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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
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: 001-38289
AVAYA HOLDINGS CORP.
(Exact name of registrant as specified in its charter)

Delaware 26-1119726
(State or other jurisdiction of incorporation or organization)  
(I.R.S. Employer Identification No.)
4655 Great America Parkway 95054
Santa Clara, California
(Address of Principal executive offices)   (Zip Code)
(908) 953-6000
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
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 AVYA New York Stock Exchange
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     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     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 of the Exchange Act.
Large accelerated filer Accelerated filer 
Non-accelerated filer Smaller Reporting Company 
Emerging growth company 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes     No  
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes      No  
As of July 31, 2020, 82,977,984 shares of common stock, $.01 par value, of the registrant were outstanding.

1


TABLE OF CONTENTS 
Item Description Page
PART I—FINANCIAL INFORMATION
1.
Financial Statements
1
2.
3.
Quantitative and Qualitative Disclosures About Market Risk
4.
Controls and Procedures
PART II—OTHER INFORMATION
1.
Legal Proceedings
1A.
Risk Factors
2.
Unregistered Sales of Equity Securities and Use of Proceeds
3.
Defaults Upon Senior Securities
4.
Mine Safety Disclosures
5.
Other Information
6.
Exhibits
7.
Signatures
When we use the terms "we," "us," "our," "Avaya" or the "Company," we mean Avaya Holdings Corp., a Delaware corporation, and its consolidated subsidiaries taken as a whole, unless the context otherwise indicates.
This Quarterly Report on Form 10-Q contains the registered and unregistered trademarks or service marks of Avaya and are the property of Avaya Holdings Corp. and/or its affiliates. This Quarterly Report on Form 10-Q also contains additional trade names, trademarks or service marks belonging to us and to other companies. We do not intend our use or display of other parties' trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.
 


2

PART I—FINANCIAL INFORMATION


Item 1. Financial Statements.

Avaya Holdings Corp.
Condensed Consolidated Statements of Operations (Unaudited)
(In millions, except per share amounts)
 
Three months ended
June 30,
Nine months ended
June 30,
2020 2019 2020 2019
REVENUE
Products $ 261    $ 297    $ 804    $ 908   
Services 460    420    1,314    1,256   
721    717    2,118    2,164   
COSTS
Products:
Costs 103    109    299    329   
Amortization of technology intangible assets 43    43    130    130   
Services 178    175    527    522   
324    327    956    981   
GROSS PROFIT 397    390    1,162    1,183   
OPERATING EXPENSES
Selling, general and administrative 232    253    763    761   
Research and development 52    49    155    154   
Amortization of intangible assets 40    41    122    122   
Impairment charges —    659    624    659   
Restructuring charges, net 20      27    12   
344    1,003    1,691    1,708   
OPERATING INCOME (LOSS) 53    (613)   (529)   (525)  
Interest expense (51)   (59)   (162)   (177)  
Other income, net 27    12    56    35   
INCOME (LOSS) BEFORE INCOME TAXES 29    (660)   (635)   (667)  
(Provision for) benefit from income taxes (20)   27    (82)   30   
NET INCOME (LOSS) $   $ (633)   $ (717)   $ (637)  
EARNINGS (LOSS) PER SHARE
Basic $ 0.08    $ (5.70)   $ (7.61)   $ (5.75)  
Diluted $ 0.08    $ (5.70)   $ (7.61)   $ (5.75)  
Weighted average shares outstanding
Basic 83.1    111.0    95.1    110.7   
Diluted 83.3    111.0    95.1    110.7   
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
1

Avaya Holdings Corp.
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(In millions)
Three months ended
June 30,
Nine months ended
June 30,
2020 2019 2020 2019
Net income (loss) $   $ (633)   $ (717)   $ (637)  
Other comprehensive loss:
Pension, post-retirement and postemployment benefit-related items, net of income taxes of $2 for the three and nine months ended June 30, 2019 —    (6)   —    (6)  
Cumulative translation adjustment (11)   (10)   (17)    
Change in interest rate swaps, net of income taxes of $7 and $18 for the three and nine months ended June 30, 2019   (22)   (35)   (53)  
Other comprehensive loss (7)   (38)   (52)   (50)  
Total comprehensive income (loss) $   $ (671)   $ (769)   $ (687)  
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

2

Avaya Holdings Corp.
Condensed Consolidated Balance Sheets (Unaudited)
(In millions, except per share and share amounts)
June 30, 2020 September 30, 2019
ASSETS
Current assets:
Cash and cash equivalents $ 742    $ 752   
Accounts receivable, net 260    314   
Inventory 56    63   
Contract assets 276    187   
Contract costs 124    114   
Other current assets 111    115   
TOTAL CURRENT ASSETS 1,569    1,545   
Property, plant and equipment, net 256    255   
Deferred income taxes, net 27    35   
Intangible assets, net 2,637    2,891   
Goodwill, net 1,477    2,103   
Operating lease right-of-use assets 167    —   
Other assets 135    121   
TOTAL ASSETS $ 6,268    $ 6,950   
LIABILITIES
Current liabilities:
Debt maturing within one year $ 50    $ 29   
Accounts payable 250    291   
Payroll and benefit obligations 166    116   
Contract liabilities 514    472   
Operating lease liabilities 49    —   
Business restructuring reserve 23    33   
Other current liabilities 192    158   
TOTAL CURRENT LIABILITIES 1,244    1,099   
Non-current liabilities:
Long-term debt, net of current portion 2,888    3,090   
Pension obligations 734    759   
Other post-retirement obligations 194    200   
Deferred income taxes, net 55    72   
Contract liabilities 336    78   
Operating lease liabilities 135    —   
Business restructuring reserve 28    36   
Other liabilities 315    316   
TOTAL NON-CURRENT LIABILITIES 4,685    4,551   
TOTAL LIABILITIES 5,929    5,650   
Commitments and contingencies (Note 20)
Preferred stock, $0.01 par value; 55,000,000 shares authorized at June 30, 2020 and September 30, 2019
Convertible series A preferred stock; 125,000 shares issued and outstanding at June 30, 2020 and no shares issued and outstanding at September 30, 2019 128    —   
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value; 550,000,000 shares authorized; 82,864,260 shares issued and outstanding at June 30, 2020; and 111,046,085 shares issued and 111,033,405 shares outstanding at September 30, 2019    
Additional paid-in capital 1,441    1,761   
Accumulated deficit (1,006)   (289)  
Accumulated other comprehensive loss (225)   (173)  
TOTAL STOCKHOLDERS' EQUITY 211    1,300   
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,268    $ 6,950   
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
3

Avaya Holdings Corp.
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
(In millions)
Common Stock Additional
Paid-In
Capital
Accumulated Deficit Accumulated
Other
Comprehensive
(Loss) Income
Total
Stockholders'
Equity
Shares Par Value
Balance as of September 30, 2019 111.0    $   $ 1,761    $ (289)   $ (173)   $ 1,300   
Issuance of common stock under the equity incentive plan 0.3    —   
Shares repurchased and retired for tax withholding on vesting of restricted stock units (0.1)   (2)   (2)  
Shares repurchased and retired under share repurchase program (10.7)   (142)   (142)  
Share-based compensation expense    
Accretion of preferred stock to redemption value (4)   (4)  
Preferred stock dividends accrued (1)   (1)  
Net loss (54)   (54)  
Other comprehensive income 10    10   
Balance as of December 31, 2019 100.5    $   $ 1,618    $ (343)   $ (163)   $ 1,113   
Issuance of common stock under the equity incentive plan 0.6    —   
Shares repurchased and retired for tax withholding on vesting of restricted stock units (0.2)   (1)   (1)  
Shares repurchased and retired under share repurchase program (18.2)   (188)   (188)  
Share-based compensation expense    
Preferred stock dividends accrued (1)   (1)  
Net loss (672)   (672)  
Other comprehensive loss (55)   (55)  
Balance as of March 31, 2020 82.7    $   $ 1,436    $ (1,015)   $ (218)   $ 204   
Issuance of common stock under the equity incentive plan 0.3    —   
Shares repurchased and retired for tax withholding on vesting of restricted stock units (0.1)   (1)   (1)  
Share-based compensation expense    
Preferred stock dividends accrued (1)   (1)  
Net income    
Other comprehensive loss (7)   (7)  
Balance as of June 30, 2020 82.9    $   $ 1,441    $ (1,006)   $ (225)   $ 211   
Balance as of September 30, 2018 110.2    $   $ 1,745    $ 287    $ 18    $ 2,051   
Issuance of common stock under the equity incentive plan 0.8    —   
Shares repurchased and retired for tax withholding on vesting of restricted stock units (0.3)   (6)   (6)  
Share-based compensation expense    
Adjustment for adoption of new accounting standard 92    92   
Net income    
Other comprehensive loss (20)   (20)  
Balance as of December 31, 2018 110.7    $   $ 1,745    $ 388    $ (2)   $ 2,132   
Share-based compensation expense    
Adjustment for adoption of new accounting standard    
Net loss (13)   (13)  
Other comprehensive income    
Balance as of March 31, 2019 110.7    $   $ 1,750    $ 378    $   $ 2,135   
Issuance of common stock under the equity incentive plan 0.3    —   
Shares repurchased and retired for tax withholding on vesting of restricted stock units (0.1)   (2)   (2)  
Share-based compensation expense    
Net loss (633)   (633)  
Other comprehensive loss (38)   (38)  
Balance as of June 30, 2019 110.9    $   $ 1,756    $ (255)   $ (32)   $ 1,470   
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
4

Avaya Holdings Corp.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions)
Nine months ended
June 30,
2020 2019
OPERATING ACTIVITIES:
Net loss $ (717)   $ (637)  
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 319    335   
Share-based compensation 21    19   
Debt discount and issuance costs 19    16   
Deferred income taxes, net (11)   (27)  
Impairment charges 624    659   
Change in fair value of emergence date warrants —    (28)  
Unrealized loss on foreign currency transactions 19     
Impairment of debt securities 10    —   
Realized gain on sale of equity securities (59)   —   
Other non-cash credits, net (7)    
Changes in operating assets and liabilities:
Accounts receivable 50    100   
Inventory   (14)  
Operating lease right-of-use assets and liabilities 12    —   
Contract assets (122)   (99)  
Contract costs   (26)  
Accounts payable (37)   27   
Payroll and benefit obligations   (66)  
Business restructuring reserve (15)   (23)  
Contract liabilities (37)   26   
Other assets and liabilities (4)   (103)  
NET CASH PROVIDED BY OPERATING ACTIVITIES 77    175   
INVESTING ACTIVITIES:
Capital expenditures (72)   (84)  
Proceeds from sale of marketable securities 412    —   
Investment in debt securities —    (10)  
Other investing activities, net —    (1)  
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 340    (95)  
FINANCING ACTIVITIES:
Shares repurchased under share repurchase program (330)   —   
Proceeds from issuance of Series A Preferred Stock, net of issuance costs of $4 121    —   
Repayment of Term Loan Credit Agreement (250)   (22)  
Borrowings under ABL Credit Agreement 50    —   
Principal payments for financing leases (8)   (12)  
Payment of acquisition-related contingent consideration (5)   (9)  
Proceeds from Employee Stock Purchase Plan   —   
Other financing activities, net (4)   (8)  
NET CASH USED FOR FINANCING ACTIVITIES (425)   (51)  
Effect of exchange rate changes on cash, cash equivalents, and restricted cash (2)    
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH (10)   30   
Cash, cash equivalents, and restricted cash at beginning of period 756    704   
Cash, cash equivalents, and restricted cash at end of period $ 746    $ 734   
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
5

Avaya Holdings Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Background and Basis of Presentation
Background
Avaya Holdings Corp. (the "Parent" or "Avaya Holdings"), together with its consolidated subsidiaries (collectively, the "Company" or "Avaya"), is a global leader in digital communications products, solutions and services for businesses of all sizes. Avaya builds open, converged and innovative solutions to enhance and simplify communications and collaboration in the cloud, on-premises or a hybrid of both. The Company's global team of professionals delivers services from initial planning and design, to implementation and integration, to ongoing managed operations, optimization, training and support. The Company manages its business operations in two segments, Products & Solutions and Services. The Company sells directly to customers through its worldwide sales force and indirectly through its global network of channel partners, including distributors, service providers, dealers, value-add resellers, system integrators and business partners that provide sales and services support.
Basis of Presentation
Avaya Holdings has no material assets or standalone operations other than its ownership of Avaya Inc. and its subsidiaries. The accompanying unaudited interim Condensed Consolidated Financial Statements of Avaya Holdings and its consolidated subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") for interim financial statements. The unaudited interim Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and other financial information for the fiscal year ended September 30, 2019, included in the Company's Annual Report on Form 10-K filed with the SEC on November 29, 2019. In management's opinion, these unaudited interim Condensed Consolidated Financial Statements reflect all adjustments, consisting of normal and recurring adjustments, necessary to fairly state the results of operations, financial position and cash flows for the periods indicated. The condensed consolidated results of operations for the interim periods reported are not necessarily indicative of the results for the entire fiscal year.
Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and revenue and expenses during the periods reported. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Actual results may differ from these estimates. During the second quarter of fiscal 2020, the World Health Organization characterized a novel strain of coronavirus ("COVID-19") as a pandemic. Concerns related to the spread of COVID-19 and the actions required to mitigate its impact have created substantial disruption to the global economy. The duration of the pandemic and the long-term impacts on the global economy are uncertain. We expect the effects of the COVID-19 pandemic to negatively impact our results of operations, cash flows and financial position. In addition, the pandemic may affect management's estimates and assumptions, in particular those that require a projection of our financial results, our cash flows or broader economic conditions, such as the collectability of accounts receivable, sales returns and allowances, the use and recoverability of inventory, the realization of deferred tax assets, annual effective tax rate, the fair value of equity compensation, the recoverability of long-lived assets, useful lives and impairment of tangible and intangible assets including goodwill (see Note 6, "Goodwill, net and Intangible Assets, net") and fair value measurements (see Note 11, "Fair Value Measurements"), among others.
The accompanying Condensed Consolidated Financial Statements of the Company have been prepared assuming that the Company will continue as a going concern and contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. While we believe existing cash and cash equivalents of $742 million as of June 30, 2020, future cash provided by operating activities and borrowings available under the ABL Credit Agreement will be sufficient to meet our future cash requirements for at least the next twelve months, our ability to meet our future cash requirements will depend on the Company's ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond the Company's control. The Company further believes that its financial resources allow it to manage the anticipated impact of COVID-19 on the Company's business operations for the foreseeable future. The challenges posed by COVID-19 on the Company's business are evolving rapidly. Consequently, the Company will continue to evaluate its financial position in light of future developments.
2. Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This standard allows companies to reclassify from accumulated other
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comprehensive income to retained earnings any stranded tax benefits resulting from the enactment of the Tax Cuts and Jobs Act. The Company adopted this standard as of October 1, 2019. The adoption of this standard did not have a material impact on the Company's Condensed Consolidated Financial Statements.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." This standard, along with other guidance subsequently issued by the FASB (collectively "ASC 842"), superseded all lease accounting guidance and requires lessees to recognize lease assets and liabilities for all leases with initial lease terms of more than 12 months. The standard makes similar changes to lessor accounting and aligns key aspects of the lessor accounting model with the GAAP revenue recognition standard. The Company adopted ASC 842 on October 1, 2019 using the modified retrospective transition method as of the beginning of the period of adoption. Therefore, on October 1, 2019, the Company recognized and measured leases without revising the historical comparative period information or disclosures. The modified retrospective transition method included optional practical expedients which lessened the burden of implementing ASC 842 by not requiring a reassessment of certain conclusions reached under the previous lease accounting guidance. The Company elected to apply the package of practical expedients to forego a reassessment of (1) whether any expired or existing contracts are or contain leases; (2) the lease classification for any expired or existing leases; and (3) the initial direct costs for an existing lease. In addition, the Company elected the land easement practical expedient permitting it to not reassess whether an existing or expired land easement is a lease or contains a lease. The Company also adopted the practical expedient permitting the non-lease components of an arrangement to be included in the right-of-use asset to which they relate. The Company did not elect the practical expedient allowing the use-of-hindsight which would require the Company to reassess the lease term of existing leases based on all facts and circumstances through the effective date.
The adoption of ASC 842 had a material impact to the Company's Condensed Consolidated Balance Sheet mainly due to the recognition of $190 million of operating lease right-of-use assets and $194 million of operating lease liabilities. The adoption of ASC 842 also resulted in the one-time reclassification of certain prepaid and deferred rent and facility-related business restructuring liabilities to operating lease right-of-use assets.
The impact of the adoption of ASC 842 on the September 30, 2019 Condensed Consolidated Balance Sheet was as follows:
September 30, 2019 Upon Adoption of ASC 842
(In millions) As Reported Adjustments
ASSETS
Other current assets $ 115    $ (2)   $ 113   
Intangible assets, net 2,891    (2)   2,889   
Operating lease right-of-use assets —    190    190   
LIABILITIES
Current liabilities:
Operating lease liabilities —    51    51   
Business restructuring reserve 33    (4)   29   
Non-current liabilities:
Operating lease liabilities —    143    143   
Business restructuring reserve 36    (1)   35   
Other liabilities 316    (3)   313   

Recent Standards Not Yet Effective

In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes". This standard simplifies the accounting for income taxes by removing certain exceptions to the general principles in Accounting Standards Codification ("ASC") 740. The amendments also improve consistent application of and simplify GAAP for other areas of ASC 740 by clarifying and amending existing guidance. This standard is effective for the Company beginning in the first quarter of fiscal 2022, with early adoption permitted. Depending on the amendment, adoption may be applied on a retrospective, modified retrospective or prospective basis. The Company intends to early adopt this standard in the first quarter of fiscal 2021. The Company does not expect the adoption of the standard to have a material impact on its Condensed Consolidated Financial Statements.
In August 2018, the FASB issued ASU No. 2018-15, "Intangibles - Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract." This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is
7

a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for the Company in the first quarter of fiscal 2021, with early adoption permitted. The amendments in this standard may be applied on a retrospective or prospective basis. The Company intends to adopt the standard on a prospective basis in the first quarter of fiscal 2021 and is currently assessing the impact the new guidance may have on its Condensed Consolidated Financial Statements.
In August 2018, the FASB issued ASU No. 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." This standard modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. This update removes disclosures that are not considered cost beneficial, clarifies certain required disclosures and adds additional disclosures. This standard is effective for the Company beginning in fiscal 2021, with early adoption permitted. The amendments in the standard need to be applied on a retrospective basis. The Company does not expect the adoption of the standard to result in material changes to its benefit plan disclosures.
In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." This standard modifies the disclosure requirements on fair value measurements by removing certain disclosures, modifying certain disclosures and adding additional disclosures. This standard is effective for the Company beginning in the first quarter of fiscal 2021. Certain disclosures in the standard need to be applied on a retrospective basis and others on a prospective basis. The Company does not expect the adoption of the standard to result in material changes to its fair value disclosures.
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." This standard, along with other guidance subsequently issued by the FASB, requires entities to estimate all expected credit losses for certain types of financial instruments, including trade receivables and contract assets, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The standard also expands the disclosure requirements to enable users of financial statements to understand the entity's assumptions, models and methods for estimating expected credit losses. This standard is effective for the Company in the first quarter of fiscal 2021 on a modified retrospective basis. The Company is currently evaluating the impact that the adoption of this standard may have on its Condensed Consolidated Financial Statements.
3. Revenue Recognition
The Company’s revenue recognition accounting policy is disclosed in its Annual Report on Form 10-K filed with the SEC on November 29, 2019. During the nine months ended June 30, 2020, the Company updated its revenue recognition accounting policy to include its new subscription offerings as detailed below.
During the nine months ended June 30, 2020, the Company continued developing and selling its subscription-based offerings which mainly consist of term software license arrangements and software as a service ("SaaS") arrangements. Term software licenses include multiple performance obligations where the term licenses are recognized upfront upon transfer of control of the software, with the associated software maintenance revenue recognized ratably over the contract term as the customer consumes the services. SaaS arrangements do not include the right for the customer to take possession of the software during the contractual term of the arrangement, and therefore have one distinct performance obligation which is satisfied over time with revenue recognized ratably over the contract term as the customer consumes the services.
Disaggregation of Revenue
The following tables provide the Company's disaggregated revenue for the periods presented:

(In millions) Three months ended
June 30,
Nine months ended
June 30,
2020 2019 2020 2019
REVENUE
Products & Solutions $ 262    $ 298    $ 805    $ 913   
Services 460    422    1,317    1,269   
Unallocated Amounts
(1)   (3)   (4)   (18)  
$ 721    $ 717    $ 2,118    $ 2,164   

8

Three months ended June 30, 2020 Three months ended June 30, 2019
(In millions) Products & Solutions Services Unallocated Total Products & Solutions Services Unallocated Total
Revenue:
U.S. $ 138    $ 277    $ —    $ 415    $ 149    $ 245    $ (2)   $ 392   
International:
Europe, Middle East and Africa 77    101    —    178    91    93    (1)   183   
Asia Pacific
32    44    (1)   75    38    47    —    85   
Americas International - Canada and Latin America 15    38    —    53    20    37    —    57   
Total International 124    183    (1)   306    149    177    (1)   325   
Total revenue $ 262    $ 460    $ (1)   $ 721    $ 298    $ 422    $ (3)   $ 717   

Nine months ended June 30, 2020 Nine months ended June 30, 2019
(In millions) Products & Solutions Services Unallocated Total Products & Solutions Services Unallocated Total
Revenue:
U.S. $ 406    $ 789    $ (2)   $ 1,193    $ 429    $ 744    $ (12)   $ 1,161   
International:
Europe, Middle East and Africa 248    289    (1)   536    290    283    (3)   570   
Asia Pacific
92    131    (1)   222    113    131    (2)   242   
Americas International - Canada and Latin America 59    108    —    167    81    111    (1)   191   
Total International 399    528    (2)   925    484    525    (6)   1,003   
Total revenue $ 805    $ 1,317    $ (4)   $ 2,118    $ 913    $ 1,269    $ (18)   $ 2,164   
Unallocated amounts represent the fair value adjustment to deferred revenue recognized upon emergence from bankruptcy and excluded from segment revenue.
Transaction Price Allocated to the Remaining Performance Obligations
The transaction price allocated to remaining performance obligations that were wholly or partially unsatisfied as of June 30, 2020 was $2.4 billion, of which 58% and 26% is expected to be recognized within 12 months and 13-24 months, respectively, with the remaining balance expected to be recognized thereafter. This excludes amounts for remaining performance obligations that are (1) for contracts recognized over time using the "right to invoice" practical expedient, (2) related to sales or usage based royalties promised in exchange for a license of intellectual property, and (3) related to variable consideration allocated entirely to a wholly unsatisfied performance obligation.
9

Contract Balances
The following table provides information about accounts receivable, contract assets and contract liabilities for the periods presented:
(In millions) June 30, 2020 September 30, 2019 Increase (Decrease)
Accounts receivable, net $ 260    $ 314    $ (54)  
Contract assets:
Current $ 276    $ 187    $ 89   
Non-current (Other assets) 49    16    33   
$ 325    $ 203    $ 122   
Cost of obtaining a contract:
Current (Contract costs) $ 88    $ 89    $ (1)  
Non-current (Other assets) 35    45    (10)  
$ 123    $ 134    $ (11)  
Cost to fulfill a contract:
Current (Contract costs) $ 36    $ 25    $ 11   
Contract liabilities:
Current $ 514    $ 472    $ 42   
Non-current 336    78    258   
$ 850    $ 550    $ 300   

The increase in Contract assets was mainly driven by growth in the Company's subscription offerings. The increase in Contract liabilities was mainly driven by consideration received in connection with the strategic partnership with RingCentral, Inc. ("RingCentral") as discussed in Note 5, "Strategic Partnership."
During the nine months ended June 30, 2020 and 2019, the Company recognized revenue of $500 million and $505 million that had been previously recorded as a Contract liability as of October 1, 2019 and October 1, 2018, respectively. As a result of contract modifications during both the three and nine months ended June 30, 2020, the Company recorded adjustments to reduce revenue by $1 million related to performance obligations that were satisfied in prior periods.
Contract Costs
The Company capitalizes direct and incremental costs incurred to obtain and to fulfill a contract in advance of revenue recognition, such as sales commissions, business partner incentives and certain labor, third party service and related product costs.
Costs to obtain a contract are amortized using the portfolio approach over the average term of the customer contracts, which corresponds to the period of benefit. For the three months ended June 30, 2020, the Company recognized $39 million for amortization of costs to obtain customer contracts, of which $38 million was included in Selling, general and administrative expense and the remaining $1 million was a reduction to Revenue. For the nine months ended June 30, 2020, the Company recognized $105 million for amortization of costs to obtain customer contracts, of which $104 million was included in Selling, general and administrative expense and the remaining $1 million was a reduction to Revenue. For the three months ended June 30, 2019, the Company recognized $27 million for amortization of costs to obtain customer contracts which was included in Selling, general and administrative expense. For the nine months ended June 30, 2019, the Company recognized $73 million for amortization of costs to obtain customer contracts, of which $70 million was included in Selling, general and administrative expense and the remaining $3 million was a reduction to Revenue.
Contract fulfillment costs are recognized consistent with the transfer to the customer of the underlying performance obligations based on the specific contracts to which they relate. For the three months ended June 30, 2020, the Company recognized $12 million of contract fulfillment costs, of which $8 million was included within Costs and the remaining $4 million was a reduction to revenue. For the nine months ended June 30, 2020, the Company recognized $32 million of contract fulfillment costs, of which $28 million was included within Costs and the remaining $4 million was a reduction to revenue. For the three
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and nine months ended June 30, 2019, the Company recognized $11 million and $31 million of contract fulfillment costs within Costs, respectively.
4. Leases
The Company enters into various arrangements for office, warehouse and data center facilities, network equipment and vehicles. The Company assesses whether an arrangement contains a lease at contract inception. When an arrangement contains a lease, the Company records a right-of-use asset and lease liability. Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make payments for the right to use the asset.
Right-of-use assets and lease liabilities are recognized at the lease commencement date at the present value of future payments over the lease term. The present value of future payments is discounted using the rate implicit in the lease, when available. However, as most of the Company's leases do not provide an implicit interest rate, the present value is calculated using the Company's incremental borrowing rate, which represents the interest rate the Company would expect to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.
Options to extend or terminate a lease are included in the calculation of the lease term to the extent that the option is reasonably certain of exercise. For the majority of the Company's leases, the Company has concluded that it is not reasonably certain it would exercise such options, therefore the lease term is generally the non-cancelable period stated within the lease. The Company has elected to not record a right-of-use asset and lease liability for short term leases with an initial term of 12 months or less. The Company's leases have remaining lease terms ranging from 1 month to 9.7 years.
The following table details the components of net lease expense for the three and nine months ended June 30, 2020:
In millions Three months ended
June 30, 2020
Nine months ended June 30, 2020
Operating lease cost (1)
$ 17    $ 51   
Short-term lease cost (1)
   
Variable lease cost (1)(2)
  14   
Finance lease amortization of right-of-use assets (1)
   
Sublease income (3)
(1)   (4)  
Total lease cost $ 23    $ 68   
(1)Allocated between Cost of products and services, and Operating expenses.
(2)Includes real estate taxes and other charges for non-lease services payable to lessors and recognized in the period incurred.
(3)Included in Other income, net.

The Company's right-of-use assets and lease liabilities for financing leases are included in the Condensed Consolidated Balance Sheet as follows:
In millions June 30, 2020
ASSETS
Property, plant and equipment, net $ 10   
LIABILITIES
Other current liabilities  
Other liabilities  
The following table presents the Company's annual maturity of lease payments, weighted average remaining lease term and weighted average interest rate for operating and financing leases as of June 30, 2020:
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In millions Operating Leases Financing Leases
Remaining three months of 2020 $ 18    $  
2021 53     
2022 47     
2023 34     
2024 25     
2025 14    —   
2026 and thereafter 21    —   
Total lease payments 212    17   
Less: imputed interest (28)   (1)  
Total lease liability $ 184    $ 16   
Weighted average remaining lease term 4.7 years 2.7 years
Weighted average interest rate 6.1  % 5.7  %
The following table presents the Company's future minimum lease payments under non-cancelable leases as of September 30, 2019, prior to the adoption of ASC 842:
In millions Operating Leases Capital Leases
2020 $ 51    $ 12   
2021 39     
2022 33     
2023 22    —   
2024 17    —   
2025 and thereafter 29    —   
Total lease payments $ 191    20   
Less: imputed interest (1)  
Total lease liability $ 19   
The capital lease obligation as of September 30, 2019 included $11 million and $8 million within Other current liabilities and Other liabilities, respectively.
The Company outsources certain delivery services associated with its Enterprise Cloud and Managed Services, which included the sale of specified assets owned by the Company that were leased-back by the Company and are accounted for as a finance lease. As of June 30, 2020 and September 30, 2019, finance lease obligations associated with these sale leaseback agreements were $7 million and $13 million, respectively.
5. Strategic Partnership
On October 3, 2019, the Company entered into certain agreements that establish the framework for the Company's strategic partnership with RingCentral, a leading provider of global enterprise cloud communications, collaboration and contact center ("CC") solutions, to accelerate the Company's transition to the cloud. Through this partnership, the Company introduced Avaya Cloud Office by RingCentral ("Avaya Cloud Office" or "ACO"), a new global unified communications as a service ("UCaaS") solution. Avaya Cloud Office expands the Company's portfolio to offer a full suite of UC, CC, UCaaS and contact center as a service solutions to its global customer base. ACO combines RingCentral's leading UCaaS platform with Avaya technology, services and migration capabilities to create a highly differentiated UCaaS offering. The transaction closed on October 31, 2019 and ACO was launched on March 31, 2020. The Company now has a full suite of public, private and hybrid cloud solutions for its global UC and CC customers and partners.
As part of the strategic partnership, the Company and RingCentral also entered into an agreement governing the terms of the commercial arrangement between the parties (the "Framework Agreement"). Under the Framework Agreement, the parties entered into a Super Master Agent Agreement, pursuant to which Avaya acts as an agent to Avaya's channel partners with respect to the sale of ACO and make direct sales of ACO. RingCentral will pay a fee to Avaya, including for the benefit of its channel partners, for each such sale. In addition, for each unit of ACO sold during the term of the Framework Agreement, RingCentral will pay Avaya certain fees. Among other things, the Framework Agreement requires Avaya to (subject to certain
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exceptions) market and sell ACO as its exclusive UCaaS solution (as defined in the Framework Agreement). The Framework Agreement has a multiyear term and can be terminated early by either party in the event (i) the other party fails to cure a material breach or (ii) the other party undergoes a change in control.
In accordance with the Framework Agreement, RingCentral paid Avaya $375 million, predominantly for future fees, as well as for certain licensing rights. The $375 million payment consisted of $361 million in RingCentral shares and $14 million in cash. During the nine months ended June 30, 2020, the Company sold all of its RingCentral shares. During the three and nine months ended June 30, 2020, the Company recognized gains on RingCentral shares of $29 million and $59 million, respectively, within Other income, net in the Condensed Consolidated Statements of Operations.
In connection with the strategic partnership, the Company and RingCentral entered into an investment agreement, whereby RingCentral purchased 125,000 shares of the Company's Series A 3% Convertible Preferred Stock, par value $0.01 per share (the "Series A Preferred Stock"), for an aggregate purchase price of $125 million. See Note 15, "Capital Stock" for additional information on the Series A Preferred Stock.
6. Goodwill, net and Intangible Assets, net
Goodwill, net
The changes in the carrying amount of goodwill by segment during fiscal 2020 were as follows:
(In millions) Products & Solutions Services Total
Balance as of September 30, 2019
Cost $ 1,282    $ 1,478    $ 2,760   
Accumulated impairment charges (657)   —    (657)  
625    1,478    2,103   
Impairment charges (624)   —    (624)  
Foreign currency fluctuations (1)   (1)   (2)  
Balance as of June 30, 2020
Cost 1,281    1,477    2,758   
Accumulated impairment charges (1,281)   —    (1,281)  
$ —    $ 1,477    $ 1,477   
Goodwill is not amortized but is subject to periodic testing for impairment in accordance with GAAP at the reporting unit level. The Company's reporting units are subject to impairment testing annually or more frequently if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company's goodwill was primarily recorded upon emergence from bankruptcy as a result of applying fresh start accounting.
The impairment test for goodwill consists of a comparison of the fair value of a reporting unit with its carrying value, including the goodwill allocated to that reporting unit. The Company estimates the fair value of each reporting unit using a weighting of fair values derived from an income approach and a market approach.
Under the income approach, the fair value of a reporting unit is estimated using a discounted cash flows model. Future cash flows are based on forward-looking information regarding revenue and costs for each reporting unit and are discounted using an appropriate discount rate. The discounted cash flows model relies on assumptions regarding revenue growth rates, projected gross profit, working capital needs, selling, general and administrative expenses, research and development expenses, business restructuring costs, capital expenditures, income tax rates, discount rates and terminal growth rates. The discount rates the Company uses represent the estimated weighted average cost of capital, which reflects the overall level of inherent risk involved in its reporting unit operations and the rate of return an outside investor would expect to earn. To estimate cash flows beyond the final year of its model, the Company uses a terminal value approach. Under this approach, the Company applies a perpetuity growth assumption to determine the terminal value. The Company incorporates the present value of the resulting terminal value into its estimate of fair value. Forecasted cash flows for each reporting unit consider current economic conditions and trends, estimated future operating results, the Company's view of growth rates and anticipated future economic conditions. Revenue growth rates inherent in the forecasts are based on input from internal and external market intelligence research sources that compare factors such as growth in global economies, regional trends in the telecommunications industry and product evolution from a technological segment basis. Macroeconomic factors such as changes in economies, product
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evolution, industry consolidation and other changes beyond the Company's control could have a positive or negative impact on achieving its targets.
The market approach estimates the fair value of a reporting unit by applying multiples of operating performance measures to the reporting unit's operating performance (the "Guideline Public Company Method"). These multiples are derived from comparable publicly-traded companies with similar investment characteristics to the reporting unit. The key estimates and assumptions that are used to determine the fair value under the market approach include current and projected 12-month operating performance results, as applicable, and the selection of the relevant multiples that are applied.
Nine Months Ended June 30, 2020
During the first quarter of fiscal 2020, the Company changed its reporting units to align with changes in its organizational structure, mainly resulting from the previously disclosed strategic review process which concluded in October 2019. As a result, on October 1, 2019, the Company consolidated its Unified Communications ("UC") and Contact Center ("CC") reporting units into a Products & Solutions reporting unit and consolidated its Global Support Services ("GSS"), Avaya Professional Services ("APS") and Enterprise Cloud and Managed Services ("ECMS") reporting units into a Services reporting unit. As a result of these changes, the Company's reporting units are the same as its operating segments. Due to the consolidation of reporting units, the Company performed an interim goodwill impairment assessment immediately before and after the consolidation on October 1, 2019 by estimating and comparing the fair value of each reporting unit to its carrying value. The Company determined that the carrying amounts of each of the Company's reporting units did not exceed their estimated fair values and therefore no impairment existed as of October 1, 2019.
During the second quarter of fiscal 2020, the Company concluded that a triggering event occurred for both of its reporting units due to (i) the impact of the COVID-19 pandemic on the macroeconomic environment which led to revisions to the Company's long-term forecast during the second quarter of fiscal 2020 and (ii) the sustained decrease in the Company's stock price since the advent of the pandemic which was caused by the resulting volatility in the financial markets. As a result, the Company performed an interim quantitative goodwill impairment test as of March 31, 2020 to compare the fair values of its reporting units to their respective carrying amounts, including the goodwill allocated to each reporting unit. The results of the Company's interim goodwill impairment test as of March 31, 2020 indicated that the estimated fair value of the Company's Services reporting unit exceeded its carrying amount by 16%. The carrying amount of the Company's Products & Solutions reporting unit exceeded its estimated fair value primarily due to a reduction in the Company's long-term forecast to reflect increased risk from higher market uncertainty and the accelerated reduction of product sales related to the Company's historical on-premises perpetual licenses. The Company anticipates a continued shift and acceleration of customers upgrading and acquiring new technology innovation through the utilization of the Company's subscription offering, which is included in the Services reporting unit. As a result, the Company recorded a goodwill impairment charge of $624 million to write down the full carrying amount of the Products & Solutions goodwill in the Impairment charges line item in the Condensed Consolidated Statements of Operations for the nine months ended June 30, 2020.
The Company's long-term forecast includes significant estimates and assumptions, including management's estimate of the potential impact of the COVID-19 pandemic on the Company's operating results. Due to the uncertainty surrounding the impact of the COVID-19 pandemic on the macroeconomic environment and, more specifically, on the Company's future operating results, it is reasonably possible that the pandemic could have a more adverse impact than what is currently contemplated by the Company's long-term forecast.
The Company determined that no events occurred or circumstances changed during the three months ended June 30, 2020 that would indicate that it is more likely than not that its goodwill was impaired. To the extent that business conditions deteriorate or if changes in key assumptions and estimates differ significantly from management's expectations, it may be necessary to record additional impairment charges in the future.
Nine Months Ended June 30, 2019
During the third quarter of fiscal 2019, the Company concluded that triggering events occurred for all of its reporting units due to a sustained decrease in the Company's stock price and lower than planned financial results which led to revisions to the Company's long-term forecast during the third quarter of fiscal 2019. As a result, the Company performed an interim quantitative goodwill impairment test as of June 30, 2019 to compare the fair values of its reporting units to their respective carrying values, including the goodwill allocated to each reporting unit.
The results of the Company's interim goodwill impairment test as of June 30, 2019 indicated that the estimated fair values of the Company's UC, GSS, APS and ECMS reporting units were greater than their carrying amounts, however, the carrying amount of the Company's CC reporting unit within the Products & Solutions segment exceeded its estimated fair value primarily due to a reduction in the Company's long-term forecast. As a result, the Company recorded a goodwill impairment charge of $657 million in the Condensed Consolidated Statement of Operations of the nine months ended June 30, 2019, representing the amount by which the carrying value of the CC reporting unit exceeded its fair value.
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Intangible Assets, net
The Company's intangible assets consist of the following for the periods indicated:
(In millions)
Technology
and Patents
Customer
Relationships
and Other
Intangibles
Trademarks
and Trade Names
Total
Balance as of June 30, 2020
Finite-lived intangible assets:
Cost $ 960    $ 2,150    $ 42    $ 3,152   
Accumulated amortization (437)   (394)   (17)   (848)  
Finite-lived intangible assets, net 523    1,756    25    2,304   
Indefinite-lived intangible assets:
Cost —    —    333    333   
Accumulated impairment —    —    —    —   
Indefinite-lived intangible assets, net —    —    333    333   
Intangible assets, net $ 523    $ 1,756    $ 358    $ 2,637   
Balance as of September 30, 2019
Finite-lived intangible assets:
Cost $ 960    $ 2,154    $ 42    $ 3,156   
Accumulated amortization (308)   (279)   (11)   (598)  
Finite-lived intangible assets, net 652    1,875    31    2,558   
Indefinite-lived intangible assets:
Cost   —    333    335   
Accumulated amortization (2)   —    —    (2)  
Indefinite-lived intangible assets, net —    —    333    333   
Intangible assets, net $ 652    $ 1,875    $ 364    $ 2,891   
Intangible assets include technology and patents, customer relationships, and trademarks and trade names. Intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets. Intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Intangible assets determined to have indefinite useful lives are not amortized but are tested for impairment annually and more frequently if events occur or circumstances change that indicate an asset may be impaired.
The recoverability test of finite-lived assets is based on forecasts of undiscounted cash flows for each asset group. The fair value for the Company's indefinite-lived intangible asset, the Avaya Trade Name, is estimated using the relief-from-royalty model, a form of the income approach. Under this methodology, the fair value of the trade name is estimated by applying a royalty rate to forecasted net revenues which is then discounted using a risk-adjusted rate of return on capital. Revenue growth rates inherent in the forecast are based on input from internal and external market intelligence research sources that compare factors such as growth in global economies, regional trends in the telecommunications industry and product evolution from a technological segment basis. The royalty rate is determined using a set of observed market royalty rates.
Nine Months Ended June 30, 2020
As a result of the goodwill triggering event described above, the Company performed a recoverability test on all of its finite-lived asset groups as of March 31, 2020 before proceeding to the goodwill impairment review and concluded that no impairment charge was necessary. As of March 31, 2020, the Company also performed an interim quantitative impairment test for the Avaya Trade Name which indicated no impairment existed and the level of excess fair value over carrying value was 5%. As of March 31, 2020, an increase in the discount rate of 50 basis points or a decrease in the long-term revenue growth rate of 140 basis points would have resulted in an estimated fair value of the trade name below its carrying value.
The Company determined that no events occurred or circumstances changed during the three months ended June 30, 2020 that would indicate that its finite-lived intangible assets may not be recoverable or that it is more likely than not that its indefinite-lived intangible assets were impaired. To the extent that business conditions deteriorate or if changes in key assumptions and estimates differ significantly from management's expectations, it may be necessary to record impairment charges in the future.
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Nine Months Ended June 30, 2019
During the third quarter of fiscal 2019, the Company elected to abandon an in-process research and development project that no longer aligned with the Company's technology roadmap. As a result, the Company recorded an impairment charge of $2 million to write down the full carrying amount of the project within the Impairment charges line item in the Condensed Consolidated Statements of Operations.
As a result of the goodwill triggering events during the third quarter of fiscal 2019, the Company performed a recoverability test on all of its finite-lived asset groups as of June 30, 2019 before proceeding to the goodwill impairment review and concluded that no impairment charge was necessary. The Company also performed an interim quantitative impairment test for the Avaya Trade Name as of June 30, 2019 and determined that its estimated fair value exceeded its carrying value and no impairment existed.
7. Supplementary Financial Information

The following table presents a summary of Other income, net for the periods indicated:
Three months ended
June 30,
Nine months ended
June 30,
(In millions) 2020 2019 2020 2019
OTHER INCOME, NET
Interest income $   $   $   $ 11   
Foreign currency loss, net (5)   (1)   (16)   (8)  
Gain on investments in equity and debt securities, net 29    —    49    —   
Other pension and post-retirement benefit credits, net     16     
Change in fair value of emergence date warrants (3)     —