AVID TECHNOLOGY, INC. 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 16 Emmy Awards, oneGrammy Award , two Oscars, and the first ever America Cinema Editors Technical Excellence Award. In 2018, Avid was named the recipient of the prestigiousPhilo T. Farnsworth Award by theTelevision 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 33,000 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. We started offering subscription licensing options for some of our products and solutions in 2014 and bySeptember 30, 2020 , had approximately 269,000 paid subscriptions. These licensing options offer choices in pricing and deployment to suit our customers' needs. Our subscription offerings to date have primarily been sold to creative professionals, though we expect to increase subscription sales to media enterprises going forward as we expand offerings and move through customer upgrade cycles, which we expect will further increase recurring revenue on a longer-term basis. Our long-term agreements are comprised of multi-year agreements with large media enterprise customers to provide specified products and services, including SaaS offerings, and channel partners and resellers to purchase minimum amounts of products and service over a specified period of time. Another key aspect of our strategy has been to implement programs to increase operational efficiencies and reduce costs. We are making significant changes in business operations to better support the company's strategy and overall performance. We have implemented a number of spending control initiatives, with an emphasis on non-personnel costs, to reduce the overall cost structure while still investing in key areas that will drive growth. We have also revamped our supply chain and logistics, and in 2019 completed our move to a lean model that leverages a new supplier and distribution network. We are optimizing our go-to- 22 -------------------------------------------------------------------------------- market strategy, simplifying our strategy to address specific customer markets to help maximize our commercial success, which we expect will improve effectiveness, while increasing efficiency and driving growth of our pipeline and ultimately revenue.
A summary of our revenue sources for the nine months ended
Three Months Ended September
30, Nine Months Ended September 30,
2020 2019 2020 2019
Software licenses $ 26,879 $ 18,968 $ 69,457 $ 54,751
Maintenance 30,826 33,361 93,190 97,018
Software licenses and maintenance 57,705 52,329 162,647 151,769
% of total revenue 64 % 56 % 64 % 51 %
Integrated solutions 26,803 34,240 76,956 122,221
Professional services & training 5,923 6,892 16,562 21,491
Total revenue $ 90,431 $ 93,461 $ 256,165 $ 295,481 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 theWorld Health Organization . COVID-19 adversely impacted our business operations and results of operations for the second and third quarter of 2020, as described in more detail under the Results of Operations below. We expect the evolving COVID-19 pandemic to continue to have an adverse impact on our business and results of operations, as the ongoing pandemic is likely to continue to depress economic activity and reduce the demand for our products and services, as well as disrupt supply chains. Although the duration and severity of the COVID-19 pandemic, and resulting economic impacts, remain uncertain, we expect that our business operations and results of operations, will be adversely impacted for at least the balance of 2020, and possibly longer. 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. We are focused on navigating the challenges presented by COVID-19, with a primary focus on preserving our liquidity and managing our cash flows by taking preemptive action to enhance our ability to meet our short-term liquidity needs. To address actual and expected reductions in net revenues, we have reduced our discretionary spending, revisited our investment strategies, and reduced payroll costs, including through temporary employee furloughs and pay cuts. In addition, inMay 2020 we received$7.8 million of funding under theU.S. government's PPP in the form of a low-interest loan that may be forgiven under certain conditions. 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."
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
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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, 2019 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.
Revenue Recognition
We enter into contracts with customers that include various combinations of products and services, which are typically capable of being distinct and are accounted for as separate performance obligations. We account for a contract when (i) it has approval and commitment from both parties, (ii) the rights of the parties have been identified, (iii) payment terms have been identified, (iv) the contract has commercial substance, and (v) collectibility is probable. We recognize revenue upon transfer of control of promised products or services to customers, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts, in an amount that reflects the consideration we expect to receive in exchange for those products or services. We often enter into contractual arrangements that have multiple performance obligations, one or more of which may be delivered subsequent to the delivery of other performance obligations. These arrangements may include a combination of products, support, training, and professional services. We allocate the transaction price of the arrangement based on the relative estimated standalone selling price of each distinct performance obligation.
See Note 9 for disaggregated revenue schedules and further discussion on revenue and deferred revenue performance obligations and the timing of revenue recognition.
Leases
We have operating leases for facilities and certain equipment inNorth America ,Europe , andAsia . 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 ofJanuary 1, 2019 , the adoption date of ASC 842, was used for our leases that commenced prior to that date. We determined that the rate of 6% is appropriate for our operating leases after we considered an estimated incremental borrowing rate provided by our bank, the interest rate of our Term Loan, and the terms and geographic locations of our facilities.
See Note 5 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 endedSeptember 30, 2020 and 2019: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Net revenues: Product 39.6 % 45.9 % 38.3 % 50.0 % Services 60.4 % 54.1 % 61.7 % 50.0 % Total net revenues 100.0 % 100.0 % 100.0 % 100.0 % Cost of revenues 35.6 % 38.1 % 36.4 % 40.5 % Gross margin 64.4 % 61.9 % 63.6 % 59.5 % Operating expenses: Research and development 15.1 % 15.9 % 16.4 % 15.7 % Marketing and selling 22.1 % 23.9 % 25.4 % 24.8 % General and administrative 11.9 % 12.9 % 13.3 % 13.0 % Amortization of intangible assets - % - % - % 0.2 % Restructuring costs, net 0.8 % 0.2 % 0.4 % 0.2 % Total operating expenses 49.9 % 52.9 % 55.5 % 53.9 % Operating income 14.5 % 9.0 % 8.1 % 5.6 % Interest and other expense, net (4.9) % (5.9) % (5.9) % (8.1) % Income (loss) before income taxes 9.6 % 3.1 % 2.2 % (2.5) % Provision for (benefit from) income taxes 0.8 % (0.3) % 0.6 % 0.1 % Net income (loss) 8.8 % 3.4 % 1.6 % (2.6) % 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 each quarter related to these large orders, as well as the services associated with them, can fluctuate from quarter to quarter and cause significant volatility in our quarterly operating results. For a discussion of these factors, see the risk factors discussed in Part I - Item 1A under the heading "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Net Revenues for the Three Months Ended September 30, 2020 and 2019 (dollars in thousands) 2020 Change 2019 Net Revenues $ % Net Revenues Products and solutions$ 35,775 $ (7,136) (16.6)%$ 42,911 Services 54,656 4,106 8.1% 50,550 Total net revenues$ 90,431 $ (3,030) (3.2)%$ 93,461 25
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Net Revenues for the Nine Months Ended September 30, 2020 and 2019
(dollars in thousands)
2020 Change 2019
Net Revenues $ % Net Revenues
Products and solutions $ 98,121 $(49,512) (33.5)%$ 147,633 Services 158,044 10,196 6.9% 147,848 Total net revenues$ 256,165 $ (39,316) (13.3)%$ 295,481 The following table sets forth the percentage of our net revenues attributable to geographic regions for the three and nine months endedSeptember 30, 2020 and 2019: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 United States 40% 34% 41% 37% Other Americas 5% 10% 6% 8% Europe, Middle East and Africa 42% 43% 39% 39% Asia-Pacific 13% 13% 14% 16%
Products and Solutions Revenues
Our products and solutions revenues are derived primarily from sales of our storage and workflow solutions, media management solutions, video creative tools, digital audio software and workstation solutions, and our control surfaces, consoles, and live-sound systems. Products and solutions revenues decreased$7.1 million , or 16.6%, for the three months endedSeptember 30, 2020 , and decreased$49.5 million , or 33.5% for the nine months endedSeptember 30, 2020 compared to the same periods in 2019. The decrease for the three and nine months endedSeptember 30, 2020 was primarily due to lower sales as a result of COVID-19,which negatively impacted revenues for the reasons discussed above under "Executive Overview - Impact of COVID-19 on our Business."
Services Revenues
Services revenues are derived primarily from support services, subscription services, professional services and training. Services revenues increased$4.1 million , or 8.1%, for the three months endedSeptember 30, 2020 , and increased$10.2 million , or 6.9%, for the nine months endedSeptember 30, 2020 compared to the same periods in 2019. The increase for the three and nine months endedSeptember 30, 2020 was primarily due to strong growth in our subscription services, partially offset by lower professional services revenue due to the negative effects of COVID-19.
Cost of Revenues, Gross Profit and Gross Margin Percentage
Cost of revenues consists primarily of costs associated with: •procurement of components and finished goods; •assembly, testing and distribution of finished products; •warehousing; •customer support related to maintenance; •royalties for third-party software and hardware included in our products; •amortization of technology; and •providing professional services and training.
Amortization of technology represents the amortization of developed technology assets acquired as part of acquisitions.
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Costs of Revenues and Gross Profit
Costs of Revenues and Gross Profit for the Three Months
Ended
(dollars in thousands)
2020 Change 2019
Costs $ % Costs
Products $ 20,957 $ (2,920) (12.2)% $ 23,877
Services 11,217 (509) (4.3)% 11,726
Total cost of revenues $ 32,174 $ (3,429) (9.6)% $ 35,603
Gross profit $ 58,257 $ 399 0.7% $ 57,858
Costs of Revenues and Gross Profit for the Nine Months
Ended
(dollars in thousands)
2020 Change 2019
Costs $ % Costs
Products $ 58,873 $ (20,662) (26.0)% $ 79,535
Services 34,322 (2,086) (5.7)% 36,408
Amortization of intangible assets - (3,738) (100.0)% 3,738
Total cost of revenues $ 93,195 $ (26,486) (22.1)% $ 119,681
Gross profit $ 162,970 $ (12,830) (7.3)% $ 175,800 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 endedDecember 31, 2019 .
Our gross margin percentage for the three months ended
Gross Margin % for the Three Months Ended September 30, 2020 and 2019
2020 Gross 2019 Gross
Margin % Change Margin %
Products 41.4% (3.0)% 44.4%
Services 79.5% 2.7% 76.8%
Total 64.4% 2.5% 61.9%
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Gross Margin % for the Nine Months Ended September 30, 2020 and 2019
2020 Gross 2019 Gross
Margin % Change Margin %
Products 40.0% (6.1)% 46.1%
Services 78.3% 2.9% 75.4%
Total 63.6% 4.1% 59.5%
Operating Expenses and Operating Income
Operating Expenses and Operating Income for the Three Months
Ended
(dollars in thousands)
2020 Change 2019
Expenses $ % Expenses
Research and development $ 13,623 $ (1,237) (8.3)% $ 14,860
Marketing and selling 19,998 (2,336) (10.5)% 22,334
General and administrative 10,796 (1,238) (10.3)% 12,034
Restructuring costs, net 723 494 215.7% 229
Total operating expenses $ 45,140 $ (4,317) (8.7)% $ 49,457
Operating income $ 13,117 $ 4,716 56.1% $ 8,401
Operating Expenses and Operating Income for the Nine Months
Ended
(dollars in thousands)
2020 Change 2019
Expenses $ % Expenses
Research and development $ 42,116 $ (4,209) (9.1)% $ 46,325
Marketing and selling 64,977 (8,364) (11.4)% 73,341
General and administrative 34,144 (4,399) (11.4)% 38,543
Amortization of intangible assets - (695) (100.0)% 695
Restructuring costs, net 1,008 490 94.6% 518
Total operating expenses $ 142,245 $ (17,177) (10.8)% $ 159,422
Operating income $ 20,725 $ 4,347 26.5% $ 16,378 Research and Development Expenses
Research and development ("R&D") expenses include costs associated with the
development of new products and the enhancement of existing products, and
consist primarily of employee compensation and benefits, facilities costs,
depreciation, costs for consulting and temporary employees, and prototype and
other development expenses. R&D expenses decreased $1.2 million , or 8.3%, for
the three months ended September 30, 2020 , and decreased $4.2 million , or 9.1%,
for the nine months
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ended
Change in R&D Expenses for the Three Months Ended
(dollars in thousands)
2020 Increase (Decrease)
From 2019
$ %
Personnel-related (203) (2.3) %
Facilities and information technology (123) (4.8) %
Consulting and outside services (399) (16.7) %
Other (512) (56.3) %
Total R&D expenses decrease $ (1,237) (8.3) %
Change in R&D Expenses for the Nine Months Ended
(dollars in thousands)
2020 Increase (Decrease)
From 2019
$ %
Personnel-related (2,826) (9.8) %
Facilities and information technology (504) (6.0) %
Consulting and outside services (266) (3.9) %
Other (613) (27.9) %
Total R&D expenses decrease $ (4,209) (9.1) %
The decrease in personnel-related expenses for the three and nine months ended
September 30, 2020 , compared to the same periods in 2019, was primarily due to a
decrease in salary expense as a result of our temporary furloughs and pay cuts
and reduced travel expenses as a result of COVID-19. The decrease in facilities
and information technology expenses and other expenses for the three and nine
months ended September 30, 2020 , compared to the same periods in 2019, were
primarily due to our programs to increase operational efficiencies and reduce
costs. The decrease in consulting and outside services for the three and nine
months ended September 30, 2020 compared to the same periods in 2019 were
primarily the result of R&D labor costs utilized for the production of our
customer funded development projects which increased in volume this year.
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 decreased$2.3 million , or 10.5%, for the three months endedSeptember 30, 2020 , and decreased$8.4 million , or 11.4%, for the nine months endedSeptember 30, 2020 compared to the same period in 2019. The tables below provide further details regarding the changes in components of marketing and selling expenses. 29 --------------------------------------------------------------------------------
Change in Marketing and Selling Expenses for the Three Months Ended
(dollars in thousands)
2020 Increase (Decrease) From 2019
$ %
Personnel-related (574) (2.5) %
Advertising and promotions (1,032) (88.9) %
Foreign exchange (gains) and losses (212) (75.1) %
Other (518) (5.3) %
Total marketing and selling expenses increase $ (2,336) (10.5) %
Change in Marketing and Selling Expenses for the Nine Months Ended
(dollars in thousands)
2020 Increase (Decrease) From 2019
$ %
Personnel-related (4,140) (5.8) %
Advertising and promotions (4,213) (79.5) %
Foreign exchange (gains) and losses 60 6.2 %
Other (71) (0.4) %
Total marketing and selling expenses increase $ (8,364) (11.4) %
The decrease in personnel-related expenses for the three and nine months ended
September 30, 2020 , compared to the same periods in 2019, were primarily due to
a decrease in salary expense as a result of our temporary furloughs and pay cuts
and reduced travel expenses as a result of COVID-19. The decrease in advertising
and promotions expenses as well as other expenses for the three and nine months
ended September 30, 2020 , compared to the same periods in 2019, were primarily
the result of our programs to reduce costs in response to COVID-19 and the
cancellation of certain trade shows in 2020. The decrease in foreign exchange
translations for the three months ended September 30, 2020 , compared to the same
period in 2019, was due to more foreign exchange losses resulted 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 decreased $1.2 million , or 10.3%, for
the three months ended September 30, 2020 , and decreased $4.4 million , or 11.4%,
for the nine months ended September 30, 2020 compared to the same period in
2019. 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, 2020 and 2019
(dollars in thousands)
2020 Decrease
From 2019
$ %
Personnel-related 1,360 29.6 %
Consulting and outside services (2,493) (57.0) %
Other (105) (3.5) %
Total G&A expenses decrease $ (1,238) (10.3) %
Change in G&A Expenses for the Nine Months Ended September 30, 2020 and 2019
(dollars in thousands)
2020 Decrease
From 2019
$ %
Personnel-related 737 4.5 %
Consulting and outside services (4,206) (35.3) %
Other (930) (8.6) %
Total G&A expenses decrease $ (4,399) (11.4) %
The increase in personnel-related expenses for the three and nine months ended
September 30, 2020 , compared to the same periods in 2019, were primarily due to
an increase in our incentive-based compensation, offset by a decrease in salary
expense as a result of our temporary furloughs and pay cuts and reduced travel
expenses as a result of COVID-19. The decrease in consulting and outside
services for the three and nine months ended September 30, 2020 , compared to the
same periods in 2019, were primarily due to lower audit fees and as a result of
our programs to reduce costs in response to COVID-19. The decrease in other
expenses for the three and nine months ended September 30, 2020 , compared to the
same periods in 2019, were primarily due to our programs to increase operational
efficiencies and reduce costs.
Provision (Benefit) for Income Taxes
Provision (Benefit) for Income Taxes for the Three Months
Ended
(dollars in thousands)
2020 Change 2019
$ %
Provision for income taxes $ 707 $ 990 349.8% $ (283)
Provision for Income Taxes for the Nine Months Ended
(dollars in thousands)
2020 Change 2019
$ %
Provision for income taxes $ 1,546 $ 1,391 897.4% $ 155
During the three months ended September 30, 2019 , we completed a legal entity
reorganization that reduced the number of our German subsidiaries. This allowed
us to remove a valuation allowance on the net operating loss carryforward
deferred tax asset of one of the surviving German entities resulting in a net
income tax benefit of $0.9 million . This non-recurring prior year benefit was a
significant driver of the increase in our income tax provision in both the three
and nine month periods ended September 30, 2020 .
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The additional increase in our income tax provision for the three and nine month
periods ended September 30, 2020 compared to the same periods in 2019 was
primarily driven by an overall increase in pre-tax income and a related deferred
tax expense recorded in our Irish branch of $0.7 million and $0.9 million for
the respective periods. The Irish deferred tax expense was partially offset by
lower foreign provisions due to changes in the jurisdictional mix of earnings.
No benefit was provided for the tax loss generated in the United States due to a
full valuation on the deferred tax asset. In addition, the estimated annual
effective tax rate excluded the United States due to its pre-tax loss position.
The CARES Act includes several income tax provisions such as net operating loss
("NOL") carryback and carryforward benefits and other tax deduction benefits. As
noted previously, the U.S. deferred tax asset has a full valuation; accordingly
these NOL and other benefit provisions had no impact on our financial statements
for the period ended September 30, 2020 . The CARES Act accelerates the
alternative minimum tax ("AMT") credit refund originally enacted by the Tax Cut
and Jobs Act in 2017. As of September 30, 2020 , we have received the cash from
the IRS associated with this refund receivable which had been recorded as a
long-term asset at December 31, 2019 .
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Liquidity and Sources of Cash
Our principal sources of liquidity include cash and cash equivalents
totaling
OnApril 8, 2019 , we entered into an amendment to the Financing Agreement. The amendment provided for an additional delayed draw term loan commitment in the aggregate principal amount of$100.0 million (the "Delayed Draw Funds") for the purpose of funding the purchase of a portion of Notes in the Offer described in Note 10 to our financial statements in Item 1 above. OnMay 2, 2019 , we received the Delayed Draw Funds under the Financing Agreement. We used$72.7 million of the Delayed Draw Funds for the purchase of a portion of our Notes,$0.6 million for the Notes interest payment, and$6.0 million for the payment of refinancing fees. OnJune 18, 2019 , we repaid$20.7 million of the Delayed Draw Funds. The$79.3 million Delayed Draw Funds borrowed and that remain outstanding will mature onMay 10, 2023 under the terms of the Financing Agreement. The amendment also modified the covenant that requires us to maintain a leverage ratio (defined to mean the ratio of (a) the sum of indebtedness under the Term Loan and Credit Facility and non-cash collateralized letters of credit to (b) consolidated EBITDA under the Term Loan and Credit Facility) based on the level of availability of our Credit Facility plus unrestricted cash on-hand (the "Leverage Ratio Covenant"). OnMay 19, 2020 , we entered into an amendment to the Financing Agreement which increased the leverage ratio that the Company is required to maintain such that following the effective date of this amendment, the Company is required to maintain a leverage ratio of no greater than 6.00:1.00 for each of the quarters endingJune 30, 2020 andSeptember 30, 2020 , 5.75:1.00 for each of the quarters endingDecember 31, 2020 andMarch 31, 2021 , 5.25:1.00 for the quarter endingJune 30, 2021 , 5.00:1.00 for the quarter endingSeptember 30, 2021 , 4.50:1.00 for the quarter endingDecember 31, 2021 , 4.30:1.00 for the quarter endingMarch 31, 2022 , 4.00:1.00 for each of the quarters endingJune 30, 2022 andSeptember 30, 2022 , and 3.75:1.00 for each of the quarters endingDecember 31, 2022 andMarch 31, 2023 . As ofSeptember 30, 2020 , we were in compliance with all covenants under the Financing Agreement. Our ability to satisfy the Leverage Ratio Covenant 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 three 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 will be adversely impacted by these developments for at least the balance of 2020, and possibly longer. To address actual and expected reductions in net revenues, we have reduced our discretionary spending and reduced payroll costs, including through temporary employee furloughs and pay cuts. In addition, inMay 2020 we received$7.8 million of funding under the PPP in the form of a low-interest loan that may be forgiven under certain conditions. We may be required to take additional remedial steps, depending on the duration and severity of the pandemic and its impact on our operations, which could include, among other things (and where allowed by the lenders), (i) further cost reductions, (ii) seeking replacement financing, (iii) raising funds through the issuance of additional equity or debt securities or the incurrence of additional borrowings, (iv) disposing of certain assets or businesses, or (v) seeking additional funding under various programs implemented by theU.S. government in response to the COVID-19 pandemic. Such remedial actions, which may not be available on favorable terms or at all, could have a material adverse impact on our business. If we are not in compliance with the Leverage Ratio Covenant and are unable to obtain an amendment or waiver, such noncompliance may result in an event of default under the Financing Agreement, which could permit acceleration of the outstanding indebtedness under the Financing Agreement and require us to repay such indebtedness before the scheduled due date. If an event of default were to occur, we might not have sufficient funds available to make the payments required. If we are unable to repay amounts owed, the lenders may be entitled to foreclose on and sell substantially all of our assets, which secure our borrowings under the Financing Agreement. 33 -------------------------------------------------------------------------------- OnMay 11, 2020 , we received$7.8 million of proceeds in connection with its incurrence of a loan under the PPP. The loan has a fixed interest rate of 1% and matures in two years. Interest payments are deferred for six months. We may apply to the SBA for the PPP loan to be forgiven in whole or in part beginning no sooner than seven weeks from the date of initial disbursement. We intend to use the proceeds of the PPP loan for purposes consistent with the PPP. While we currently believe that our use of the loan proceeds will meet the conditions for forgiveness of the loan, we cannot assure that we will be eligible for forgiveness of the loan, in whole or in part. Any PPP loan balance remaining following forgiveness by the SBA will be fully re-amortized over the remaining term of the loan. Our cash requirements vary depending on factors such as the growth of the business, changes in working capital, capital expenditures, and obligations under our cost efficiency program. 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 expected to evolve rapidly. Consequently, we will continue to evaluate our financial position in light of future developments, particularly those relating to COVID-19.
Cash Flows
The following table summarizes our cash flows for the periods presented (in thousands):
Nine Months Ended
2020 2019
Net cash provided by operating activities $ 8,843 $ 1,112
Net cash used in investing activities (5,619) (5,629)
Net cash used in financing activities (24,313) (7,183)
Effect of foreign currency exchange rates on cash, cash equivalents and restricted cash
1,394 (615)
Net decrease in cash, cash equivalents and restricted cash $
(19,695)
Cash Flows from Operating Activities
Cash provided by operating activities aggregated
Cash Flows from Investing Activities
For the nine months endedSeptember 30, 2020 , net cash flows used in investing activities reflected$5.6 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 endedSeptember 30, 2020 , net cash flows used in financing activities were primarily the result of the repayment of our Notes, partially offset by borrowings under the PPP loan.
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 Condensed Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.
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