NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL INFORMATION
The accompanying condensed consolidated financial statements include the accounts of Avid Technology, Inc. and its wholly owned subsidiaries (collectively, “we” or “our”). These financial statements are unaudited. However, in the opinion of management, the condensed consolidated financial statements reflect all normal and recurring adjustments necessary for their fair statement. Interim results are not necessarily indicative of results expected for any other interim period or a full year. We prepared the accompanying unaudited condensed consolidated financial statements in accordance with the instructions for Form 10-Q and, therefore, include all information and footnotes necessary for a complete presentation of operations, comprehensive income (loss), financial position, changes in stockholders’ deficit, and cash flows in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying condensed consolidated balance sheet as of December 31, 2019 was derived from our audited consolidated financial statements and does not include all disclosures required by U.S. GAAP for annual financial statements. We filed audited consolidated financial statements as of and for the year ended December 31, 2019 in our Annual Report on Form 10-K for the year ended December 31, 2019, which included information and footnotes necessary for such presentation. The financial statements contained in this Form 10-Q should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2019.
The consolidated results of operations for the three months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2020. The Company’s results of operations are affected by economic conditions, including macroeconomic conditions and levels of business and consumer confidence.
The COVID-19 pandemic has adversely affected the Company’s results of operations and financial condition, primarily due to reduced demand for our products and services which has led to lower net revenues. These economic impacts are the result of, but not limited to:
•the postponement or cancellation of film and television productions, major sporting events, and live music events;
•delays in purchasing and projects by our enterprise customers and channel partners;
•disruption to the supply chain caused by distribution and other logistical issues, including disruptions arising from government restrictions; and
•decreased productivity due to travel restrictions, work-from-home policies or shelter-in-place orders.
These effects are expected to continue, although the full impact of the COVID-19 pandemic on the Company’s consolidated results of operations and financial condition over the longer term is uncertain. The Company is actively managing its business to respond to this health crisis and will continue to evaluate the nature and extent of the impact. We expect that our business operations and results of operations will be adversely impacted by these developments for at least the balance of 2020, and possibly longer. To address actual and expected reductions in net revenues, we have reduced our discretionary spending and reduced payroll costs, including through temporary employee furloughs and pay cuts. In addition, in May 2020 we received $7.8 million of funding under the U.S. government’s Paycheck Protection Program (the “PPP”) in the form of a low-interest loan that may be forgiven under certain conditions. We may be required to take additional remedial steps, depending on the duration and severity of the pandemic and its impact on our operations and cash flows, which could include, among other things (and where allowed by the lenders), (i) further cost reductions, (ii) seeking replacement financing, (iii) raising funds through the issuance of additional equity or debt securities or the incurrence of additional borrowings, (iv) disposing of certain assets or businesses, or (v) seeking additional funding under various programs implemented by the U.S. government in response to the COVID-19 pandemic. Such remedial actions, which may not be available on favorable terms or at all, could have a material adverse impact on our business, and/or could result in non-compliance with financial covenants in our financing agreements with lenders which, in the absence of a waiver or amendment, could result in an event of default under such financing agreements, which could permit acceleration of the outstanding indebtedness and require us to repay such indebtedness before the scheduled due date. If an event of default were to occur, we might not have sufficient funds available to make the payments required. If we are unable to repay amounts owed, the lenders may be entitled to foreclose on and sell substantially all of our assets, which secure our borrowings. We anticipate that we will have sufficient internal and external sources of liquidity to fund operations and anticipated working capital and other expected cash needs for at least the next 12 months as well as for the foreseeable
future. We also believe that our financial resources will allow us to manage the anticipated impact of COVID-19 on our business operations and results of operations for the foreseeable future, which could include reductions in revenue and delays in payments from customers and partners. The challenges posed by COVID-19 on our business are expected to evolve rapidly. Consequently, we will continue to evaluate our financial position in light of future developments, particularly those relating to COVID-19.
Our preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from our estimates.
Significant Accounting Policies - Revenue Recognition
We enter into contracts with customers that include various combinations of products and services, which are typically capable of being distinct and are accounted for as separate performance obligations. We account for a contract when (i) it has approval and commitment from both parties, (ii) the rights of the parties have been identified, (iii) payment terms have been identified, (iv) the contract has commercial substance, and (v) collectibility is probable. We recognize revenue upon transfer of control of promised products or services to customers, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts, in an amount that reflects the consideration we expect to receive in exchange for those products or services.
We often enter into contractual arrangements that have multiple performance obligations, one or more of which may be delivered subsequent to the delivery of other performance obligations. These arrangements may include a combination of products, support, training, and professional services. We allocate the transaction price of the arrangement based on the relative estimated standalone selling price of each distinct performance obligation.
See Note 9 for disaggregated revenue schedules and further discussion on revenue and deferred revenue performance obligations and the timing of revenue recognition.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
On January 1, 2019, we adopted ASC 842 using the modified retrospective transition approach, as provided by ASU No. 2018-11, Leases - Targeted Improvements (“ASU 2018-11”). We elected the package of practical expedients permitted under the transition guidance. Results for reporting periods beginning after January 1, 2019 are presented under ASC 842, while prior periods have not been adjusted and continue to be reported in accordance with our historic accounting under previous U.S. GAAP.
The primary impact of ASC 842 is that substantially all of our leases are recognized on the balance sheet, by recording right-of-use assets and short-term and long-term lease liabilities, both of which are material to our consolidated balance sheet. The new standard does not have a material impact on our consolidated statement of operations and cash flows, and the effect of applying ASC 842 as a cumulative-effect adjustment to retained earnings as of January 1, 2019 is immaterial.
Recent Accounting Pronouncements To Be Adopted
In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 is intended to enhance and simplify aspects of the income tax accounting guidance in ASC 740 as part of the FASB's simplification initiative. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2020 with early adoption permitted. The Company is currently evaluating the impact this guidance may have on its consolidated financial statements and related disclosures.
In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 is intended to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the
expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This guidance is effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this guidance may have on its consolidated financial statements and related disclosures.
2. NET INCOME (LOSS) PER SHARE
Net income (loss) per common share is presented for both basic income (loss) per share (“Basic EPS”) and diluted income (loss) per share (“Diluted EPS”). Basic EPS is based on the weighted-average number of common shares outstanding during the period. Diluted EPS is based on the weighted-average number of common shares and common share equivalents outstanding during the period.
The potential common shares that were considered anti-dilutive securities were excluded from the diluted earnings per share calculations for the relevant periods either because the sum of the exercise price per share and the unrecognized compensation cost per share was greater than the average market price of our common stock for the relevant periods, or because they were considered contingently issuable. The contingently issuable potential common shares result from certain stock options and restricted stock units granted to our employees that vest based on performance conditions, market conditions, or a combination of performance and market conditions.
The following table sets forth (in thousands) potential common shares that were considered anti-dilutive securities at September 30, 2020 and 2019.
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|
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|
September 30, 2020
|
|
September 30, 2019
|
Options
|
390
|
|
|
594
|
|
Non-vested restricted stock units
|
3,220
|
|
|
2,699
|
|
Anti-dilutive potential common shares
|
3,610
|
|
|
3,293
|
|
The following table sets forth (in thousands) the basic and diluted weighted common shares outstanding for the three and nine months ended September 30, 2020.
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|
Three months ended
|
Nine months ended
|
|
|
Weighted common shares outstanding - basic
|
44,019
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|
43,665
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|
|
|
Net effect of common stock equivalents
|
739
|
|
833
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|
|
|
Weighted common shares outstanding - diluted
|
44,758
|
|
44,498
|
|
|
|
3. FAIR VALUE MEASUREMENTS
Assets Measured at Fair Value on a Recurring Basis
We measure deferred compensation investments on a recurring basis. As of September 30, 2020 and December 31, 2019, our deferred compensation investments were classified as either Level 1 or Level 2 in the fair value hierarchy. Assets valued using quoted market prices in active markets and classified as Level 1 are money market and mutual funds. Assets valued based on other observable inputs and classified as Level 2 are insurance contracts.
The following tables summarize our deferred compensation investments measured at fair value on a recurring basis (in thousands):
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Fair Value Measurements at Reporting Date Using
|
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September 30,
2020
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
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|
Significant
Other
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Financial assets:
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|
|
|
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|
Deferred compensation assets
|
$
|
487
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|
|
$
|
261
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|
|
$
|
226
|
|
|
$
|
—
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Fair Value Measurements at Reporting Date Using
|
|
December 31, 2019
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
Significant
Other
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Financial assets:
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|
|
|
|
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|
Deferred compensation assets
|
$
|
1,156
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|
|
$
|
338
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|
|
$
|
818
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|
|
$
|
—
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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.
4. INVENTORIES
Inventories consisted of the following (in thousands):
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September 30, 2020
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|
December 31, 2019
|
Raw materials
|
$
|
7,885
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|
|
$
|
9,036
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|
Work in process
|
316
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|
|
371
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|
Finished goods
|
20,177
|
|
|
19,759
|
|
Total
|
$
|
28,378
|
|
|
$
|
29,166
|
|
As of September 30, 2020 and December 31, 2019, finished goods inventory included $1.7 million and $1.5 million, respectively, associated with products shipped to customers and deferred labor costs for arrangements where revenue recognition had not yet commenced.
5. LEASES
We have entered into a number of facility leases to support our research and development activities, sales operations, and other corporate and administrative functions in North America, Europe, and Asia, which qualify as operating leases under U.S. GAAP. We also have a limited number of equipment leases that qualify as either operating or finance leases. We determine if contracts with vendors represent a lease or have a lease component under U.S. GAAP at contract inception. Our leases have remaining terms ranging from less than one year to eight years. Some of our leases include options to extend or terminate the lease prior to the end of the agreed upon lease term. For purposes of calculating lease liabilities, lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise such options.
Operating lease right of use assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the lease commencement date. As our leases generally do not provide an implicit rate, we
use an estimated incremental borrowing rate in determining the present value of future payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular location and currency environment. We used an average incremental borrowing rate of 6% as of January 1, 2019, the adoption date of ASC 842, for our leases that commenced prior to that date. The operating leases are included in “Right of use assets,” “Accrued expenses and other current liabilities,” and “Long-term lease liabilities” on our condensed consolidated balance sheets as of September 30, 2020 and December 31, 2019.
Finance lease right of use assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the lease commencement date. Each lease agreement provides an implicit discount rate used to determine the present value of future payments. The weighted-average discount rate is 2.3% as of September 30, 2020, the commencement date for our leases. The finance leases are included in “Other assets” and “Other long-term liabilities” on our condensed consolidated balance sheet as of September 30, 2020.
The weighted-average remaining lease term of our operating leases is 6.6 years as of September 30, 2020. Lease costs for minimum lease payments is recognized on a straight-line basis over the lease term. Our total operating lease costs were $2.2 million and $2.4 million for the three months ended September 30, 2020 and September 30, 2019, respectively. Our total operating lease costs were $7.2 million and $7.2 million for the nine months ended September 30, 2020 and September 30, 2019 respectively. Related cash payments were $2.0 million and $2.4 million for the three months ended September 30, 2020 and September 30, 2019, respectively. Related cash payments were $6.9 million and $7.3 million for the nine months ended September 30, 2020 and September 30, 2019, respectively. For the nine months ended September 30, 2020, right of use assets obtained in exchange for new operating lease liabilities was $5.7 million. Operating lease costs are included within research and development, marketing and selling, and general and administrative lines on the condensed consolidated statements of operations, and the related cash payments are included in the operating cash flows on the condensed consolidated statements of cash flows. Finance lease costs, short-term lease costs, variable lease costs, and sublease income are not material.
The table below reconciles the undiscounted future minimum lease payments for operating and finance leases under non-cancelable leases with terms of more than one year to the total lease liabilities recognized on the condensed consolidated balance sheets as of September 30, 2020 (in thousands):
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|
|
|
|
|
|
|
|
Year Ending December 31,
|
Operating Leases
|
Finance Leases
|
2020 (excluding nine months ended September 30, 2020)
|
$
|
2,067
|
|
$
|
12
|
|
2021
|
7,590
|
|
289
|
|
2022
|
6,472
|
|
255
|
|
2023
|
5,579
|
|
226
|
|
2024
|
4,875
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|
—
|
|
Thereafter
|
16,637
|
|
—
|
|
Total future minimum lease payments
|
$
|
43,220
|
|
$
|
782
|
|
Less effects of discounting
|
(7,837)
|
|
(27)
|
|
Total lease liabilities
|
$
|
35,383
|
|
$
|
755
|
|
Supplemental balance sheet information related to leases was as follows (in thousands):
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|
|
|
|
Operating Leases
|
September 30, 2020
|
Right of use assets
|
$
|
30,408
|
|
|
|
Accrued expenses and other current liabilities
|
(5,910)
|
|
Operating lease liabilities (LT)
|
(29,473)
|
|
Total lease liabilities
|
$
|
(35,383)
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|
|
|
|
|
|
|
Finance Leases
|
September 30, 2020
|
Other assets
|
$
|
737
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|
|
|
Accrued expenses and other current liabilities
|
(220)
|
|
Other long-term liabilities
|
(535)
|
|
Total lease liabilities
|
$
|
(755)
|
|
6. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consisted of the following (in thousands):
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|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
$
|
5,335
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|
|
$
|
5,186
|
|
Finance leases
|
535
|
|
|
—
|
|
Other
|
292
|
|
|
460
|
|
Total
|
$
|
6,162
|
|
|
$
|
5,646
|
|
7. COMMITMENTS AND CONTINGENCIES
Commitments
We entered into a long-term agreement to purchase a variety of information technology solutions from a third party in the second quarter of 2020, which included an unconditional commitment to purchase a minimum of $32.2 million of products and services over the initial five years of the agreement. We have purchased $0.6 million of products and services pursuant to this agreement as of September 30, 2020.
We have letters of credit that are used as security deposits in connection with our leased Burlington, Massachusetts office space. In the event of default on the underlying leases, the landlords would, at September 30, 2020, be eligible to draw against the letters of credit to a maximum of $1.3 million in the aggregate. The letters of credit are subject to aggregate reductions provided that we are not in default under the underlying leases and meet certain financial performance conditions. In no case will the letters of credit amounts for the Burlington leases be reduced to below $1.2 million in the aggregate throughout the lease periods.
We also have letters of credit in connection with security deposits for other facility leases totaling $0.6 million in the aggregate, as well as letters of credit totaling $1.9 million that otherwise support our ongoing operations. These letters of credit have various terms and expire during 2020 and beyond, while some of the letters of credit may automatically renew based on the terms of the underlying agreements.
Substantially all of our letters of credit are collateralized by restricted cash included in the caption “Restricted cash” and “Other long-term assets” on our condensed consolidated balance sheets as of September 30, 2020.
Contingencies
Our industry is characterized by the existence of a large number of patents and frequent claims and litigation regarding patent and other intellectual property rights. In addition to the legal proceedings described above, we are involved in legal proceedings from time to time arising from the normal course of business activities, including claims of alleged infringement of intellectual property rights and contractual, commercial, employee relations, product or service performance, or other matters. We do not believe these matters will have a material adverse effect on our financial position or results of operations. However, the outcome of legal proceedings and claims brought against us is subject to significant
uncertainty. Therefore, our financial position or results of operations may be negatively affected by the unfavorable resolution of one or more of these proceedings for the period in which a matter is resolved. Our results could be materially adversely affected if we are accused of, or found to be, infringing third parties’ intellectual property rights.
Following the termination of our former Chairman and Chief Executive Officer on February 25, 2018, we received a notice alleging that we breached the former executive’s employment agreement. On April 16, 2019 we received an additional notice again alleging we breached the former executive’s employment agreement. We have since been in communications with our former Chairman and Chief Executive Officer’s counsel. While we intend to defend any claim vigorously, when and if a claim is actually filed, we are currently unable to estimate an amount or range of any reasonably possible losses that could occur as a result of this matter.
On July 14, 2020, we sent a notice to a customer demanding sums that we believe are due to Avid pursuant to a contract. On October 7, 2020, the customer sent a notice to us denying any legal liability and demanding payment for breach of contract resulting from various alleged delays by us. While we intend to defend any claim vigorously when and if a claim is actually filed, we are currently unable to estimate an amount or range of any reasonably possible losses that could occur related to this matter.
We consider all claims on a quarterly basis and based on known facts assess whether potential losses are considered reasonably possible, probable, and estimable. Based upon this assessment, we then evaluate disclosure requirements and whether to accrue for such claims in our condensed consolidated financial statements. We record a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case.
At September 30, 2020 and as of the date of filing of these condensed consolidated financial statements, we believe that, other than as set forth in this note, no provision for liability nor disclosure is required related to any claims because: (a) there is no reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claim, (b) a reasonably possible loss or range of loss cannot be estimated, or (c) such estimate is immaterial.
Additionally, we provide indemnification to certain customers for losses incurred in connection with intellectual property infringement claims brought by third parties with respect to our products. These indemnification provisions generally offer perpetual coverage for infringement claims based upon the products covered by the agreement and the maximum potential amount of future payments we could be required to make under these indemnification provisions is theoretically unlimited. To date, we have not incurred material costs related to these indemnification provisions; accordingly, we believe the estimated fair value of these indemnification provisions is immaterial. Further, certain of our arrangements with customers include clauses whereby we may be subject to penalties for failure to meet certain performance obligations; however, we have not recorded any related material penalties to date.
We provide warranties on externally sourced and internally developed hardware. For internally developed hardware, and in cases where the warranty granted to customers for externally sourced hardware is greater than that provided by the manufacturer, we record an accrual for the related liability based on historical trends and actual material and labor costs. The following table sets forth the activity in the product warranty accrual account for the nine months ended September 30, 2020 and 2019 (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2020
|
|
2019
|
Accrual balance at beginning of year
|
$
|
1,337
|
|
|
$
|
1,706
|
|
Accruals for product warranties
|
1,030
|
|
|
732
|
|
Costs of warranty claims
|
(1,003)
|
|
|
(1,016)
|
|
Accrual balance at end of period
|
$
|
1,364
|
|
|
$
|
1,422
|
|
The warranty accrual is included in the caption “accrued expenses and other current liabilities” in our condensed consolidated balance sheet.
8. RESTRUCTURING COSTS AND ACCRUALS
During the three months ended September 30, 2020 and September 30, 2019, we recorded restructuring charges of $0.7 million and $0.2 million, respectively, for employee severance cost adjustments.
During the nine months ended September 30, 2020 and September 30, 2019 we recorded restructuring charges of $1.0 million and $0.5 million respectively.
Restructuring Summary
The following table sets forth restructuring expenses recognized for the three and nine months ended September 30, 2020 and 2019 (in thousands):
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|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Employee
|
$
|
723
|
|
|
$
|
202
|
|
|
$
|
911
|
|
|
$
|
473
|
|
Facility
|
—
|
|
|
—
|
|
|
97
|
|
|
5
|
|
Total facility and employee charges
|
723
|
|
|
202
|
|
|
1,008
|
|
|
478
|
|
Other
|
—
|
|
|
27
|
|
|
—
|
|
|
40
|
|
Total restructuring charges, net
|
$
|
723
|
|
|
$
|
229
|
|
|
$
|
1,008
|
|
|
$
|
518
|
|
|
|
|
|
|
|
|
|
The following table sets forth the activity in the restructuring accruals for the nine months ended September 30, 2020 (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
|
|
|
|
|
|
|
|
|
Accrual balance as of December 31, 2019
|
$
|
155
|
|
|
|
|
|
|
|
|
|
Restructuring charges and revisions
|
911
|
|
|
|
|
|
|
|
|
|
Cash payments
|
(258)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual balance as of September 30, 2020
|
808
|
|
|
|
|
|
|
|
|
|
Less: current portion
|
808
|
|
|
|
|
|
|
|
|
|
Long-term accrual balance as of September 30, 2020
|
$
|
—
|
|
|
|
|
|
|
|
|
|
The employee restructuring accrual at September 30, 2020 represents severance costs to former employees that will be paid out within 12 months, and is, therefore, included in the caption “accrued expenses and other current liabilities” in our condensed consolidated balance sheets as of September 30, 2020.
On January 1, 2019, we had facilities restructuring accruals of $0.1 million included in the caption “accrued expenses and other current liabilities” and $0.2 million included in the caption “other long-term liabilities," which were reclassified upon the adoption of ASC 842 to the right of use asset account.
9. REVENUE
Disaggregated Revenue and Geography Information
Through the evaluation of the discrete financial information that is regularly reviewed by the chief operating decision makers (our chief executive officer and chief financial officer), we have determined that we have one reportable segment.
The following table is a summary of our revenues by type for the three and nine months ended September 30, 2020 and 2019 (in thousands):
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2020
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2019
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2020
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2019
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Products and solutions net revenues
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$
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35,775
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$
|
42,911
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|
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$
|
98,121
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$
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147,633
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Subscription services
|
17,907
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|
|
10,297
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|
48,292
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|
29,339
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Support services
|
30,826
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|
33,361
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|
93,190
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|
|
97,018
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Professional services, training and other services
|
5,923
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|
|
6,892
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|
|
16,562
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|
|
21,491
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Total net revenues
|
$
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90,431
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|
$
|
93,461
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$
|
256,165
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$
|
295,481
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The following table sets forth our revenues by geographic region for the three and nine months ended September 30, 2020 and 2019 (in thousands):
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2020
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2019
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2020
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2019
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Revenues:
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United States
|
$
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36,190
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$
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31,267
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$
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105,166
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$
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110,697
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Other Americas
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4,505
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9,471
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15,841
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23,232
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Europe, Middle East and Africa
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37,537
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40,579
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99,478
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115,171
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Asia-Pacific
|
12,199
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12,144
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35,680
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|
46,381
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Total net revenues
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$
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90,431
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$
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93,461
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$
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256,165
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$
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295,481
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Contract Asset
Contract asset activity for the nine months ended September 30, 2020 was as follows (in thousands):
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September 30, 2020
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Contract asset at January 1, 2020
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$
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19,494
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Revenue in excess of billings
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22,045
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Customer billings
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(26,263)
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Contract asset at September 30, 2020
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$
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15,276
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Deferred Revenue
Deferred revenue activity for the nine months ended September 30, 2020 was as follows (in thousands):
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September 30, 2020
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Deferred revenue at January 1, 2020
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$
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97,901
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Billings deferred
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47,723
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Recognition of prior deferred revenue
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(64,460)
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Deferred revenue at September 30, 2020
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$
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81,164
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A summary of the significant performance obligations included in deferred revenue as of September 30, 2020 is as follows (in thousands):
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September 30, 2020
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Product
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$
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5,133
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Subscription
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3,320
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Support contracts
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61,596
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Implied PCS
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8,860
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Professional services, training and other
|
2,255
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Deferred revenue at September 30, 2020
|
$
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81,164
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Remaining Performance Obligations
For transaction prices allocated to remaining performance obligations, we apply practical expedients and do not disclose quantitative or qualitative information for remaining performance obligations (i) that have original expected durations of one year or less and (ii) where we recognize revenue equal to what we have the right to invoice and that amount corresponds directly with the value to the customer of our performance to date.
Historically, for many of our products, we had an ongoing practice of making when-and-if-available software updates available to customers free of charge for a period of time after initial sales to customers. The expectation created by this practice of providing free Software Updates represents an implied obligation of a form of post-contract customer support (“Implied PCS”) which represents a performance obligation. While we have ceased providing Implied PCS on new product offerings, we continue to provide Implied PCS for older products that were predominately sold in prior years. Revenue attributable to Implied PCS performance obligations is recognized over time on a ratable basis over the period that Implied PCS is expected to be provided, which is typically six years. We have remaining performance obligations of $8.9 million attributable to Implied PCS recorded in deferred revenue as of September 30, 2020. We expect to recognize revenue for these remaining performance obligations of $1.1 million for the remainder of 2020 and $3.3 million, $2.0 million, $1.2 million and $0.8 million for the years ending December 31, 2021, 2022, 2023, and 2024, respectively, and $0.5 million thereafter.
As of September 30, 2020, we had approximately $53.7 million of transaction price allocated to remaining performance obligations for certain enterprise agreements that have not yet been fully invoiced. Approximately $48.1 million of these performance obligations were unbilled as of September 30, 2020. Remaining performance obligations represent obligations we must deliver for specific products and services in the future where there is not yet an enforceable right to invoice the customer. Our remaining performance obligations do not include contractually committed minimum purchases that are common in our strategic purchase agreements with resellers since our specific obligations to deliver products or services is not yet known, as customers may satisfy such commitments by purchasing an unknown combination of current or future product offerings. While the timing of fulfilling individual performance obligations under the contracts can vary dramatically based on customer requirements, we expect to recognize the $53.7 million in roughly equal installments through 2026.
Remaining performance obligation estimates are subject to change and are affected by several factors, including terminations due to contract breach, contract amendments, and changes in the expected timing of delivery.
10. LONG-TERM DEBT AND CREDIT AGREEMENT
Long-term debt consisted of the following (in thousands):
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September 30, 2020
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December 31, 2019
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Term Loan, net of debt issuance costs of $2,846 at September 30, 2020 and $3,334 at December 31, 2019
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$
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199,159
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$
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200,105
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Notes, net of unamortized original issue discount and debt issuance costs of $0 at September 30, 2020 and $680 at December 31, 2019
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—
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28,187
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PPP Loan
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7,800
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—
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Other long-term debt
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1,250
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1,296
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Total debt
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208,209
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229,588
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Less: current portion
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4,135
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30,554
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Total long-term debt
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$
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204,074
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$
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199,034
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The following table summarizes the contractual maturities of our borrowing obligations as of September 30, 2020 (in thousands):
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Fiscal Year
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Term Loan
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PPP Loan
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Other Long-Term Debt
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Total
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2020
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$
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797
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$
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—
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$
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36
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$
|
833
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2021
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4,781
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—
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153
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4,934
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2022
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6,375
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7,800
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|
|
164
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14,339
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2023
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190,052
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|
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—
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|
|
176
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|
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190,228
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2024
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—
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—
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|
|
188
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|
188
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Thereafter
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—
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—
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|
|
533
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|
|
533
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Total before unamortized discount
|
202,005
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|
7,800
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|
|
1,250
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|
211,055
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Less: unamortized discount and issuance costs
|
2,846
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—
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—
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|
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2,846
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Less: current portion of long-term debt
|
3,985
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—
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|
|
150
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|
|
4,135
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Total long-term debt
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$
|
195,174
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|
$
|
7,800
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|
|
$
|
1,100
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|
|
$
|
204,074
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Term Loan and Credit Facility
On February 26, 2016, we entered into a financing agreement (the “Financing Agreement”) with Cerberus Business Finance, LLC, as collateral and administrative agent, and the lenders party thereto (the “Lenders”). The Lenders originally agreed to provide us with (a) a term loan in the aggregate principal amount of $100.0 million (the “Term Loan”), and (b) a revolving credit facility (the “Credit Facility”) of up to a maximum of $5.0 million in borrowings outstanding at any time. We granted a security interest on substantially all of our assets to secure the obligations under the Term Loan and the Credit Facility. The Term Loan requires us to use 50% of excess cash flow, as defined in the Financing Agreement, to repay outstanding principal of the loans under the Financing Agreement. The Financing Agreement contains customary representations and warranties, covenants, mandatory prepayments, and events of default under which our payment obligations may be accelerated.
On November 9, 2017, we entered into an amendment and borrowed an additional $15.0 million term loan and increased the amount available under the Credit Facility by $5.0 million.
On May 10, 2018, we entered into an amendment to the Financing Agreement, which extended the maturity of the Financing Agreement to May 2023, and increased the Term Loan by $22.7 million and the amount available under the Credit Facility by $12.5 million, for an aggregate amount available of $22.5 million.
On April 8, 2019, we entered into an amendment to the Financing Agreement. The amendment provided for an additional delayed draw term loan commitment in the aggregate principal amount of $100.0 million (the “Delayed Draw Funds”) for the purpose of funding the purchase of a portion of Notes in the Offer described below. On May 2, 2019, we received the Delayed Draw Funds under the Financing Agreement. We used $72.7 million of the Delayed Draw Funds for the purchase of a portion of our Notes, $0.6 million for the Notes interest payment, and $6.0 million for the payment of refinancing fees. On June 18, 2019, we repaid $20.7 million of the Delayed Draw Funds. The $79.3 million Delayed Draw Funds borrowed and that remain outstanding will mature on May 10, 2023 under the terms of the Financing Agreement. The amendment also modified the covenant that requires us to maintain a leverage ratio (defined to mean the ratio of (a) the sum of indebtedness under the Term Loan and Credit Facility and non-cash collateralized letters of credit to (b) consolidated EBITDA under the Term Loan and Credit Facility) based on the level of availability of our Credit Facility plus unrestricted cash on-hand. The Financing Agreement amendment effective April 8, 2019 was accounted for as a debt modification, and therefore, $1.6 million of the refinancing fees paid directly to the Lenders was recorded as deferred debt issuance costs, and $4.4 million of the refinancing fees paid to the third parties was expensed.
On May 7, 2020, we entered into an amendment to the Financing Agreement. The amendment modified certain definitions in the Financing Agreement to reflect our incurrence of a loan under the PPP.
On May 19, 2020, we entered into an amendment to the Financing Agreement. The amendment increased the applicable margin with respect to the interest rate of reference rate loans from 5.25% to 5.75% and of LIBOR rate loans from 6.25% to 6.75%. The amendment also increased the leverage ratio that the Company is required to maintain such that following the effective date of this amendment, the Company is required to maintain a leverage ratio of no greater than 6.00:1.00 for each of the quarters ending June 30, 2020 and September 30, 2020, 5.75:1.00 for each of the quarters ending December 31, 2020 and March 31, 2021, 5.25:1.00 for the quarter ending June 30, 2021, 5.00:1.00 for the quarter ending September 30, 2021, 4.50:1.00 for the quarter ending December 31, 2021, 4.30:1.00 for the quarter ending March 31, 2022, 4.00:1.00 for each of the quarters ending June 30, 2022 and September 30, 2022, and 3.75:1.00 for each of the quarters ending December 31, 2022 and March 31, 2023. The amendment also resets the prepayment premium to 1.5% of the principal amount of the loans prepaid through the end of 2020, 0.5% of the principal amount of the loans prepaid through the end of 2021, and 0.0% thereafter.
We recorded $3.8 million and $12.2 million of interest expense on the Term Loan during the three and nine months ended September 30, 2020, respectively. We recognized $0.4 million and $0.8 million of interest expense related to the Credit Facility during the three and nine months ended September 30, 2020, respectively. We were in compliance with the Financing Agreement covenants as of September 30, 2020.
At June 30, 2020, we had $22.0 million outstanding under the Credit Facility. During September 2020, we repaid the outstanding balance of $22.0 million under the Credit Facility, and as of September 30, 2020 no amounts were drawn under the facility.
PPP Loan
On May 11, 2020, the Company received $7.8 million of proceeds in connection with its incurrence of a loan under the PPP which was created through the Coronavirus Aid, Relief, and Economic Act (“CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). The application for these funds requires the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria. The loan has a fixed interest rate of 1% and matures in two years. Interest payments are deferred for six months. We recognized an immaterial amount of interest expense related to the loan during the three months ended September 30, 2020.
Pursuant to the CARES Act and implementing rules and regulations, the Company may apply to the SBA for the PPP loan to be forgiven in whole or in part beginning no sooner than seven weeks from the date of initial disbursement. The Company intends to use the proceeds of the PPP loan for purposes consistent with the PPP. While the Company currently believes that its use of the loan proceeds will meet the conditions for forgiveness of the loan, the Company cannot assure
that it will be eligible for forgiveness of the loan, in whole or in part. Any PPP loan balance remaining following forgiveness by the SBA will be fully re-amortized over the remaining term of the loan.
2.00% Convertible Senior Notes due 2020 (“Notes”)
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.
During 2017, we purchased 2,000 of our 125,000 outstanding Notes and settled $2.0 million of the Notes for $1.7 million in cash. We recorded $2.0 million extinguishment of debt, an immaterial amount of equity reacquisition, and an immaterial loss on the extinguishment of debt.
During 2018, we purchased an additional 16,247 of our 123,000 outstanding Notes and settled another $16.2 million of the Notes for $14.7 million in cash. We recorded $16.2 million extinguishment of debt, an immaterial amount of equity reacquisition, and an immaterial gain on the extinguishment of debt.
On January 22, 2019, we purchased an additional 3,900 of our 106,753 outstanding Notes and settled another $3.9 million of the Notes for $3.6 million in cash. We recorded $3.9 million extinguishment of debt, an immaterial amount of equity reacquisition, and an immaterial gain on the extinguishment of debt.
On April 11, 2019, we announced the commencement of a cash tender offer (the “Offer”) for any and all of our outstanding Notes. On May 9, 2019, as of the expiration of the Offer, Notes with an aggregate principal amount of $74.0 million were validly tendered. We accepted for purchase all Notes that were validly tendered at the expiration of the Offer at a purchase price equal to $982.50 per $1,000 principal amount of Notes, and settled the Offer on May 13, 2019 for $72.7 million in cash. We repurchased 73,986 Notes, recorded $74.0 million extinguishment of debt, $0.6 million of equity reacquisition, and $2.9 million loss on the extinguishment of debt. In connection with the Offer, the number of options under the Capped Call was reduced to 28,867 to mirror the remaining principal outstanding for the Notes, and an immaterial partial unwind cash payment was received in May 2019.
On June, 15, 2020, the maturity date of the Notes, we fully repaid the outstanding principal and unpaid interest on the Notes. The Notes paid interest semi-annually on June 15 and December 15 of each year at an annual rate of 2.00%. Total interest expense for the nine months ended September 30, 2020 was $1.0 million, reflecting the coupon and accretion of the discount.
11. STOCKHOLDERS’ EQUITY
Stock-Based Compensation
Information with respect to option shares granted under all of our stock incentive plans for the nine months ended September 30, 2020 was as follows:
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Time-Based Shares
|
Performance-Based Shares
|
Total Shares
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average
Remaining
Contractual
Term (years)
|
Aggregate
Intrinsic
Value
(in thousands)
|
Options outstanding at January 1, 2020
|
565,000
|
|
—
|
|
565,000
|
|
$7.57
|
|
|
Granted
|
—
|
|
—
|
|
—
|
|
$—
|
|
|
Exercised
|
(175,355)
|
|
—
|
|
(175,355)
|
|
$7.73
|
|
|
Forfeited or canceled
|
—
|
|
—
|
|
—
|
|
$—
|
|
|
Options outstanding at September 30, 2020
|
389,645
|
|
—
|
|
389,645
|
|
$7.51
|
0.54
|
$413
|
Options vested at September 30, 2020 or expected to vest
|
|
|
389,645
|
|
$7.51
|
0.54
|
$413
|
Options exercisable at September 30, 2020
|
|
|
389,645
|
|
$7.51
|
0.54
|
$413
|
Information with respect to our non-vested restricted stock units for the nine months ended September 30, 2020 was as follows:
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|
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|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
Non-Vested Restricted Stock Units
|
|
Time-Based Shares
|
Performance-Based Shares
|
Total Shares
|
Weighted-
Average
Grant-Date
Fair Value
|
Weighted-
Average
Remaining
Contractual
Term (years)
|
Aggregate
Intrinsic
Value
(in thousands)
|
Non-vested at January 1, 2020
|
2,087,933
|
|
554,265
|
|
2,642,198
|
|
$6.40
|
|
|
Granted
|
1,424,480
|
|
578,316
|
|
2,002,796
|
|
$6.92
|
|
|
Vested
|
(991,552)
|
|
(328,673)
|
|
(1,320,225)
|
|
$6.23
|
|
|
Forfeited
|
(104,473)
|
|
—
|
|
(104,473)
|
|
$7.16
|
|
|
Non-vested at September 30, 2020
|
2,416,388
|
|
803,908
|
|
3,220,296
|
|
$6.77
|
1.03
|
$27,534
|
Expected to vest
|
|
|
3,220,296
|
|
$6.77
|
1.03
|
$27,534
|
Stock-based compensation was included in the following captions in our condensed consolidated statements of operations for the nine months ended September 30, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Cost of products revenues
|
$
|
150
|
|
|
$
|
103
|
|
|
$
|
370
|
|
|
$
|
244
|
|
Cost of services revenues
|
283
|
|
|
82
|
|
|
539
|
|
|
177
|
|
Research and development expenses
|
546
|
|
|
305
|
|
|
1,199
|
|
|
762
|
|
Marketing and selling expenses
|
739
|
|
|
532
|
|
|
1,761
|
|
|
1,276
|
|
General and administrative expenses
|
1,579
|
|
|
1,023
|
|
|
4,263
|
|
|
3,329
|
|
|
$
|
3,297
|
|
|
$
|
2,045
|
|
|
$
|
8,132
|
|
|
$
|
5,788
|
|