NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A.BUSINESS
Description of Business
Avid Technology, Inc. (“Avid”, “we” or “us”) develops, markets, sells, and supports 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.
Subsequent Event
On January 25, 2023, we announced a voluntary early retirement program, in order to realign the organization and enable further investment in key priority areas and proactively manage transitional planning. The program is currently made available to those employees in the US who were at least 58 years old with 4 or more years of service at Avid. Employees had until February 13, 2023 to opt in to the program. We are still in the process of evaluating the impact for those who opt in to the program.
B.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include our accounts and our wholly owned subsidiaries. Intercompany balances and transactions have been eliminated.
Basis of Presentation and Use of Estimates
Our preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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 financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from our estimates.
Immaterial corrections from a previous year:
During the fourth quarter of 2022, the Company recorded an adjustment of approximately $2.0 million to subscription revenue related to a correction of an immaterial error in our standalone selling prices related to the prior years. We determined the adjustment was not material to any prior periods presented in the accompanying consolidated financial statements and the notes hereto.
Revenue Recognition
We enter into contracts with customers that include various combinations of products and services, which are typically capable of being distinct and are accounted for as separate performance obligations. We account for a contract when (i) it has approval and commitment from both parties, (ii) the rights of the parties have been identified, (iii) payment terms have been identified, (iv) the contract has commercial substance, and (v) collectability is probable. We recognize revenue upon transfer of control of promised products or services to customers, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts, in an amount that reflects the consideration we expect to receive in exchange for those products or services.
See Note P for disaggregated revenue schedules and further discussion on revenue and deferred revenue performance obligations and the timing of revenue recognition.
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 and 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.
While not a common practice for us, in the event we grant the customer the option to acquire additional products or services in an arrangement, we consider if the option provides a material right to the customer that it would not receive without entering into the contract (e.g., an incremental discount compared to the range of discounts typically given for similar products or services). If a material right is deemed to exist, we account for the option as a distinct performance obligation and recognize revenue when those future products or services are transferred or when the option expires.
We also record as revenue all amounts billed to customers for shipping and handling costs and record the actual shipping costs as a component of cost of revenues. Reimbursements received from customers for out-of-pocket expenses are recorded as revenues, with related costs recorded as cost of revenues. We present revenues net of any taxes collected from customers and remitted to government authorities.
Our contracts rarely contain significant financing components as payments from customers are due within a short period from when our performance obligations are satisfied.
We are applying the practical expedient for the deferral of sales commissions and other contract acquisition costs, which are expensed as incurred, because the amortization period would be one year or less.
Allowance for Sales Returns and Exchanges
We maintain allowances for estimated potential sales returns and exchanges from our customers, which represents variable consideration under ASC 606. We record a provision for estimated returns and other allowances as a reduction of revenues in the same period that related revenues are recorded based on historical experience and specific customer analysis. Use of management estimates is required in connection with establishing and maintaining a sales allowance for expected returns and other credits. The allowance also includes rebates offered through our partner program. If actual returns differ from the estimates, additional allowances could be required.
The following table sets forth the activity in the allowance for sales returns and exchanges for the years ended December 31, 2022, 2021, and 2020 (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Allowance for sales returns and exchanges – beginning of year | $ | 11,298 | | | $ | 9,306 | | | $ | 8,230 | |
Additions and adjustments to the allowance | 1,016 | | | 8,885 | | | 10,746 | |
Deductions against the allowance | (4,608) | | | (6,893) | | | (9,670) | |
| | | | | |
Allowance for sales returns and exchanges – end of year | $ | 7,706 | | | $ | 11,298 | | | $ | 9,306 | |
The allowance for sales returns and exchanges reflects an estimate of amounts invoiced that will not be collected, as well as other allowances and credits that have been or are expected to offset the trade receivables. The allowance for sales returns and exchanges is recorded as a component of accrued expenses and other current liabilities as of December 31, 2022, December 31, 2021 and December 31, 2020.
Trade Receivables and Allowances for Doubtful Accounts
We classify our right to consideration in exchange for deliverables as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional (i.e. only the passage of time is required before payment is due). We present such receivables in accounts receivable, net of allowance for doubtful accounts, in our consolidated balance sheets. We maintain allowances for estimated losses from bad debt resulting from the inability of our customers to make required payments for products or services. When evaluating the adequacy of the allowances, we analyze accounts receivable balances, historical bad debt experience, customer concentrations, customer credit worthiness, and current economic trends. To date, actual bad debts have not differed materially from management’s estimates.
The following table sets forth the activity in the allowance for doubtful accounts for the years ended December 31, 2022, 2021, and 2020 (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Allowance for doubtful accounts – beginning of year | $ | 1,456 | | | $ | 1,478 | | | $ | 958 | |
Provision for doubtful accounts | 1,056 | | | 694 | | | 1,298 | |
Reduction in allowance for doubtful accounts | (1,911) | | | (716) | | | (778) | |
Allowance for doubtful accounts – end of year | $ | 601 | | | $ | 1,456 | | | $ | 1,478 | |
Translation of Foreign Currencies
The functional currency of each of our foreign subsidiaries is the local currency, except for the Irish manufacturing branch and Orad Hi-Tech Systems Ltd. (“Orad”) that we acquired in June 2015. The functional currency for both the Irish manufacturing branch and Orad is the U.S. dollar due to the extensive interrelationship of the operations of the Irish branch, Orad, and the U.S. parent, and the high volume of intercompany transactions among the two subsidiaries and the parent. The assets and liabilities of the subsidiaries whose functional currencies are currencies other than the U.S. dollar are translated into U.S. dollars at the current exchange rate in effect at the balance sheet date. Income and expense items for these entities are translated using rates that approximate those in effect during the period. Cumulative translation adjustments are included in accumulated other comprehensive income (loss), which is reflected as a separate component of stockholders’ deficit. We do not record tax provisions or benefits for the net changes in the foreign currency translation adjustment as we intend to permanently reinvest undistributed earnings in our foreign subsidiaries.
The U.S. parent company, Irish manufacturing branch, and Orad, all of whose functional currency is the U.S. dollar, carry certain monetary assets and liabilities denominated in currencies other than the U.S. dollar. These assets and liabilities typically include cash, accounts receivable, and intercompany operating balances denominated in foreign currencies. These assets and liabilities are remeasured into the U.S. dollar at the current exchange rate in effect at the balance sheet date. Foreign currency transaction and remeasurement gains and losses are included within marketing and selling expenses in the results of operations.
The U.S. parent company and various other wholly owned subsidiaries have long-term intercompany loan balances denominated in foreign currencies that are remeasured into the U.S. dollar at the current exchange rate in effect at the balance sheet date. Such loan balances are not expected to be settled in the foreseeable future. Any gains and losses relating to these loans are included in the accumulated other comprehensive income (loss), which is reflected as a separate component of stockholders’ deficit.
We have significant international operations and, therefore, our revenues, earnings, cash flows, and financial position are exposed to foreign currency risk from foreign-currency-denominated receivables, payables, sales and expense transactions, and net investments in foreign operations. We derive more than half of our revenues from customers outside the United States. The 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 risks that changes in foreign currency could adversely affect our revenues, net income, cash flow, and financial position. Foreign currency transaction and remeasurement losses and gains are included within marketing and selling expenses in the results of operations. For the year ended December 31, 2022, 2021, and 2020 we recorded net losses of $1.4 million, $1.3 million, and $0.4 million respectively, that resulted from foreign currency denominated transactions and the revaluation of foreign currency denominated assets and liabilities.
Cash, Cash Equivalents, Marketable Securities and Restricted Cash
We measure cash equivalents and marketable securities at fair value on a recurring basis. The cash equivalents and marketable securities consist primarily of money market investments, mutual funds, and insurance contracts held in deferred compensation plans. The money market investments and mutual funds held in our deferred compensation plan in the U.S. are reported at fair value within other current assets using quoted market prices with the gains and losses included as other income (expense) in our statement of operations. The insurance contracts held in the deferred compensation plans for employees in Israel and Germany are reported at fair value within other long-term assets using other observable inputs. Other than the investments held in our deferred compensation plans, we held no marketable securities at December 31, 2022 or 2021. Restricted cash consists of cash balances which are restricted as to withdrawal or usage and includes cash to collateralize bank letters of credit related primarily to security deposits on our facilities leases and our ongoing operations.
Concentration of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist of cash, cash equivalents, restricted cash, and accounts receivable. We place our cash and cash equivalents with financial institutions that management believes to be of high credit quality. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers that make up our customer base and their dispersion across different regions. No individual customer accounted for 10% or more of our total net revenues or net accounts receivable in the periods presented.
Inventories
Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or net realizable value. Management regularly reviews inventory quantities on hand and writes down inventory to our realizable value to reflect estimated obsolescence or lack of marketability based on assumptions about future inventory demand and market conditions. Inventory in the digital-media market, including our inventory, is subject to technological change or obsolescence; therefore, utilization of existing inventory may differ from our estimates.
Property and Equipment, Internal Use Software, and Cloud Computing Arrangements
Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful life of the asset. We typically depreciate our property and equipment using the following minimum and maximum useful lives:
| | | | | | | | | | | | | | |
| | Depreciable Life |
| | Minimum | | Maximum |
Computer and video equipment and software, including internal use software | | 2 years | | 5 years |
Manufacturing tooling and testbeds | | 3 years | | 5 years |
Office equipment | | 3 years | | 5 years |
Furniture, fixtures, and other | | 3 years | | 8 years |
We capitalize certain development costs incurred in connection with our internal use software. Costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct, are capitalized until the software is substantially complete and ready for its intended use. Capitalized costs are recorded as part of property and equipment. Maintenance and training costs are expensed as incurred. Internal use software is amortized on a straight-line basis over its estimated useful life, generally three years.
We also enter into certain cloud-based software hosting arrangements that are accounted for as service contracts. For internal-use software obtained through a hosting arrangement that is in the nature of a service contract, we incur certain implementation costs such as integrating, configuring, and software customization, which are consistent with costs incurred during the application development stage for on-premise software. We apply the same guidance to determine costs that are eligible for capitalization. For these arrangements, we amortize the capitalized development costs straight-line over the fixed, noncancellable term of the associated hosting arrangement plus any reasonably certain renewal periods. We also apply the same impairment model to both internal-use software and capitalized implementation costs in a software hosting arrangement that is in the nature of a service contract.
Leasehold improvements are amortized over the shorter of the useful life of the improvement or the remaining term of the lease. Expenditures for maintenance and repairs are expensed as incurred. Upon retirement or other disposition of assets, the cost and related accumulated depreciation are eliminated from the accounts and the resulting gain or loss is reflected in “other income, net” in the results of operations.
Goodwill
We concluded that we have only one reporting unit and stockholders’ deficit of $118.8 million as of December 31, 2022. According to the guidance, the goodwill of reporting units with zero or negative carrying values will not be impaired.
Long-Lived Assets
We periodically evaluate our long-lived assets for events and circumstances that indicate a potential impairment. If an impairment indicator is present, a long-lived asset is assessed for impairment when the undiscounted expected future cash flows derived from that asset are less than its carrying value. The cash flows used for this analysis take into consideration a number of factors including past operating results, budgets and economic projections, market trends, and product development cycles. The amount of any impairment would be equal to the difference between the estimated fair value of the asset, based on a discounted cash flow analysis, and its carrying value.
Advertising Expenses
All advertising costs are expensed as incurred and are classified as marketing and selling expenses. Advertising expenses for the years ended December 31, 2022, 2021, and 2020 were $2.7 million, $2.9 million, and $0.1 million, respectively.
Research and Development Costs
Research and development costs are expensed as incurred.
Income Taxes
We account for income taxes using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. 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. Deferred tax assets are regularly reviewed 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. We are required 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.
The Inflation Reduction Act (IRA) was signed into law on August 16, 2022. The IRA includes, among other things, a corporate alternative minimum tax (CAMT) that applies to certain applicable corporations with average financial statement income in excess of $1 billion. CAMT applies to years beginning in 2023. We do not currently expect a material impact (if any) of the CAMT. The IRA also includes a new U.S. federal 1% excise tax on publicly traded corporations that repurchase their stock, applicable to buybacks occurring on or after January 1, 2023. The amount of the excise tax is generally 1% of the fair market value of the shares repurchased at the time of the repurchase. However, for purposes of calculating the excise tax, repurchasing corporations are permitted to net the fair market value of certain new stock issuances against the fair market value of stock repurchases during the same taxable year.
We account for uncertainty in income taxes recognized in our financial statements by applying a two-step process to determine the amount of tax 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 benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves (“unrecognized tax benefits”) that are considered appropriate, as well as the related net interest and penalties.
Accounting for Stock-Based Compensation
Our stock-based employee compensation plans allow us to grant stock awards, options, or other equity-based instruments, or a combination thereof, as part of our overall compensation strategy. For stock-based awards granted, we record stock-based compensation expense based on the grant date fair value over the requisite service periods for the individual awards, which generally equal the vesting periods. The vesting of stock-based award grants may be based on time, performance conditions, market conditions, or a combination of time, performance and market conditions. We account for forfeitures when they occur.
Certain Company stock-based compensation awards contain provisions that allow for continued vesting into retirement. Stock-based awards are considered fully vested for expense attribution purposes when the employee's retention of the award is no longer contingent on providing subsequent service.
Product Warranties
We provide warranties on externally sourced and internally developed hardware. The warranty period for all of our products is generally 90 days to one year, but can extend up to five years depending on the manufacturer’s warranty or local law. 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. At the end of each quarter, we reevaluate our estimates to assess the adequacy of the recorded warranty liabilities and adjusts the accrued amounts accordingly.
Computation of Net Income Per Share
Net income per share is presented for both basic earnings per share (“Basic EPS”) and diluted earnings per share (“Diluted EPS”). Basic EPS is based on the weighted-average number of common shares outstanding during the period, excluding non-vested restricted stock held by employees. Diluted EPS is based on the weighted-average number of common and potential common shares outstanding during the period. Potential common shares result from the assumed exercise of outstanding stock options and non-vested restricted stock and restricted stock units, the proceeds and remaining unrecorded compensation expense of which are then assumed to have been used to repurchase outstanding common stock using the treasury stock method. For periods when we report net income, potential common shares with combined purchase prices and unamortized compensation costs in excess of our average common stock fair value for the related period or that are contingently issuable are considered anti-dilutive.
Accounting for Restructuring Plans
Based on our policies for the calculation and payment of severance benefits, we account for employee-related restructuring charges as an ongoing benefit arrangement in accordance with ASC Topic 712, Compensation - Nonretirement Postemployment Benefits.
Related Party Transactions
From time to time we enter into arrangements with parties which may be affiliated with us, executive officers, and members of our board of directors. These transactions are primarily comprised of sales transactions in the normal course of business and are immaterial to the financial statements for all periods presented.
Leases
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, the Middle East, and Asia, which qualify as operating leases under U.S. GAAP. We also have a limited number of equipment leases that also qualify as operating leases. We determine if contracts with vendors represent a lease or have a lease component under U.S. GAAP at contract inception. During 2020, we also entered into a limited number of equipment leases that qualify as finance leases. Our leases have remaining terms ranging from less than one year to six years. We lease corporate office space in Burlington, Massachusetts, which expires in May 2028. 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 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. The operating leases are included in “Right of use assets,” “Accrued expenses and other current liabilities,” and “Long-term lease liabilities” on our consolidated balance sheets.
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.
Lease costs are included within cost of revenues and operating expenses on the consolidated statements of operations, and the related cash payments are included in the operating cash flows on the consolidated statements of cash flows. Variable lease costs, finance lease costs, and sublease income are not material.
Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
We have elected the following lease exceptions and practical expedients:
| | | | | |
Separation of lease and non-lease components | Non-lease components are excluded from our right of use (“ROU”) assets and lease liabilities and expensed as incurred. |
Short-term policy | We have elected the short-term lease recognition exemption for all applicable classes of underlying assets. Short-term disclosures include only those leases with a term greater than one month and 12 months or less, and expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less, that do not include an option to purchase the underlying asset that we are reasonably certain to exercise, are not recorded on the consolidated balance sheets. |
Treasury Stock
The Company records the aggregate purchase price of treasury stock at cost and includes treasury stock as a reduction to stockholders' equity.
Recently Adopted Accounting Pronouncement
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.
C. NET INCOME PER SHARE
Net income per common share is presented for both Basic EPS and 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 shares 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.
The following table sets forth (in thousands) common shares considered anti-dilutive securities at December 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | |
| |
| December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
Options | — | | | — | | | 4 | |
Non-vested restricted stock units | 782 | | | 941 | | | 737 | |
Anti-dilutive potential common shares | 782 | | | 941 | | | 741 | |
The following table sets forth (in thousands) the basic and diluted weighted common shares outstanding at December 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Weighted common shares outstanding - basic | 44,531 | | | 45,101 | | | 43,822 | |
Net effect of common stock equivalents | 325 | | | 1,202 | | | 1,056 | |
Weighted common shares outstanding - diluted | 44,856 | | | 46,303 | | | 44,878 | |
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D. FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
We measure deferred compensation investments on a recurring basis. At December 31, 2022 and 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. The assets held at fair value are included in “Other current assets” and “Other long-term assets” on our consolidated balance sheet as of December 31, 2022 and 2021 .
The following tables summarize our deferred compensation investments measured at fair value on a recurring basis (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at Reporting Date Using |
| December 31, 2022 | | 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 investments | $ | 376 | | | $ | 85 | | | $ | 291 | | | $ | — | |
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| | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at Reporting Date Using |
| December 31, 2021 | | 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 investments | $ | 408 | | | $ | 99 | | | $ | 309 | | | $ | — | |
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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. The carrying value of the term loan is net of debt issuance costs and approximates its fair value.
E INVENTORIES
Inventories consisted of the following at December 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Raw materials | $ | 7,984 | | | $ | 8,519 | |
Work in process | 288 | | | 304 | |
Finished goods | 12,709 | | | 11,099 | |
Total | $ | 20,981 | | | $ | 19,922 | |
At December 31, 2022 and 2021, finished goods inventory included $1.4 million and $1.9 million, respectively, associated with products shipped to customers or deferred labor costs for arrangements where revenue recognition had not yet commenced.
F. PROPERTY, PLANT AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
Computer and video equipment and software | | $ | 119,602 | | | $ | 133,294 | |
Manufacturing tooling and testbeds | | 4,228 | | | 4,889 | |
Office equipment | | 610 | | | 4,909 | |
Furniture, fixtures and other | | 4,853 | | | 9,915 | |
Leasehold improvements | | 27,834 | | | 37,034 | |
| | 157,127 | | | 190,041 | |
Less: accumulated depreciation and amortization | | 133,443 | | | 174,013 | |
Total | | $ | 23,684 | | | $ | 16,028 | |
We capitalize certain development costs incurred in connection with our internal use software. For the year ended December 31, 2022, we capitalized $8.8 million of contract labor and internal labor costs related to internal use software, and recorded the capitalized costs in computer and video equipment and software. There were $2.6 million of contract labor and internal labor costs capitalized for the year ended December 31, 2021. Internal use software is amortized on a straight line basis over its estimated useful life of three years, and we recorded amortization expense of $3.8 million, $3.1 million, and $3.1 million for the years ended December 31, 2022, 2021, and 2020 respectively.
Depreciation and amortization expense related to property and equipment was $8.3 million, $8.3 million, and $8.5 million for the years ended December 31, 2022, 2021, and 2020 respectively.
The following table presents our long-lived assets by geography at December 31, 2022 and 2021 (in thousands):
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| December 31, |
| 2022 | | 2021 |
United States | $ | 46,338 | | | $ | 38,408 | |
Other countries | 7,917 | | | 8,223 | |
Total | $ | 54,255 | | | $ | 46,631 | |
G. GOODWILL
The acquisition of Orad resulted in goodwill of $32.6 million in 2015. 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 one reporting unit and operating segment. We have stockholders’ deficit of $118.8 million as of December 31, 2022. As the reporting unit has a negative carrying value, goodwill will not be impaired.
H. LEASES
As of December 31, 2022, the weighted average incremental borrowing rate on our operating leases was 5.9% and the weighted average remaining lease term was 5.1 years. Lease costs for minimum lease payments is recognized on a straight-line basis over the lease term. Our total lease costs were $5.8 million, $7.1 million, and $9.1 million, and total related cash payments were $6.2 million, $7.6 million, and $9.0 million for the years ended December 31, 2022, 2021, and 2020, respectively. Short term lease costs were $2.4 million and $1.8 million for the years ended December 31, 2022 and 2021, respectively, and were immaterial for the year ended December 31, 2020. Right of use assets obtained in exchange for new operating lease liabilities were $1.9 million and $0.5 million for the years ended December 31, 2022 and 2021, respectively.
The accompanying consolidated results of operations reflect rent expense on a straight-line basis over the term of the leases. Total expense under operating leases was $8.1 million, $9.0 million, and $10.2 million for the years ended December 31, 2022, 2021, and 2020, respectively.
The table below reconciles the undiscounted future minimum lease payments under non-cancelable leases with terms of more than one year to the total lease liabilities recognized on the consolidated balance sheets as of December 31, 2022 (in thousands):
| | | | | | | | |
Year Ending December 31, | Operating Leases | Finance Leases |
2023 | 6,199 | | 219 | |
2024 | 5,443 | | 46 | |
2025 | 5,483 | | — | |
2026 | 5,544 | | — | |
2027 | 5,056 | | — | |
Thereafter | 1,805 | | — | |
Total future minimum lease payments | 29,530 | | 265 | |
Less effects of discounting | (4,241) | | (2) | |
Total lease liabilities | $ | 25,289 | | $ | 263 | |
| | |
| | |
| | |
| | |
| | |
| | |
| | | | | |
Operating Leases | December 31, 2022 |
Right of use assets | $ | 21,395 | |
| |
Accrued expenses and other current liabilities | 4,819 | |
Long-term lease liabilities | 20,470 | |
Total lease liabilities | $ | 25,289 | |
| | | | | |
Finance Leases | December 31, 2022 |
Other assets | $ | 254 | |
| |
Accrued expenses and other current liabilities | 217 | |
Other long-term liabilities | 46 | |
Total lease liabilities | $ | 263 | |
Included in the operating lease commitments below are obligations under leases for which we have vacated the underlying facilities as part of various restructuring plans. These leases expire at various dates through 2026 and represent an aggregate obligation of $1.3 million. We received $0.5 million, $0.6 million, and $0.8 million of sublease income during the years ended December 31, 2022, 2021, and 2020, respectively. The future minimum lease commitments under non-cancelable leases at December 31, 2022 were as follows (in thousands):
| | | | | |
Year Ending December 31, | Operating Leases |
2023 | $ | 6,901 | |
2024 | $ | 5,984 | |
2025 | $ | 6,008 | |
2026 | $ | 5,579 | |
2027 | $ | 5,060 | |
Thereafter | $ | 1,805 | |
Total | $ | 31,337 | |
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. The weighted-average discount rate is 2.3% as of September 30, 2020, the commencement date for our leases.
I. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following at December 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Consulting and professional fees | $ | 1,000 | | | $ | 1,320 | |
Operating lease liabilities - short term | 4,819 | | | 5,098 | |
Accrued royalties | 2,536 | | | 2,842 | |
Accrued warranty | 941 | | | 1,219 | |
Employee restructuring | 205 | | | 655 | |
Sales return & allowance | 7,706 | | | 11,298 | |
Other (individual items less than 5% of total current liabilities) | 18,824 | | | 15,120 | |
Total | $ | 36,031 | | | $ | 37,552 | |
J. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consisted of the following at December 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Finance lease liabilities | 46 | | | 289 | |
Deferred compensation | 3,715 | | | 4,981 | |
Other long-term liabilities | 587 | | | 647 | |
Total | $ | 4,348 | | | $ | 5,917 | |
K. COMMITMENTS AND CONTINGENCIES
Commitments
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-year term of the agreement. We have purchased $19.9 million pursuant to this agreement as of December 31, 2022 to develop Azure-certified solutions which includes developing virtualized versions of many of our product offerings, allowing them to run in a private cloud, public cloud, or in hybrid deployments.
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 December 31, 2022, be eligible to draw against the letters of credit to a maximum of $0.7 million in the aggregate.
We also 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.
We have future minimum lease commitments under non-cancelable leases totaling $31.3 million which are described in detail in Note H, Leases.
Purchase Commitments and Sole-Source Suppliers
As of December 31, 2022, we have entered into purchase commitments for certain inventory and other goods used in our normal operations. The purchase commitments covered by these agreements are for a period of less than 1 year and in the aggregate total $29.1 million as of December 31, 2022.
We depend on sole-source suppliers for certain key hardware components of our products. Although we have procedures in place to mitigate the risks associated with our sole-sourced suppliers, we cannot be certain that we will be able to obtain sole-sourced components or finished goods from alternative suppliers or that we will be able to do so on commercially reasonable terms without a material impact on our results of operations or financial position. We procure product components and build inventory based on forecasts of product life cycle and customer demand. If we are unable to provide accurate forecasts or manage inventory levels in response to shifts in customer demand, we may have insufficient, excess, or obsolete product inventory.
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 above, 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.
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 assesses 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 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. Legal fees are recognized as incurred when the legal services are provided, and therefore are not recognized as part of a loss contingency accrual.
At December 31, 2022 and as of the date of filing of these 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. The following table sets forth the activity in the product warranty accrual account for the years ended December 31, 2022, 2021, and 2020 (in thousands):
| | | | | |
Accrual balance at January 1, 2020 | $ | 1,337 | |
Accruals for product warranties | 1,065 | |
Cost of warranty claims | (1,307) | |
Accrual balance at December 31, 2020 | 1,095 | |
Accruals for product warranties | 1,349 | |
Cost of warranty claims | (1,225) | |
Accrual balance at December 31, 2021 | 1,219 | |
Accruals for product warranties | 723 | |
Cost of warranty claims | (1,001) | |
Accrual balance at December 31, 2022 | $ | 941 | |
L. CAPITAL STOCK
Preferred Stock
We have authorized up to one million shares of preferred stock, $0.01 par value per share, for issuance. Each series of preferred stock shall have such rights, preferences, privileges, and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges, and liquidation preferences, as may be determined by our board of directors.
Common Stock Repurchases
On September 9, 2021, our board of directors approved the repurchase of up to $115.0 million of our outstanding shares. This authorization does not have a prescribed expiration date. As of December 31, 2022, approximately $37.1 million of the $115.0 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 year ended December 31, 2022, the Company repurchased 2,036,524 shares of its common stock for $52.8 million. These amounts may differ from the repurchases of common stock amounts in the consolidated statements of cash flows due to unsettled share repurchases at the end of a period.
Stock Incentive Plans
There is an aggregate of 10,540,000 of our shares of $0.01 par value per share common stock authorized and reserved for issuance under the Avid Technology, Inc. Amended and Restated 2014 Stock Incentive Plan (the “Plan”). The Plan was originally adopted by our board of directors on September 14, 2014 and approved by our stockholders on October 29, 2014. In connection with the approval of the Plan, our Amended and Restated 2005 Stock Incentive Plan has been closed; no additional awards may be granted under that 2005 plan. As of December 31, 2022, there were no remaining shares available for issuance under the 2005 plan.
Under the Plan, we may grant stock awards or options to purchase our common stock to employees, officers, directors, and consultants. The exercise price for options generally must be no less than market price on the date of grant. Awards may be
performance-based where vesting or exercisability is conditioned on achieving performance objectives, time-based, or a combination of both. Option grants become exercisable over various periods, typically three years to four years for employees and one year for non-employee directors, and have a maximum term of seven years to ten years. Restricted stock unit awards with time-based vesting typically vest over three years to four years for employees and one year for non-employee directors. Certain Company stock-based compensation awards contain provisions that allow for continued vesting into retirement. Stock-based awards are considered fully vested for expense attribution purposes when the employee's retention of the award is no longer contingent on providing subsequent service.
We use the Black-Scholes option pricing model to estimate the fair value of stock option grants with time-based vesting. The Black-Scholes model relies on a number of key assumptions to calculate estimated fair value. The assumed dividend yield of zero is based on the fact that we have never paid cash dividends and has no present expectation to pay cash dividends. The expected volatility is based on actual historic stock volatility for periods equivalent to the expected term of the award. The assumed risk-free interest rate is the U.S. Treasury security rate with a term equal to the expected life of the option. The assumed expected life is based on company-specific historical experience considering the exercise behavior of past grants and models the pattern of aggregate exercises.
The fair value of restricted stock unit awards with time-based vesting is based on the intrinsic value of the awards at the date of grant, as the awards have a purchase price of $0.01 per share.
We also issue option grants or restricted stock unit awards with vesting based on market conditions. Performance-based restricted stock units will vest based on achievement of our relative total shareholder return against the Russell 2000 Index over a three-year period. The fair values and derived service periods for all grants that include vesting based on market conditions are estimated using the Monte Carlo valuation method. For stock option grants that include vesting based on performance conditions, the fair values are estimated using the Black-Scholes option pricing model. For restricted stock unit awards that include vesting based on performance conditions, the fair values are estimated based on the intrinsic values of the awards at the date of grant, as the awards have a purchase price of $0.01 per share.
Information with respect to options granted under all stock option plans for the year ended December 31, 2022 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Number of Options | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Life (years) | | Aggregate Intrinsic Value (in thousands) | | | |
Options Outstanding at December 31, 2019 | 565,000 | | | $7.57 | | 1.17 | | 571 | | | | |
Granted | — | | | — | | | | | | | |
Exercised | (319,000) | | | 7.65 | | | | | | | |
Forfeited or Expired | — | | | — | | | | | | | |
Options Outstanding at December 31, 2020 | 246,000 | | | $7.48 | | 0.44 | | $ | 1,358 | | | | |
Granted | — | | | — | | | | | | | |
Exercised | (246,000) | | | 7.48 | | | | | | | |
Forfeited or Expired | — | | | — | | | | | | | |
Options outstanding at December 31, 2021 | — | | | $— | | 0 | | $ | — | | | | |
Granted | — | | | — | | | | | | | |
Exercised | — | | | — | | | | | | | |
Forfeited or Expired | — | | | — | | | | | | | |
Options outstanding at December 31, 2022 | — | | | $— | | 0.00 | | $ | — | | | | |
| | | | | | | | | | |
Exercisable at: | | | | | | | | | | |
December 31, 2020 | 246,000 | | | $7.48 | | 0.44 | | $1,358 | | | |
December 31, 2021 | — | | | $— | | 0.00 | | $— | | | |
December 31, 2022 | — | | | $— | | 0.00 | | $— | | | |
The cash received from stock options exercised during the year ended December 31, 2020 was $1.6 million. There was no cash received from stock options exercised during the years ended December 31, 2022 and 2021.
Information with respect to non-vested time-based restricted stock units for the year ended December 31, 2022 was as follows:
| | | | | | | | | | | |
| Number of Restricted Stock Units | Weighted- Average Grant-Date Fair Value | Shares Retained to Cover Statutory Minimum Withholding Taxes |
Outstanding at December 31, 2019 | 2,087,933 | | $6.41 | |
Granted | 1,518,714 | | 7.20 | |
Vested | (1,193,553) | | 6.33 | 403,798 | |
Forfeited | (298,215) | | 6.52 | |
Outstanding at December 31, 2020 | 2,114,879 | | $7.01 | |
Granted | 458,469 | | 29.01 | |
Vested | (1,466,907) | | 6.83 | 492,008 | |
Forfeited | (44,607) | | 10.43 | |
Outstanding at December 31, 2021 | 1,061,834 | | $16.60 | |
Granted | 562,191 | | 32.08 | |
Vested | (673,285) | | 15.09 | 246,274 | |
Forfeited | (162,523) | | 19.96 | |
Outstanding at December 31, 2022 | 788,217 | | $28.24 | |
| | | |
Information with respect to non-vested performance-based restricted stock units for the year ended December 31, 2022 was as follows:
| | | | | | | | | | | |
| Number of Performance-based Restricted Stock Units | Weighted- Average Grant-Date Fair Value | Shares Retained to Cover Statutory Minimum Withholding Taxes |
Outstanding at December 31, 2019 | 554,265 | | $6.39 | |
Granted | 578,316 | | 6.64 | |
Vested | (328,673) | | 5.80 | 133,596 | |
Forfeited | (150,480) | | 7.11 | |
Outstanding at December 31, 2020 | 653,428 | | $6.74 | |
Granted | 397,048 | | 15.07 | |
Vested | (471,112) | | 5.81 | 196,703 | |
Forfeited | — | | — | |
Outstanding at December 31, 2021 | 579,364 | | $13.20 | |
Granted | 296,405 | | 22.69 | |
Vested | (454,804) | | 10.19 | 200,208 | |
Forfeited | (126,954) | | 22.97 | |
Outstanding at December 31, 2022 | 294,011 | | $23.20 | |
| | | |
| | | |
| | | |
The weighted-average grant date fair value of time and performance-based restricted stock units granted during the years ended December 31, 2022, 2021, and 2020 was $28.84, $22.54, and $7.05, respectively. The total weighted-average fair value of time and performance-based restricted stock units vested during the years ended December 31, 2022, 2021, and 2020 was $14.8 million, $12.8 million, and $9.5 million, respectively.
Employee Stock Purchase Plan
On February 27, 2008, the board of directors approved our Second Amended and Restated 1996 Employee Stock Purchase Plan (the “ESPP”). On May 27, 2008 our stockholders approved an increase of the number of shares of our common stock authorized for issuance under the Second Amended and Restated ESPP from 1,700,000 to 2,500,000 shares. In May 2018, we registered an aggregate of 650,000 of our shares of $0.01 par value per share common stock, which have been authorized and reserved for issuance under the Avid Technology, Inc. Second Amended and Restated ESPP.
Our Second Amended and Restated ESPP offers our shares for purchase at a price equal to 85% of the closing price on the applicable offering period termination date. Shares issued under the ESPP are considered compensatory. Accordingly, we are required to measure fair value and record compensation expense for share purchase rights granted under the ESPP. In July 2015, the board of directors approved an amendment to the ESPP to change the subscription period from three to six months and accordingly to adjust the payroll cap to $5,000 per plan period. A total of 451,000 shares remained available for issuance under the ESPP at December 31, 2022.
We use the Black-Scholes option pricing model to calculate the fair value of shares issued under the ESPP. The Black-Scholes model relies on a number of key assumptions to calculate estimated fair values. The following table sets forth the weighted-average key assumptions and fair value results for shares issued under the ESPP during the years ended December 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Expected dividend yield | 0.00% | | 0.00% | | 0.00% |
Risk-free interest rate | 1.50% | | 0.08% | | 0.82% |
Expected volatility | 63.9% | | 62.9% | | 72.1% |
Expected life (in years) | 0.50 | | 0.49 | | 0.50 |
Weighted-average fair value of shares issued (per share) | $5.03 | | $3.77 | | $1.40 |
The following table sets forth the quantities and average prices of shares issued under the ESPP for the years ended December 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Shares issued under the ESPP | 41,194 | | 26,988 | | 61,750 |
Average price of shares issued | $22.32 | | $29.95 | | $8.67 |
We did not realize a material tax benefit from the tax deductions for stock option exercises, vested restricted stock units and shares issued under the ESPP during the years ended December 31, 2022, 2021, or 2020.
Stock-Based Compensation Expense
The following table sets forth Stock-based compensation expense by award type for the years ended December 31, 2022, 2021, and 2020, respectively (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Share-based compensation expense by type: | | | | | |
| | | | | |
Time-based Restricted Stock Units | $ | 13,585 | | | $ | 10,010 | | | $ | 8,340 | |
Performance-based Restricted Stock Units | 2,779 | | | 3,575 | | | 2,211 | |
ESPP | 191 | | | 152 | | | 113 | |
Total Share-based compensation expense | $ | 16,555 | | | $ | 13,737 | | | $ | 10,664 | |
Stock-based compensation was included in the following captions in our consolidated statements of operations for the years ended December 31, 2022, 2021, and 2020, respectively (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Cost of revenues | $ | 2,063 | | | $ | 1,800 | | | $ | 1,339 | |
Research and development expenses | 2,289 | | | 1,620 | | | 1,725 | |
Marketing and selling expenses | 3,088 | | | 2,484 | | | 2,176 | |
General and administrative expenses | 9,115 | | | 7,833 | | | 5,424 | |
Total | $ | 16,555 | | | $ | 13,737 | | | $ | 10,664 | |
At December 31, 2022, there was $17.9 million of total unrecognized compensation cost related to non-vested stock-based compensation awards granted under our stock-based compensation plans. We expect this amount to be amortized approximately as follows: $10.2 million in 2023, $6.1 million in 2024, and $1.5 million in 2025. At December 31, 2022, the weighted-average recognition period of the unrecognized compensation cost was approximately 1.1 years.
M. EMPLOYEE BENEFIT PLANS
Employee Benefit Plans
We have a Section 401(k) plan, which we refer to as the 401(k) plan, that covers substantially all U.S. employees. The 401(k) plan allows employees to make contributions up to a specified percentage of their compensation. We may, upon resolution by our board of directors, make discretionary contributions to the plan. Our contributions to the 401(k) plan totaled $1.9 million in 2022, $0.7 million in 2021, and $0.5 million in 2020.
In addition, we have various retirement and post-employment plans covering certain international employees. Certain plans allow us to match employee contributions up to a specified percentage as defined by the plans. Our contributions to these plans totaled $1.4 million, $1.4 million, and $1.4 million in 2022, 2021, and 2020 respectively.
Deferred Compensation Plans
We maintain a nonqualified deferred compensation plan (the “Deferred Plan”). The Deferred Plan covers senior management and members of the board of directors. In November 2013, the board of directors determined to indefinitely suspend the Deferred Plan and not offer participants the opportunity to participate in the Deferred Plan as of 2014. The benefits payable under the Deferred Plan represent an unfunded and unsecured contractual obligation to pay the value of the deferred compensation in the future, adjusted to reflect deemed investment performance. Payouts are generally made upon termination of employment with us. The assets of the Deferred Plan, as well as the corresponding obligations, were approximately $0.1 million and $0.1 million at December 31, 2022 and 2021, respectively, and were recorded in “other current assets” and “accrued compensation and benefits” at those dates.
In connection with the acquisition of a business in 2010, we assumed the assets and liabilities of a deferred compensation arrangement for a single individual in Germany. The arrangement represents a contractual obligation to pay a fixed value, periodically adjusted for inflation, and paid in euros for a period specified in the contract. In connection with the acquisition of Orad, we assumed the assets and liabilities of a deferred compensation arrangement for employees in Israel. Our assets and
liabilities related to the arrangements consisted of assets recorded in “other long-term assets” of $0.3 million at December 31, 2022 and $0.3 million at December 31, 2021, representing the value of related insurance contracts and investments, and liabilities recorded as “long-term liabilities” of $3.7 million at December 31, 2022 and $5.0 million at December 31, 2021, representing the fair value of the estimated benefits to be paid under the arrangements.
N. INCOME TAXES
Income before income taxes and the components of the income tax (benefit) provision consisted of the following for the years ended December 31, 2022, 2021, and 2020 (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Income from operations before income taxes: | | | | | |
United States | $ | 31,322 | | | $ | 31,085 | | | $ | 9,182 | |
Foreign | 14,015 | | | 12,870 | | | 3,252 | |
Total income from operations before income taxes | $ | 45,337 | | | $ | 43,955 | | | $ | 12,434 | |
Provision for (Benefit from) income taxes: | | | | | |
Current tax expense (benefit): | | | | | |
Federal | $ | — | | | $ | — | | | $ | — | |
State | 121 | | | 119 | | | 133 | |
Foreign benefit of net operating losses | (880) | | | (1,616) | | | (883) | |
Other foreign | 1,283 | | | 2,612 | | | 1,295 | |
Total current tax expense | 524 | | | 1,115 | | | 545 | |
Deferred tax (benefit) expense: | | | | | |
| | | | | |
Federal | — | | | — | | | — | |
State | — | | | — | | | — | |
Other foreign | (10,428) | | | 1,452 | | | 827 | |
Total deferred tax (benefit) expense | (10,428) | | | 1,452 | | | 827 | |
Total (benefit from) provision for income taxes | $ | (9,904) | | | $ | 2,567 | | | $ | 1,372 | |
Net deferred tax assets (liabilities) consisted of the following at December 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Deferred tax assets: | | | |
Tax credit and loss carryforwards | $ | 230,253 | | | $ | 247,658 | |
Allowances for bad debts | 42 | | | 45 | |
Difference in accounting for: | | | |
Revenues | 10,563 | | | 3,515 | |
Costs and expenses | 27,350 | | | 27,093 | |
Inventories | 1,289 | | | 1,529 | |
| | | |
| | | |
Long-term lease liabilities | 5,365 | | | 6,093 | |
Gross deferred tax assets | 274,862 | | | 285,933 | |
Valuation allowance | (252,874) | | | (273,877) | |
Deferred tax assets after valuation allowance | 21,988 | | | 12,056 | |
Deferred tax liabilities: | | | |
Difference in accounting for: | | | |
| | | |
Costs and expenses | (826) | | | (779) | |
Inventories | — | | | (46) | |
| | | |
Right of use asset | (5,312) | | | (6,021) | |
Gross deferred tax liabilities | (6,138) | | | (6,846) | |
Net deferred tax assets | $ | 15,850 | | | $ | 5,210 | |
Recorded as: | | | |
| | | |
Deferred tax assets, net | 15,859 | | | 5,210 | |
| | | |
Deferred tax liabilities, net | (9) | | | — | |
Net deferred tax assets | $ | 15,850 | | | $ | 5,210 | |
Deferred tax assets and liabilities reflect the net tax effects of the tax credits and net operating loss carryforwards and the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The ultimate realization of the net deferred tax assets is dependent upon the generation of sufficient future taxable income in the applicable tax jurisdictions. 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 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.
For U.S. federal and state income tax purposes at December 31, 2022, we had tax credit carryforwards of $46.9 million, which will expire between 2023 and 2042, federal net operating loss carryforwards of $616.4 million and state net operating loss carryforwards of $328.1 million, the majority of which will expire between 2023 and 2037.
The federal net operating loss and tax credit amounts are subject to annual limitations under Section 382 change of ownership rules of the Internal Revenue Code. We completed an assessment at September 19, 2022 regarding whether there may have been a Section 382 ownership change and concluded that it is more likely than not that none of our net operating loss and tax credit amounts are subject to any Section 382 limitation. Our Section 382 conclusion remains unchanged at December 31, 2022.
Additionally, we have foreign net operating loss carryforwards of $107.5 million and capital loss carryforwards of $1.5 million, each with an indefinite carryforward period and tax credit carryforwards of $6.0 million that begin to expire in 2031. We have
determined there is uncertainty regarding the realization of a portion of these assets and have recorded a valuation allowance against $49.3 million of net operating losses, $1.5 million of capital losses and $6.0 million of tax credits at December 31, 2022.
Our assessment of the valuation allowance on the 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.
The following table sets forth a reconciliation of our income tax provision (benefit) to the statutory U.S. federal tax amount for the years ended December 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Statutory tax | $ | 9,521 | | | $ | 9,230 | | | $ | 2,611 | |
Tax credits utilized and expired | 838 | | | 892 | | | 1,356 | |
Foreign operations | 4,155 | | | 1,526 | | | 981 | |
Change in uncertain tax positions | (11,323) | | | — | | | (474) | |
Non-deductible expenses and other | 630 | | | 294 | | | 304 | |
Stock based compensation | (3,115) | | | (7,542) | | | (430) | |
Non-deductible executive compensation | 2,630 | | | 3,464 | | | 551 | |
Non-taxable income from PPP loan forgiveness | — | | | (1,638) | | | — | |
Change in valuation allowance | (13,240) | | | (3,659) | | | (3,527) | |
(Benefit from) provision for income taxes | $ | (9,904) | | | $ | 2,567 | | | $ | 1,372 | |
The increase in our statutory tax is driven by the increase in our income from operations before taxes. The change in our tax credits is driven by expiring U.S. research and development tax credits exceeding current year tax credits generated. Changes in the jurisdictional mix of our foreign profitability and, in 2022, increases in our U.S. foreign income inclusion - also known as global intangible low-taxed income (GILTI) - largely driven by the 2022 U.S. tax law change requiring the capitalization of R&D costs – drives the change in the taxes on foreign operations. The 2022 decrease in our uncertain tax positions relates to the recognition of an uncertain tax benefit associated with our German subsidiary’s net operating loss carryforwards due to the expiration of the statute of limitations associated with the issue. The change in our stock-based compensation was related to the increased deduction resulting from the increase in the market value of our stock compared to the book expense determined at the grant date. The change in the non-deductible executive compensation was primarily related to the change in the value of stock compensation awarded to our executives. The decreases in our valuation allowance were primarily driven by the decreases of U.S. net deferred tax assets. In 2022 the decrease in our net deferred tax assets was driven by higher U.S. taxable income largely associated with the 2022 U.S. tax law change requiring the capitalization of R&D costs. The higher taxable income allowed us to utilize interest expense carryforward deductions and to utilize net operating losses that would have expired in 2022 and 2023. These deferred tax asset utilizations were largely, but not entirely, substituted with new deferred tax assets representing future R&D amortization deductions.
As a result of Tax Cuts and Jobs Act (TCJA) and the current U.S. taxation of deemed repatriated earnings, the additional taxes that might be payable upon repatriation of foreign earnings are not significant. However, we do not have any current plans to repatriate these earnings because the underlying cash will be used to fund the ongoing operations of the foreign subsidiaries.
A tax position must be more likely than not to be sustained before being recognized in the financial statements. It also requires the accrual of interest and penalties as applicable on unrecognized tax positions. At January 1, 2020, our unrecognized tax benefits and related accrued interest and penalties related to an audit issue at our subsidiary in Israel in the amount of $1.8 million and $11.2 million related to German net operating loss carryforwards utilizable in our subsequently reorganized German subsidiary. During 2020, we reversed the accrual for the unrecognized tax position related to the audit issue at our subsidiary in Israel due to the settlement of the issue. The total decreases to the value of our unrecognized tax benefits during 2020, including the impacts of any foreign currency revaluations, were $(0.8) million. The balance of the unrecognized benefit at December 31, 2020 relates only to the unrecognized tax position related to our German subsidiary net operating loss carryforward. During 2021, we had a decrease in our unrecognized tax positions of $(0.5) million of which $0.4 million related to a withholding tax issue in our Irish subsidiary and $(0.9) million related to foreign currency revaluations. During 2022, the decrease of $11.2 million was primarily due to the expiration of the statute of limitations associated with net operating loss carryforwards at our German subsidiary. The
balance of the unrecognized benefit at December 31, 2022 relates only Irish withholding tax issue, which would not affect our income tax provision or effective rate if recognized.
The following table sets forth a reconciliation of the beginning and ending amounts of unrecognized tax benefits for the years ended December 31, 2022, 2021, and 2020 (in thousands):
| | | | | |
Unrecognized tax benefits at January 1, 2020 | $ | 13,011 | |
Decreases for tax positions taken during a prior period | (818) | |
Unrecognized tax benefits at December 31, 2020 | 12,193 | |
Decreases for tax positions taken during a prior period | (524) | |
Unrecognized tax benefits at December 31, 2021 | 11,669 | |
Decreases due to expiration of statute of limitations | (11,233) | |
Unrecognized tax benefits at December 31, 2022 | $ | 436 | |
We recognize interest and penalties related to uncertain tax positions in income tax expense. There were no accrued interest and penalties related to uncertain tax positions at December 31, 2022 and 2021.
The tax years 2011 and forward remain open to examination by taxing authorities in the jurisdictions in which we operate. The most significant operating jurisdictions include: the United States, Ireland, the Netherlands, Germany, Israel, Japan, and the United Kingdom.
O. RESTRUCTURING COSTS AND ACCRUALS
2020 Restructuring Plan
In October 2020, we committed to a restructuring plan in order to undergo a strategic reorganization of our business. We are making significant changes in business operations to better support our strategy and overall performance. The 2020 restructuring plan is complete as of December 31, 2022.
During the year ended December 31, 2022, we recorded restructuring costs of $0.5 million. The restructuring charges for the year ended December 31, 2022 were a result of severance costs related to approximately three positions eliminated during 2022.
During the year ended December 31, 2021, we recorded restructuring costs of $1.1 million. The restructuring charges for the year ended December 31, 2021 were a result of severance costs related to approximately 24 positions eliminated during 2021.
During the year ended December 31, 2020, we recorded restructuring costs of $5 million. The restructuring charges for the year ended December 31, 2020 were a result of severance costs related to approximately 93 positions eliminated during 2020.
Restructuring Summary
The following table sets forth restructuring expenses recognized for the years ended December 31, 2022, 2021, and 2020 (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Employee | $ | 513 | | | $ | 1,116 | | | $ | 4,949 | |
Facility | — | | | — | | | 97 | |
Total restructuring charges, net | $ | 513 | | | $ | 1,116 | | | $ | 5,046 | |
The following table sets forth the activity in the restructuring accruals for the years ended December 31, 2022, 2021, and 2020 (in thousands).
| | | | | |
| Employee- Related |
Accrual balance at December 31, 2019 | $ | 155 | |
Restructuring charges and revisions | 4,949 | |
| |
Cash payments | (1,461) | |
Foreign exchange impact on ending balance | 44 | |
Accrual balance at December 31, 2020 | 3,687 | |
Restructuring charges and revisions | 954 | |
| |
Cash payments | (3,947) | |
Foreign exchange impact on ending balance | (39) | |
Accrual balance at December 31, 2021 | $ | 655 | |
Restructuring charges and revisions | 513 | |
| |
Cash payments | (948) | |
Foreign exchange impact on ending balance | (15) | |
Current accrual balance at December 31, 2022 | $ | 205 | |
| |
| |
| |
The employee-related accruals at December 31, 2022 represent severance costs to former employees that will be paid out within 12 months, and are, therefore, included in the caption “accrued expenses and other current liabilities” in our consolidated balance sheets.
P. REVENUE
Revenue Components and Performance Obligations
Subscription Services
We offer subscription versions of many of our software products with monthly, annual and multi-year terms. While we are beginning to offer subscription versions for most of our product portfolio in connection with our cloud strategy, current subscription sales primarily consist of our Media Composer, Pro Tools, and Sibelius offerings. We sell these products to customers under standard terms and conditions and payment is due upfront, except for webstore transactions which are typically billed monthly. Contract assets for annual and multi-year subscriptions billed monthly are recorded on our balance sheet upon customer commitment, net of expected early cancellations where we estimate variable consideration based on historical experience. Subscription services have several performance obligations, including a right to use the software and stand-ready
performance obligations to (i) provide unspecified bug fixes and software enhancements, or Software Updates, and (ii) call support when and if needed. The allocated revenue related to the right to use the licensed software is recognized at a point in time once control has been transferred and the customer has the ability to access the software. Stand-ready performance obligations related to Software Updates and call support are satisfied over time and revenue is recognized ratably over the term of the subscription.
Maintenance Services
We offer maintenance contracts, which are typically annual, for our integrated solutions. Maintenance contracts for individual products are sold bundled with initial product offerings or as renewals once initial contracts have lapsed. Maintenance contracts are also sold on an enterprise basis where a customer purchases maintenance for all Avid products owned. Maintenance contracts are provided under our standard terms and conditions and payment is due in advance of the maintenance being provided. Maintenance contracts include stand-ready performance obligations to provide (i) Software Updates, (ii) call support, and (iii) hardware maintenance. Maintenance contract performance obligations are satisfied over time and revenue is recognized ratably over the term of the contract.
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 represents an implied performance obligation of a form of post-contract maintenance support (“Implied Maintenance Release PCS”) which represents a performance obligation. While we have ceased providing Implied Maintenance Release PCS on new product offerings, we continue to provide Implied Maintenance Release PCS for older products that were predominately sold in prior years. Revenue attributable to Implied Maintenance Release PCS performance obligations is recognized over time on a ratable basis over the period that Implied Maintenance Release PCS is expected to be provided, which is typically six years.
Integrated Solutions
We offer a wide range of video and audio products and solutions. Our video solutions consist of storage and workflow solutions, our media management solutions, and our video creative tools, which include our Media Composer, NEXIS, Airspeed, Maestro, and MediaCentral product lines that consist of software licenses or integrated hardware and software solutions. Our audio solutions consist of sales of digital audio software and workstation solutions and our control surfaces, consoles and live-sound systems, which include our Pro Tools, Pro Tools HD, Pro Tools | S6, VENUE | S6L, and Sibelius product lines that consist of software licenses or integrated hardware and software solutions. We sell these products to customers under a contract or signed quote and payment terms are generally 30 to 60 days from delivery. Each individual product sold to a customer represents a distinct performance obligation for us and revenue is recognized at the point in time when control of the product transfers, which is typically when the product is shipped to the customer or, in the case of certain software licenses, when the software license term commences and is accessible by the customer.
Professional Services, Training, and Other
We sell a variety of professional services, training, and other services that complement product and maintenance offerings. Professional services consist primarily of standard configuration, commissioning (i.e., setting up equipment purchased) and on-air support (i.e., monitoring a customer’s production environment available during initial system go-live, live sporting events, etc.) and providing customization services for some of our products. We also offer training and certification programs for many of our products and workflows. Other revenues include shipping and handling charges and reimbursable travel expenses. We sell professional services, training and other services under a contract or signed quote, and for larger projects, statements of work that outline the customer’s specifications and requirements. Services are primarily sold on a time and materials basis, however, fixed fee arrangements are also executed from time to time. Payments are generally billed upon completion of the service or, for larger projects, on an installment basis as services are rendered. While the nature of service deliverables can vary significantly, each service deliverable generally represents a distinct performance obligation and revenue is recognized over time, typically in proportion of the total hours incurred as a percentage of total estimated hours required to complete the project.
Enterprise Agreements
From time to time, we enter into enterprise wide agreements whereby the customer agrees to purchase specified products and services from us over an extended period of time, often for a single fixed contractual price. For such agreements, management
identifies each performance obligation in the contract and allocates the total contract price to each performance obligation based on relative estimated SSP. Once the transaction price is allocated to individual performance obligations, the components are recognized in the respective categories of revenue above consistent with the timing of the recognition of performance obligations described therein.
Disaggregated Revenue and Geography Information
The following is a summary of our revenues by type for the years ended December 31, 2022, 2021, and 2020 (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Subscription services | $ | 151,330 | | | $ | 108,443 | | | $ | 72,831 | |
Maintenance services | 109,845 | | | 122,411 | | | 124,175 | |
Integrated solutions | 123,277 | | | 131,073 | | | 112,904 | |
Perpetual Licenses | 11,091 | | | 23,793 | | | 27,858 | |
Professional services, training and other services | 21,870 | | | 24,224 | | | 22,698 | |
Total net revenues | $ | 417,413 | | | $ | 409,944 | | | $ | 360,466 | |
The following table sets forth our revenues by geographic region for the years ended December 31, 2022, 2021, and 2020 (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Revenues: | | | | | |
United States | $ | 178,023 | | | $ | 173,717 | | | $ | 143,518 | |
Other Americas | 31,046 | | | 20,399 | | | 24,026 | |
Europe, Middle East and Africa | 150,976 | | | 160,390 | | | 142,370 | |
Asia-Pacific | 57,368 | | | 55,438 | | | 50,552 | |
Total net revenues | $ | 417,413 | | | $ | 409,944 | | | $ | 360,466 | |
Contract Asset
Contract asset activity for the years ended December 31, 2022 and 2021 was as follows (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Contract asset at beginning of period | $ | 25,397 | | | $ | 18,579 | |
Revenue in excess of billings | 86,362 | | | 66,455 | |
Customer billings | (73,994) | | | (59,637) | |
Contract asset at end of period | 37,765 | | | 25,397 | |
Less: current portion | 32,295 | | | 18,903 | |
Long-term portion | $ | 5,470 | | | $ | 6,494 | |
The increase in contract assets during the year ended December 31, 2022 is due to the timing of payments due under our enterprise network agreements which predominately are payable annually, whereas performance obligations are fulfilled on a continuous basis partially offset by continued growth in our subscription offerings. The long-term portion of contract assets is included in “other long-term assets” in our consolidated balance sheet for the year ended December 31, 2022.
Deferred Revenue
Deferred revenue activity for the years ended December 31, 2022 and 2021 was as follows (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Deferred revenue at beginning of period | $ | 98,082 | | | $ | 99,258 | |
Billings deferred | 81,515 | | | 81,517 | |
Recognition of prior deferred revenue | (85,447) | | | (82,693) | |
Deferred revenue at end of period | $ | 94,150 | | | $ | 98,082 | |
A summary of the performance obligations included in deferred revenue as of December 31, 2022 is as follows (in thousands):
| | | | | |
| December 31, 2022 |
Product | $ | 7,040 | |
Subscription | 17,730 | |
Maintenance Contracts | 64,759 | |
Implied Maintenance Release PCS | 4,028 | |
Professional services, training and other | 593 | |
Deferred revenue at December 31, 2022 | $ | 94,150 | |
Remaining Performance Obligations
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.
We have remaining performance obligations of $4.0 million attributable to Implied Maintenance Release PCS recorded in deferred revenue as of December 31, 2022. We expect to recognize revenue for these remaining performance obligations of $1.6 million, $1.1 million, $0.7 million, $0.4 million, and $0.2 million for the years ended December 31, 2023, 2024, 2025, 2026, and 2027, respectively, and an immaterial amount thereafter.
As of December 31, 2022, we had approximately $20.4 million of transaction price allocated to remaining performance obligations for certain enterprise agreements that have not yet been invoiced and are therefore not recorded as deferred revenue on our balance sheet. Unbilled remaining performance obligations represent obligations we have to deliver for specific products and services in the future where there is not yet an enforceable right to invoice the customer. Our unbilled 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 based on customer requirements, we expect to recognize the $24.4 million in 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.
Q. LONG-TERM DEBT AND CREDIT AGREEMENT
Long-term debt consisted of the following (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Term loan, net of unamortized debt issuance costs and debt discount of $2,485 and $2,059 at December 31, 2022 and 2021, respectively | $ | 181,853 | | | $ | 168,941 | |
Other long-term debt | 815 | | | 1,023 | |
Total debt | 182,668 | | | 169,964 | |
Less: current portion | 9,710 | | | 9,158 | |
Total long-term debt | $ | 172,958 | | | $ | 160,806 | |
The following table summarizes the maturities of our borrowing obligations as of December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
Fiscal Year | Term Loan | | | Other Long-Term Debt | | Total |
2023 | $ | 9,550 | | | | $ | 160 | | | $ | 9,710 | |
2024 | 13,131 | | | | 171 | | | 13,302 | |
2025 | 17,907 | | | | 184 | | | 18,091 | |
2026 | 19,100 | | | | 197 | | | 19,297 | |
2027 | 124,650 | | | | 103 | | | 124,753 | |
Thereafter | — | | | | — | | | — | |
Total before unamortized discount | 184,338 | | | | 815 | | | 185,153 | |
Less: unamortized discount and issuance costs | (2,485) | | | | — | | | (2,485) | |
Less: current portion of long-term debt | (9,550) | | | | (160) | | | (9,710) | |
Total long-term debt | $ | 172,303 | | | | $ | 655 | | | $ | 172,958 | |
Credit Agreement
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 $180.0 million (the “Term Loan”) and (b) a revolving credit facility (the “Revolving Credit Facility”) of up to a maximum of $70.0 million in borrowings outstanding at any time. The Revolving 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 in the principal amount of $201 million under the Company’s prior financing agreement with Cerberus Business Finance, LLC, which was then terminated. As a result of this termination, the Company incurred a loss on extinguishment of debt of $3.7 million as a result of writing off $2.6 million of remaining unamortized issuance costs as well as a $1.1 million prepayment penalty.
In connection with the Credit Agreement, the Company incurred $2.5 million of issuance discounts and an immaterial amount of issuance costs. The Term Loan discount and issuance costs will be amortized over the remaining life of the Second A&R Credit Agreement.
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 0.25%, 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.
In connection with the A&R Credit Agreement, the Company accounted for the amendment as a modification and incurred an additional $0.4 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 Second A&R Credit Agreement.
On October 6, 2022, the Company executed a 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, which replaces 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.
In connection with the Second A&R Credit Agreement, the Company accounted for the amendment as a modification and incurred an additional $0.5 million of issuance costs during the three months ended December 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 Second A&R Credit Agreement.
We recorded $7.8 million of interest expense on the Term Loan and Revolving Credit Facility for the twelve months ended December 31, 2022. The effective interest rate for the twelve months ended December 31, 2022 was 4.43%. As of December 31, 2022, there were no amounts drawn under the Revolving Credit Facility. We were in compliance with the Second A&R Credit Agreement covenants as of December 31, 2022.
.