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 to create prestigious and award-winning feature films, music recordings, television shows, live concerts, sporting events, and news broadcasts. Avid has been honored for technological innovation with 18 Emmy Awards, one Grammy Award, two Oscars (Scientific and Technical Academy Awards of Merit), and the first ever America Cinema Editors Technical Excellence Award.
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. A key element of our strategy is our transition to a recurring revenue-based model through a combination of subscription offerings, maintenance contracts, and long-term agreements. We started offering subscription licensing options for some of our products and solutions in 2014 and by the end of 2022 we offered subscription licensing for all of our software solutions and we had approximately 506,000 paid subscriptions. Subscription count includes all paid and active seats under multi-seat licenses. These licensing options offer choices in pricing and deployment to suit our customers' needs. 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 agreements with channel partners and resellers to purchase minimum amounts of products and service over a specified period of time. Avid is committed to our digital transformation initiative, which focuses on optimizing systems, processes, and back-office functions with the objective of improving our operations related to our digital and subscription business. The initiative started in the third quarter of 2021, and is expected to continue through 2024. We plan to significantly invest in transforming our enterprise-wide infrastructure and technologies to benefit customers and drive enhanced performance across the company. 28
CRITICAL ACCOUNTING ESTIMATES
Our 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 regularly reevaluate our estimates and judgments, including those related to the following: revenue recognition and allowances for sales returns and exchanges and income tax assets and liabilities. 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 that are not readily apparent from other sources. Actual results may differ from these estimates.
We believe the following critical accounting estimates most significantly affect
the portrayal of our financial condition and involve our most difficult and
subjective estimates and judgments.
We often enter into contractual arrangements that have multiple performance obligations, one or more of which may be delivered subsequent to the delivery of other performance obligations. These arrangements may include a combination of products, maintenance, training, and professional services. We allocate the transaction price of the arrangement based on the relative estimated standalone selling price, or SSP, of each distinct performance obligation. Our process for determining SSP for each performance obligation involves significant management judgment. In determining SSP, we maximize observable inputs and consider a number of data points, including: • the pricing of standalone sales (in the limited instances where available); • the pricing established by management when setting prices for deliverables that are intended to be sold on a standalone basis; • contractually stated prices for deliverables that are intended to be sold on a standalone basis; • other pricing factors, such as the geographical region in which the products are sold and expected discounts based on the customer size and type. Determining SSP for performance obligations which we never sell separately also requires significant judgment. In estimating the SSP in these circumstances, we consider the likely price that would have resulted from established pricing practices had the deliverable been offered separately and the prices a customer would likely be willing to pay. We only include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. We reduce transaction prices for estimated returns and other allowances that represent variable consideration under ASC 606, which we estimate based on historical return experience and other relevant factors, and we record a corresponding refund liability as a component of accrued expenses and other current liabilities. Other forms of contingent revenue or variable consideration are infrequent.
Income Tax Assets and Liabilities
We record deferred tax assets and liabilities based on the net tax effects of tax credits, operating loss carryforwards, and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes compared to the amounts used for income tax purposes. We regularly review our deferred tax assets for recoverability with consideration for such factors as historical losses, projected future taxable income, and the expected timing of the reversals of existing temporary differences. A valuation allowance is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management believes the U.S deferred tax assets, based largely on the history of U.S. tax losses, warrant a full valuation allowance based on the weight of available negative evidence. We also determined that a full valuation allowance is warranted on a portion of our foreign deferred tax assets. 29 -------------------------------------------------------------------------------- Our assessment of the valuation allowance on our U.S. and foreign deferred tax assets could change in the future based on our levels of pre-tax income and other tax-related adjustments. Reversal of the valuation allowance in whole or in part would result in a non-cash reduction in income tax expense during the period of reversal. To the extent some or all of our valuation allowance is reversed, future financial statements would reflect an increase in non-cash income tax expense until such time as our deferred tax assets are fully utilized. We account for uncertainty in income taxes recognized in our financial statements by applying a two-step process to determine the amount of tax provision or benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon examination by the taxing authorities based on the technical merits of the position. If the tax position is deemed more likely than not to be sustained, the tax position is then assessed to determine the amount of provision or benefit to recognize in the financial statements. The amount of provision or benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. Our provision for income taxes includes the effects of any resulting tax reserves, referred to as unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties. RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") provides narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our Form 10-K for the fiscal year ended December 31, 2021, for discussion of the results of operations for the year ended December 31, 2021, compared to the year ended December 31, 2020, which is incorporated by reference herein.
Recent Developments Affecting Our Business
Our business and financial performance depend significantly on worldwide economic conditions. We face global macroeconomic challenges, particularly in light of the effects of the ongoing geopolitical conflicts in Ukraine, the COVID-19 pandemic, uncertainty in the markets, volatility in exchange rates, inflationary trends and evolving dynamics in the global trade environment. Throughout 2022, we observed significant market uncertainty, increasing inflationary pressures, supply constraints and a strengthening U.S. dollar. We continue to manage through supply constraints seen industry-wide due to component shortages, and for which the duration of such constraints is uncertain. These shortages have resulted in increased costs (i.e., component and other commodity costs, freight, expedite fees, etc.) which have had a negative impact on our product gross margin and have resulted in extended lead times for us and our customers. As a company with an extensive global footprint, we are subject to risks and exposures from foreign currency exchange rate fluctuations caused by significant events with macroeconomic impacts. We continuously monitor the direct and indirect impacts of these circumstances on our business and financial results, as well as the overall global economy and geopolitical landscape. Foreign currency exchange rate fluctuations negatively impacted our revenue and earnings during 2022. While our revenue and earnings are relatively predictable as a result of our subscription-based business model, the broader implications of these macroeconomic events on our business, results of operations and overall financial position, particularly in the long term, remain uncertain. See the section titled "Risk Factors" in Part I, Item 1A of this report for further discussion of the possible impact of these macroeconomic issues on our business. On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (the "Inflation Reduction Act") into law. the Inflation Reduction Act imposes an excise tax of 1% tax on the fair market value of net stock repurchases made after December 31, 2022. The impact of this provision will be dependent on the extent of share repurchases made in future periods. We continue to analyze the impacts of the Inflation Reduction Act; however, it is not expected to have a material impact on our financial statements. Additionally, the Inflation Reduction Act includes a new corporate alternative minimum tax which is not currently applicable to the Company. 30 --------------------------------------------------------------------------------
The following table sets forth certain items from our consolidated statements of
operations as a percentage of net revenues for the periods indicated:
Year Ended December 31, 2022 2021 2020 Net revenues: Subscription revenues 36.3 % 26.4 % 20.2 % Maintenance revenues 26.3 % 29.9 % 34.4 % Integrated solutions revenue 37.4 % 43.7 % 45.4 % Total net revenues 100.0 % 100.0 % 100.0 % Cost of revenues 34.3 % 35.2 % 36.7 % Gross margin 65.7 % 64.8 % 63.3 % Operating expenses: Research and development 16.0 % 16.0 % 15.8 % Marketing and selling 23.0 % 23.2 % 24.3 % General and administrative 13.7 % 14.0 % 13.0 % Restructuring costs, net 0.1 % 0.3 % 1.4 % Total operating expenses 52.8 % 53.5 % 54.5 % Operating income 12.9 % 11.3 % 8.8 % Interest and other expense, net (2.0) % (0.6) % (5.3) % Income before income taxes 10.9 % 10.7 % 3.5 % Benefit from (provision for) income taxes (2.4) % 0.6 % 0.4 % Net income 13.3 % 10.1 % 3.1 %
A summary of our revenue sources for the years ended December 31, 2022, 2021 and
2020 respectively, is as follows (in thousands):
Year Ended December 31, 2022 2021 2020 Subscriptions $ 151,330 $ 108,443 $ 72,831 Maintenance 109,845 122,411 124,175 Subscriptions and Maintenance 261,175 230,854 197,006 Perpetual Licenses 11,091 23,793 27,858 Software Licenses and Maintenance 272,266 254,647 224,864 Integrated Solutions 123,277 131,073 112,904 Professional Services and Training 21,870 24,224 22,698 Total Revenue $ 417,413 $ 409,944 $ 360,466 Net Revenues Our net revenues are derived mainly from sales of subscription software solutions, maintenance contracts, and integrated solutions for digital media content production, management and distribution, and related professional services. 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, 31 -------------------------------------------------------------------------------- businesses, and revenue models, which is influencing their short-term and long-term purchasing decisions. As a result of these factors, the timing and amount of product revenue recognized related to orders for large, complex solutions, as well as the services associated with them, can fluctuate from quarter to quarter and cause significant volatility in our quarterly and annual operating results. See the risk factors discussed in Part I - Item 1A under the heading "Risk Factors" of this Form 10-K. Avid has now completed the allocation of transaction price for 2022 using an updated SSP methodology that includes consideration of the effect of multi-year customer contracts, and, as a result has recorded a negative adjustment of $3.3 million in the quarter ended December 31, 2022, consisting of $1.3 million related to fiscal year 2022, $2.1 million related to fiscal year 2021, and a benefit of $0.1 million related to fiscal year 2020, to account for the cumulative impact of these multi-year term customer contracts since the quarter ended December 31, 2020. This adjustment represents 0.3% of cumulative revenue during the three fiscal years ended December 31, 2022, and represents 2.9% of revenue for the quarter ended December 31, 2022. Net Revenues for the Years Ended December 31, 2022 and 2021 (dollars in thousands) 2022 Change 2021 Net Revenues $ % Net Revenues Subscription $ 151,330 $ 42,887 39.5% $ 108,443 Maintenance 109,845 (12,566) (10.3)% 122,411 Integrated solutions & other 156,238 (22,852) (12.8)% 179,090 Total net revenues $ 417,413 $ 7,469 1.8% $ 409,944
The following table sets forth the percentage of our net revenues attributable
to geographic regions for the periods indicated:
Year Ended December 31, 2022 2021 2020 United States 43% 42% 40% Other Americas 7% 5% 7% Europe, Middle East and Africa 36% 39% 39% Asia-Pacific 14% 14% 14% Subscription Revenue Subscription revenues have continued increasing year over year, in line with expectations, as a result of new customers adopting our solutions, customers transitioning from our perpetual product licenses to our subscription-based model and our offering subscription licensing options for more of our software solutions. The Company anticipates this trend to continue throughout the next few years as we continue to add new customers and transition to subscription and SAAS based solutions for more of our offerings. Subscription revenue in 2022 was impacted by the $3.3 million reduction in revenue as a result of the adjustment noted above. Maintenance Revenue Our maintenance revenues are derived from a variety of maintenance contracts for our software and integrated solutions. Maintenance contracts allow each customer to select the level of technical and operational support that they need to maintain their operational effectiveness. Maintenance contracts typically include the right to the latest software updates, call support, and, in some cases, hardware maintenance. We expect maintenance revenues to decrease in the coming years as customers who are on maintenance contracts continue to migrate to our subscription and SAAS based solutions offset in part by customers with perpetual licenses continue to renew their maintenance contracts. Additionally, during 2022, maintenance revenue declined by $12.6 million from the prior year, primarily due to lower maintenance revenue related to new integrated solutions sales; this was caused by delayed integrated solutions shipments as a result of supply chain issues. 32 --------------------------------------------------------------------------------
Integrated Solutions and other Revenues
Integrated solutions and other revenues decreased as a result of delayed
shipments due to supply chain issues as well as customers transitioning from our
perpetual product licenses to our subscription-based model.
At December 31, 2022, we had revenue backlog of approximately $382.8 million, of which approximately $223.9 million is expected to be recognized in the next 12 months, compared to $412.8 million of revenue backlog at December 31, 2021. Revenue backlog, as we define it, consists of firm orders received and includes both (i) orders where the customer has paid in advance of our performance obligations being fulfilled, and (ii) orders for future product deliveries or services that have not yet been invoiced by us. Revenue backlog associated with arrangement consideration paid in advance primarily consists of deferred revenue related to (i) the undelivered portion of annual maintenance contracts and (ii) Implied Maintenance Release PCS performance obligations. See Note P, Revenue, to our Consolidated Financial Statements in Item 8 of the Form 10-K for a description of implied performance obligation of a form of post-contract maintenance support ("Implied Maintenance Release PCS"). Revenue backlog associated with orders for future product deliveries and services where cash has not been received primarily consists of (i) product orders received but not yet shipped, (ii) professional services not yet rendered, and (iii) future years of multi-year maintenance agreements not yet billed. Our definition of backlog includes contractual commitments with customers that specify minimum future purchases, however, since these contractual arrangements do not specify which specific products and services must be purchased to fulfill these commitments, they do not meet the definition of an unfulfilled remaining performance obligation under GAAP. Orders included in revenue backlog may be reduced, canceled, or deferred by our customers. The expected timing of the recognition of revenue backlog as revenue is based on our current estimates and could change based on a number of factors, including (i) the timing of delivery of products and services, (ii) customer cancellations or change orders, or (iii) changes in the estimated period of time Implied Maintenance Release PCS is provided to customers. As there is no industry standard definition of revenue backlog, our reported revenue backlog may not be comparable with other companies. Revenue backlog as of any particular date should not be relied upon as indicative of our net revenues for any future period.
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 goods; •warehousing; •customer support related to maintenance; •royalties for third-party software and hardware included in our products; and •providing professional services and training for customers. Costs of Revenues for the Years Ended December 31, 2022 and 2021 (dollars in thousands) 2022 Change 2021 Costs $ % Costs Subscription $ 23,504 $ 8,541 57.1% $ 14,963 Maintenance 19,913 (3,068) (13.4)% 22,981 Integrated solutions & other 99,558 (6,638) (6.3)% 106,196 Total cost of revenues $ 142,975 $ (1,165) (0.8)% $ 144,140 Gross profit $ 274,438 $ 8,634 3.2% $ 265,804 33
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 such as disk drives, and currency exchange-rate fluctuations. Gross Margin % for the Years Ended December 31, 2022 and 2021 2022 Gross (Decrease) Increase in 2021 Gross Margin % Gross Margin % Margin % Subscription 84.5% (1.7)% 86.2% Maintenance 81.9% 0.7% 81.2% Integrated solutions & other 36.3% (4.4)% 40.7% Total Gross Margin 65.7% 0.9% 64.8% Subscription gross margin decreased in 2022 due to increased customer care costs being allocated to subscription as well as the $3.3 million reduction in revenue as a result of the adjustment noted above. The margin for integrated solutions decreased as a result of supply chain issues in 2022. The total gross margin improved due to the increased volume on our higher margin subscription revenue.
Operating Expenses and Operating Income
Operating Expenses and Operating Income for the Years
Ended December 31, 2022 and 2021
(dollars in thousands) 2022 Change 2021 Expenses $ % Expenses Research and development expenses $ 66,904 $ 1,345 2.1% $ 65,559 Marketing and selling expenses 95,977 483 0.5% 95,494 General and administrative expenses 57,189 (183) (0.3)% 57,372 Restructuring costs, net 513 (603) (54.0)% 1,116 Total operating expenses $ 220,583 $ 1,042 0.5% $ 219,541 Operating income $ 53,855 $ 7,592 16.4% $ 46,263
Research and Development Expenses
Research and development, or R&D, expenses include costs associated with the development of new products and the enhancement of existing products, and consist primarily of employee salaries and benefits, facilities costs, depreciation, costs for consulting and temporary employees, and prototype and other development expenses. The table below provides further details regarding the changes in components of R&D expense. 34 -------------------------------------------------------------------------------- Year-Over-Year Change in R&D Expenses for the Year Ended December 31, 2022 (dollars in thousands) 2022 Increase/(Decrease) From 2021 $ % Consulting and outside services expenses $ 2,654 27.1% Facilities and information technology expenses (600) (4.8)% Personnel and other expenses (388) (0.9)% Computer hardware and supplies expenses (321) (19.9)% Total research and development expenses change $ 1,345 2.1% The increase in consulting and outside services was primarily due to both an increase in fees as well as increased usage of contractors. The decrease in facilities and information technology expenses is largely due to a decrease in headcount in our R&D departments, which resulted in lower allocated expenses to the R&D department. This decrease is partially offset by the increased spend on our information technology infrastructure to support ongoing business operations.
Marketing and Selling Expenses
Marketing and selling expenses consist primarily of employee salaries and benefits for selling, marketing, and pre-sales customer support personnel, commissions, travel expenses, advertising and promotional expenses, web design costs, and facilities costs. The table below provides further details regarding the changes in components of marketing and selling expense. Year-Over-Year Change in Marketing and Selling Expenses
for Year Ended December 31, 2022
(dollars in thousands) 2022 Increase/(Decrease) From 2021 $ % Advertising and marketing 688 31.5% Consulting and other expenses (522) (5.7)% Facilities and information technology expenses 444 2.9% Personnel-related expenses $ (245) (0.4)% Foreign exchange translations 118 9.2% Total marketing and selling expenses change $ 483 0.5% The increase in advertising and marketing was primarily due to the resumption of in-person trade shows and events that were attended remotely in the prior year. The decrease in consulting and other expenses was primarily due to consulting work performed in 2021 around our digital transformation initiative focused on building an overall framework for design implementations. The increase in facilities and information technology expenses was related to increased spend on our information technology infrastructure to support ongoing business operations. The decrease in personnel-related expenses was primarily the result of a decrease in variable related compensation. The increase in foreign exchange translations was due to foreign exchange gains and losses from foreign currency denominated transactions and the revaluation of foreign currency denominated assets and liabilities. These foreign exchange changes were primarily due to the euro-dollar and pound-dollar exchange rate volatility.
General and Administrative Expenses
General and administrative, or G&A, expenses consist primarily of employee
salaries and benefits for administrative, executive, finance, and legal
personnel, audit, legal, and strategic consulting fees, and insurance,
information systems, and facilities costs. The table below provides further
details regarding the changes in components of G&A expense.
35 -------------------------------------------------------------------------------- Year-Over-Year Change in G&A Expenses for the Year Ended December 31, 2022 (dollars in thousands) 2022 Increase/(Decrease) From 2021 $ % Other expenses (693) (1.9)% Facilities and information technology expenses 613 10.0% Consulting and outside services expenses (103) (0.7)% Total general and administrative expenses change $ (183) (0.3)%
The decrease in other expenses was primarily a result of reduced business
development activities in 2022. The increase in facilities and information
technology expenses was related to increased spend on our information technology
infrastructure to support ongoing business operations.
Restructuring Costs, Net
In October 2020, we committed to a restructuring plan in order to reorganize the business to better support the company's strategy and overall performance. This restructuring plan was complete as of December 31, 2022.
During the year ended December 31, 2022, we recorded $0.5 million of severance
costs for three positions that were eliminated during 2022.
During the year ended December 31, 2021, we recorded $1.1 million of severance
costs for 24 positions that were eliminated during 2021.
Interest and Other Income, Net
Interest and Other Income, net for the Years Ended December 31, 2022 and 2021 (dollars in thousands) 2022 Change 2021 Income Income (Expense) $ % (Expense) Interest income $ 45 $ 39 650.0% $ 6 Interest expense (9,395) (2,240) 31.3% (7,155) Other income, net 832 (4,009) (82.8)% 4,841
Total interest and other income, net $ (8,518) $ (6,210)
269.1% $ (2,308) The increase in interest expense was due to a higher interest rate as a result of increases in the Secured Overnight Financing Rate (SOFR) on our borrowings and a higher level of borrowings, offset in part by lower interest rate margin on our borrowings. See Note Q, Long-Term Debt and Credit Agreement, to our Consolidated Financial Statements in Item 8 of this Form 10-K for further information. Other income, net in 2021 included the gain on the forgiveness of our PPP loan offset by the loss due to extinguishment of debt. 36 --------------------------------------------------------------------------------
(Benefit from) Provision for Income Taxes
(Benefit from) Provision for Income Taxes for the Years
Ended December 31, 2022 and 2021
(dollars in thousands) 2022 Change 2021 Provision $ % Provision
(Benefit from) Provision for income taxes $ (9,904) $ (12,471)
(485.8)% $ 2,567
Our effective tax rate, which represents our tax provision as a percentage of
income before tax, was (21.8)% and 5.8% respectively, for 2022 and 2021.
The decrease in our 2022 provision was primarily driven by an $11.3 million non-recurring benefit from the release of a reserve for an uncertain tax position in our German subsidiary due to the expiration of a related statute of limitations augmented by $0.7 million due to a windfall deduction related to stock based compensation in our UK subsidiary. We have significant accumulated deferred tax assets including the tax effects of net operating losses and tax credit carryovers. The realization of the net deferred tax assets is dependent upon the generation of sufficient future taxable income in the applicable tax jurisdictions. We regularly review our deferred tax assets for recoverability with consideration for such factors as historical losses, projected future taxable income, the expected timing of the reversals of existing temporary differences, and tax planning strategies. ASC Topic 740, Income Taxes, requires us to record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management believes the remaining deferred tax assets, based largely on the long history of U.S. tax losses, warrant a valuation allowance based on the weight of available negative evidence. We have also determined that a full valuation allowance is warranted on a portion of our foreign deferred tax assets. We have experienced recent profitability in the U.S.; however we intend to continue maintaining a full valuation allowance on our U.S. deferred tax assets until there is sufficient positive evidence to allow us to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. Any such release of the valuation allowance, or a portion thereof, would result in a material non-cash income tax benefit in the quarter the realizability of the respective deferred taxes were deemed to be more likely than not and would increase non-cash income tax expense in the periods subsequent to the reversal. 37 --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Sources of Cash
Our principal source of liquidity is cash and cash equivalents, which totaled $35.2 million as of December 31, 2022. We have generally funded operations in recent years through the use of existing cash balances, supplemented from time to time with the proceeds of long-term debt and borrowings under our credit facilities. Our cash requirements vary depending on factors such as the growth of the business, changes in working capital, and capital expenditures. We expect to operate the business and execute our strategic initiatives principally with funds generated from operations, remaining net proceeds from the term loan borrowings under the Second Amended and Restated Credit Agreement ("Second A&R Credit Agreement"), and draws of up to a maximum of $120.0 million under the Second A&R Credit Agreement's revolving credit facility described below. 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 from the filing of our annual report as well as for the foreseeable future. Refer to the contractual obligations discussion below, for our anticipated cash requirements related to contractual obligations. In year ended December 31, 2021, we committed to a digital transformation initiative focused around modernizing our enterprise-wide infrastructure and technologies to benefit our customers and drive enhanced performance across the company. Over the next three years, we plan to invest significant funds and resources towards implementing these new technologies as part of this initiative. These expenditures will be a mix of capital expenditures which will flow through our investing operations as well as SAAS based software solutions which will increase our use of cash from operations.
On January 5, 2021, we entered into the Credit Agreement with JPMorgan Chase Bank, N.A., as the administrative agent, or the Agent, and the lenders party thereto, or the Lenders. Pursuant to the Credit Agreement, the Lenders agreed to provide us with (a) a term loan in the aggregate principal amount of $180.0 million, (or the "Term Loan") and (b) a revolving credit facility of up to a maximum of $70.0 million in borrowings outstanding at any time, (the "Revolving Credit Facility"). We borrowed the full amount of the $180.0 million Term Loan on the closing date, but did not borrow any amount under the Revolving Credit Facility on the closing date. The borrowings under the Term Loan and cash on hand were used to repay outstanding borrowings under the Company's prior financing agreement with Cerberus Business Finance, LLC, which was then terminated. Prior to the maturity of the Revolving Credit Facility, any amounts borrowed under the Revolving Credit Facility could be repaid and, subject to the terms and conditions of the Credit Agreement, reborrowed in whole or in part without penalty. On February 25, 2022, the Company executed an Amended and Restated Credit Agreement (the "A&R Credit Agreement") with JPMorgan Chase Bank, N.A. and the Lenders. The A&R Credit Agreement extended the term of the Term Loan by approximately one year to February 25, 2027, reduced the applicable interest rate margins by 0.25%, removed the LIBOR floor, moved the reference rate from LIBOR to SOFR, reset the principal amortization schedule, and eliminated the fixed charge coverage ratio. The A&R Credit Agreement contained a financial covenant to maintain a total net leverage ratio of no more than 4.00 to 1.00 initially, with step downs thereafter. Other terms of the A&R Credit Agreement remained substantially the same as the Credit Agreement. The Term Loan, as amended, had an initial interest rate of SOFR plus a 0.10% credit spread adjustment plus an applicable margin of 2.25%, with a 0% floor. The applicable margin for SOFR loans under the A&R Credit Agreement ranged from 1.75% to 3.0%, depending on the Company's total net leverage ratio. Both the Term Loan and the Revolving Credit Facility would mature on February 25, 2027 under the A&R Credit Agreement. On October 6, 2022, the Company executed the Second Amended and Restated Credit Agreement (the "Second A&R Credit Agreement") with JPMorgan Chase Bank, N.A. and the Lenders. Pursuant to the Second A&R Credit Agreement, the Lenders agreed to provide the Company with (a) an additional term loan in the aggregate principal amount of $20 million (of which approximately $19 million was used to pay off the Company's outstanding drawings under the Revolving Credit Facility), and (b) an additional $50 million of available borrowing capacity under the Revolving Credit Facility, increasing the aggregate amount available to $120.0 million. The Second A&R Credit Agreement, amends and restates the Company's existing A&R Credit Agreement, includes substantially similar terms and does not result in any changes to financial covenants, pricing or the maturity date of February 25, 2027. 38 -------------------------------------------------------------------------------- Financial terms and prepayments. Under the Second A&R Credit Agreement, interest accrues on outstanding borrowings under the Term Loan and the Revolving Credit Facility at a rate of the Alternate Base Rate, Adjusted Term SOFR Rate, the Adjusted EURIBO Rate, Adjusted TIBO Rate pr Adjusted Daily Simple RFR (each as defined in the Second A&R Credit Agreement), at the option of the Company, plus a spread of 0.75% to 2.00% with no floor with respect to the Alternate Base Rate, and a spread of 1.75% to 3.00% with no floor with respect to the Adjusted Term SOFR Rate, the Adjusted EUROIBO Rate, the Adjusted TIBO Rate or the Adjusted Daily Simple RFR, in each case depending on our total net leverage ratio. In addition, we have to pay the Lenders, on a quarterly basis, a commitment fee at a rate of 0.20% to 0.50%, depending on our leverage ratio, on the average daily amount equal to (1) the total revolving commitments under the Revolving Credit Facility less (2) total amount of the outstanding borrowings under the Revolving Credit Facility during the immediately preceding three month period. During the term of the Revolving Credit Facility, we are entitled to reduce the maximum amounts of the Lenders' commitments under the Revolving Credit Facility. We are also able to prepay all or any portion of the borrowings under the Second A&R Credit Agreement on or prior to the stated maturity, subject to the payment of certain break funding amounts, if applicable. In addition, subject to exceptions we are required to prepay the Term Loan with proceeds we receive from specified events, including sales of assets, insurance proceeds and condemnation awards and the incurrence of certain indebtedness. The Term Loan requires quarterly principal payments equal to $2,387,500 from March 31, 2023 through March 31, 2024, $3,581,250 from June 30, 2024 through March 31, 2025, and $4,775,000 on June 30, 2025 and on the last day of each calendar quarter thereafter, with the remaining aggregate principal amount due at maturity. Collateral and guarantees. We and our subsidiary, Avid Technology Worldwide, Inc., or Avid Worldwide, granted a security interest in substantially all of our assets to secure the obligations of all obligors under the Term Loan and the Revolving Credit Facility. Avid Worldwide provided a guarantee of all our obligations under the Second A&R Credit Agreement. Our future subsidiaries (other than foreign subsidiaries and certain immaterial subsidiaries) are also required to become a party to the applicable security agreements and guarantee the obligations under the Second A&R Credit Agreement. Representations and restrictive covenants. The Second A&R Credit Agreement contains representations, warranties and restrictive covenants that are customary for an agreement of that kind, including, for example, covenants that limited or restricted us from incurring additional indebtedness, granting liens, making investments and restricted payments, making acquisitions, entering into swap agreements, paying dividends, making payments of or amending the terms of certain subordinated indebtedness, engaging in sale and leaseback transactions, and engaging in transactions with affiliates. Events of default. The Second A&R Credit Agreement contains customary events of default under which our payment obligations could be accelerated. These events of default include, among others, failure to pay amounts payable under the Second A&R Credit Agreement when due, breach of representations and warranties, failure to perform covenants, a change of control, default or acceleration of material indebtedness, certain judgments and certain impairments to the collateral. Financial covenants. The Company is required to maintain a maximum total net leverage ratio, generally defined as the ratio of (x) consolidated total indebtedness minus liquidity maintained in the United States up to $25 million as of the end of each fiscal quarter to (y) consolidated EBITDA for the period of four consecutive fiscal quarters ending as of such date, not to exceed 3.75 to 1:00 as of the end of the fiscal quarters ending September 30, 2022 through December 31, 2022; 3.50 to 1.00 as of the end of the fiscal quarters ending March 31, 2023 through June 30, 2023; 3.25 to 1.00 as of the end of the fiscal quarters ending September 30, 2023 through December 31, 2023; and 3.00 to 1.00 as of the end of fiscal quarters ending on or after March 31, 2024. Our ability to satisfy the maximum total net leverage ratio covenant in the future depends on our ability to maintain profitability and cash flow in line with prior results. This includes our ability to maintain bookings and billings in line with levels experienced over the last 12 months. In recent quarters, we have experienced volatility in bookings and billings resulting from, among other things, (i) our transition towards subscription and recurring revenue streams and the resulting decline in traditional upfront product sales, (ii) the rapid evolution of the media industry resulting in changes to our customers' needs, (iii) the impact of new and anticipated product launches and features, and (iv) volatility in currency rates. In the event revenues in future quarters are lower than we currently anticipate, we may be forced to take remedial actions which could include, among other things (and where allowed by the lenders), (i) further cost reductions, (ii) seeking replacement financing, (iii) raising funds through the issuance of additional equity or debt securities or the incurrence of additional borrowings, or (iv) disposing of certain assets or businesses. Such remedial actions, which may not be available on favorable terms or at all, could have a material adverse impact on our business. If we are not in compliance with the net leverage ratio covenant and are unable to obtain an amendment or waiver, such noncompliance may result in an event of default under the Second A&R Credit Agreement, which could permit acceleration of the outstanding indebtedness under the Second A&R Credit 39 -------------------------------------------------------------------------------- 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 Second A&R Credit Agreement.
The following table summarizes our cash flows for the years ended December 31,
2022, 2021, and 2020 (in thousands):
Ended December 31,
2022 2021 2020 Net cash provided by operating activities $ 48,019 $ 62,489 $ 39,555 Net cash used in investing activities (15,251) (6,819) (5,692) Net cash used in financing activities (52,700) (77,735) (24,549)
Effect of foreign currency exchange rates on cash and
(1,772) (1,016) 1,748 Net (decrease) increase in cash, cash equivalents and restricted cash $ (21,704) $ (23,081) $ 11,062
Cash Flows from Operating Activities
Cash provided by operating activities aggregated $48.0 million for the year ended December 31, 2022. The decrease compared to the prior year was primarily due to a change in working capital. Our contract assets increased as a result of growth in subscription licensing of our enterprise software solutions, with certain agreements having multi-year term.
Cash Flows from Investing Activities
For the year ended December 31, 2022, the net cash flow used in investing activities reflected $15.3 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 leasehold improvements. In addition, in 2022 we increased spending on the development of internal-use software as we upgrade and improve our back-office applications, as well as development of our cloud related infrastructure.
Cash Flows from Financing Activities
For the year ended December 31, 2022, net cash flows used in financing activities were primarily the result of our stock repurchase program and our common stock repurchases for tax withholdings for net settlement of equity awards. This was offset by $20 million cash provided from a new term loan as part of our Second A&R Credit Agreement in October 2022.
The following table outlines our contractual payment obligations as of
December 31, 2022 (in thousands):
Less than After Total 1 Year 2 - 5 Years 5 Years Term Loan $ 184,338 $ 9,550 $ 174,788 $ - Other long-term debt 815 160 655 - Operating leases 31,337 6,901 22,631 1,805 Unconditional purchase obligations 29,123 29,123 - - $ 245,613 $ 45,734 $ 198,074 $ 1,805 40
Other contractual arrangements that may result in cash payments consisted of the
following at December 31, 2022 (in thousands):
Total 1 Year 2 - 5 Years 5 Years Stand-by letters of credit 3,143 1,382 1,062 699 $ 3,143 $ 1,382 $ 1,062 $ 699 We entered into a long-term agreement to purchase a variety of information technology solutions from a third party in the second quarter of 2020, which included an unconditional commitment to purchase a minimum of $32.2 million of products and services over the initial five years of the agreement. We have purchased $19.9 million of products and services pursuant to this agreement as of December 31, 2022. We have letters of credit that are used as security deposits in connection with our leased Burlington, Massachusetts headquarters office space. In the event of default on the underlying leases, the landlords would, at December 31, 2022, be eligible to draw against the letters of credit to a maximum of $0.7 million in the aggregate. In addition, we have letters of credit in connection with security deposits for other facility leases totaling $0.5 million in the aggregate, as well as letters of credit totaling $2.0 million that otherwise support our ongoing operations. These letters of credit have various terms and expire during 2023 and beyond, while some of the letters of credit may automatically renew based on the terms of the underlying agreements.
RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncement
See Note B, Summary of Significant Accounting Policies, to our Consolidated
Financial Statements in Item 8 of the Form 10-K for a description of recently
adopted accounting standards.
Recent Accounting Pronouncement to be Adopted
See Note B, Summary of Significant Accounting Policies, to our Consolidated
Financial Statements in Item 8 of the Form 10-K for a description of certain
issued accounting standards that have not been adopted and may impact our
financial statements in future reporting periods.
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