125,106
 102,853
 1,395
 229,354
Less: unamortized discount and issuance costs3,130
 15,209
 
 18,339
2,465
 7,283
 
 9,748
Less: current portion of long-term debt5,750
 
 133
 5,883
1,275
 
 130
 1,405
Total long-term debt$95,932
 $105,791
 $1,529
 $203,252
$121,366
 $95,570
 $1,265
 $218,201


2.00% Convertible Senior Notes due 2020


On June 15, 2015, we issued $125.0 million aggregate principal amount of our Notes in an offering conducted in accordance with Rule 144A under the Securities Act of 1933. The Notes pay interest semi-annually on June 15 and December 15 of each year at an annual rate of 2.00% and mature on June 15, 2020, unless earlier convertedrepurchased or repurchasedconverted in accordance with their terms prior to such date. Total interest expense for the three months ended March 31, 2019 and 2018 and 2017 was $2.2$1.9 million and $2.1$2.2 million, respectively, reflecting the coupon and accretion of the discount.


On December 15,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.


On February 8,During 2018, we purchased an additional 2,00016,247 of our 123,000 outstanding Notes and settled another $2.0$16.2 million of the Notes for $1.7$14.7 million in cash. We recorded $2.0$16.2 million extinguishment of debt, an immaterial amount of equity reacquisition, and an immaterial lossgain 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.



Term Loan and Credit Facility


On February 26, 2016, we entered into thea Financing Agreement (the “Financing Agreement”) with Cerberus Business Finance, LLC, as collateral and administrative agent, and the Lenders. Pursuant to the Financing Agreement, thelenders party thereto (the “Lenders”). The Lenders originally agreed to provide us with (a) a term loan in the aggregate principal amount of $100.0 million (the “Term Loan”), and (b) a revolving credit facility (the “Credit Facility”) of up to a maximum of $5.0 million in borrowings


outstanding at any time. 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 $121.0 million in outstanding principal of the Notes has not been repaid or refinanced by such time. We granted a security interest on substantially all of our assets to secure the obligations under the Credit FacilityTerm Loan and the Term Loan. We 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 March 31, 2018.

We 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 us to use 50% of excess cash flow, as defined in the Financing Agreement, to repay outstanding principal of the loans under the Financing Agreement.

The Financing Agreement contains customary representations and warranties, covenants, mandatory prepayments, and events of default under which our payment obligations may be accelerated.

On March 14,November 9, 2017, (the “Amendment No. 1 Effective Date”), we 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. Under the terms of the amendment, aggregate quarterly principal repayments beginning September 30, 2018 through June 30, 2020 will be $318,750, then from July 1, 2020 through June 30, 2021 equal to $796,875, finally from July 1, 2021 through May 10, 2023 equal to $1,593,750.

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

On April 8, 2019, we entered into an amendment to the Financing Agreement. The First Amendment modifiedamendment provides for an additional delayed draw term loan commitment in the covenant requiringaggregate principal amount of $100 million (the “Delayed Draw Funds”), which may be used to fund the purchase of our Notes. On May 2, 2019, we received the Delayed Draw Funds under the Financing Agreement. The Delayed Draw Funds will remain available to us to maintainpurchase Notes for a Leverage Ratio (definedperiod of 90 calendar days. At the end of such 90-day period, any remaining Delayed Draw Funds that have not been used to meanpurchase Notes must be repaid and no further funds will be available to borrow under the ratio of (a) total funded indebtednesscommitment. Any Delayed Draw Funds drawn and used to (b) consolidated EBITDA) such that followingfund the Amendment No. 1 Effective Date, we are 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 ended December 31, 2017, 4.40:1.00 for eachpurchase 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. FollowingNotes will mature on May 10, 2023, the Amendment No. 1 Effective Date,current maturity date under the Financing Agreement. Under the terms of the amendment, interest accrues on the Delay Draw Funds and the existing outstanding borrowings under the credit facility and the term loan (each as defined in the Financing Agreement)Agreement 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 recorded $2.3 million and $1.9 million of interest expenseThe amendment also modified the covenant that requires us to maintain a leverage ratio based on the Term Loan forlevel of availability plus unrestricted cash on-hand. For a more detailed description of the three months ended March 31, 2018 and 2017, respectively. As of March 31, 2018, we were in complianceamendment, see our Form 8-K filed with the Financing Agreement covenants.

On November 9, 2017 (the “Amendment No. 2 Effective Date”), we entered into an amendment (the “Second Amendment”) to the Financing Agreement. The Second Amendment extended an additional $15.0 million term loan to us, 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 $0.2 million commencing in March 2018. The Second Amendment also granted us the ability to use up to $15.0 million to purchase NotesSecurities 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.

On May 10, 2018 (the “Amendment No. 4 Effective Date”), we entered into an amendment (the “Fourth Amendment”) to the Financing Agreement. The Fourth Amendment extended the maturity of the Financing Agreement to May 2023 and increased the term and revolving facilities by an aggregate of $35.0 million. In addition, under the terms of the Fourth Amendment, the facility is subject to lower annual fees and interest rates, has a reduced principal amortization schedule and no longer includes a springing repayment feature related to the maturity of our Notes due in June 2020.

Exchange Commission on April 11, 2019.
11.


12.    STOCKHOLDERS’ EQUITY


Stock-Based Compensation


Information with respect to option shares granted under all of our stock incentive plans for the three months ended March 31, 20182019 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, 2019891,892

891,892
$8.46  
Granted


$—  
Exercised(41,250)
(41,250)$7.34  
Forfeited or canceled(78,804)
(78,804)$10.82  
Options outstanding at March 31, 2019771,838

771,838
$8.281.52$18
Options vested at March 31, 2019 or expected to vest  771,838
$8.281.52$18
Options exercisable at March 31, 2019  771,838
$8.281.52$18

 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, 20182,290,017

2,290,017
$9.65  
Granted


$—  
Exercised


$—  
Forfeited or canceled(28,490)
(28,490)$21.55  
Options outstanding at March 31, 20182,261,527

2,261,527
$9.501.18$—
Options vested at March 31, 2018 or expected to vest  2,261,527
$9.501.08$—
Options exercisable at March 31, 2018  2,261,527
$9.501.18$—




Information with respect to our non-vested restricted stock units for the three months ended March 31, 20182019 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, 20191,978,676
966,143
2,944,819
$4.91  
Granted434,147
411,043
845,190
$6.54  
Vested(221,555)(467,923)(689,478)$4.99  
Forfeited(79,639)(139,414)(219,053)$4.67  
Non-vested at March 31, 20192,111,629
769,849
2,881,478
$5.391.25$21,438
Expected to vest  2,682,950
$5.521.25$19,961

 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, 20181,809,138
1,254,110
3,063,248
$5.10  
Granted803,159
732,884
1,536,043
$4.55  
Vested(222,232)
(222,232)$5.62  
Forfeited(448,001)(757,247)(1,205,248)$5.33  
Non-vested at March 31, 20181,942,064
1,229,747
3,171,811
$4.711.26$14,368
Expected to vest  2,674,948
$4.881.26$12,118


Stock-based compensation was included in the following captions in our condensed consolidated statements of operations for the three months ended March 31, 20182019 and 20172018 (in thousands):
 Three Months Ended March 31,
 2019
2018
Cost of products revenues$51
 $19
Cost of services revenues18
 34
Research and development expenses195
 152
Marketing and selling expenses294
 360
General and administrative expenses1,180
 138
 $1,738
 $703


 Three Months Ended March 31,
 2018
2017
Cost of products revenues$19
 $15
Cost of services revenues34
 49
Research and development expenses152
 88
Marketing and selling expenses360
 356
General and administrative expenses138
 903
 $703
 $1,411



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


Our mission is to enable our clientsempower media creators with innovative technology and collaborative tools to create, connectentertain, inform, educate and collaborate through continuous innovation of an open media ecosystem, powerful common platform and tools.enlighten the world. Our clients rely on Avid to create the most prestigious and award-winning feature films, music recordings, television shows, live concerts, sporting events and news broadcasts. Avid has been honored for technological innovation with 1516 Emmy Awards, one Grammy Award, two Oscars and the first ever America Cinema Editors Technical Excellence Award. In 2018, Avid was named the recipient of the prestigious Philo T. Farnsworth Award by the Television Academy, to honor Avid’s 30 years of continuous, transformative technology innovations, including products that have improved and accelerated the entire editing and post production process for television. Our creative tools and workflow solutions were used in all 20182019 Oscar nominated films for Best Film Editing, Best Sound Editing, Best Sound Mixing, and Best Original Score and used in the winner of Best Picture.


Operations Overview


Our strategy for connecting creative professionals and media organizationsenterprises with audiences in a more powerful, efficient, collaborative, and profitable waysway leverages our Avid MediaCentral Platform - 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, and enables fast and easy creation, delivery and monetization of content.

We work to ensure that we are meeting customer needs, staying ahead of industry trends and investing in the 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 media production and distribution environment for the media industry. Our Avid Advantage Support Plans reinforceinteractive relationship with our strategy by offering a new standard in service, support and education to enable our customers to derive more efficiency from their Avid investment. In addition, thecustomer base. The Avid Customer Association (“ACA”), was established as anto be the world’s most innovative and influential media technology community representing thousands of organizations and over 20,00027,000 professionals from all levels of the industry.industry including the industry’s most inspirational and award-winning thought leaders, innovators and storytellers. The ACAAvid Customer Association fosters collaboration between Avid, its customers and other industry colleagues to help shape our product offerings as well as providing a means to shape our industry together.


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 had approximately 100,000137,000 paying cloud-enabled subscribers at the end of the first quarter of 2018, a 40% increase from the first quarter of 2017.2019. These licensing options offer choicechoices in pricing and deployment to suit our customers’ needsneeds. While our subscription offerings to date have primarily been sold to creative professionals, going forward, we expect to increase subscription sales to media enterprises as we expand offerings and 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. We believe our transitionstrategy to aincrease recurring revenue model, we expect thatwill continue to increase our revenue, deferredvisibility of revenue and cash flow fromflows in future periods.

Another key aspect of our strategy has been to implement programs to increase operational efficiencies and reduce costs. We are making significant changes in business operations to better support the company’s strategy and overall performance. We have implemented a number of spending control initiatives with an emphasis on non-personnel costs to reduce the overall cost structure while still investing in key areas that will be adversely affected asdrive growth. We are also revamping our supply chain and logistics, moving to a lean model that leverages a new product offeringssupplier and distribution network. We are sold at a wider variety of price points.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 sources for the three months ended March 31, 2019 and 2018 is as follows (in thousands):

 Three Months Ended March 31,
 2019 2018
Software licenses$17,412
 $17,147
Maintenance32,019
 33,771
Software licenses and maintenance49,431
 50,918
% of total revenue48% 52%
Integrated solutions46,265
 37,717
Professional services & training7,623
 9,302
Total revenue$103,319
 $97,937


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




We believe that our critical accounting policies and estimates are those related to revenue recognition and allowances for sales returns and exchanges; discount rates used for lease liabilities, stock-based compensation; income tax assets and liabilities; and restructuring charges and accruals. We believe these policies and estimates are critical because they most significantly affect the portrayal of our financial condition and results of operations and involve our most complex and subjective estimates and judgments. A discussion of our critical accounting policies and estimates may be found in our Annual Report on Form 10-K for the year ended December 31, 20172018 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. On January 1, 2018, we adopted ASC Topic 606 using the modified retrospective method applied to contracts not completed as of January 1, 2018. See Note 1, Note 9, and the Revenue Recognition discussion below for a further description. As a result of our adoption of ASC 606 effective January 1, 2018 using the modified retrospective method, prior period revenue amounts have not been adjusted to conform with ASC 606 and therefore may not be comparable.


Revenue Recognition


We enter into contracts with customers that include various combinations of products and services, which are typically capable of being distinct and are accounted for as separate performance obligations. The Company accountsWe 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.

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


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


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

Leases

We have operating leases for facilities and certain equipment in North America, Europe and Asia. Our process for determining SSP for each performance obligation involves significant management judgment. In determining SSP, we maximize observable inputsoperating lease right-of-use assets and consider a number of data points, including:
the pricing of standalone sales (in the limited instances where available);
the pricing established by management when setting prices for deliverables thatliabilities are intended to be sold on a standalone basis;
contractually stated prices for deliverables that are intended to be sold on a standalone basis;
other pricing factors, such as the geographical region in which the products are sold and expected discountsrecognized based on the customer sizepresent value of the future minimum lease payments over the lease term at commencement date. As our leases generally do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. An average incremental borrowing rate of 6% as of January 1, 2019, the adoption date of ASC 842, was used for our leases that commenced prior to that date. We determined that the rate of 6% is appropriate for our operating leases after we considered an estimated incremental borrowing rate provided by our bank, the interest rate of our Term Loan, and type.

Determining SSP for performance obligations whichthe terms and geographic locations of our facilities. For the $38.0 million we never sell separately also requires significant judgment. In estimatingrecorded as the SSP, we considernet lease liabilities as of January 1, 2019 that was calculated using a 6% discount rate, an increase or decrease in the likely price thatdiscount rate of 2% would have resulted from established pricing practices hadan impact of approximately $3.0 million on the deliverable been offered separately and the prices a customer would likely be willing to pay.net lease liabilities recorded. See Note 6 for further discussion on our leases.

We only include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.  We reduce transaction prices for estimated returns and other allowances that represent variable consideration under ASC 606, which we estimate based on historical return experience and other relevant factors, and record a corresponding refund liability as a component of accrued expenses and other current liabilities.  Other forms of contingent revenue or variable consideration are infrequent.

While not a common practice for us, in the event we grant the customer the option to acquire additional products or services in an arrangement, we consider if the option provides a material right to the customer that it would not receive without entering into the contract (e.g., an incremental discount compared to the range of discounts typically given for similar products or services).  If a material right is deemed to exist, we account for the option as a distinct performance obligation and recognize revenue when those future products or services are transferred or when the option expires.


We also record as revenue all amounts billed to customers for shipping and handling costs and record the actual shipping costs as a component of cost of revenues. Reimbursements received from customers for out-of-pocket expenses are recorded as revenues, with related costs recorded as cost of revenues. We present revenues net of any taxes collected from customers and remitted to government authorities.

Our contracts rarely contain significant financing components as payments from customers are due within a short period from when our performance obligations are satisfied.

We are applying the practical expedient for the deferral of sales commissions and other contract acquisition costs, which are expensed as incurred, because the amortization period would be one year or less.



RESULTS OF OPERATIONS


The following table sets forth certain items from our condensed consolidated statements of operations as a percentage of net revenues for the three months ended March 31, 20182019 and 2017:2018:
Three Months Ended March 31,Three Months Ended March 31,
2018 20172019 2018
Net revenues:      
Product47.4 % 49.0 %52.6 % 47.4 %
Services52.6 % 51.0 %47.4 % 52.6 %
Total net revenues100.0 % 100.0 %100.0 % 100.0 %
Cost of revenues43.1 % 38.9 %40.7 % 43.1 %
Gross margin56.9 % 61.1 %59.3 % 56.9 %
Operating expenses:      
Research and development16.0 % 18.1 %15.8 % 16.0 %
Marketing and selling26.7 % 24.8 %24.1 % 26.7 %
General and administrative14.2 % 13.9 %13.3 % 14.2 %
Amortization of intangible assets0.4 % 0.3 %0.4 % 0.4 %
Restructuring costs, net3.0 % 0.9 %0.5 % 3.0 %
Total operating expenses60.3 % 58.0 %54.1 % 60.3 %
Operating (loss) income(3.4)% 3.1 %
Operating income (loss)5.2 % (3.4)%
Interest and other expense, net(5.5)% (4.7)%(5.0)% (5.5)%
Loss before income taxes(8.9)% (1.6)%
Income (loss) before income taxes0.2 % (8.9)%
Provision for income taxes0.3 % 0.1 %0.4 % 0.3 %
Net loss(9.2)% (1.7)%(0.2)% (9.2)%


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 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, 2017.2018.





Net Revenues for the Three Months Ended March 31, 2018 and 2017
Net Revenues for the Three Months Ended March 31, 2019 and 2018Net Revenues for the Three Months Ended March 31, 2019 and 2018
(dollars in thousands)
2018 Change 20172019 Change 2018
Net Revenues $ % Net RevenuesNet Revenues $ % Net Revenues
Video products and solutions$31,574
 $2,753
 9.6% $28,821
Audio products and solutions14,836
 (7,349) (33.1)% 22,185
Products and solutions46,410
 (4,596) (9.0)% 51,006
54,396
 7,986
 17.2% 46,410
Services51,527
 (1,574) (3.0)% 53,101
48,923
 (2,604) (5.1)% 51,527
Total net revenues$97,937
 $(6,170) (5.9)% $104,107
$103,319
 $5,382
 5.5% $97,937



The following table sets forth the percentage of our net revenues attributable to geographic regions for the three months ended March 31, 20182019 and 2017:2018:
Three Months Ended March 31,Three Months Ended March 31,
2018 20172019 2018
United States38% 35%38% 38%
Other Americas6% 7%7% 6%
Europe, Middle East and Africa42% 40%36% 42%
Asia-Pacific14% 18%19% 14%


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 increased $2.8 million, or 9.6%, for the three months ended March 31, 2018 compared to the same period in 2017. The increase is primarily the result of strength in marketplace offerings through our alliance partner program, and improved storage product sales compared to the same period in 2017.
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 decreased $7.3increased $8.0 million, or 33.1%17.2%, for the three months ended March 31, 20182019, compared to the same period in 2017.2018. The decrease in audio revenuesincrease was primarily due to the accelerated revenue recognition of Pro Tools 12 during the three months ended March 31, 2017 as the result of the cessation of Implied Maintenance Release PCS for Pro Tools.strong growth in our storage product sales, control surfaces and live-sound consoles sales.


Services Revenues


Services revenues are derived primarily from maintenance contracts, as well as professional services and training. Services revenues decreased $1.6$2.6 million, or 3.0%5.1%, for the three months ended March 31, 20182019, compared to the same period in 2017.2018. The decrease in services revenues was primarily due to the accelerated revenue recognitiontiming of Pro Tools support contractslarge projects and efforts to rationalize profitability of professional services by taking on less low margin projects during the three months ended March 31, 2017 as2019, compared to the result of the cessation of Implied Maintenance Release PCS for Pro Tools.same period in 2018.





Cost of Revenues, Gross Profit and Gross Margin Percentage


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


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



Costs of Revenues and Gross Profit for the Three Months Ended March 31, 2018 and 2017
Costs of Revenues and Gross Profit for the Three Months Ended March 31, 2019 and 2018Costs of Revenues and Gross Profit for the Three Months Ended March 31, 2019 and 2018
(dollars in thousands)
2018 Change 20172019 Change 2018
Costs $ % CostsCosts $ % Costs
Products$26,295
 $1,791
 7.3% $24,504
$27,600
 $1,305
 5.0% $26,295
Services13,985
 (109) (0.8)% 14,094
12,487
 (1,498) (10.7)% 13,985
Amortization of intangible assets1,950
 
 —% 1,950
1,950
 
 —% 1,950
Total cost of revenues$42,230
 $1,682
 4.1% $40,548
$42,037
 $(193) (0.5)% $42,230
          
Gross profit$55,707
 $(7,852) (12.4)% $63,559
$61,282
 $5,575
 10.0% $55,707


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, 2017.2018. Our total gross margin percentage for the three months ended March 31, 2018 decreased2019 increased to 56.9%59.3% from 61.1%56.9% for the same period in 2017.2018. The decreases wereincrease was primarily due to the decreased revenue from oura favorable mix of high margin product revenues, increased products and services as discussed above, partially offset bysolutions revenue and cost savings resulting from our programs to reduce costs and increase operational efficiencies.


Gross Margin % for the Three Months Ended March 31, 2018 and 2017
Gross Margin % for the Three Months Ended March 31, 2019 and 2018Gross Margin % for the Three Months Ended March 31, 2019 and 2018
2018 Gross
Margin %
 Change 
2017 Gross
Margin %
2019 Gross
Margin %
 Change 
2018 Gross
Margin %
Products43.3% (8.7)% 52.0%49.3% 6.0% 43.3%
Services72.9% (0.6)% 73.5%74.5% 1.6% 72.9%
Total56.9% (4.2)% 61.1%59.3% 2.4% 56.9%


Operating Expenses and Operating Income




Operating Expenses and Operating Income for the Three Months Ended March 31, 2018 and 2017
Operating Expenses and Operating Income (Loss) for the Three Months Ended March 31, 2019 and 2018Operating Expenses and Operating Income (Loss) for the Three Months Ended March 31, 2019 and 2018
(dollars in thousands)
2018 Change 20172019 Change 2018
Expenses $ % ExpensesExpenses $ % Expenses
Research and development$15,685
 $(3,203) (17.0)% $18,888
$16,285
 $600
 3.8% $15,685
Marketing and selling26,132
 321
 1.2% 25,811
24,878
 (1,254) (4.8)% 26,132
General and administrative13,955
 (476) (3.3)% 14,431
13,788
 (167) (1.2)% 13,955
Amortization of intangible assets363
 
 —% 363
363
 
 —% 363
Restructuring costs, net2,907
 1,924
 195.7% 983
558
 (2,349) (80.8)% 2,907
Total operating expenses$59,042
 $(1,434) (2.4)% $60,476
$55,872
 $(3,170) (5.4)% $59,042
          
Operating (loss) income$(3,335) $(6,418) (208.2)% $3,083
Operating income (loss)$5,410
 $8,745
 (262.2)% $(3,335)




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; facilities costs; depreciation; costs for consulting and temporary employees; and prototype and other development expenses. R&D expenses decreased $3.2increased $0.6 million, or 17.0%3.8%, for the three months ended March 31, 20182019, compared to the same period in 2017.2018. 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 March 31, 2018 and 2017
Change in R&D Expenses for the Three Months Ended March 31, 2019 and 2018Change in R&D Expenses for the Three Months Ended March 31, 2019 and 2018
(dollars in thousands)
2018 Decrease
From 2017
2019 Increase (Decrease)
From 2018
$ %$ %
Personnel-related$(1,872) (17.7)%$1,875
 21.5 %
Consulting and outside services(829) (24.9)%(518) (20.7)%
Facilities and information technology(395) (10.3)%(338) (9.8)%
Other(107) (9.4)%(419) (40.6)%
Total R&D expenses decrease$(3,203) (17.0)%
Total R&D expenses increase$600
 3.8 %


The increase in personnel-related expenses for the three months ended March 31, 2019, compared to the same period in 2018, was primarily due to the capitalization of certain R&D labor costs for the three months ended March 31, 2018. The capitalized R&D labor costs were related to our SaaS product platform development, and were not material for the three months ended March 31, 2019 as the new projects were in an early stage. We expect to capitalize certain R&D labor costs in the remaining quarters of 2019 as the SaaS product platform development work continues. The decreases in allother R&D expense categories for the three months ended March 31, 2018,2019, compared to the same period in 2017,2018, were primarily the result of our cost efficiency program completed at the end of 2017.programs to increase operational efficiencies and reduce costs.


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; travel expenses; advertising and promotional expenses; web design costs and facilities costs. Marketing and selling expenses increased $0.3decreased $1.3 million, or 1.2%4.8%, for the three months ended March 31, 20182019, compared to the same period in 2017.2018. 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 March 31, 2018 and 2017
(dollars in thousands)
 
2018 (Decrease) Increase
From 2017
 $ %
Foreign exchange losses$(939) (66.5)%
Sales kickoff meeting801
 144.8 %
Consulting and outside services409
 114.1 %
Other50
 0.2 %
Total marketing and selling expenses increase$321
 1.2 %
Change in Marketing and Selling Expenses for the Three Months Ended March 31, 2019 and 2018
(dollars in thousands)
 2019 Decrease From 2018
 $ %
Foreign exchange loss$(459) (96.9)%
Advertising and promotions(308) (11.1)%
Consulting and outside services(276) (36.0)%
Facilities and information technology(211) (1.0)%
Total marketing and selling expenses decrease$(1,254) (4.8)%


DuringFor the three months ended March 31, 2018,2019, net foreign exchange gains and losses, (specifically, resultingwhich are included in marketing and selling expenses, were minimal, compared to the net loss of $0.5 million for the same period in 2018. The foreign exchange gains and losses result from foreign currency denominated transactions and the revaluation of foreign currency denominated assets and liabilities), which are includedliabilities. The changes were primarily due to the euro-dollar exchange rate volatility. The decreases in other marketing and


selling expenses, were $0.5 million compared to losses of $1.4 million during the three months ended March 31, 2017. The increase in sales kickoff meeting expensesexpense categories for the three months ended March 31, 2018,2019, compared to the same period in 2017, was2018, were primarily the result of the cancellation of 2017 sales kickoff meeting dueour programs to the cost efficiency program which was substantially completed in 2017. The increase in consultingoperational efficiencies and outside services for the three months ended March 31, 2018, compared to the same period in 2017, was primarily due to more contractors used to meet higher demand for professional services from our customers.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; audit, legal and strategic consulting 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 decreased $0.5$0.2 million, or 3.3%1.2%, for the three months ended March 31, 20182019, compared to the same period in 2017.2018. 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 March 31, 2018 and 2017
Change in G&A Expenses for the Three Months Ended March 31, 2019 and 2018Change in G&A Expenses for the Three Months Ended March 31, 2019 and 2018
(dollars in thousands)
2018 Increase (Decrease)
From 2017
2019 Increase (Decrease)
From 2018
$ %$ %
Personnel-related$(1,183) (18.7)%$1,213
 23.6 %
Consulting and outside services725
 15.9 %(1,025) (19.4)%
Other(18) (0.8)%(355) (10.0)%
Total G&A expenses decrease$(476) (3.3)%$(167) (1.2)%



The decreaseincrease in personnel-related expenseexpenses for the three months ended March 31, 2018,2019, compared to the same period in 2017,2018, was primarily due to decreasesincreases in stock-based compensation and the incentive-based compensation accrual and stock-based compensation.accrual. The increasedecrease in consulting and outside services for the three months ended March 31, 2018,2019, compared to the same period in 2017,2018, was primarily due to an increase in audit fees and webstore fees.lower legal expenses.




Provision for Income Taxes


Provision for Income Taxes for the Three Months Ended March 31, 2018 and 2017
Provision for Income Taxes for the Three Months Ended March 31, 2019 and 2018Provision for Income Taxes for the Three Months Ended March 31, 2019 and 2018
(dollars in thousands)
2018 Change 20172019 Change 2018
  $ %    $ %  
Provision for income taxes$255
 $103
 67.8% $152
$438
 $183
 71.8% $255




We had a tax benefitprovision of (2.9)%194.7% and (8.6)(2.9)%, respectively, as a percentage of income and loss before tax for the three months ended March 31, 20182019 and 2017.2018. The $0.1 million increase in the tax provision increase for the three month periodmonths ended March 31, 2019, compared to the same period in 2018, is primarily relateddue to the 2017 benefit associated with amortization of foreign intangibles which was not present in the 2018 period. Changes in the jurisdictional mix of earnings partially offset the increase in the three-month period.worldwide pre-tax income. 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 due to its pre-tax loss position.


On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was signed into law. The TCJA changed many aspects of U.S. corporate income taxation and included reduction of the corporate income tax rate from 35% to 21% , implementation of a territorial tax system and imposition of a tax on deemed repatriated earnings of foreign subsidiaries. The TCJA was effective as of December 31, 2017 and at that time we made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. As of March 31, 2018, we have not completed our accounting for the tax effects of the TCJA nor does the provision recorded at March 31, 2018 include any related adjustments for the effects of the TCJA. We will continue to assess our provision for income taxes as future guidance is issued, but do not currently anticipate significant revisions will be necessary. Any such revisions will be treated in accordance with the one year measurement period guidance outlined in Staff Accounting Bulletin No. 118. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the TCJA. The accounting is expected to be complete within the one year measurement period particularly after the 2017 U.S. corporate income tax return is filed in 2018.



LIQUIDITY AND CAPITAL RESOURCES


Liquidity and Sources of Cash


Our principal sources of liquidity include cash and cash equivalents totaling $55.3 million as of March 31, 2019. 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 $48.0 million as of March 31, 2018.

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 December 31, 2017.


On February 26, 2016,April 8, 2019, we entered into the Financing Agreement with the Lenders. Pursuantan amendment to the Financing Agreement, we entered into aAgreement. The amendment provides 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 with$100 million, which may be used to fund the ability to draw up to a maximumpurchase of $5.0 million in revolving credit. All outstanding loansour Notes. On May 2, 2019, we received the Delayed Draw Funds under the Financing AgreementAgreement. The Delayed Draw Funds will become dueremain available to us to purchase Notes for a period of 90 calendar days. At the end of such 90-day period, any remaining Delayed Draw Funds that have not been used to purchase Notes must be repaid and payable in February 2021, or in May 2020 ifno further funds will be available to borrow under the $121.0 million in outstanding principalcommitment. Any Delayed Draw Funds drawn and used to fund the purchase of 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 defaultwill mature on May 10, 2023, the current maturity date 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 modifiesUnder the covenant requiring us 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, we are required to keep 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 ended December 31, 2017, 4.40:1.00 for eachterms 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,amendment, interest accrues on the Delayed Draw Funds and the existing outstanding borrowings under the credit facility and the term loan (each as defined in the Financing Agreement)Agreement at a rate of either the LIBOR Rate (as defined in the Financing Agreement) plus 7.25%6.25% or a Reference Rate (as definedplus 5.25%, at our option. The amendment also modified the covenant requiring us to maintain a leverage ratio based on the level of availability plus unrestricted cash on-hand set forth in the Financing Agreement) plus 6.25%, at the option of Avid. As of March 31, 2018, we were in compliance with the Financing Agreement covenants.amendment

On November 9, 2017 (the “Amendment No. 2 Effective Date”), we entered into the Second Amendment to the Financing Agreement. The Second Amendment extended an additional $15.0 million term loan to us, 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 $0.2 million 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.

On May 10, 2018 (the “Amendment No. 4 Effective Date”), we entered into an amendment (the “Fourth Amendment”) to the Financing Agreement. The Fourth Amendment extended the maturity of the Financing Agreement to May 2023 and increased the term and revolving facilities by an aggregate of $35.0 million. In addition, under the terms of the Fourth Amendment, the facility is subject to lower annual fees and interest rates, has a reduced principal amortization schedule and no longer includes a springing repayment feature related to the maturity of our Notes due in June 2020.


Our ability to satisfy the Leverage Ratioleverage ratio covenant in the future is dependent on our ability to maintain bookings and billingsrevenues 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) dramatic changes in the media industry and the impact it has on our customers, (iii) the impact of new and anticipated product launches and features, and (iv) volatility in currency rates. In addition to the impact of new bookings and billings, GAAP revenues recognized as the result of the existence of Implied Maintenance Release PCS in prior periods completed in 2017, which will have an adverse impact on our Leverage Ratio.


In the event bookings and billingsrevenues in future quarters are lower than we currently anticipate, we may be forced to take remedial actions 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. 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 Ratioleverage 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.


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 expect to operate the business and execute 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. 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.





Cash Flows


The following table summarizes our cash flows for the periods presented (in thousands):
Three Months Ended March 31,Three Months Ended March 31,
2018 20172019 2018
Net cash provided by operating activities$5,370
 $3,534
$6,376
 $5,370
Net cash used in investing activities(2,088) (1,736)(1,767) (2,088)
Net cash used in financing activities(3,703) (1,620)(5,331) (3,723)
Effect of foreign currency exchange rates on cash, cash equivalents and restricted cash(5) 188
(55) 15
Net (decrease) increase in cash, cash equivalents and restricted cash$(426) $366
Net decrease in cash, cash equivalents and restricted cash$(777) $(426)



Cash Flows from Operating Activities


Cash provided by operating activities aggregated $5.4$6.4 million for the three months ended March 31, 2018.2019. The increase in cash provided by operations compared to the three months ended March 31, 20172018 was primarily attributabledue to improved cash collectionsincreased revenues and our programs to increase operational efficiencies and reduce costs, the cost efficiency program completed at the endimpact of 2017.which was partially offset by an increase in working capital requirements.


Cash Flows from Investing Activities


For the three months ended March 31, 2018,2019, net cash flows used in investing activities reflected $2.1$1.8 million used for the purchase of property and 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 three months ended March 31, 2018,2019, net cash flows used in financing activities were primarily due tofor the $1.4 million principal paymentrepurchase of the Term Loan, and the $1.7 million settlement of theour outstanding Notes.


RECENT ACCOUNTING PRONOUNCEMENTS


Recently Adopted Accounting Pronouncementsand 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.


During the three months ended March 31, 20182019 and 2017,2018, we recorded an immaterial net lossesgain and a net loss of $0.5 million, respectively. The foreign exchange gains and $1.4 million, respectively, thatlosses were 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 March 31, 20182019, 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 and borrowedon February 26, 2016, an additional $15.0 million and $22.7 million under the Term Loan on November 9, 2017. On March 14, 2017 (the “Amendment No. 1 Effective Date”), we entered into an amendment (the “First Amendment”)and May 10, 2018, respectively. We also maintain a revolving Credit Facility that allows us to the Financing Agreement, with the lenders party thereto.borrow up to $22.5 million. Following the Amendment No.1 Effective Date,amendment effective May 10, 2018, interest accrues on outstanding borrowings under the credit facilityTerm Loan and the term loanCredit Facility (each as defined in the Financing Agreement) at a rate of either the LIBOR Rate (as defined in the Financing Agreement) plus 7.25%6.625% or a Reference Rate (as defined in the Financing Agreement) plus 6.25%5.625%, at our option. We also maintainUnder the terms of the amendment effective April 8, 2019, interest accrues on outstanding borrowings under the Term Loan and the Credit facility (each as defined in the Financing Agreement) at a revolving Credit Facility that allows us to borrow up to $10.0 million.rate of either the LIBOR Rate (as defined in the Financing Agreement) plus 6.25% or a Reference Rate (as defined in the Financing Agreement) plus 5.25%, at our option. 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 and of our Notes on December 15,during 2017, $16.2 million during 2018, and an additional $2.0$3.9 million on February 8, 2018.January 22, 2019.  The Notes pay interest semi-annually on June 15 and December 15 of each year, at an annual rate of 2.00% and mature on June 15, 2020 unless earlier repurchased or converted in accordance with their terms prior to such date. 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 March 31, 2018.2019. 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 March 31, 2018,2019, these disclosure controls and procedures were effective at a reasonable level of assurance.


Changes in Internal Control over Financial Reporting


There were no changes in our internal control over financial reporting during the quarterly period ended March 31, 2018,2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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 78 “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, 2017.2018.




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, 20172018 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.


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
31.1  X      
31.2  X      
32.1  X      
*10.18-KApril 11, 2019001-36254
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:May 10, 20186, 2019By: /s/ Brian E. AgleKenneth Gayron 
  Name:Brian E. AgleKenneth Gayron  
  Title:SeniorExecutive Vice President and Chief Financial Officer 




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