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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________

Commission File Number:  1-36254
__________________
Avid Technology, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 04-2977748
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
75 Network Drive
Burlington Massachusetts 01803
   Address of Principal Executive Offices, Including Zip Code
(978) 640-6789
Registrant's Telephone Number, Including Area Code
__________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.01 par value AVID Nasdaq Global Select Market
Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No ¨
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes x   No ¨ 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 under the Exchange Act.
Large accelerated filer
o
Accelerated filer
x
Non-accelerated filer  
o
Smaller reporting company
o
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 under the Exchange Act).  
Yes ☐   No x
The number of shares outstanding of the registrant’s Common Stock, as of November 5, 2021, was 45,021,985.



AVID TECHNOLOGY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2021

TABLE OF CONTENTS
  Page
     
1
2
3
4
6
7
   
   
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
   




CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

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

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

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

our business strategies and market positioning;

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

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

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

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

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

the anticipated performance of our products;

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

our plans regarding repatriation of foreign earnings;

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

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

our compliance with covenants contained in the agreements governing our indebtedness;

our ability to service our debt and meet the obligations thereunder;

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




fluctuations in foreign exchange and interest rates;
the risk of restatement of our financial statements;

estimated asset and liability values;

our ability to protect and enforce our intellectual property rights; and

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

Actual results and events in future periods may differ materially from those expressed or implied by forward-looking statements in this Form 10-Q. There are a number of factors that could cause actual events or results to differ materially from those indicated or implied by forward-looking statements, many of which are beyond our control, including the risk factors discussed herein and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020, in Part II, Item 1A of this Quarterly Report on Form 10-Q, and in other documents we file from time to time with the U.S. Securities and Exchange Commission (“SEC”). In addition, the forward-looking statements contained in this Form 10-Q represent our estimates only as of the date of this filing and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update these forward-looking statements in the future, we specifically disclaim any obligation to do so, whether to reflect actual results, changes in assumptions, changes in other factors affecting such forward-looking statements, or otherwise.

We own or have rights to trademarks and service marks that we use in connection with the operation of our business.  “Avid” is a trademark of Avid Technology, Inc. Other trademarks, logos, and slogans registered or used by us and our subsidiaries in the United States and other countries include, but are not limited to, the following: Avid, Avid NEXIS, AirSpeed, FastServe, MediaCentral, Media Composer, Pro Tools, and Sibelius. Other trademarks appearing in this Form 10-Q are the property of their respective owners.





PART I - FINANCIAL INFORMATION

ITEM 1.    UNAUDITED FINANCIAL STATEMENTS

AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data, unaudited)
Three Months Ended Nine Months Ended
  September 30, September 30,
  2021 2020 2021 2020
Net revenues:    
Products $ 36,850  $ 35,775  $ 107,295  $ 98,121 
Services 64,790  54,656  183,585  158,044 
Total net revenues 101,640  90,431  290,880  256,165 
Cost of revenues:    
Products 20,468  20,957  60,044  58,873 
Services 15,269  11,217  43,379  34,322 
Total cost of revenues 35,737  32,174  103,423  93,195 
Gross profit 65,903  58,257  187,457  162,970 
Operating expenses:    
Research and development 17,129  13,623  48,639  42,116 
Marketing and selling 24,413  19,998  66,511  64,977 
General and administrative 14,901  10,796  42,214  34,144 
Restructuring costs, net (88) 723  1,001  1,008 
Total operating expenses 56,355  45,140  158,365  142,245 
Operating income 9,548  13,117  29,092  20,725 
Interest expense, net (1,646) (4,566) (5,547) (15,437)
Other income, net 7,864  143  4,459  233 
Income before income taxes 15,766  8,694  28,004  5,521 
Provision for income taxes 991  707  1,832  1,546 
Net income $ 14,775  $ 7,987  $ 26,172  $ 3,975 
Net income per common share – basic $0.32 $0.18 $0.58 $0.09
Net income per common share – diluted $0.32 $0.18 $0.56 $0.09
Weighted-average common shares outstanding – basic 45,564  44,019  45,115  43,665 
Weighted-average common shares outstanding – diluted 46,428  44,758  46,449  44,498 
The accompanying notes are an integral part of the condensed consolidated financial statements.
1


AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, unaudited)
Three Months Ended Nine Months Ended
  September 30, September 30,
  2021 2020 2021 2020
Net income $ 14,775  $ 7,987  $ 26,172  $ 3,975 
Other comprehensive (loss) income:
Foreign currency translation adjustments (738) 995  (1,980) 1,114 
Comprehensive income $ 14,037  $ 8,982  $ 24,192  $ 5,089 
The accompanying notes are an integral part of the condensed consolidated financial statements.


2


AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, unaudited)
September 30,
2021
December 31,
2020
ASSETS    
Current assets:    
Cash and cash equivalents $ 50,485  $ 79,899 
Restricted cash
1,422  1,422 
Accounts receivable, net of allowances of $1,422 and $1,478 at September 30, 2021 and December 31, 2020, respectively 58,125  78,614 
Inventories 22,215  26,568 
Prepaid expenses 6,766  6,044 
Contract assets 22,612  18,579 
Other current assets 2,335  2,366 
Total current assets 163,960  213,492 
Property and equipment, net 15,211  16,814 
Goodwill 32,643  32,643 
Right of use assets 25,202  29,430 
Deferred tax assets, net 5,413  6,801 
Other long-term assets 6,462  5,958 
Total assets $ 248,891  $ 305,138 
LIABILITIES AND STOCKHOLDERS’ DEFICIT    
Current liabilities:    
Accounts payable $ 22,413  $ 21,823 
Accrued compensation and benefits 26,320  29,105 
Accrued expenses and other current liabilities 34,511  42,264 
Income taxes payable 1,447  1,664 
Short-term debt 9,159  4,941 
Deferred revenue 76,658  87,974 
Total current liabilities 170,508  187,771 
Long-term debt 162,990  202,759 
Long-term deferred revenue 10,109  11,284 
Long-term lease liabilities 24,466  28,462 
Other long-term liabilities 7,249  7,786 
Total liabilities 375,322  438,062 
Commitments and contingencies (Note 7)
Stockholders’ deficit:
Common stock, par value $0.01; authorized: 100,000 shares; issued: 45,693 shares at September 30, 2021 and 44,420 shares at December 31, 2020; outstanding: 45,281 shares at September 30, 2021 and 44,420 shares at December 31, 2020 454  442 
Treasury stock (11,169) — 
Additional paid-in capital 1,030,116  1,036,658 
Accumulated deficit (1,142,175) (1,168,347)
Accumulated other comprehensive loss (3,657) (1,677)
Total stockholders’ deficit (126,431) (132,924)
Total liabilities and stockholders’ deficit $ 248,891  $ 305,138 
The accompanying notes are an integral part of the condensed consolidated financial statements.
3


AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
(in thousands, unaudited)
Nine Months Ended September 30, 2021
  Shares of
Common Stock
  Additional     Accumulated
Other
Total
  Issued In
Treasury
Common
Stock
Paid-in
Capital
Accumulated
Deficit
Treasury
Stock
Comprehensive
Loss
Stockholders’
Deficit
Balances at January 1, 2021 44,420 442 1,036,658 (1,168,347) (1,677) (132,924)
Stock issued pursuant to employee stock plans 592 (7,712) (7,706)
Stock-based compensation 3,122 3,122
Net income 4,391 4,391
Other comprehensive loss (1,457) (1,457)
Balances at March 31, 2021 45,012 448  1,032,068  (1,163,956) (3,134) (134,574)
Stock issued pursuant to employee stock plans 513 4 (5,973) (5,969)
Stock-based compensation 3,580 3,580
Net income 7,006 7,006
Other comprehensive income 215 215
Balances at June 30, 2021 45,525 452 1,029,675 (1,156,950) (2,919) (129,742)
Stock issued pursuant to employee stock plans 168 2 (3,073) (3,071)
Repurchase of common stock (412) (11,169) (11,169)
Stock-based compensation 3,514 3,514
Net income 14,775 14,775
Other comprehensive loss (738) (738)
Balances at September 30, 2021 45,693 (412) 454 1,030,116 (1,142,175) (11,169) (3,657) (126,431)

4


Nine Months Ended September 30, 2020
  Shares of
Common Stock
  Additional     Accumulated
Other
Total
  Issued In
Treasury
Common
Stock
Paid-in
Capital
Accumulated
Deficit
Treasury
Stock
Comprehensive
Loss
Stockholders’
Deficit
Balances at January 1, 2020 43,150 430 1,027,824 (1,179,409) (3,930) (155,085)
Stock issued pursuant to employee stock plans 398 4 (1,818) (1,814)
Stock-based compensation 2,109 2,109
Net loss (5,857) (5,857)
Other comprehensive loss (815) (815)
Balances at March 31, 2020 43,548 434 1,028,115 (1,185,266) (4,745) (161,462)
Stock issued pursuant to employee stock plans 368 —  (538) —  —  —  (535)
Stock-based compensation —  —  —  2,726  —  —  —  2,726
Net income —  —  —  —  1,845  —  —  1,845
Other comprehensive income —  —  —  —  —  —  934  934
Balances at June 30, 2020 43,916 437 1,030,303 (1,183,421) (3,811) (156,492)
Stock issued pursuant to employee stock plans 207 2 (1) 1
Stock-based compensation 3,297 3,297
Net income 7,987 7,987
Other comprehensive income 995 995
Balances at September 30, 2020 44,123 439 1,033,599 (1,175,434) (2,816) (144,212)

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

5


AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
Nine Months Ended
  September 30,
  2021 2020
Cash flows from operating activities:    
Net income $ 26,172  $ 3,975 
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization 6,323  6,317 
Allowance for doubtful accounts 401  1,349 
Stock-based compensation expense 10,216  8,132 
Non-cash provision for restructuring 841  653 
Non-cash interest expense 386  3,408 
Loss on extinguishment of debt 2,579  — 
Gain on forgiveness of PPP loan (7,800) — 
Unrealized foreign currency transaction (gains) losses (1,400) 219 
Benefit from deferred taxes 1,388  997 
Changes in operating assets and liabilities:    
Accounts receivable 20,089  12,741 
Inventories 4,353  788 
Prepaid expenses and other assets (1,343) 1,390 
Accounts payable 590  (26,440)
Accrued expenses, compensation and benefits and other liabilities (10,635) 7,752 
Income taxes payable (217) 81 
Deferred revenue and contract assets (16,525) (12,519)
Net cash provided by operating activities 35,418  8,843 
Cash flows from investing activities:    
Purchases of property and equipment (4,750) (5,619)
Net cash used in investing activities (4,750) (5,619)
Cash flows from financing activities:    
Proceeds from revolving line of credit —  22,000 
Repayment on revolving line of credit —  (22,000)
Proceeds from long-term debt 180,000  7,800 
Repayment of debt (208,142) (1,474)
Payments for repurchase of common stock (10,526) — 
Payments for repurchase of outstanding notes —  (28,867)
Proceeds from the issuance of common stock under employee stock plans 363  252 
Common stock repurchases for tax withholdings for net settlement of equity awards (17,108) (2,610)
Unwind capped call cash receipt —  875 
Prepayment penalty on extinguishment of debt (1,169) — 
Payments for credit facility issuance costs (2,574) (289)
Net cash used in financing activities (59,156) (24,313)
Effect of exchange rate changes on cash, cash equivalents and restricted cash (927) 1,394 
Net decrease in cash, cash equivalents and restricted cash (29,415) (19,695)
Cash, cash equivalents and restricted cash at beginning of period 83,638  72,575 
Cash, cash equivalents and restricted cash at end of period 54,223  52,880 
Supplemental information:
Cash and cash equivalents $ 50,485  $ 49,142 
Restricted cash $ 1,422  $ 1,664 
Restricted cash included in other long-term assets $ 2,316  $ 2,074 
Total cash, cash equivalents and restricted cash shown in the statement of cash flows $ 54,223  $ 52,880 
Cash paid (refunded) for income taxes $ 706  $ (659)
Cash paid for interest $ 6,354  $ 13,579 
The accompanying notes are an integral part of the condensed consolidated financial statements.
6


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

1.    FINANCIAL INFORMATION

The accompanying condensed consolidated financial statements include the accounts of Avid Technology, Inc. and its wholly owned subsidiaries (collectively, “we” or “our”). These financial statements are unaudited. However, in the opinion of management, the condensed consolidated financial statements reflect all normal and recurring adjustments necessary for their fair statement. Interim results are not necessarily indicative of results expected for any other interim period or a full year. We prepared the accompanying unaudited condensed consolidated financial statements in accordance with the instructions for Form 10-Q and, therefore, include all information and footnotes necessary for a complete presentation of operations, comprehensive income, financial position, changes in stockholders’ deficit, and cash flows in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying condensed consolidated balance sheet as of December 31, 2020 was derived from our audited consolidated financial statements and does not include all disclosures required by U.S. GAAP for annual financial statements. We filed audited consolidated financial statements as of and for the year ended December 31, 2020 in our Annual Report on Form 10-K for the year ended December 31, 2020, which included information and footnotes necessary for such presentation. The financial statements contained in this Form 10-Q should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020.

The consolidated results of operations for the three or nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2021. The Company’s results of operations are affected by economic conditions, including macroeconomic conditions and levels of business and consumer confidence.

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

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

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

Through 2021, our results have shown a gradual recovery towards pre-pandemic spending levels with the continuing positive signs of recovery from the impacts of the COVID-19 pandemic driven by vaccination and government stimulus programs, particularly in the United States. At the same time, certain countries continue to face challenges with renewed lockdowns and travel restrictions and there remains uncertainty relating to the ongoing spread and severity of the virus and its variants. While we are encouraged by the trends we have seen so far in 2021, to the extent that the pandemic continues to have negative impacts on economies, our results could be affected and uneven. Consequently, we will continue to evaluate our financial position in light of future developments, particularly those relating to COVID-19.

Our preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from our estimates.
7



Significant Accounting Policies - Revenue Recognition

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

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

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

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

On January 1, 2021, we adopted ASU 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 is intended to enhance and simplify aspects of the income tax accounting guidance in ASC 740 as part of the FASB's simplification initiative. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2020 with early adoption permitted. Our adoption of ASU 2019-12 did not have a material impact on our consolidated financial statements.

Recent Accounting Pronouncements To Be Adopted

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

2.    NET INCOME PER SHARE

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

8


The following table sets forth (in thousands) potential common shares that were considered anti-dilutive securities at September 30, 2021 and 2020:
  September 30, 2021 September 30, 2020
Options —  390 
Non-vested restricted stock units 930  3,220 
Anti-dilutive potential common shares 930  3,610 

The following table sets forth (in thousands) the basic and diluted weighted common shares outstanding for the three and nine months ended September 30, 2021:

Three months ended Nine month ended
September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020
Weighted common shares outstanding - basic 45,564  44,019  45,115  43,665 
Net effect of common stock equivalents 864  739  1,334  833 
Weighted common shares outstanding - diluted 46,428  44,758  46,449  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, 2021 and December 31, 2020, our deferred compensation investments were classified as either Level 1 or Level 2 in the fair value hierarchy. Assets valued using quoted market prices in active markets and classified as Level 1 are money market and mutual funds. Assets valued based on other observable inputs and classified as Level 2 are insurance contracts.

The following tables summarize our deferred compensation investments measured at fair value on a recurring basis (in thousands):
    Fair Value Measurements at Reporting Date Using
  September 30,
2021
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs
(Level 3)
Financial assets:        
Deferred compensation assets $ 372  $ 99  $ 273  $ — 
    Fair Value Measurements at Reporting Date Using
  December 31, 2020 Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs
(Level 3)
Financial assets:        
Deferred compensation assets $ 522  $ 282  $ 240  $ — 

Financial Instruments Not Recorded at Fair Value

9


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):
  September 30, 2021 December 31, 2020
Raw materials $ 6,710  $ 8,223 
Work in process 304  353 
Finished goods 15,201  17,992 
Total $ 22,215  $ 26,568 

As of September 30, 2021 and December 31, 2020, finished goods inventory included $1.6 million and $1.2 million, respectively, associated with products shipped to customers and deferred labor costs for arrangements where revenue recognition had not yet commenced.


5.    LEASES

We have entered into a number of facility leases to support our research and development activities, sales operations, and other corporate and administrative functions in North America, Europe, and Asia, which qualify as operating leases under U.S. GAAP. We also have a limited number of equipment leases that qualify as either operating or finance leases. We determine if contracts with vendors represent a lease or have a lease component under U.S. GAAP at contract inception. Our leases have remaining terms ranging from less than one year to seven years. Some of our leases include options to extend or terminate the lease prior to the end of the agreed upon lease term. For purposes of calculating lease liabilities, lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise such options.

Operating lease right of use assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the lease commencement date. As our leases generally do not provide an implicit rate, we use an estimated incremental borrowing rate in determining the present value of future payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular location and currency environment. As of September 30, 2021, the weighted average incremental borrowing rate was 6.0% and the weighted average remaining lease term was 6.0 years.

Finance lease right of use assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the lease commencement date. Each lease agreement provides an implicit discount rate used to determine the present value of future payments. As of September 30, 2021, the weighted-average discount rate was 2.3% and the weighted average remaining lease term was 2.0 years.

Lease costs for minimum lease payments is recognized on a straight-line basis over the lease term. Our total operating lease costs were $1.7 million and $2.2 million for the three months ended September 30, 2021 and September 30, 2020, respectively, and $5.4 million and $7.2 million for the nine months ended September 30, 2021 and September 30, 2020, respectively. Related cash payments were $1.9 million and $2.0 million for the three months ended September 30, 2021 and September 30, 2020, respectively, and were $5.8 million and $6.9 million for the nine months ended September 30, 2021 and September 30, 2020, respectively. Short term lease costs were $0.4 million and $1.0 million for the three and nine months ended September 30, 2021, respectively. Short term lease costs for the three and nine months ended September 30, 2020 were immaterial. 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, variable lease costs, and sublease income are not material.
10



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, 2021 (in thousands):
Year Ending December 31, Operating Leases Finance Leases
2021 (excluding nine months ended September 30, 2021) $ 1,847  $ 167 
2022 6,549  255 
2023 5,613  226 
2024 4,942  — 
2025 5,031  — 
Thereafter 11,695  — 
Total future minimum lease payments $ 35,677  $ 648 
Less effects of discounting (6,004) (13)
Total lease liabilities $ 29,673  $ 635 

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

Operating Leases
September 30, 2021
Right of use assets $ 25,202 
Accrued expenses and other current liabilities (5,207)
Long-term lease liabilities (24,466)
     Total lease liabilities $ (29,673)


Finance Leases
September 30, 2021
Other assets $ 490 
Accrued expenses and other current liabilities (246)
Other long-term liabilities (389)
     Total lease liabilities $ (635)

6.    OTHER LONG-TERM LIABILITIES

Other long-term liabilities consisted of the following (in thousands):
  September 30, 2021 December 31, 2020
Deferred compensation $ 5,407  $ 5,818 
Finance lease liabilities 389  472 
Other long-term liabilities 1,453  1,496 
   Total $ 7,249  $ 7,786 


11


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 $9.2 million of products and services pursuant to this agreement as of September 30, 2021.

We have letters of credit that are used as security deposits in connection with our leased Burlington, Massachusetts office space. In the event of default on the underlying leases, the landlords would, at September 30, 2021, be eligible to draw against the letters of credit to a maximum of $0.7 million in the aggregate. The letters of credit are subject to aggregate reductions provided that we are not in default under the underlying leases and meet certain financial performance conditions. In no case will the letters of credit amounts for the Burlington leases be reduced to below $0.7 million in the aggregate throughout the lease periods.

We also have letters of credit in connection with security deposits for other facility leases totaling $0.6 million in the aggregate, as well as letters of credit totaling $1.9 million that otherwise support our ongoing operations. These letters of credit have various terms and expire during 2021 and beyond, while some of the letters of credit may automatically renew based on the terms of the underlying agreements.

Substantially all of our letters of credit are collateralized by restricted cash included in the caption “Restricted cash” and “Other long-term assets” on our condensed consolidated balance sheets as of September 30, 2021.

Contingencies

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

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

On July 14, 2020, we sent a notice to a customer demanding sums that we believe are due to Avid pursuant to a contract. On October 7, 2020, the customer sent a notice to us denying any legal liability and demanding payment for breach of contract resulting from various alleged delays by us. While we intend to defend any claim vigorously when and if a claim is actually filed, we are currently unable to estimate an amount or range of any reasonably possible losses that could occur related to this matter.

We consider all claims on a quarterly basis and based on known facts assess whether potential losses are considered reasonably possible, probable, and estimable. Based upon this assessment, we then evaluate disclosure requirements and whether to accrue for such claims in our condensed consolidated financial statements. We record a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case.
12



At September 30, 2021 and as of the date of filing of these condensed consolidated financial statements, we believe that, other than as set forth in this note, no provision for liability nor disclosure is required related to any claims because: (a) there is no reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claim, (b) a reasonably possible loss or range of loss cannot be estimated, or (c) such estimate is immaterial.

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

We provide warranties on externally sourced and internally developed hardware. For internally developed hardware, and in cases where the warranty granted to customers for externally sourced hardware is greater than that provided by the manufacturer, we record an accrual for the related liability based on historical trends and actual material and labor costs. The following table sets forth the activity in the product warranty accrual account for the nine months ended September 30, 2021 and 2020 (in thousands):
Nine Months Ended September 30,
2021 2020
Accrual balance at beginning of period $ 1,095  $ 1,337 
Accruals for product warranties 988  1,030 
Costs of warranty claims (900) (1,003)
Accrual balance at end of period $ 1,183  $ 1,364 

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

8.    RESTRUCTURING COSTS AND ACCRUALS

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

During the three months ended September 30, 2021, we recorded recoveries of $0.1 million due to employee severance cost adjustments. During the nine months ended September 30, 2021, we recorded restructuring charges of $1.0 million for employee severance costs related to approximately 24 positions eliminated throughout 2021.

During the three months and nine months ended September 30, 2020, we recorded restructuring charges of $0.7 million and $1.0 million, respectively, for employee severance costs.

13


The following table sets forth the activity in the restructuring accruals for the nine months ended September 30, 2021 (in thousands):
  Employee
Accrual balance as of December 31, 2020 $ 3,687 
Restructuring charges and revisions 838 
Cash payments (3,778)
Foreign exchange impact on ending balance (24)
Accrual balance as of September 30, 2021 $ 723 

The employee restructuring accrual at September 30, 2021 represents severance costs to former employees that will be paid out within 12 months, and is, therefore, included in the caption “accrued expenses and other current liabilities” in our condensed consolidated balance sheets as of September 30, 2021.


9.    REVENUE

Disaggregated Revenue and Geography Information

Through the evaluation of the discrete financial information that is regularly reviewed by the chief operating decision makers (our chief executive officer and chief financial officer), we have determined that we have one reportable segment.

The following table is a summary of our revenues by type for the three and nine months ended September 30, 2021 and 2020 (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
  2021 2020 2021 2020
Products and solutions net revenues $ 36,850  $ 35,775  $ 107,295  $ 98,121 
Subscription services 28,008  17,907  74,384  48,292 
Maintenance 30,702  30,826  90,997  93,190 
Professional services, training and other services 6,080  5,923  18,204  16,562 
Total net revenues $ 101,640  $ 90,431  $ 290,880  $ 256,165 

The following table sets forth our revenues by geographic region for the three and nine months ended September 30, 2021 and 2020 (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
  2021 2020 2021 2020
Revenues:    
United States $ 45,026  $ 36,190  $ 126,084  $ 105,166 
Other Americas 5,222  4,505  15,030  15,841 
Europe, Middle East and Africa 38,782  37,537  109,400  99,478 
Asia-Pacific 12,610  12,199  40,366  35,680 
Total net revenues $ 101,640  $ 90,431  $ 290,880  $ 256,165 

Contract Asset

Contract asset activity for the nine months ended September 30, 2021 and 2020 was as follows (in thousands):
14


September 30, 2021 September 30, 2020
Contract asset at beginning of year $ 18,579  $ 19,494 
Revenue in excess of billings 43,757  22,045 
Customer billings (39,724) (26,263)
Contract asset at end of period $ 22,612  $ 15,276 


Deferred Revenue

Deferred revenue activity for the nine months ended September 30, 2021 and 2020 was as follows (in thousands):
September 30, 2021 September 30, 2020
Deferred revenue at beginning of period $ 99,258  $ 97,901 
Billings deferred 56,846  47,723 
Recognition of prior deferred revenue (69,337) (64,460)
Deferred revenue at end of period $ 86,767  $ 81,164 

A summary of the significant performance obligations included in deferred revenue is as follows (in thousands):
September 30, 2021
Product $ 4,364 
Subscription 7,380 
Maintenance contracts 66,676 
Implied PCS 6,400 
Professional services, training and other 1,947 
Deferred revenue at September 30, 2021
$ 86,767 

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 $6.4 million attributable to Implied PCS recorded in deferred revenue as of September 30, 2021. We expect to recognize revenue for these remaining performance obligations of $0.7 million for the remainder of 2021 and $2.2 million, $1.5 million, $1.0 million and $0.6 million for the years ending December 31, 2022, 2023, 2024, and 2025, respectively, and $0.4 million thereafter.

As of September 30, 2021, we had approximately $40.7 million of transaction price allocated to remaining performance obligations for certain enterprise agreements that have not yet been fully invoiced. Approximately $32.0 million of these performance obligations were unbilled as of September 30, 2021. Remaining performance obligations represent obligations
15


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 $40.7 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):
September 30, 2021 December 31, 2020
Term Loan, net of unamortized issuance costs and debt discount of $2,188 and $2,579 at September 30, 2021 and December 31, 2020, respectively $ 171,062  $ 198,629 
PPP loan —  7,800 
Other long-term debt 1,087  1,271 
    Total debt $ 172,149  $ 207,700 
Less: current portion 9,159  4,941 
Total long-term debt $ 162,990  $ 202,759 

The following table summarizes the contractual maturities of our borrowing obligations as of September 30, 2021 (in thousands):
Fiscal Year Credit Agreement Other Long-Term Debt Total
2021 $ 2,250  39  $ 2,289 
2022 9,000  162  9,162 
2023 13,500  174  13,674 
2024 18,000  186  18,186 
2025 18,000  200  18,200 
Thereafter 112,500  326  112,826 
Total before unamortized discount
173,250  1,087  174,337 
Less: unamortized discount and issuance costs 2,188  —  2,188 
Less: current portion of long-term debt
9,000  159  9,159 
Total long-term debt $ 162,062  $ 928  $ 162,990 


Credit Agreement

On January 5, 2021, the Company entered into a Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. as collateral and administrative agent, and a syndicate of banks, as lenders thereunder (the “Lenders”). Pursuant to the Credit Agreement, the Lenders agreed to provide the Company with (a) a term loan in the aggregate principal amount of $180.0 million (the “Term Loan”) and (b) a revolving credit facility (the “Credit Facility”) of up to a maximum of $70.0 million in borrowings outstanding at any time. The Credit Facility, which was undrawn at closing, can be used for working capital, other general corporate purposes and for other permitted uses. The proceeds from the Term Loan, plus available cash on hand, were used to repay outstanding borrowings of $201 million under the Company’s prior financing
16


agreement with Cerberus Business Finance, LLC ( the “Financing Agreement”), which was then terminated. As a result of this termination, the Company incurred a loss on extinguishment of debt of $3.7 million as a result of writing off $2.6 million of remaining unamortized issuance costs as well as a $1.1 million prepayment penalty.

The Term Loan has an initial interest rate of LIBOR plus an applicable margin of 3.00%, with a 0.25% LIBOR floor. The applicable margin on the Term Loan and the Credit Facility ranges from 2.00% to 3.25%, depending on leverage. The effective interest rate for the three months ended September 30, 2021 was 2.86%.

The Term Loan requires quarterly principal payments which commenced in March 2021 equal to 5.0% of the original principal amount of the Term Loan in years one and two, 7.5% of the original principal amount of the Term Loan in year three, and 10% of the original principal amount of the Term Loan in years four and five, with the remaining aggregate principal amount due at maturity.

The Company granted a security interest on substantially all of its assets to secure the obligations under the Credit Facility and the Term Loan.

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

In connection with the Credit Agreement, the Company incurred $2.5 million of issuance discounts and an immaterial amount of issuance costs. The Term Loan discount and issuance costs will be amortized over the five year life of the Credit Agreement. We recorded $1.3 million and $4.1 million of interest expense on the Term Loan for the three and nine months ended September 30, 2021, respectively. As of September 30, 2021, there were no amounts drawn under the Credit Facility.

PPP Loan

On May 11, 2020, the Company received $7.8 million of proceeds in connection with its incurrence of a loan under the Paycheck Protection Program (“PPP”) which was created through the Coronavirus Aid, Relief, and Economic Act (“CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). The application for these funds required the Company to, in good faith, certify that the economic uncertainty at the time of application made the loan request necessary to support the ongoing operations of the Company. This certification further required the Company to take into account its then-current business activity and ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The receipt of these funds, and the forgiveness of the loan attendant to these funds, was dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on its future adherence to the forgiveness criteria. On July 6, 2021, the Company received notification from the Lender that the SBA approved the Company’s PPP loan forgiveness application for the entire PPP loan balance of $7.8 million plus all accrued interest. The Company recorded the forgiveness of $7.8 million of principal as a gain on forgiveness of debt, included in the Statements of Operations as other income.

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11. STOCKHOLDERS’ EQUITY

Stock-Based Compensation

Information with respect to the Company’s option shares granted under all of our stock incentive plans for the nine months ended September 30, 2021 was as follows:
  Total Number of Options Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic
Value
(in thousands)
Options outstanding at January 1, 2021 246,000  $7.48    
Granted —     
Exercised (246,000) 7.48    
Forfeited or canceled —     
Options outstanding at September 30, 2021 —  — 

Information with respect to the Company’s non-vested restricted stock units for the nine months ended September 30, 2021 was as follows:
  Number of Restricted Stock Units Weighted-
Average
Grant-Date
Fair Value
Weighted-
Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic
Value
(in thousands)
Shares Retained to Cover Statutory Minimum Withholding Taxes
Non-vested at January 1, 2021 2,114,879  $7.01     — 
Granted 452,759  28.99     — 
Vested (1,269,341) 6.76     (414,070)
Forfeited (41,123) 9.25     — 
Outstanding at September 30, 2021 1,257,174  $15.09 0.92 $36,345
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Information with respect to the Company’s non-vested performance-based restricted stock units for the nine months ended September 30, 2021 was as follows:
  Number of Performance-based Restricted Stock Units Weighted-
Average
Grant-Date
Fair Value
Weighted-
Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic
Value
(in thousands)
Shares Retained to Cover Statutory Minimum Withholding Taxes
Non-vested at January 1, 2021 653,428  $6.74     — 
Granted 397,048  15.07     — 
Vested (471,112) 5.81     (196,703)
Forfeited —      — 
Non-vested at September 30, 2021 579,364  $13.20 1.04 $16,749


Stock-based compensation was included in the following captions in the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2021 and 2020 (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
  2021 2020 2021 2020
Share-based compensation expense by type:
Time-based Restricted Stock Units $ 2,507  $ 2,515  $ 7,528  $ 6,032 
Performance-based Restricted Stock Units 977  756  2,599  2,021 
ESPP 30  26  89  79 
Total share-based compensation expense $ 3,514  $ 3,297  $ 10,216  $ 8,132 
`

Three Months Ended September 30, Nine Months Ended September 30,
  2021 2020 2021 2020
Cost of products revenues $ 132  $ 150  $ 423  $ 370 
Cost of services revenues 311  283  938  539 
Research and development expenses 340  546  1,270  1,199 
Marketing and selling expenses 639  739  1,858  1,761 
General and administrative expenses 2,092  1,579  5,727  4,263 
Total share-based compensation expense $ 3,514  $ 3,297  $ 10,216  $ 8,132 

On September 9, 2021, our Board of Directors approved the repurchase of up to $115.0 million of our outstanding shares. This authorization does not have a prescribed expiration date. As of September 30, 2021, approximately $103.8 million of the $115.0 million share repurchase authorization remained available. The Company has no obligation to repurchase any amount of its common stock, and the program may be suspended or discontinued at any time. For the three months ended September 30, 2021, the Company repurchased 412,175 shares of its common stock for $11.2 million. These amounts may differ from the repurchases of common stock amounts in the condensed consolidated statements of cash flows due to unsettled share repurchases at the end of a period.



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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXECUTIVE OVERVIEW

Business Overview

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

Our mission is to empower media creators with innovative technology and collaborative tools to entertain, inform, educate, and enlighten the world. Our clients rely on Avid’s products and solutions to create prestigious and award-winning feature films, music recordings, television shows, live concerts, sporting events, and news broadcasts. Avid has been honored for technological innovation with 18 Emmy Awards, one Grammy Award, two Oscars, and the first ever America Cinema Editors Technical Excellence Award. In 2018, Avid was named the recipient of the prestigious Philo T. Farnsworth Award by the Television Academy to honor Avid’s 30 years of continuous, transformative technology innovations, including products that have improved and accelerated the editing and post production process for television.

Operations Overview

Our strategy for connecting creative professionals and media enterprises with audiences in a powerful, efficient, collaborative, and profitable way leverages our creative software tools, including Pro Tools for audio and Media Composer for video, and our MediaCentral Platform - the open, extensible, and customizable foundation that streamlines and simplifies content workflows by integrating all Avid or third-party products and services that run on top of it. The platform provides secure and protected access, and enables fast and easy creation, delivery, and monetization of content.

We work to ensure that we are meeting customer needs, staying ahead of industry trends, and investing in the right areas through a close and interactive relationship with our customer base. The Avid Customer Association was established to be an innovative and influential media technology community. It represents thousands of organizations and over 30,000 professionals from all levels of the industry including inspirational and award-winning thought leaders, innovators, and storytellers. The Avid Customer Association fosters collaboration between Avid, its customers, and other industry colleagues to help shape our product offerings and provide a means to shape our industry together.

A key element of our strategy is our transition to a recurring revenue-based model through a combination of subscription offerings and long-term agreements. As of September 30, 2021, we had approximately 389,000 paid subscriptions. Starting in the third quarter of 2021, subscription count includes all paid and active seats under multi-seat licenses. These licensing options offer choices in pricing and deployment to suit our customers’ needs. Our subscription offerings to date have mostly been sold to creative professionals, although in the third quarter of 2020 we introduced subscription offerings for our enterprise software solutions. We expect to increase subscription sales to media enterprises going forward as we expand offerings and move through customer upgrade cycles, which we expect will further increase recurring revenue on a longer-term basis. Our long-term agreements are comprised of multi-year agreements with large media enterprise customers to provide specified products and services, including SaaS offerings, and channel partners and resellers to purchase minimum amounts of products and service over a specified period of time.

During the third quarter of 2021, Avid began implementing a Digital Transformation which focuses on optimizing systems, processes, and back-office functions with the objective of improving our operations related to our digital and subscription business. Over the next four years, we plan to significantly invest in transforming our enterprise-wide infrastructure and technologies to benefit customers and drive enhanced performance across the company.

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A summary of our revenue sources for the three and nine months ended September 30, 2021 and 2020 is as follows (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Subscriptions $ 28,008  $ 17,907  $ 74,384  $ 48,292 
Maintenance 30,702  30,826  90,997  93,190 
Subscriptions and Maintenance 58,710  48,733  165,381  141,482 
Perpetual Licenses 5,678  8,972  18,596  21,165 
Software Licenses and Maintenance 64,388  57,705  183,977  162,647 
Integrated solutions 31,172  26,803  88,699  76,956 
Professional services & training 6,080  5,923  18,204  16,562 
Total revenue $ 101,640  $ 90,431  $ 290,880  $ 256,165 

Impact of COVID-19 on Our Business

We have operations in a number of countries, which exposes us to risks associated with public health crises such as the novel coronavirus (COVID-19) that was declared a pandemic by the World Health Organization. COVID-19 adversely impacted our business operations and results of operations for the year ended 2020. These economic impacts are the result of, but not limited to:

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

Our results for the first nine months of 2021 reflect a gradual recovery towards pre-pandemic spending levels with the continuing positive signs of recovery from the impacts of the COVID-19 pandemic driven by vaccination and government stimulus programs, particularly in the US. At the same time, certain countries continue to face challenges with renewed lockdowns and travel restrictions and there remains uncertainty relating to the ongoing spread and severity of the virus and its variants. While we are encouraged by the trends we have seen so far in 2021, to the extent that the pandemic continues to have negative impacts on economies, our results could be affected and uneven. We may be required to take additional steps to preserve our liquidity depending on the duration and severity of the pandemic and its impact on our operations and cash flows. For further discussion of these issues, see “Liquidity and Capital Resources” below.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

We believe that our critical accounting policies and estimates are those related to revenue recognition and allowances for sales returns and exchanges, discount rates used for lease liabilities, stock-based compensation, income tax assets and liabilities, and restructuring charges and accruals. We believe these policies and estimates are critical because they most significantly affect the portrayal of our financial condition and results of operations and involve our most complex and subjective estimates and judgments. A discussion of our critical accounting policies and estimates may be found in our Annual Report on Form 10-K for the year ended December 31, 2020 in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Policies and Estimates” and below. There have been no significant changes to the identification of the accounting policies and estimates that are deemed critical.
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Revenue Recognition

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

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

See Note 9 “Revenue” of our Notes to Condensed Consolidated Financial Statements under Part 1, Item 1 of this Form 10-Q for disaggregated revenue schedules and further discussion on revenue and deferred revenue performance obligations and the timing of revenue recognition.

Leases

We have operating leases for facilities and certain equipment in North America, Europe, and Asia. Our operating lease right-of-use assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As our leases generally do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. An average incremental borrowing rate of 6% as of January 1, 2019, the adoption date of ASC 842, was used for our leases that commenced prior to that date. We determined that the rate of 6% is appropriate for our operating leases after we considered an estimated incremental borrowing rate provided by our bank, the interest rate of our prior credit facility, and the terms and geographic locations of our facilities.

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

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RESULTS OF OPERATIONS

The following table sets forth certain items from our condensed consolidated statements of operations as a percentage of net revenues for the three and nine months ended September 30, 2021 and 2020:
  Three Months Ended September 30, Nine Months Ended September 30,
  2021 2020 2021 2020
Net revenues:    
Product 36.3  % 39.6  % 36.9  % 38.3  %
Services 63.7  % 60.4  % 63.1  % 61.7  %
Total net revenues 100.0  % 100.0  % 100.0  % 100.0  %
Cost of revenues 35.2  % 35.6  % 35.6  % 36.4  %
Gross margin 64.8  % 64.4  % 64.4  % 63.6  %
Operating expenses:    
Research and development 16.9  % 15.1  % 16.7  % 16.4  %
Marketing and selling 24.0  % 22.1  % 22.9  % 25.4  %
General and administrative 14.7  % 11.9  % 14.5  % 13.3  %
Restructuring costs, net (0.1) % 0.8  % 0.3  % 0.4  %
Total operating expenses 55.4  % 49.9  % 54.4  % 55.5  %
Operating income 9.4  % 14.5  % 10.0  % 8.1  %
Interest expense, net (1.6) % (5.0) % (1.9) % (6.0) %
Other income, net 7.7  % 0.1  % 1.5  % 0.1  %
Income before income taxes 15.5  % 9.6  % 9.6  % 2.2  %
Provision for income taxes 1.0  % 0.8  % 0.6  % 0.6  %
Net income 14.5  % 8.8  % 9.0  % 1.6  %

Net Revenues

Our net revenues are derived mainly from sales of products and solutions for digital media content production, management and distribution, and related professional services and maintenance contracts. We also sell individual licenses for our software products through our webstore. We commonly sell large, complex solutions to our customers that, due to their strategic nature, have long lead times where the timing of order execution and fulfillment can be difficult to predict. In addition, the rapid evolution of the media industry is changing our customers’ needs, businesses, and revenue models, which is influencing their short-term and long-term purchasing decisions. As a result of these factors, the timing and amount of product revenue recognized related to these large orders, as well as the services associated with them, can fluctuate from quarter to quarter and cause significant volatility in our quarterly operating results. For a discussion of these factors, see the risk factors discussed in Part I, Item 1A under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020.

Net Revenues for the Three Months Ended September 30, 2021 and 2020
(dollars in thousands)
2021 Change 2020
  Net Revenues $ % Net Revenues
Products and solutions $ 36,850  $ 1,075  3.0% $ 35,775 
Services 64,790  10,134  18.5% 54,656 
Total net revenues $ 101,640  $ 11,209  12.4% $ 90,431 


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Net Revenues for the Nine Months Ended September 30, 2021 and 2020
(dollars in thousands)
2021 Change 2020
  Net Revenues $ % Net Revenues
Products and solutions $ 107,295  $ 9,174  9.3% $ 98,121 
Services 183,585  25,541  16.2% 158,044 
Total net revenues $ 290,880  $ 34,715  13.6% $ 256,165 

The following table sets forth the percentage of our net revenues attributable to geographic regions for the three and nine months ended September 30, 2021 and 2020:
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
United States 44% 40% 43% 41%
Other Americas 5% 5% 5% 6%
Europe, Middle East and Africa 38% 42% 38% 39%
Asia-Pacific 13% 13% 14% 14%

Products and Solutions Revenues

Our products and solutions revenues are derived primarily from sales of our storage and workflow solutions, media management solutions, video creative tools, digital audio software and workstation solutions, and our control surfaces, consoles, and live-sound systems. Products and solutions revenues increased $1.1 million, or 3.0%, for the three months ended September 30, 2021, and increased $9.2 million, or 9.3%, for the nine months ended September 30, 2021, compared to the same periods in 2020. The increase for the three and nine months ended September 30, 2021 was primarily due to higher sales as a result of the economy recovering from the COVID-19 pandemic, which negatively impacted products and solutions revenues in 2020 for the reasons discussed above under “Executive Overview – Impact of COVID-19 on Our Business.”

Services Revenues

Services revenues are derived primarily from maintenance contracts, subscription services, and professional services and training. Services revenues increased $10.1 million, or 18.5%, for the three months ended September 30, 2021, and increased $25.5 million, or 16.2% for the nine months ended September 30, 2021 compared to the same periods in 2020. The increase for the three and nine months ended September 30, 2021 was primarily due to increased subscription services and professional services as a result of the economy recovering from the COVID-19 pandemic, which negatively impacted products and solutions revenues in 2020 for the reasons discussed above under “Executive Overview – Impact of COVID-19 on Our Business.”

Cost of Revenues, Gross Profit and Gross Margin Percentage

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







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Costs of Revenues and Gross Profit

Costs of Revenues and Gross Profit for the Three Months Ended September 30, 2021 and 2020
(dollars in thousands)
2021 Change 2020
  Costs $ % Costs
Products $ 20,468  $ (489) (2.3)% $ 20,957 
Services 15,269  4,052  36.1% 11,217 
    Total cost of revenues $ 35,737  $ 3,563  11.1% $ 32,174 
Gross profit $ 65,903  $ 7,646  13.1% $ 58,257 


Costs of Revenues and Gross Profit for the Nine Months Ended September 30, 2021 and 2020
(dollars in thousands)
2021 Change 2020
  Costs $ % Costs
Products $ 60,044  $ 1,171  2.0% $ 58,873 
Services 43,379  9,057  26.4% 34,322 
    Total cost of revenues $ 103,423  $ 10,228  11.0% $ 93,195 
Gross profit $ 187,457  $ 24,487  15.0% $ 162,970 


Gross Margin Percentage

Gross margin percentage, which is net revenues less costs of revenues divided by net revenues, fluctuates based on factors such as the mix of products sold, the cost and proportion of third-party hardware and software included in the systems sold, the offering of product upgrades, price discounts and other sales-promotion programs, the distribution channels through which products are sold, the timing of new product introductions, sales of aftermarket hardware products, and currency exchange-rate fluctuations. For a discussion of these factors, see the risk factors discussed in Part I, Item 1A under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020.

Our gross margin percentage for the three months ended September 30, 2021 increased to 64.8% from 64.4% and for the nine months ended September 30, 2021 increased to 64.4% from 63.6%, compared to the same periods in 2020. These increases were primarily due to increased products and subscription revenue as a result of higher volumes, slightly offset by the increase in our stock based compensation expense and reduction in professional services revenue while maintaining the same cost structure.
Gross Margin % for the Three Months Ended September 30, 2021 and 2020
  2021 Gross
Margin %
Change 2020 Gross
Margin %
Products 44.5% 3.1% 41.4%
Services 76.4% (3.1)% 79.5%
Total 64.8% 0.4% 64.4%

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Gross Margin % for the Nine Months Ended September 30, 2021 and 2020
  2021 Gross
Margin %
Change 2020 Gross
Margin %
Products 44.0% 4.0% 40.0%
Services 76.4% (1.9)% 78.3%
Total 64.4% 0.8% 63.6%
Operating Expenses and Operating Income

Operating Expenses and Operating Income for the Three Months Ended September 30, 2021 and 2020
(dollars in thousands)
2021 Change 2020
  Expenses $ % Expenses
Research and development $ 17,129  $ 3,506  25.7% $ 13,623 
Marketing and selling 24,413  4,415  22.1% 19,998 
General and administrative 14,901  4,105  38.0% 10,796 
Restructuring costs, net (88) (811) (112.2)% 723 
Total operating expenses $ 56,355  $ 11,215  24.8% $ 45,140 
Operating income $ 9,548  $ (3,569) (27.2)% $ 13,117 

Operating Expenses and Operating Income for the Nine Months Ended September 30, 2021 and 2020
(dollars in thousands)
2021 Change 2020
  Expenses $ % Expenses
Research and development $ 48,639  $ 6,523  15.5% $ 42,116 
Marketing and selling 66,511  1,534  2.4% 64,977 
General and administrative 42,214  8,070  23.6% 34,144 
Restructuring costs, net 1,001  (7) (0.7)% 1,008 
Total operating expenses $ 158,365  $ 16,120  11.3% $ 142,245 
Operating income $ 29,092  $ 8,367  40.4% $ 20,725 

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 increased $3.5 million, or 25.7%, for the three months ended September 30, 2021 and $6.5 million, or 15.5%, for the nine months ended
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September 30, 2021, compared to the same periods in 2020. The tables below provide further details regarding the changes in components of R&D expenses.

Change in R&D Expenses for the Three Months Ended September 30, 2021 and 2020
(dollars in thousands)
  2021 Increase
From 2020
$ %
Personnel-related 1,615  18.4  %
Facilities and information technology 878  35.7  %
Consulting and outside services 645  32.3  %
Other 368  92.4  %
Total R&D expenses decrease $ 3,506  25.7  %


Change in R&D Expenses for the Nine Months Ended September 30, 2021 and 2020
(dollars in thousands)
  2021 Increase
From 2020
$ %
Personnel-related 3,585  13.7  %
Facilities and information technology 1,484  18.9  %
Consulting and outside services 536  7.8  %
Computer hardware 480  55.4  %
Other 438  124.5  %
Total R&D expenses decrease $ 6,523  15.5  %

The increase in facilities and information technology expenses and personnel-related expenses for the three and nine months ended September 30, 2021, compared to the same periods in 2020, was primarily the result of the wind-down of our employee furlough program, which was implemented in the second and third quarters of 2020 to reduce costs in response to COVID-19. The increase in consulting and outside services for the three and nine months ended September 30, 2021, compared to the same periods in 2020, was primarily the result of increased use if external contractors utilized for research and development efforts. The increase in computer hardware and other expenses for the three and nine months ended September 30, 2021, compared to the same periods in 2020, was primarily the result of increased hardware purchases to aid in the testing of our new product developments and prototypes.

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 $4.4 million, or 22.1%, for the three months ended September 30, 2021, and increased $1.5 million, or 2.4%, for the nine months ended September 30, 2021, compared to the same periods in 2020. The tables below provide further details regarding the changes in components of marketing and selling expenses.
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Change in Marketing and Selling Expenses for the Three Months Ended September 30, 2021 and 2020
(dollars in thousands)
  2021 Increase From 2020
  $ %
Personnel-related 2,120  14.1  %
Advertising and promotions 819  633.8  %
Consulting and outside services 908  117.6  %
Foreign exchange (gains) and losses 534  769.2  %
Other 34  0.1  %
Total marketing and selling expenses decrease $ 4,415  22.1  %

Change in Marketing and Selling Expenses for the Nine Months Ended September 30, 2021 and 2020
(dollars in thousands)
  2021 Increase (Decrease) From 2020
  $ %
Personnel-related 4,481  10.0  %
Facilities and information technology (1,556) (13.5) %
Advertising and promotions 1,182  108.8  %
Foreign exchange (gains) and losses (204) (20.1) %
Consulting and outside services (794) (21.2) %
Other (1,575) (59.1) %
Total marketing and selling expenses increase $ 1,534  2.4  %

The increase in personnel-related expenses for the three and nine months ended September 30, 2021, compared to the same periods in 2020, was primarily due to an increase in salary expense as a result of the furlough program and reduced travel expenses in the 2020 periods in response to the COVID-19 pandemic. The increase in advertising and promotions expenses for the three and nine months ended September 30, 2021, compared to the same periods in 2020, were primarily the result of resuming our programs that were paused in 2020 in response to COVID-19. The increase in consulting and outside services for the three months ended September 30, 2021 are primarily due to an increased used of in external contractors to provide marketing and promotional support as well as assist in our digital transformation initiative. The decrease in consulting and outside services for the nine months ended September 30, 2021 was due to the cancellation of certain trade shows and internal meetings in 2021, which still took place during Q1 2020 before the COVID-19 pandemic began. The decrease in facilities and information technology and other for the nine months ended September 30, 2021 was primarily the result of a one-time bad debt expense in 2020 and a decrease in our facilities related costs as we continue to decrease our footprint. The change in foreign exchange translations for the three and nine months ended September 30, 2021, compared to the same periods in 2020, was due to foreign exchange gains and losses from foreign currency denominated transactions and the revaluation of foreign currency denominated assets and liabilities. These foreign exchange changes were primarily due to the euro-dollar exchange rate volatility.

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 increased $4.1 million, or 38.0%, for the three months ended September 30, 2021, and increased $8.1 million, or 23.6%, for the nine months ended September 30, 2021, compared to the same periods in 2020. The tables below provide further details regarding the changes in components of G&A expenses.
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Change in G&A Expenses for the Three Months Ended September 30, 2021 and 2020
(dollars in thousands)
  2021 Increase
From 2020
  $ %
Personnel-related 1,595  26.8  %
Consulting and outside services 1,430  75.9  %
Other 1,080  36.5  %
Total G&A expenses increase $ 4,105  38.0  %

Change in G&A Expenses for the Nine Months Ended September 30, 2021 and 2020
(dollars in thousands)
  2021 Increase (Decrease)
From 2020
  $ %
Personnel-related 4,306  25.1  %
Consulting and outside services 2,472  32.0  %
Facilities and information technology (1,161) (20.1) %
Other 2,453  67.2  %
Total G&A expenses decrease $ 8,070  23.6  %

The increase in personnel-related expenses for the three and nine months ended September 30, 2021, compared to the same periods in 2020, was primarily due to increase in salary expense as a result of our furlough program and reduced travel expenses in the prior year in response to the COVID-19 pandemic. The increase in consulting and outside services and other for the three and nine months ended September 30, 2021, compared to the same periods in 2020, was primarily a result of resuming our programs that were previously paused in response to COVID-19. In addition, we have incurred expenses in 2021 related to our share repurchase program, business development activities, and our digital transformation initiative.
Provision for Income Taxes
Provision for Income Taxes for the Three Months Ended September 30, 2021 and 2020
(dollars in thousands)
2021 Change 2020
  $ %
Provision for income taxes $ 991  $ 284  40.2% $ 707 

Provision for Income Taxes for the Nine Months Ended September 30, 2021 and 2020
(dollars in thousands)
2021 Change 2020
  $ %
Provision for income taxes $ 1,832  $ 286  18.5% $ 1,546 

The changes in the tax provision for the three month and nine-month periods ended September 30, 2021 compared to the same periods in 2020 were driven primarily by changes in income before income taxes and the jurisdictional mix of earnings. No provision or benefit was provided in the United States due to a full valuation on its deferred tax asset.

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LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Sources of Cash

Our principal sources of liquidity include cash and cash equivalents totaling $50.5 million as of September 30, 2021, as well as the availability of borrowings of up to $70.0 million under our revolving Credit Facility. 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.

In quarter ended September 30, 2021, we committed to a digital transformation initiative focused around modernizing our enterprise-wide infrastructure and technologies to benefit our customers and drive enhanced performance across the company. Over the next four years we plan to invest significant funds and resources towards implementing these new technologies.

On January 5, 2021, we entered into the Credit Agreement with JPMorgan Chase Bank, N.A. and a syndicate of banks, as collateral and administrative agent, and the Lenders. Pursuant to the Credit Agreement, the Lenders agreed to provide us with the Term Loan and the Credit Facility. We borrowed the full amount of the Term Loan, or $180.0 million, on the closing date, but did not borrow any of the $70.0 million available under the Credit Facility on the closing date. The proceeds from the Term Loan, plus available cash on hand, were used to repay outstanding borrowings of $201.0 million under the Company’s prior credit facility with Cerberus Business Finance, LLC, which was then terminated. Prior to the maturity of the Credit Facility, any amounts borrowed under the Credit Facility may be repaid and, subject to the terms and conditions of the Credit Agreement, reborrowed in whole or in part without penalty. The Credit Agreement contains two financial covenants. The Company is required to maintain a maximum total net leverage ratio, generally defined as the ratio of (x) consolidated total indebtedness minus liquidity maintained in the United States up to $25 million to (y) consolidated EBITDA, not to exceed 4.00 to 1.00 for the fiscal quarters ending March 31, 2021 through June 30, 2021; 3.75 to 1.00 for the fiscal quarters ending September 30, 2021 through December 31, 2021; 3.50 to 1.00 for the fiscal quarters ending March 31, 2022 through June 30, 2022; 3.25 to 1.00 for the fiscal quarters ending September 30, 2022 through December 31, 2022; and 3.00 to 1.00 for fiscal quarters ending on or after March 31, 2023. The Company is also required to maintain a fixed charge coverage ratio not less than 1.20 to 1.00 at the end of each fiscal quarter ending on or after March 31, 2021. The Credit Agreement’s fixed charge coverage ratio is generally defined as the ratio of (x) consolidated EBITDA minus unfinanced capital expenditures, cash tax expense and certain restricted payments to (y) consolidated fixed charges.

Our ability to satisfy the two financial covenants in the future is dependent on our ability to maintain profitability at or above levels experienced over the last 12 months. In recent quarters, we have experienced volatility in revenues 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, (iv) volatility in currency rates, and (v) in the four most recent quarters, the economic impacts of the COVID-19 pandemic. If revenues were to decrease from the levels of the last 12 months, we would need to reduce expenses to maintain the required level of profitability. In light of the COVID-19 pandemic, we are closely monitoring our current and expected future liquidity levels and covenant compliance.

As discussed above, while the duration and severity of the COVID-19 pandemic, and resulting economic impacts, remain uncertain, we expect that our business operations and results of operations may be affected and uneven by these developments for at least the balance of 2021. To address actual and expected reductions in net revenues, we have continued to keep our discretionary spending low. We may be required to take additional remedial steps, depending on the duration and severity of the pandemic and its impact on our operations, which could include, among other things (and where allowed by the lenders), (i) further cost reductions, (ii) seeking replacement financing, (iii) raising funds through the issuance of additional equity or debt securities or the incurrence of additional borrowings, or (iv) disposing of certain assets or businesses. Such remedial actions, which may not be available on favorable terms or at all, could have a material adverse impact on our business. If we are not in compliance with the covenants and are unable to obtain an amendment or waiver, such noncompliance may result in an event of default under the Credit Agreement, which could permit acceleration of the outstanding indebtedness under the Credit 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 lenders may be entitled to foreclose on and sell substantially all of our assets, which secure our borrowings under the Credit Agreement.

On May 11, 2020, we received $7.8 million of proceeds in connection with our incurrence of a loan under the PPP. The loan had a fixed interest rate of 1% and was to mature on May 11, 2022. Interest payments are deferred until a forgiveness decision is returned by the SBA. Pursuant to the CARES Act and implementing rules and regulations, we applied to the SBA for the full
30


amount of the PPP loan to be forgiven. On July 6, 2021, the Company received notification from the Lender that the SBA approved the Company’s PPP loan forgiveness application for the entire PPP loan balance of $7.8 million plus all accrued interest. The forgiveness of the PPP loan was recognized during the period ending September 30, 2021 within other income on our Statement of Operations.

Our cash requirements vary depending on factors such as the growth of the business, changes in working capital, and capital expenditures. 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 cash flows 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 constantly evolving. Consequently, we will continue to evaluate our financial position in light of future developments, particularly those relating to COVID-19.

Cash Flows

The following table summarizes our cash flows for the periods presented (in thousands):
  Nine Months Ended September 30,
  2021 2020
Net cash provided by operating activities $ 35,418  $ 8,843 
Net cash used in investing activities (4,750) (5,619)
Net cash used in financing activities (59,156) (24,313)
Effect of foreign currency exchange rates on cash, cash equivalents and restricted cash (927) 1,394 
Net decrease in cash, cash equivalents and restricted cash $ (29,415) $ (19,695)

Cash Flows from Operating Activities

Cash provided by operating activities aggregated $35.4 million for the nine months ended September 30, 2021. The increase in cash provided by operations compared to the nine months ended September 30, 2020 was primarily due to an increase in revenue and a change in working capital.

Cash Flows from Investing Activities

For the nine months ended September 30, 2021, net cash flows used in investing activities reflected $4.8 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 nine months ended September 30, 2021, net cash flows used in financing activities were primarily the result of our stock repurchase program and our common stock repurchases for tax withholdings for net settlement of equity awards. In addition, we paid down $28 million on our term loan as part of our refinancing activity in January 2021.

RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements and 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 Unaudited Condensed Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.
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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.

We recorded a net foreign exchange loss of $0.8 million and $1.0 million for the nine months ended September 30, 2021 and 2020, respectively. The foreign exchange losses resulted from foreign currency denominated transactions and the revaluation of foreign currency denominated assets and liabilities.

A hypothetical change of 10% in appreciation or depreciation of foreign currency exchange rates from the quoted foreign currency exchange rates as of September 30, 2021 would not have a significant impact on our financial position, results of operations, or cash flows.

Interest Rate Risk

On January 5, 2021, the Company entered into the Credit Agreement with JPMorgan Chase Bank, N.A., as collateral and administrative agent, and a syndicate of banks, as lenders thereunder. Pursuant to the Credit Agreement, the Lenders agreed to provide the Company with the Term Loan and the Credit Facility. Under the Credit Agreement, interest accrues on outstanding borrowings at a rate of the Adjusted LIBO Rate, the Adjusted EURIBO Rate or the Alternate Base Rate (each as defined in the Credit Agreement), at the option of the Company, plus a spread of 2.00% to 3.25% for Adjusted LIBO Rate and Adjusted EURIBO Rate loans, with a 0.25% LIBOR floor, and 1.00% to 2.25% for Alternate Base Rate loans, in each case depending on our leverage ratio. As of September 30, 2021, we have $173 million outstanding under the Term Loan. A hypothetical 10% increase or decrease in interest rates paid on outstanding borrowings under the Credit Agreement would not have a material impact on our financial position, results of operations, or cash flows.

ITEM 4.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Our management, including the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2021. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our management concluded that, as of September 30, 2021, 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 September 30, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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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.


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PART II - OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

See Note 7 “Commitments and Contingencies” of our Notes to Unaudited Condensed Consolidated Financial Statements under Part 1, Item 1 of this Form 10-Q regarding our legal proceedings.


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, 2020 in addition to the other information included in this Form 10-Q before making an investment decision regarding our common stock. If any of these risks actually occurs, our business, financial condition, or operating results would likely suffer, possibly materially, the trading price of our common stock could decline, and you could lose part or all of your investment.
There has been no material change to the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2020.


ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Share repurchase activity during the three months ended September 30, 2021 was as follows (in thousands, except number of shares and per share amounts):

Period Total number of shares purchased Average price paid per share Total number of shares purchased as part of publicly announced programs
Maximum approximate dollar value of shares that may yet be purchased under the programs
September 13, 2021 - September 30, 2021 412,175 $ 27.07  412,175 103,844

See Note 11 of Notes to Unaudited Condensed Consolidated Financial Statements for further information regarding our share repurchase program.


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.

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EXHIBIT INDEX
      Incorporated by Reference
Exhibit
No.
Description Filed with
this Form
10-Q
Form or
Schedule
SEC Filing
Date
SEC File
Number
3.1 8-K March 31, 2017 001-36254
3.2 10-K March 9, 2020 001-36254
31.1 X        
31.2 X        
32.1 X