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(Exact Name of Registrant as Specified in Its Charter)
iDelaware
i04-2977748
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i75 Network Drive
iBurlington
iMassachusetts
i01803
Address
of Principal Executive Offices, Including Zip Code
(i978) i640-3000
Registrant's Telephone Number, Including Area Code
__________________
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock, $0.01 par value
iAVID
iNasdaq
Global Select Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. iYesx 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). iYesx No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company” and “emerging growth company” in Rule 12b-2 under the Exchange Act.
iLarge
accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
io
Emerging
growth company
io
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 under the Exchange Act).
This
Quarterly Report on Form 10-Q (“Form 10-Q”) includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained in this Form 10-Q that relate to future results or events are forward-looking statements. Forward-looking statements may be identified by use of forward-looking words, such as “anticipate,”“believe,”“confidence,”“could,”“estimate,”“expect,”“feel,”“intend,”“may,”“plan,”“should,”“seek,”“will,” and “would,” or similar expressions.
Forward-looking statements may involve subjects relating to, among others, the following:
•the effects that the COVID-19 pandemic, including variants, and its related consequences
may have on the national and global economy and on our business and operations, revenues, cash flows and profitability, and capital resources;
•our ability to successfully implement our strategy, including our cost saving measures and other actions implemented in response to the COVID-19 pandemic;
•the anticipated trends and developments in our markets and the success of our products in these markets;
•our ability to develop, market, and sell new products and services;
•our business strategies and market positioning;
•our
ability to achieve our goal of expanding our market positions;
•our ability to accelerate growth of our cloud-enabled platform;
•anticipated trends relating to our sales, financial condition or results of operations, including our ongoing shift to a recurring revenue model and complex enterprise sales with long sales cycles;
•the expected timing of recognition of revenue backlog as revenue, and the timing of recognition of revenues from subscription offerings;
•our ability to successfully consummate acquisitions, and investment transactions
and to successfully integrate acquired businesses;
•the anticipated performance of our products;
•our ability to maintain adequate supplies of products and components, including through sole-source supply arrangements;
•our plans regarding repatriation of foreign earnings;
•the outcome, impact, costs, and expenses of pending litigation or any new litigation or government inquiries to which we may become subject;
•the effect of the continuing
worldwide macroeconomic uncertainty on our business and results of operations, including acts of war, armed conflict, and cyber conflict, such as the Russian invasion of Ukraine, and related international sanctions and reprisals;
•our compliance with covenants contained in the agreements governing our indebtedness;
•our ability to service our debt and meet the obligations thereunder;
•the effect of seasonal changes in demand for our products and services;
•fluctuations
in foreign exchange and interest rates;
•estimated asset and liability values;
•our ability to protect and enforce our intellectual property rights; and
•the expected availability of cash to fund our business and our ability to maintain adequate liquidity and capital resources, generally and in the wake of the COVID-19 pandemic
Actual results and events in future periods may differ materially from those expressed or implied by forward-looking statements in this Form 10-Q. There are a number of factors that could cause actual events or results to differ materially from those indicated
or implied by forward-looking statements, many of which are beyond our control, including the risk factors discussed herein and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021, in Part II, Item 1A of this Quarterly Report on Form 10-Q, and in other documents we file from time to time with the U.S. Securities and Exchange Commission (“SEC”). In addition, the forward-looking statements contained in this Form 10-Q represent our estimates only as of the date of this filing and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update these forward-looking statements in the future, we specifically disclaim any obligation to do so, whether to reflect actual results, changes in assumptions, changes in other factors affecting such forward-looking statements, or otherwise.
We
own or have rights to trademarks and service marks that we use in connection with the operation of our business. “Avid” is a trademark of Avid Technology, Inc. Other trademarks, logos, and slogans registered or used by us and our subsidiaries in the United States and other countries include, but are not limited to, the following: Avid, Avid NEXIS, AirSpeed, FastServe, MediaCentral, Media Composer, Pro Tools, and Sibelius. Other trademarks appearing in this Form 10-Q are the property of their respective owners.
Proceeds
from the issuance of common stock under employee stock plans
i468
i363
Common
stock repurchases for tax withholdings for net settlement of equity awards
(i10,885)
(i14,038)
Prepayment
penalty on extinguishment of debt
i—
(i1,169)
Payments
for credit facility issuance costs
(i440)
(i2,574)
Net
cash used in financing activities
(i19,407)
(i43,242)
Effect
of exchange rate changes on cash, cash equivalents and restricted cash
(i941)
i56
Net
decrease in cash, cash equivalents and restricted cash
(i12,486)
(i26,563)
Cash,
cash equivalents and restricted cash at beginning of period
i60,556
i83,638
Cash,
cash equivalents and restricted cash at end of period
$
i48,070
$
i57,075
Supplemental
information:
Cash and cash equivalents
$
i44,332
$
i53,337
Restricted
cash
i2,413
i1,422
Restricted
cash included in other long-term assets
i1,325
i2,316
Total
cash, cash equivalents and restricted cash shown in the statement of cash flows
$
i48,070
$
i57,075
Cash
paid for income taxes
$
i1,293
$
i336
Cash
paid for interest
$
i1,542
$
i1,308
The
accompanying notes are an integral part of the condensed consolidated financial statements.
6
AVID TECHNOLOGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. iFINANCIAL
INFORMATION
The accompanying condensed consolidated financial statements include the accounts of Avid Technology, Inc. and its wholly owned subsidiaries (collectively, “we” or “our”). These financial statements are unaudited. However, in the opinion of management, the condensed consolidated financial statements reflect all normal and recurring adjustments necessary for their fair statement. Interim results are not necessarily indicative of results expected for any other interim period or a full year. We prepared the accompanying unaudited condensed consolidated financial statements in accordance with the instructions for Form 10-Q and, therefore, include all information and footnotes necessary for a complete presentation of operations, comprehensive income, financial position, changes in stockholders’
deficit, and cash flows in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying condensed consolidated balance sheet as of December 31, 2021 was derived from our audited consolidated financial statements and does not include all disclosures required by U.S. GAAP for annual financial statements. We filed audited consolidated financial statements as of and for the year ended December 31, 2021 in our Annual Report on Form 10-K for the year ended December 31, 2021, which included information and footnotes necessary for such presentation. The financial statements contained in this Form 10-Q should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31,
2021.
The consolidated results of operations for the three months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2022. The Company’s results of operations are affected by economic conditions, including macroeconomic conditions and levels of business and consumer confidence.
In March 2020, the World Health Organization declared the outbreak of the novel coronavirus ("COVID-19") a pandemic. The COVID-19 pandemic has created, and may continue to create, significant uncertainty in macroeconomic conditions, including disrupted supply chains and significant volatility in financial
markets. The countries in which the Company operates have begun easing initial measures to control the spread of COVID-19. However, the Company is not able to estimate the impact that COVID-19 will continue to have on worldwide economic activity or the Company’s financial position. In addition, the Russian invasion of Ukraine has led to further economic disruption, which may exacerbate supply chain issues further. The Company continues to assess the potential impacts of armed conflict and COVID-19 and the measures taken by governments, businesses and other organizations in response to COVID-19 as information becomes available.
Our
preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from our estimates.
Reclassifications
As our business continues to shift towards a subscription-based model, we have reformatted our income statement presentation to conform with this shift starting on our Annual Report for the year ended December 31, 2021. We have reclassified certain prior period amounts related to revenue and cost of goods sold within our consolidated statements
of operations and accompanying notes to conform to our current period presentation. These reclassifications did not affect total revenue or total cost of goods sold.
i
Significant Accounting Policies
There have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our Annual Report.
iRecent
Accounting Pronouncements
7
Recently Adopted Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 is intended to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR)
and other interbank offered rates to alternative reference rates. This guidance is effective beginning on March 12, 2020, and the Company adopted ASU 2020-04 as of January 1, 2022. The Company has determined the impact of this adoption was not material to our consolidated financial statements and related disclosures.
2. iNET
INCOME PER SHARE
Net income per common share is presented for both basic income per share (“Basic EPS”) and diluted income per share (“Diluted EPS”). Basic EPS is based on the weighted-average number of common shares outstanding during the period. Diluted EPS is based on the weighted-average number of common shares and common share equivalents outstanding during the period.
The potential common shares that were considered anti-dilutive securities were excluded from the diluted earnings per share calculations for the relevant periods either because the sum of the exercise price per share and the unrecognized compensation cost per share was greater than the average market price of our common stock for the relevant periods, or because they were considered contingently issuable. The contingently issuable potential common shares
result from certain stock options and restricted stock units granted to our employees that vest based on performance conditions, market conditions, or a combination of performance and market conditions.
i
The following table sets forth (in thousands) potential common shares that were considered anti-dilutive securities at June 30, 2022 and 2021:
The
following table sets forth (in thousands) the basic and diluted weighted common shares outstanding for the three and six months ended June 30, 2022 and 2021:
Assets Measured at Fair Value on a Recurring Basis
We measure deferred compensation investments on a recurring basis. As of June 30, 2022 and December 31, 2021, our deferred compensation investments were classified as either Level 1 or Level 2 in the fair value hierarchy. Assets valued using quoted market prices in active markets and classified as Level 1 are money market and mutual funds. Assets valued based on other observable inputs and classified as Level 2 are insurance contracts.
8
i
The
following tables summarize our deferred compensation investments measured at fair value on a recurring basis (in thousands):
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Financial assets:
Deferred
compensation assets
$
i408
$
i99
$
i309
$
i—
/
Financial
Instruments Not Recorded at Fair Value
The carrying amounts of our other financial assets and liabilities including cash, accounts receivable, accounts payable, and accrued liabilities approximate their respective fair values because of the relatively short period of time between their origination and their expected realization or settlement.
4. iINVENTORIES
i
Inventories
consisted of the following (in thousands):
As
of June 30, 2022 and December 31, 2021, finished goods inventory included $i2.1 million and $i1.9
million, respectively, associated with products shipped to customers and deferred labor costs for arrangements where revenue recognition had not yet commenced.
5. iiLEASES/
We
have entered into a number of facility leases to support our research and development activities, sales operations, and other corporate and administrative functions in North America, Europe, and Asia, which qualify as operating leases under U.S. GAAP. We also have a limited number of equipment leases that qualify as either operating or finance leases. We determine if contracts with vendors represent a lease or have a lease component under U.S. GAAP at contract inception. Our leases have remaining terms ranging from less than ione
year to isix years. Some of our leases include options to extend or terminate the lease prior to the end of the agreed upon lease term. For purposes of calculating lease liabilities, lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise such options.
Operating lease right of use assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the lease commencement date. As our leases generally do not provide an implicit rate, we
9
use
an estimated incremental borrowing rate in determining the present value of future payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular location and currency environment. As of June 30, 2022, the weighted average incremental borrowing rate was i5.9% and the weighted average remaining lease term was i5.5
years.
Finance lease right of use assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the lease commencement date. Each lease agreement provides an implicit discount rate used to determine the present value of future payments. As of June 30, 2022, the weighted-average discount rate was i2.3% and the weighted average remaining lease term was i1.6
years.
Lease costs for minimum lease payments is recognized on a straight-line basis over the lease term. Our total operating lease costs were $i1.4 million and $i1.8
million for the three months ended June 30, 2022 and June 30, 2021, respectively and $i2.9 million and $i3.7
million for the six months ended June 30, 2022 and June 30, 2021, respectively. Related cash payments were $i1.5 million and $i1.9
million for the three months ended June 30, 2022 and June 30, 2021, respectively, and $i3.1 million and $i4.0
million for the six months ended June 30, 2022 and June 30, 2021, respectively. Short term lease costs were $i0.6 million and $i0.5
million for the three months ended June 30, 2022 and June 30, 2021, respectively, and $i1.2 million and $i0.8
million for the six months ended June 30, 2022 and June 30, 2021, respectively. Operating lease costs are included within research and development, marketing and selling, and general and administrative lines on the condensed consolidated statements of operations, and the related cash payments are included in the operating cash flows on the condensed consolidated statements of cash flows. Finance lease costs, variable lease costs, and sublease income are not material.
ii
The
table below reconciles the undiscounted future minimum lease payments for operating and finance leases under non-cancelable leases with terms of more than one year to the total lease liabilities recognized on the condensed consolidated balance sheets as of June 30, 2022 (in thousands):
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 $i32.2 million of products and services over the initial ifive
years of the agreement. We have purchased $i15.7 million of products and services pursuant to this agreement as of June 30, 2022.
We have letters of credit that are used as security deposits in connection with our leased Burlington, Massachusetts office space. In the event of default on the underlying leases, the landlords would, at June 30, 2022, be eligible to draw against the letters of credit to a maximum
of $i0.7 million.
We also have letters of credit in connection with security deposits for other facility leases totaling $i0.6
million in the aggregate, as well as letters of credit totaling $i1.9 million that otherwise support our ongoing operations. These letters of credit have various terms and expire during 2022 and beyond, while some of the letters of credit may automatically renew based on the terms of the underlying agreements.
Substantially all of our letters of credit are collateralized by restricted cash included in the caption “Restricted cash” and “Other long-term assets” on our condensed consolidated
balance sheets as of June 30, 2022.
Contingencies
Our industry is characterized by the existence of a large number of patents and frequent claims and litigation regarding patent and other intellectual property rights. In addition to the legal proceedings described below, we are involved in legal proceedings from time to time arising from the normal course of business activities, including claims of alleged infringement of intellectual property rights and contractual, commercial, employee relations, product or service performance, or other matters. We do not believe these matters will have a material adverse effect on our financial position or results of operations. However, the outcome of legal proceedings and claims brought against us is subject to significant uncertainty. Therefore, our financial
position or results of operations may be negatively affected by the unfavorable resolution of one or more of these proceedings for the period in which a matter is resolved. Our results could be materially adversely affected if we are accused of, or found to be, infringing third parties’ intellectual property rights.
11
Following the termination of our former Chairman and Chief Executive Officer on February 25, 2018, we received a notice alleging that we breached the former employee’s employment agreement. On April 16, 2019, we received an additional notice again alleging we breached the former employee’s employment agreement. We have since been in communications
with our former Chairman and Chief Executive Officer’s counsel. While we intend to defend any claim vigorously, when and if a claim is actually filed, we are currently unable to estimate an amount or range of any reasonably possible losses that could occur as a result of this matter.
On July 14, 2020, we sent a notice to a customer demanding sums that we believe are due to Avid pursuant to a contract. On October 7, 2020, the customer sent a notice to us denying any legal liability and demanding payment for breach of contract resulting from various alleged delays by us. While we intend to defend any claim vigorously when and if
a claim is actually filed, we are currently unable to estimate an amount or range of any reasonably possible losses that could occur related to this matter.
We consider all claims on a quarterly basis and based on known facts assess whether potential losses are considered reasonably possible, probable, and estimable. Based upon this assessment, we then evaluate disclosure requirements and whether to accrue for such claims in our condensed consolidated financial statements. We record a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated and such amount is material. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case.
At
June 30, 2022 and as of the date of filing of these condensed consolidated financial statements, we believe that, other than as set forth in this note, no provision for liability nor disclosure is required related to any claims because: (a) there is no reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claim, (b) a reasonably possible loss or range of loss cannot be estimated, or (c) such estimate is immaterial.
Additionally, we provide indemnification to certain customers for losses incurred in connection with intellectual property infringement claims brought by third parties with respect to our products. These indemnification provisions generally offer perpetual coverage for infringement claims based upon the products covered by the agreement and the maximum potential amount of future payments
we could be required to make under these indemnification provisions is theoretically unlimited. To date, we have not incurred material costs related to these indemnification provisions; accordingly, we believe the estimated fair value of these indemnification provisions is immaterial. Further, certain arrangements with customers include clauses whereby we may be subject to penalties for failure to meet certain performance obligations; however, we have not recorded any related material penalties to date.
We provide warranties on externally sourced and internally developed hardware. For internally developed hardware, and in cases where the warranty granted to customers for externally sourced hardware is greater than that provided by the manufacturer, we record an accrual for the related liability based on historical trends and actual material and labor costs. iThe
following table sets forth the activity in the product warranty accrual account for the six months ended June 30, 2022 and 2021 (in thousands):
The
warranty accrual is included in the caption “accrued expenses and other current liabilities” in our condensed consolidated balance sheet.
12
8. iRESTRUCTURING COSTS AND ACCRUALS
In
October 2020, we committed to a restructuring plan in order to undergo a strategic reorganization of our business. The strategic reorganization involved significant changes in business operations to better support our strategy and overall performance. The restructuring plan related to our strategic reorganization is expected to be substantially completed in 2022.
During the six months ended June 30, 2022, we recorded restructuring charges of $i0.4 million for employee severance
costs related to i3 positions eliminated during the first half of 2022.
During the six months ended June 30, 2021, we recorded restructuring charges of $i1.1 million
for employee severance costs related to i23 positions eliminated during the first half of 2021.
i
The following table sets
forth the activity in the restructuring accruals for the six months ended June 30, 2022 (in thousands):
Through the evaluation of the discrete financial information that is regularly reviewed by the chief operating decision makers (our chief executive officer and chief financial officer), we have determined that we have ione reportable segment.
i
The
following table is a summary of our revenues by type for the three and six months ended June 30, 2022 and 2021 (in thousands):
For transaction prices allocated to remaining performance obligations, we apply practical expedients and do not disclose quantitative or qualitative information for remaining performance obligations (i) that have original expected durations of one year or less and (ii) where we recognize revenue equal to what we have the right to invoice and that amount corresponds directly with the value to the customer of our performance to date.
Historically, for many of our products, we had an ongoing practice of making when-and-if-available software updates available to customers free of charge for a period of time after initial sales to customers. The expectation created by
this practice of providing free Software Updates represents an implied obligation of a form of post-contract customer support (“Implied PCS”) which represents a performance obligation. While we have ceased providing Implied PCS on new product offerings, we continue to provide Implied PCS for older products that were predominately sold in prior years. Revenue attributable to Implied PCS performance obligations is recognized over time on a ratable basis over the period that Implied PCS is expected to be provided, which is typically iisix
years/. We have remaining performance obligations of $i4.7 million attributable to Implied PCS recorded in deferred revenue as of June 30, 2022. We expect to recognize revenue for these remaining performance obligations of $i1.0
million for the remainder of 2022 and $i1.5 million, $i1.1 million, $i0.7
million and $i0.3 million for the years ending December 31, 2023, 2024, 2025, and 2026, respectively, and $i0.1
million thereafter.
As of June 30, 2022, we had approximately $i30.2 million of transaction price allocated to remaining performance obligations for certain enterprise agreements that have not yet been fully invoiced. Approximately $i22.4
million of these performance obligations were unbilled as of June 30, 2022. Remaining performance obligations represent obligations we must deliver for specific products and services in the future where there is not yet an enforceable right to invoice the customer. Our remaining performance obligations do not include contractually committed minimum purchases that are common in our strategic purchase agreements with resellers since our specific obligations to deliver products or services is not yet known, as customers may satisfy such commitments by purchasing an unknown combination of current or future product offerings. While the timing of fulfilling individual performance obligations under the contracts can vary dramatically based on customer requirements, we expect to recognize the $i30.2
million in roughly equal installments through 2027.
Remaining performance obligation estimates are subject to change and are affected by several factors, including terminations due to contract breach, contract amendments, and changes in the expected timing of delivery.
10. iLONG-TERM
DEBT AND CREDIT AGREEMENT
i
Long-term debt consisted of the following (in thousands):
On January 5, 2021, the Company entered into a Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. as collateral and administrative agent, and a syndicate of banks, as lenders thereunder (the “Lenders”). Pursuant to the Credit Agreement, the Lenders agreed to provide the Company with (a) a term loan in the aggregate principal amount of $i180.0 million
(the “Term Loan”) and (b) a revolving credit facility (the “Credit Facility”) of up to a maximum of $i70.0 million in borrowings outstanding at any time. The Credit Facility, which was undrawn at closing, can be used for working capital, other general corporate purposes and for other permitted uses. The proceeds from the Term Loan, plus available cash on hand, were used to repay outstanding borrowings of $i201 million
under the Company’s prior financing agreement with Cerberus Business Finance, LLC ( the “Financing Agreement”), which was then terminated. As a result of this termination, the Company incurred a loss on extinguishment of debt of $i3.7 million made up of $i2.6 million
of remaining unamortized issuance costs as well as a $i1.1 million prepayment penalty.
In association with the Credit Agreement, the Company incurred $i2.5 million
of issuance discounts and an immaterial amount of issuance costs. The Term Loan had an initial interest rate of LIBOR plus an applicable margin of i3.00%, with a i0.25% LIBOR floor. The applicable
margin on the Term Loan and the Credit Facility ranged from i2.00% to i3.25%, depending on leverage.
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 to February 25, 2027, reduced the applicable interest rate margins by i0.25%, removed the LIBOR floor, moved the reference rate from LIBOR to the Secured
Overnight Financing Rate (“SOFR”), reset the principal amortization schedule, and eliminated the fixed charge coverage ratio. The effective interest rate for the six months ended June 30, 2022 was i2.95%.
The Company granted a security interest on substantially all of its assets to secure the obligations under the Credit Facility and the Term Loan.
The
A&R Credit Agreement also requires the Company to maintain a total net leverage ratio of no more than i4.00 to 1.00 initially, with step downs thereafter. Other terms of the A&R Credit Agreement remain substantially the same as the Credit Agreement. We were in compliance with the A&R Credit Agreement covenants as of June 30, 2022.
In
connection with the A&R Credit Agreement, the Company incurred an additional $i0.4 million of issuance costs during the three months ended March 31, 2022. These additional costs and the remaining unamortized Term Loan discount and issuance costs will be amortized jointly over the amended remaining life of the A&R Credit Agreement. We recorded $i1.4 million
and $i2.5 million of interest expense on the Term Loan for the three and six months ended June 30, 2022, respectively. As of June 30, 2022, there was $i19.0 million
outstanding under the Credit Facility.
16
11. iSTOCKHOLDERS’ EQUITY
Stock-Based Compensation
i
Information
with respect to the Company’s non-vested restricted stock units for the six months ended June 30, 2022 was as follows:
Number
of Restricted Stock Units
Weighted- Average Grant-Date Fair Value
Weighted- Average Remaining Contractual Term (years)
Aggregate Intrinsic Value (in thousands)
Shares Retained to Cover Statutory Minimum Withholding Taxes
The
following table sets forth sitock-based compensation expense by award type for the three and six months ended June 30, 2022 and 2021 (in thousands):
Stock-based
compensation was included in the following captions in the Company’s condensed consolidated statements of operations for the three and six months ended June 30, 2022 and 2021 (in thousands):
On
September 9, 2021, our Board of Directors approved the repurchase of up to $i115.0 million of our outstanding shares. This authorization does not have a prescribed expiration date. As of June 30, 2022, approximately $i65.0 million
of the $i115.0 million share repurchase authorization remained available. The Company has no obligation to repurchase any amount of its common stock, and the program may be suspended or discontinued at any time. For the three months ended June 30, 2022, the Company repurchased i559,572
shares of its common stock for $i14.1 million. These amounts may differ from the repurchases of common stock amounts in the condensed consolidated statements of cash flows due to unsettled share repurchases at the end of a period.
18
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXECUTIVE OVERVIEW
Business Overview
We develop, market, sell, and support software and integrated solutions for video and audio content creation, management and distribution. We are a leading technology provider that powers the media and entertainment industry. We do this by providing an open and efficient platform for digital media, along with a comprehensive set of tools and workflow solutions. Our solutions are used in production and post-production facilities; film studios; network, affiliate, independent and cable television stations; recording studios; live-sound performance
venues; advertising agencies; government and educational institutions; corporate communications departments; and by independent video and audio creative professionals, as well as aspiring professionals. Projects produced using our tools, platform, and ecosystem include feature films, television programming, live events, news broadcasts, sports productions, commercials, music, video, and other digital media content. With over one million creative users and thousands of enterprise clients relying on our technology platforms and solutions around the world, Avid enables the industry to thrive in today’s connected media and entertainment world.
Our mission is to empower media creators with innovative technology and collaborative tools to entertain, inform, educate, and enlighten the world. Our clients rely on Avid’s products and solutions to create prestigious and award-winning feature films, music recordings,
television shows, live concerts, sporting events, and news broadcasts. Avid has been honored for technological innovation with 18 Emmy Awards, one Grammy Award, two Oscars, and the first ever America Cinema Editors Technical Excellence Award.
Operations Overview
Our strategy for connecting creative professionals and media enterprises with audiences in a powerful, efficient, collaborative, and profitable way leverages our creative software tools, including Pro Tools for audio, Media Composer for video, Sibelius for musical composition and our MediaCentral Platform - the open, extensible, and customizable foundation that streamlines and simplifies content workflows by integrating all Avid or third-party products and services that run on top of it. The platform provides secure and protected access, and enables fast and easy creation,
delivery, and monetization of content.
We work to ensure that we are meeting customer needs, staying ahead of industry trends, and investing in the right areas through a close and interactive relationship with our customer base. The Avid Customer Association was established to be an innovative and influential media technology community. It represents thousands of organizations and over 30,000 professionals from all levels of the industry including inspirational and award-winning thought leaders, innovators, and storytellers. The Avid Customer Association fosters collaboration between Avid, its customers, and other industry colleagues to help shape our product offerings and provide a means to shape our industry together.
A key element of our strategy is our transition to a recurring revenue-based model through a combination of subscription offerings
and long-term agreements. As of June 30, 2022, we had approximately 450,000 paid subscriptions. The subscription count includes all paid and active seats under multi-seat licenses. These licensing options offer choices in pricing and deployment to suit our customers’ needs. Our subscription offerings to date have been sold to creative professionals and media enterprises. We expect to increase subscription sales to media enterprises going forward as we expand offerings and move through customer upgrade cycles, which we expect will further increase recurring revenue on a longer-term basis. Our long-term agreements are comprised of multi-year agreements with large media enterprise customers to provide specified products and services, including SaaS offerings, and channel partners and resellers to purchase minimum amounts of products and service over a specified period of time.
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 project started in the third quarter of 2021, has continued through the first half of 2022 and is expected to continue through 2025. We plan to significantly invest in transforming our enterprise-wide infrastructure and technologies to benefit customers and drive enhanced performance across the company.
A summary of our revenue sources for the three and six months ended June 30, 2022 and 2021 is as follows (in thousands):
During the COVID-19 pandemic, our priority has been supporting our employees, customers, partners and communities, while positioning Avid for the future. The pandemic has driven organizations across the globe to digitize their operations and support remote workforces at a faster speed and greater scale than ever before. We have moved towards a hybrid work model in certain countries, giving our employees the flexibility to work offsite or at onsite Avid locations.
The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, and created significant volatility and disruption of financial markets. We continue to manage through significant supply constraints seen industry-wide due to component shortages caused, in part, by the COVID-19 pandemic, 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.
The extent to which our operations may be impacted will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including the severity or resurgence of a COVID-19 outbreak, actions by government authorities to contain an outbreak or treat its impact, actions by government authorities to address inflationary and cost pressures, and the severity, length and potential expansion of the conflict in Ukraine. The impacts of these uncertain global economic and geopolitical conditions could result in further supply chain disruptions, including the shortages of critical
components, and continued disruptions to, and volatility in, the financial markets. Recent events surrounding the global economy, geopolitics, and the COVID-19 pandemic continue to evolve.Although we believe that we will ultimately emerge from these events well positioned for long-term growth, uncertainties remain and, as such, we cannot reasonably estimate the duration or extent of these adverse factors on our business, results of operations, financial position or cash flows.
CRITICAL ACCOUNTING ESTIMATES
Our condensed consolidated financial statements have been prepared in accordance with U.S GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We base our estimates and judgments on historical experience and various other factors we believe to be reasonable under the circumstances, the results of which form the basis for judgments about the carrying values of assets and liabilities and the amounts of revenues and expenses. Actual results may differ from these estimates.
We believe that our critical accounting policies and estimates are those related to revenue recognition and allowances for sales returns and exchanges, stock-based compensation, and income tax assets and liabilities. We believe these policies and estimates are critical because they most significantly affect the portrayal of our financial condition and results of operations and
involve our most complex and subjective estimates and judgments. A discussion of our critical accounting policies and estimates may be found in our Annual Report on Form 10-K for the year ended December 31, 2021 in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Policies and Estimates”. There have been no significant changes to our critical accounting policies and estimates since our Annual Report on Form 10-K for the year ended December 31, 2021.
20
RESULTS
OF OPERATIONS
The following table sets forth certain items from our condensed consolidated statements of operations as a percentage of net revenues for the three and six months ended June 30, 2022 and 2021:
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, 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 operating results. For a discussion of these factors, see the risk factors discussed in Part I, Item 1A under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021.
The
following table sets forth the percentage of our net revenues attributable to geographic regions for the three and six months ended June 30, 2022 and 2021:
Our subscription revenues are derived primarily from sales of our Media Composer, MediaCentral, Pro Tools, and Sibelius offerings. Subscription revenues increased $12.6 million, or 58.7%, for the three months ended June 30, 2022, and increased $20.7 million, or 44.7% for the six months ended June 30, 2022, compared to the same periods in 2021. The increase for the three and six months ended
June 30, 2022 was primarily a result of new customers adopting our subscription solutions and customers transitioning from our perpetual product licenses to our subscription-based model.
Maintenance Revenues
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. Maintenance revenues decreased $2.7 million, or 8.8%, for the three months ended June 30, 2022, and decreased $4.2 million or 7.0% for the six months ended June 30, 2022, compared to the same periods in 2021. The decrease for the three and six months ended June 30, 2022 was primarily due to customers transitioning from our perpetual based licenses to our subscription licenses. In addition, there was lower maintenance revenue related to new integrated solutions sales due to delayed integrated solutions shipments as a result of supply chain issues in the six months ended June 30, 2022 compared to the same period in 2021.
Integrated
Solutions and other Revenues
Our integrated solutions and other revenues are derived primarily from sales of our storage and workflow solutions, media management solutions, video creative tools, digital audio software and workstation solutions, and our control surfaces, consoles, and live-sound systems, as well as professional and learning services. Integrated solutions and other revenues decreased $7.2 million or 16.7% for the three months ended June 30, 2022, and decreased $7.4 million or 9.0% for the six months ended June 30, 2022, compared to the same periods in 2021 as the result of delayed shipments due to supply chain issues.
22
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
•professional services and training for customers.
Costs
of Revenues and Gross Profit
Costs of Revenues and Gross Profit for the Three Months Ended June 30, 2022 and 2021
(dollars in thousands)
2022
Change
2021
Costs
$
%
Costs
Subscriptions
$
6,292
$
2,717
76.0%
$
3,575
Maintenance
5,253
(569)
(9.8)%
5,822
Integrated
solutions & other
22,769
(2,572)
(10.1)%
25,341
Total cost of revenues
$
34,314
$
(424)
(1.2)%
$
34,738
Gross
profit
$
63,366
$
3,228
5.4%
$
60,138
Costs
of Revenues and Gross Profit for the Six Months Ended June 30, 2022 and 2021
(dollars in thousands)
2022
Change
2021
Costs
$
%
Costs
Subscriptions
$
11,894
$
5,704
92.1%
$
6,190
Maintenance
10,530
(866)
(7.6)%
11,396
Integrated
solutions & other
45,775
(4,325)
(8.6)%
50,100
Total cost of revenues
$
68,199
$
513
0.8%
$
67,686
Gross
profit
$
130,130
$
8,576
7.1%
$
121,554
Gross Margin Percentage
Gross margin percentage, which is net revenues less costs of revenues divided by net revenues, fluctuates based on factors such as the mix of products sold, the cost and proportion of third-party hardware and software included in the systems sold, the offering of product upgrades, price discounts and other sales-promotion
programs, the distribution channels through which products are sold, the timing of new product introductions, sales of aftermarket hardware products, and currency exchange-rate fluctuations. For a discussion of these factors, see the risk factors discussed in Part I, Item 1A under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021.
Our increase in gross margin percentage for the three and six months ended June 30, 2022 compared to the same periods in 2021, was primarily due to increased volume on our higher margin subscription revenue. This was partially offset by lower integrated solutions gross margin due to supply chain issues.
Operating
Expenses and Operating Income for the Three Months Ended June 30, 2022 and 2021
(dollars in thousands)
2022
Change
2021
Expenses
$
%
Expenses
Research
and development
$
16,023
$
(70)
(0.4)%
$
16,093
Marketing and selling
23,673
2,319
10.9%
21,354
General
and administrative
13,364
(314)
(2.3)%
13,678
Restructuring costs, net
342
327
2,180.0%
15
Total operating expenses
$
53,402
$
2,262
4.4%
$
51,140
Operating
income
$
9,964
$
966
10.7%
$
8,998
Operating
Expenses and Operating Income for the Six Months Ended June 30, 2022 and 2021
(dollars in thousands)
2022
Change
2021
Expenses
$
%
Expenses
Research
and development
$
32,759
$
1,249
4.0%
$
31,510
Marketing and selling
45,600
3,502
8.3%
42,098
General
and administrative
28,175
862
3.2%
27,313
Restructuring costs, net
357
(732)
(67.2)%
1,089
Total operating expenses
$
106,891
$
4,881
4.8%
$
102,010
Operating
income
$
23,239
$
3,695
18.9%
$
19,544
24
Research and Development Expenses
Research and development (“R&D”) expenses include costs associated with the development of new products and the enhancement of existing
products, and consist primarily of employee compensation and benefits, facilities costs, depreciation, costs for consulting and temporary employees, and prototype and other development expenses. The tables below provide further details regarding the changes in components of research and development expenses.
Change in Research and Development Expenses for the Three Months Ended June 30, 2022 and 2021
(dollars in thousands)
2022
Increase (Decrease) From 2021
$
%
Consulting and outside services
239
10.9
%
Other
(309)
(2.2)
%
Total research and development expenses decrease
$
(70)
(0.4)
%
Change
in Research and Development Expenses for the Six Months Ended June 30, 2022 and 2021
The
increase in R&D expenses for the six months ended June 30, 2022, compared to the same period in 2021 was primarily due to increased consulting and outside research and development services which is a result of both an increase in price as well as increased usage of consultants. The decrease in other expenses for the three months ended June 30, 2022, compared to the same period in 2021 was due to increased capitalization of employees salaries for time spent on internal-use software development.
Marketing and Selling Expenses
Marketing and selling expenses consist primarily of employee compensation and benefits for selling, marketing and pre-sales customer support personnel, commissions, travel expenses, advertising
and promotional expenses, web design costs, and facilities costs. The tables below provide further details regarding the changes in components of marketing and selling expenses.
25
Change in Marketing and Selling Expenses for the Three Months Ended June 30, 2022 and 2021
(dollars in thousands)
2022
Increase From 2021
$
%
Personnel-related
924
5.7
%
Consulting and outside services
497
89.7
%
Foreign exchange (gains) and losses
278
102.1
%
Other
620
14.5
%
Total
marketing and selling expenses increase
$
2,319
10.9
%
Change in Marketing and Selling Expenses for the Six Months Ended June 30, 2022 and 2021
(dollars in thousands)
2022
Increase From 2021
$
%
Personnel-related
1,149
3.6
%
Advertising and promotions
464
35.1
%
Foreign exchange (gains) and losses
1,005
480.3
%
Consulting
and outside services
865
68.2
%
Other
19
0.3
%
Total marketing and selling expenses increase
$
3,502
8.3
%
The increase in personnel-related
expenses for the three and six months ended June 30, 2022, compared to the same periods in 2021, was primarily the result of resuming travel as well as annual salary increases. The increase in consulting and outside services for the three and six months ended June 30, 2022 was primarily due to an increase in price as well as use of external contractors to provide marketing and promotional support, as well as scheduled events for recognition and professional development of top sales individuals. The change in foreign exchange translations for the three and six months ended June 30, 2022, compared to the same periods in 2021, was due to foreign exchange gains and losses from foreign currency denominated transactions and the revaluation of foreign currency denominated assets and liabilities. These foreign exchange changes
were primarily due to the euro-dollar exchange rate volatility. The increase in other expenses for the three months ended June 30, 2022 was related to increased pricing on our third party software subscriptions as well as increased spend on our information technology infrastructure to support ongoing business operations.
General and Administrative Expenses
General and administrative (“G&A”) expenses consist primarily of employee compensation and benefits for administrative, executive, finance and legal personnel, audit, legal and strategic consulting fees, and insurance, information systems and facilities costs. Information systems and facilities costs reported within general and administrative expenses are net of allocations to other expenses categories. The tables below
provide further details regarding the changes in components of G&A expenses.
26
Change in G&A Expenses for the Three Months Ended June 30, 2022 and 2021
(dollars in thousands)
2022 Increase
(Decrease) From 2021
$
%
Facilities and information
249
16.8
%
Other
(563)
(4.6)
%
Total G&A expenses decrease
$
(314)
(2.3)
%
Change
in G&A Expenses for the Six Months Ended June 30, 2022 and 2021
(dollars in thousands)
2022 Increase From 2021
$
%
Personnel-related
342
2.5
%
Facilities and information
401
13.4
%
Other
119
1.2
%
Total
G&A expenses increase
$
862
3.2%
The decrease in other expenses for the three months ended June 30, 2022, compared to the same period in 2021, was primarily a result of business development activities that have slowed in 2022. The increase in facilities and information technology expenses for the three and six months ended June 30, 2022, compared to the same periods in 2021, related to increased spend on our information technology infrastructure to support ongoing business operations. The increase in personnel-related expenses for the six months ended June 30,
2022, compared to the same period in 2021, was primarily due to an increase in variable related compensation and annual salary increases.
Provision for Income Taxes
Provision for Income Taxes for the Three Months Ended June 30, 2022 and 2021
(dollars
in thousands)
2022
Change
2021
$
%
Provision for income taxes
$
726
$
367
102.2%
$
359
Provision
for Income Taxes for the Six Months Ended June 30, 2021 and 2020
(dollars in thousands)
2022
Change
2021
$
%
Provision for income taxes
$
1,852
$
1,011
120.2%
$
841
We
had a tax provision of 9.0% and 9.3% as a percentage of income before tax for the three month and six month periods ended June 30, 2022, respectively. The increases in the tax provisions for the three and six month periods ended June 30, 2022, compared to the same periods in 2021, were driven primarily by the increases in pre-tax income and the jurisdictional mix of earnings. No provision or benefit was provided in the United States due to a full valuation on the deferred tax asset.
27
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
and Sources of Cash
Our principal sources of liquidity include cash and cash equivalents totaling $44.3 million as of June 30, 2022, as well as the availability of borrowings of up to $70.0 million under our revolving Credit Facility. As of June 30, 2022, there was $19.0 million outstanding under the Credit Facility. We have generally funded operations in recent years through the use of existing cash balances, supplemented from time to time with the proceeds of long-term debt and borrowings under our credit facilities.
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 project started in the third quarter of 2021, has continued through the first half of 2022 and is expected to continue through 2025. We plan to significantly invest in transforming our enterprise-wide infrastructure and technologies to benefit customers and drive enhanced performance across the company.
On January 5, 2021, we entered into the Credit Agreement with JPMorgan Chase Bank, N.A. and a syndicate of banks, as collateral and administrative agent, and the Lenders. Pursuant to the Credit Agreement, the Lenders agreed to provide us with the Term Loan and the Credit Facility. We borrowed the full amount of the Term Loan, or $180.0 million, on the closing date, but did not borrow any of the $70.0 million available under the Credit Facility on the closing date. The
proceeds from the Term Loan, plus available cash on hand, were used to repay outstanding borrowings of $201.0 million under the Company’s prior credit facility with Cerberus Business Finance, LLC, which was then terminated. Prior to the maturity of the Credit Facility, any amounts borrowed under the Credit Facility may be repaid and, subject to the terms and conditions of the Credit Agreement, reborrowed in whole or in part without penalty.
On February 25, 2022, the Company executed 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 contains 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 remain substantially the same as the Credit Agreement. The Term Loan, as amended, has an initial interest rate of SOFR plus an applicable margin of 2.25%, with a 0% floor. The applicable margin for SOFR loans under the A&R Credit Agreement ranges from 1.75% to 3.0%, depending on the Company’s total net leverage ratio. Both the Term Loan and the revolving Credit Facility mature on February 25, 2027.
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 perpetual software 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 A&R Credit Agreement, which could permit acceleration of the outstanding indebtedness under the A&R Credit Agreement and require us to repay such indebtedness before the scheduled due date. If an event of default were to occur, we might not have sufficient funds available to make the payments required. If we are unable to repay amounts owed, the lenders may be entitled to foreclose on and sell
substantially all of our assets, which secure our borrowings under the A&R Credit Agreement.
Our cash requirements vary depending on factors such as the growth of the business, changes in working capital, and capital expenditures. We anticipate that we will have sufficient internal and external sources of liquidity to fund operations and anticipated working capital and other expected cash needs for at least the next 12 months as well as for the foreseeable future. We also believe that our financial resources will allow us to manage the anticipated impact of COVID-19 on our business
28
operations and cash flows for the foreseeable future, which could include reductions in revenue and delays
in payments from customers and partners. The challenges posed by COVID-19 on our business are constantly evolving. Consequently, we will continue to evaluate our financial position in light of future developments, particularly those relating to COVID-19.
Cash Flows
The following table summarizes our cash flows for the periods presented (in thousands):
Effect of foreign currency exchange rates on cash, cash equivalents and restricted cash
(941)
56
Net decrease in cash, cash equivalents and restricted cash
$
(12,486)
$
(26,563)
Cash
Flows from Operating Activities
Cash provided by operating activities aggregated $15.2 million for the six months ended June 30, 2022. The decrease in cash provided by operations compared to the six months ended June 30, 2021 was primarily due to a change in working capital.
Cash Flows from Investing Activities
For the six months ended June 30, 2022, net cash flows used in investing activities reflected $7.4 million used for the purchase of property and equipment which largely consist of computer hardware and software to support R&D activities and information systems. In addition, we have increased resources to spend time 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 six months ended June 30, 2022, net cash flows used in financing activities were primarily the result of our proceeds on the revolving credit facility, offset by our stock repurchase program and our common stock repurchases for tax withholdings for net settlement of equity awards.
RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting
Pronouncementsand Recent Accounting Pronouncements To Be Adopted
Our recently adopted and to be adopted accounting pronouncements are set forth in Note 1 “Financial Information” of our Notes to Unaudited Condensed Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.
29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Foreign Currency Exchange Risk
We have significant international
operations and derive more than half of our revenues from customers outside the United States. This business is, for the most part, transacted through international subsidiaries and generally in the currency of the end-user customers. Therefore, we are exposed to the changes in foreign currency exchange rates that could adversely affect our revenues, net income, and cash flow.
We recorded a net foreign exchange loss of $1.2 million and $0.2 million for the six months ended June 30, 2022 and 2021, respectively. The foreign exchange losses resulted from foreign currency denominated transactions and the revaluation of foreign currency denominated assets and liabilities.
A
hypothetical change of 10% in appreciation or depreciation of foreign currency exchange rates from the quoted foreign currency exchange rates as of June 30, 2022 would not have a significant impact on our financial position, results of operations, or cash flows.
Interest Rate Risk
On February 25, 2022, the Company executed an Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A. and the Lenders. The A&R Credit Agreement had an initial interest rate of SOFR plus an applicable margin of 2.25%, with a 0% floor. The applicable margin for SOFR loans under the A&R Credit Agreement ranges from 1.75% to 3.0%, depending on the
Company’s total net leverage ratio. A hypothetical 10% increase or decrease in interest rates paid on outstanding borrowings under the Credit Agreement would not have a material impact on our financial position, results of operations, or cash flows.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation and supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified under SEC rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, including the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures as of June 30, 2022. Management recognizes that any controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our management concluded that, as of June 30, 2022, these disclosure controls and procedures were effective at a reasonable level of assurance.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarterly period ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent
Limitation on the Effectiveness of Internal Controls
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The effectiveness of any system of internal control over financial reporting is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting can only provide reasonable, not absolute, assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade
our internal controls as necessary or appropriate for our business, but cannot assure that such improvements will be sufficient to provide us with effective internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 7 “Commitments and Contingencies” of our Notes to Unaudited Condensed Consolidated
Financial Statements under Part 1, Item 1 of this Form 10-Q regarding our legal proceedings.
ITEM 1A.RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described in Part I, Item 1A under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 in addition to the other information included in this Form 10-Q before making an investment decision regarding our common stock. If any of these risks actually occurs, our business, financial condition, or operating results would likely suffer,
possibly materially, the trading price of our common stock could decline, and you could lose part or all of your investment.
There has been no material change to the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Share repurchase activity during the three months ended March 31, 2022 was as follows:
Period
Total
number of shares purchased
Average price paid per share
Total number of shares purchased as part of publicly announced programs
Maximum approximate dollar value of shares that may yet be purchased under the programs
eXtensible
Business Reporting Language (XBRL) Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
*101.SCH
XBRL Taxonomy Extension Schema Document
X
*101.CAL
XBRL
Taxonomy Calculation Linkbase Document
X
*101.DEF
XBRL Taxonomy Definition Linkbase Document
X
*101.LAB
XBRL Taxonomy Label Linkbase Document
X
*101.PRE
XBRL
Taxonomy Presentation Linkbase Document
X
__________________________
* Pursuant to Rule 406T of Regulation S-T, XBRL (Extensible Business Reporting Language) information is deemed not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934 and otherwise is not subject to liability under these sections.
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SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
