Avid Technology, which has been conducting an internal investigation into its current and historical accounting treatment related to software updates, has concluded that its “unaudited interim consolidated financial statements for the quarterly periods ended (i) September 30, 2012 and 2011, (ii) June 30, 2012 and 2011, and (iii) March 31, 2012 and 2011, as well as its audited consolidated financial statements for the years ended December 31, 2011, 2010 and 2009 should no longer be relied upon because of errors in the application of US GAAP.”
The company had previously disclosed that it has been unable to submit Form 10-K and Form 10-Q filings to the SEC because of its investigation the accounting treatment related to bug fixes, upgrades, enhancements and compatibility extensions.
As a result of these delayed filings with regulators, Avid has been notified by the NASDAQ stock exchange that the company does not comply with NASDAQ Listing Rule 5250(c)(1), which requires timely filing of periodic reports with the SEC.
Failure to regain compliance could result in the delisting of Avid’s shares from the NASDAQ Global Select Market.
The company said it has undertaken and initial review of “whether software updates previously made available by the company to certain of its customers at no-charge included upgrades, enhancements or compatibility extensions and if so, whether such upgrades, enhancements or compatibility extensions met the definition of post-contract customer support (PCS) under U.S. Generally Accepted Accounting Principles (“GAAP”).”
Avid says that “during the course of this initial review, the company concluded that certain of these no-charge software updates should have been accounted for as implied PCS when recognizing revenue for the original sale of the related product.”
On May 20, 2013, after evaluating management’s initial assessment of the potential magnitude of the incorrect application of GAAP with respect to certain Software Updates, the Audit Committee of the Company’s Board of Directors concluded, after discussions with the Company’s management that the Company’s unaudited interim consolidated financial statements for the quarterly periods ended (i) September 30, 2012 and 2011, (ii) June 30, 2012 and 2011, and (iii) March 31, 2012 and 2011, as well as its audited consolidated financial statements for the years ended December 31, 2011, 2010 and 2009 should no longer be relied upon because of these errors in the application of GAAP. The Company’s Audit Committee discussed this matter with the Company’s independent registered public accounting firm, Ernst & Young LLP. In addition, any previously issued press release or other publicly issued statement by the Company containing financial information for such periods should not be relied upon.
The company said in a regulatory filing that it intends to correct the errors it has discovered through the filing of its Form 10-K for the year ended December 31, 2012. However, it cautioned that the company “is not currently able to predict when it will file its Form 10-K for the year ended December 31, 2012.”
Avid says it expects that the timing of revenue recognition for the impacted customer arrangements will change from the historical presentation in the company’s financial statements pursuant to which revenue was recognized up front, generally to being recognized ratably over the estimated implied PCS service period. In addition, the timing of recognition of certain costs related to these customer arrangements may also be impacted, along with the timing of related income taxes. The company cannot at this time estimate the full impact of the adjustments of revenue and costs, and the related impact on income taxes, on any previously issued financial statements for any individual reporting period, although it may be significant. However, while the restatement adjustments will impact previously reported revenue and operating results for prior periods, the restatement adjustments are not expected to affect the amount of total revenue ultimately to be earned, or the amount or timing of cash received or to be received, from the sales transactions or the company’s liquidity or cash flow for any prior period.
Avid said it is also reassessing its accounting for certain restructuring expenses related to lease obligations and other exit activities in the quarters ended June 30, 2012 and September 30, 2012. While Avid continues to analyze the accounting treatment of these restructuring expenses, it has concluded that it has improperly accounted for such restructuring expenses and currently estimates that the restructuring expenses may have been cumulatively overstated by approximately $3.5 million on a pre-tax basis at September 30, 2012.
Avid’s management, including its Chief Executive Officer and Chief Financial Officer, has concluded that the company’s disclosure controls and procedures and internal controls over financial reporting were not effective as of December 31, 2012 or March 31, 2013 because of the material weaknesses in the company’s internal controls over financial reporting relating to the matters disclosed in the Company’s Form 10-Q for the quarterly periods ended September 30, 2012, June 30, 2012 and March 31, 2012, and for the treatment of software updates described previously.
Avid said its evaluation of current and historical accounting treatment related to software updates is ongoing, and that it may identify additional issues that could require further adjustments to the company’s prior financial statements for one or more prior fiscal years or periods.
Avid says it is working diligently to complete the review and continues to focus its efforts on completing and filing the delayed periodic reports, including restatements, as soon as possible. During this evaluation, the company plans to continue to invest in its product innovation and execute on its growth strategy.
The company also said it “believes it is well positioned to support its customers’ ongoing success.”
Ordinarily, this kind of statement sounds like typical PR spin, but in the case of Avid, our research shows that this is indeed the case. Despite its widely-reported problems of late, the company continues to enjoy strong loyalty from its broadcast industry customer base. However, if the market begins to perceive that there is a cloud of uncertainty over Avid’s future, things could deteriorate in the future. Thus far, Avid has done a good job of communicating with the market during its accounting review process. Now the company must resolve its issues, and get back to focusing 100 percent on meeting the needs of its customer base.
Press Release: Avid Announces Receipt of Second Anticipated NASDAQ Letter and Initial Determinations of its Accounting Evaluation
© Devoncroft Partners. All Rights Reserved.