UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer |
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(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Name of each exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of May 5, 2022, the registrant had
EVERBRIDGE, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
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Page |
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PART I. |
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3 |
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Item 1. |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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34 |
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Item 3. |
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48 |
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Item 4. |
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PART II. |
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50 |
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Item 1. |
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50 |
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Item 1A. |
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Item 2. |
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51 |
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Item 3. |
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52 |
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Item 4. |
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52 |
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Item 5. |
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52 |
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Item 6. |
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53 |
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2
PART I—FINANCIAL INFORMATION
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Item 1. |
Condensed Consolidated Financial Statements (Unaudited). |
EVERBRIDGE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)
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March 31, 2022 |
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December 31, 2021 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Restricted cash |
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Accounts receivable, net |
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Prepaid expenses |
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Deferred costs and other current assets |
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Total current assets |
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Property and equipment, net |
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Capitalized software development costs, net |
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Goodwill |
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Intangible assets, net |
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Restricted cash |
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Prepaid expenses |
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Deferred costs and other assets |
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Total assets |
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$ |
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$ |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued payroll and employee related liabilities |
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Accrued expenses |
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Deferred revenue |
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Convertible senior notes |
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Other current liabilities |
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Total current liabilities |
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Long-term liabilities: |
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Deferred revenue, noncurrent |
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Convertible senior notes |
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Deferred tax liabilities |
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Other long-term liabilities |
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Total liabilities |
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Commitments and contingencies |
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Stockholders' equity: |
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Preferred stock, par value $ as of March 31, 2022 and December 31, 2021, respectively |
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Common stock, $ shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively |
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Additional paid-in capital |
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Accumulated deficit |
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Accumulated other comprehensive loss |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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See accompanying notes to condensed consolidated financial statements.
3
EVERBRIDGE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
(unaudited)
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Three Months Ended March 31, |
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2022 |
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2021 |
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Revenue |
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$ |
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$ |
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Cost of revenue |
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Gross profit |
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Operating expenses: |
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Sales and marketing |
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Research and development |
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General and administrative |
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Total operating expenses |
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Operating loss |
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Other expense, net: |
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Interest and investment income |
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Interest expense |
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Loss on extinguishment of convertible notes and capped call modification |
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— |
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Other income (expense), net |
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( |
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Total other expense, net |
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( |
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Loss before income taxes |
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Benefit from income taxes |
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Net loss |
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$ |
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$ |
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Net loss per share attributable to common stockholders: |
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Basic |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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Weighted-average common shares outstanding: |
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Basic |
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Diluted |
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See accompanying notes to condensed consolidated financial statements.
4
EVERBRIDGE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(unaudited)
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Three Months Ended March 31, |
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2022 |
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2021 |
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Net loss |
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$ |
( |
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$ |
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Other comprehensive loss: |
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Foreign currency translation adjustment, net of taxes |
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( |
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Total comprehensive loss |
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$ |
( |
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$ |
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See accompanying notes to condensed consolidated financial statements.
5
EVERBRIDGE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)
(unaudited)
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Common stock |
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Additional paid-in |
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Accumulated |
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Accumulated- other comprehensive |
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Shares |
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Par value |
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capital |
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deficit |
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loss |
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Total |
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Balance at December 31, 2021 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Cumulative effect of adoption of ASU 2020-06, net of taxes |
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— |
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— |
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( |
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— |
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( |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Vesting of restricted stock units and performance-based restricted stock units |
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— |
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— |
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— |
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Shares withheld related to net share settlement of stock awards |
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( |
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— |
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( |
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— |
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— |
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( |
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Exercise of stock options |
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— |
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— |
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— |
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Issuance of shares under employee stock purchase plan |
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— |
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— |
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— |
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Other comprehensive loss |
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— |
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— |
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— |
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— |
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( |
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( |
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Net loss |
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— |
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— |
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— |
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( |
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— |
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( |
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Balance at March 31, 2022 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Common stock |
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Additional paid-in |
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Accumulated |
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Accumulated- other comprehensive |
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Shares |
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Par value |
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capital |
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deficit |
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income |
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Total |
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Balance at December 31, 2020 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Issuance of common stock in connection with acquisition |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Vesting of restricted stock units and performance-based restricted stock units |
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— |
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— |
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— |
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Shares withheld related to net share settlement of stock awards |
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( |
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— |
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( |
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— |
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— |
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( |
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Exercise of stock options |
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— |
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— |
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— |
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Issuance of shares under employee stock purchase plan |
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— |
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— |
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— |
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Equity component of convertible notes due 2026, net of allocated issuance costs and taxes |
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— |
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— |
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— |
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— |
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Purchase of capped call hedge for the convertible notes due 2026, including issuance costs |
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— |
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— |
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( |
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— |
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— |
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( |
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Settlement of convertible notes due 2022 |
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— |
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— |
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Termination and modification of capped call hedge for convertible notes due 2022 |
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— |
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— |
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— |
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— |
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Other comprehensive loss |
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— |
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— |
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— |
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— |
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( |
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( |
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Net loss |
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— |
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— |
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— |
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( |
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— |
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( |
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Balance at March 31, 2021 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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See accompanying notes to condensed consolidated financial statements.
6
EVERBRIDGE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
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Three Months Ended March 31, |
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2022 |
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2021 |
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Cash flows from operating activities: |
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Net loss |
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$ |
( |
) |
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$ |
( |
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Adjustments to reconcile net loss to net cash provided by operating activities: |
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Depreciation and amortization |
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Amortization of deferred costs |
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Deferred income taxes |
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( |
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( |
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Accretion of interest on convertible senior notes |
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Loss on extinguishment of convertible notes and capped call modification |
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— |
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Provision for credit losses and sales reserve |
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Stock-based compensation |
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Other non-cash adjustments |
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( |
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( |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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Prepaid expenses |
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( |
) |
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( |
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Deferred costs |
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( |
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( |
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Other assets |
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( |
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Accounts payable |
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( |
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( |
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Accrued payroll and employee related liabilities |
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( |
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( |
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Accrued expenses |
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Deferred revenue |
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Other liabilities |
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( |
) |
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( |
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Net cash provided by operating activities |
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Cash flows from investing activities: |
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Capital expenditures |
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( |
) |
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( |
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Payment for acquisition of business, net of acquired cash |
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( |
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( |
) |
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Additions to capitalized software development costs |
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( |
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( |
) |
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Net cash used in investing activities |
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( |
) |
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( |
) |
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Cash flows from financing activities: |
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Proceeds from issuance of convertible notes |
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— |
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Payments of debt issuance costs |
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— |
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( |
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Purchase of convertible notes capped call hedge |
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— |
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|
( |
) |
|
Repurchase of convertible notes |
|
|
— |
|
|
|
( |
) |
|
Proceeds from termination of convertible notes capped call hedge |
|
|
— |
|
|
|
|
|
|
Stock award shares withheld to settle employee tax withholding liability |
|
|
( |
) |
|
|
( |
) |
|
Proceeds from employee stock purchase plan |
|
|
|
|
|
|
|
|
|
Proceeds from stock option exercises |
|
|
|
|
|
|
|
|
|
Other |
|
|
( |
) |
|
|
— |
|
|
Net cash provided by financing activities |
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash, cash equivalents and restricted cash |
|
|
( |
) |
|
|
( |
) |
|
Net increase in cash, cash equivalents and restricted cash |
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash—beginning of period |
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash—end of period |
|
$ |
|
|
|
$ |
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
— |
|
|
$ |
|
|
|
Taxes, net of refunds received |
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash activities: |
|
|
|
|
|
|
|
|
|
Common stock issued in connection with acquisition |
|
|
— |
|
|
|
|
|
|
Contingent consideration in connection with acquisition |
|
|
— |
|
|
|
|
|
|
Common stock issued in connection with settlement of convertible notes |
|
|
— |
|
|
|
|
|
|
Debt issuance costs included in accrued expenses |
|
|
— |
|
|
|
|
|
|
Capitalized assets included in accounts payable and accrued expenses |
|
|
|
|
|
|
|
|
|
Stock-based compensation capitalized for software development costs |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
7
EVERBRIDGE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(1) Business and Nature of Operations
Everbridge, Inc., a Delaware corporation (together with its wholly-owned subsidiaries, referred to as “Everbridge” or the “Company”), is a global software company that provides enterprise software applications that automate and accelerate organizations’ operational response to critical events in order to keep people safe and organizations running. The Company’s SaaS-based platform enables the Company’s customers to manage and mitigate critical events. The Company’s enterprise applications, such as Mass Notification, Safety Connection, IT Alerting, Visual Command Center, Public Warning, Community Engagement, Risk Center, Crisis Management, CareConverge, Control Center, 911 Connect, Travel Risk Management, SnapComms and E911, automate numerous critical event management (“CEM”) processes. The Company generates revenue primarily from subscription fees to the Company’s enterprise applications. The Company has operations in the United States, United Kingdom, Norway, China, Netherlands, Canada, New Zealand, France, India, and other countries.
(2) Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
The condensed consolidated balance sheet as of December 31, 2021, included herein, was derived from the audited financial statements as of that date, but does not include all disclosures including certain notes required by U.S. GAAP on an annual reporting basis.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, comprehensive loss, statements of stockholders’ equity and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year 2022 or any future period.
Effective January 1, 2022, the Company adopted the requirements of Accounting Standards Update (“ASU”) 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, as discussed in this Note 2 and Note 9.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Assets and liabilities which are subject to judgment and use of estimates include the determination of the period of benefit for deferred commissions, relative stand-alone selling price for identified performance obligations in the Company’s revenue transactions, allowances for credit losses, the fair value of assets acquired and liabilities assumed in business combinations, the fair value of contingent consideration, the recoverability of goodwill and long-lived assets, valuation allowances with respect to deferred tax assets, useful lives associated with property and equipment and intangible assets, contingencies, and the valuation and assumptions underlying stock-based compensation. On an ongoing basis, the Company evaluates its estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of assets and liabilities. In addition, the Company engages valuation specialists to assist with management’s determination of the valuation of its fair values of assets acquired and liabilities assumed in business combinations, convertible senior notes, and certain market-based performance equity awards.
8
There have been significant changes to the global economic situation as a consequence of the COVID-19 pandemic. There continue to be uncertainties with respect to macroeconomic conditions as a result of the pandemic and otherwise and there may be future periods of global instability and volatility in markets where the Company conducts business which could cause changes to estimates as a result of the financial circumstances. Such changes to estimates could potentially result in impacts that would be material to the consolidated financial statements, particularly with respect to the timing of revenue recognition resulting from potential implementation delays, evaluating the recoverability of long-lived assets with finite useful lives for impairment and estimates of credit losses for accounts receivables and contract assets.
Concentrations of Credit and Business Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents and accounts receivable.
The Company maintains cash and cash equivalent balances at several banks. Accounts located in the United States are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $
The Company’s accounts receivable are generally unsecured and are derived from revenue earned from customers primarily located in the United States, Norway, Netherlands, Sweden and the United Kingdom and are generally denominated in U.S. Dollars, Norwegian Krone, Euro, Swedish Kronor or British Pounds. Each reporting period, the Company reevaluates each customer’s ability to satisfy credit obligations and maintains an allowance for credit risk based on the evaluations.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with original maturities of three months or less at the date of purchase to be cash equivalents. Cash equivalents consist of funds deposited into money market funds. Cash and cash equivalents are recorded at cost, which approximates fair value.
Restricted Cash
The Company’s restricted cash balance primarily consists of cash held at a financial institution for collateral against performance on the Company’s customer contracts and certain other cash deposits for specific purposes.
Significant Accounting Policies
There have been no changes to the Company’s significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 25, 2022, that have had a material impact on the Company’s condensed consolidated financial statements and related notes.
Revenue Recognition
The Company derives its revenues primarily from subscription services and professional services. Revenues are recognized when control of services is transferred to the Company’s customers in an amount that reflects the consideration it expects to be entitled to in exchange for those services.
The Company determines revenue recognition through the following steps:
|
|
• |
Identification of the contract, or contracts, with a customer; |
|
|
• |
Identification of the performance obligations in the contract; |
|
|
• |
Determination of the transaction price; |
|
|
• |
Allocation of the transaction price to the performance obligations in the contract; and |
|
|
• |
Recognition of revenue when, or as, the Company satisfies a performance obligation. |
9
Subscription Services Revenues
Subscription services revenues primarily consist of fees that provide customers access to one or more of the Company’s hosted applications for critical event management, with routine customer support. Revenue is generally recognized over time on a ratable basis over the contract term beginning on the date that the Company’s service is made available to the customer. All services are recognized using an output measure of progress looking at time elapsed as the contract generally provides the customer equal benefit throughout the contract period.
Professional Services Revenues
Professional services revenues primarily consist of fees for deployment and optimization services, as well as training. The majority of the Company’s consulting contracts revenue is recognized over time as the services are performed. For contracts billed on a fixed price basis, revenue is recognized over time based on the proportion performed.
Software License Revenues
The Company also sells software and related post contract support for on premises usage as well as professional services, hardware and hosting. The Company’s on premises license transactions are generally perpetual in nature and are recognized at a point in time when made available to the customer for use. Significant judgment is required to determine the standalone selling prices for each distinct performance obligation in order to allocate the transaction price for purposes of revenue recognition. Making this judgment of estimating a standalone selling price involves consideration of overall pricing objectives, market conditions and other factors, including the value of the Company’s other similar contracts, the applications sold, customer demographics, geographic locations, and the number and types of users within the Company’s contracts. The significant judgment was primarily due to using such considerations to estimate the price that each distinct performance obligation would be sold for on a standalone basis because such performance obligations are typically sold together on a bundled basis. Changes in these estimates of standalone selling prices can have a material effect on the amount of revenue recognized from each distinct performance obligation.
Contracts with Multiple Performance Obligations
Most of the Company’s contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis for those performance obligations with stable observable prices and then the residual method applied for any performance obligation that has pricing which is highly variable. The Company determines the standalone selling prices based on the Company’s overall pricing objectives, taking into consideration market conditions and other factors, including the value of the Company’s contracts, pricing when certain services are sold on a standalone basis, the applications sold, customer demographics, geographic locations, and the volume of services and users.
Returns
The Company does not offer rights of return for its products and services in the normal course of business.
Customer Acceptance
The Company’s contracts with customers generally do not include customer acceptance clauses.
Trade and Other Receivables
Trade and other receivables are primarily comprised of trade receivables that are recorded at the invoice amount, net of an allowance for credit risk, which is not material. Other receivables represent unbilled receivables related to subscription and professional services contracts, net of an allowance for credit losses, which is not material.
Deferred Costs
Sales commissions earned by the Company’s sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Subscription-related commissions costs are deferred and then amortized on a straight-line basis over a period of benefit that the Company has determined to be
10
Deferred Revenue
Deferred revenue consists of amounts that have been invoiced and for which the Company has the right to bill, but that have not been recognized as revenue because the related goods or services have not been transferred. Deferred revenue that will be realized during the succeeding 12-month period is recorded as current, and the remaining deferred revenue is recorded as non-current.
In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined its contracts generally do not include a significant financing component. The primary purpose of the Company’s invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company’s products and services, not to receive financing from its customers or to provide customers with financing. Examples include invoicing at the beginning of a subscription term with revenue recognized ratably over the contract period.
Recently Adopted Accounting Pronouncements
ASU 2021-10
In November 2021, the Financial Accounting Standards Board (“FASB”) issued ASU 2021-10, Government Assistance (Topic 832), Disclosures by Business Entities about Government Assistance. ASU 2021-10 requires annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. The Company adopted ASU 2021-10 on
ASU 2021-04
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. ASU 2021-04 requires accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after the modification or exchange based on the economic substance of the modification or exchange. The recognition of the modification depends on the nature of the transaction in which the equity-classified written call option is modified. If there is more than one element in a transaction (for example, if the modification involves both a debt modification and an equity issuance), then the guidance requires allocating the effect of the option modification to each element. The Company adopted ASU 2021-04 on
ASU 2020-06
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. ASU 2020-06 reduces the number of accounting models for convertible instruments by eliminating two of the three models in Accounting Standards Codification (“ASC”) 470-20, Debt—Debt with Conversion and Other Options, that require separate accounting for embedded conversion features, amends the requirements for a contract that is potentially settled in an entity’s own shares to be classified in equity, and amends certain guidance on the computation of earnings per share for convertible instruments and contracts on an entity’s own equity. The Company adopted the standard on
Upon adoption of ASU 2020-06, the Company no longer separately presents in equity the embedded conversion feature of the
Adoption of ASU 2020-06 resulted in an adjustment to the carrying amount of the convertible senior notes, deferred tax liabilities, additional paid-in capital and a cumulative catch-up adjustment to the opening balance of accumulated deficit; however, prior-period information, including basic and diluted loss per share of common stock, has not been adjusted as a result of applying the modified retrospective approach and continue to be reported under the accounting standards in effect for the prior period. The adoption of ASU 2020-06 had no impact on total cash provided from or used in operating, financing, or investing activities in the Company’s condensed consolidated statements of cash flows. For details on the impact of the Company’s adoption of ASU 2020-06, see Note 9.
11
Recently Issued Accounting Guidance Not Yet Adopted
ASU 2021-08
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. ASU 2021-08 requires the recognition and measurement of contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, Revenue from Contracts with Customers. Considerations to determine the amount of contract assets and contract liabilities to record at the acquisition date include the terms of the acquired contract, such as timing of payment, identification of each performance obligation in the contract and allocation of the contract transaction price to each identified performance obligation on a relative standalone selling price basis as of contract inception. ASU 2021-08 is effective for the Company beginning in the first quarter of 2023. ASU 2021-08 should be applied prospectively for acquisitions occurring on or after the effective date of the amendments. Early adoption of the proposed amendments would be permitted, including adoption in an interim period. The Company is currently assessing the impact this standard will have on the Company’s condensed consolidated financial statements.
Other accounting standard updates effective for interim and annual periods beginning after December 31, 2021 are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
(3) Accounts Receivable and Contract Assets, Net
Accounts receivable, net is as follows (in thousands):
|
|
|
As of |
|
|
As of |
|
||
|
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
||
|
Accounts receivable amortized cost |
|
$ |
|
|
|
$ |
|
|
|
Allowance for credit losses |
|
|
( |
) |
|
|
( |
) |
|
Net accounts receivable |
|
$ |
|
|
|
$ |
|
|
The following table summarizes the changes in the allowance for credit losses for accounts receivable (in thousands):
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Balance, beginning of period |
|
$ |
( |
) |
|
$ |
( |
) |
|
Provision for expected credit losses |
|
|
( |
) |
|
|
( |
) |
|
Write-offs, net |
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
( |
) |
|
$ |
( |
) |
Contract assets, net, included in deferred costs and other current assets on the condensed consolidated balance sheets is as follows (in thousands):
|
|
|
As of |
|
|
As of |
|
||
|
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
||
|
Contract asset amortized cost |
|
$ |
|
|
|
$ |
|
|
|
Allowance for credit losses |
|
|
( |
) |
|
|
( |
) |
|
Net contract asset |
|
$ |
|
|
|
$ |
|
|
The following table summarizes the changes in the allowance for credit losses for contract assets (in thousands):
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Balance, beginning of period |
|
$ |
( |
) |
|
$ |
( |
) |
|
Provision for expected credit losses |
|
|
( |
) |
|
|
( |
) |
|
Balance, end of period |
|
$ |
( |
) |
|
$ |
( |
) |
12
Credit loss expense was $
The following table summarizes the changes in the sales reserve (in thousands):
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Balance, beginning of period |
|
$ |
( |
) |
|
$ |
( |
) |
|
Write-offs |
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
( |
) |
|
$ |
( |
) |
(4) Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
|
|
|
Useful life |
|
|
As of |
|
|
As of |
|
|||
|
|
|
in years |
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
|||
|
Furniture and equipment |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
Leasehold improvements (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
System hardware |
|
|
|
|
|
|
|
|
|
|
|
|
|
Office computers |
|
|
|
|
|
|
|
|
|
|
|
|
|
Computer and system software |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Property and equipment, net |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
(1) |
|
Depreciation and amortization expense for property and equipment was $
(5) Capitalized Software Development Costs, Net
Capitalized software development costs, net consisted of the following (in thousands):
|
|
|
Gross carrying amount |
|
|
Amortization period |
|
Accumulated amortization |
|
|
Net carrying amount |
|
|||
|
As of March 31, 2022 |
|
$ |
|
|
|
|
|
$ |
( |
) |
|
$ |
|
|
|
As of December 31, 2021 |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
The Company capitalized software development costs of $
Amortization expense for capitalized software development costs was $
The expected amortization of capitalized software development costs, as of March 31, 2022, for each of the following years is as follows (in thousands):
|
|
|
|
|
|
|
2022 (for the remaining nine months) |
|
$ |
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
2025 |
|
|
|
|
|
|
|
$ |
|
|
13
(6) Fair Value Measurements
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value because of the short maturity of these items.
Certain assets, including long-lived assets, goodwill and intangible assets are also subject to measurement at fair value on a non-recurring basis if they are deemed to be impaired as a result of an impairment review. For the three months ended March 31, 2022 and year ended December 31, 2021,
The following table summarizes the Company's financial assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy. Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement (in thousands):
|
|
|
As of March 31, 2022 |
|
|||||||||||||
|
|
|
Quoted |
|
|
Significant |
|
|
|
|
|
|
|
|
|
||
|
|
|
Prices in |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|||
|
|
|
Active |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|||
|
|
|
Markets |
|
|
Inputs |
|
|
Inputs |
|
|
Total Fair |
|
||||
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Value |
|
||||
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
Total financial assets |
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
|
|
|
Total financial liabilities |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2021 |
|
|||||||||||||
|
|
|
Quoted |
|
|
Significant |
|
|
|
|
|
|
|
|
|
||
|
|
|
Prices in |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|||
|
|
|
Active |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|||
|
|
|
Markets |
|
|
Inputs |
|
|
Inputs |
|
|
Total Fair |
|
||||
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Value |
|
||||
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
Total financial assets |
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
|
|
|
Total financial liabilities |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
|
|
The Company classifies and discloses fair value measurements in one of the following three categories of fair value hierarchy:
|
Level 1 - |
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets and liabilities. |
|
Level 2 - |
Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly. |
|
Level 3 - |
Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. |
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
The Company’s assets that are measured by management at fair value on a recurring basis are generally classified within Level 1 or Level 2 of the fair value hierarchy. The Company did
14
The Company considers all highly liquid investments purchased with a remaining maturity of three months or less to be cash equivalents. The fair value of the Company’s investments in certain money market funds is their face value and such instruments are classified as Level 1 and are included in cash and cash equivalents on the condensed consolidated balance sheets.
The following tables summarize the changes in Level 3 financial instruments (in thousands):
|
Fair value at December 31, 2020 |
|
$ |
|
|
|
Contingent consideration from RedSky acquisition |
|
|
|
|
|
Adjustment for one2many acquisition |
|
|
( |
) |
|
Adjustment for SnapComms acquisition |
|
|
|
|
|
Foreign currency translation |
|
|
( |
) |
|
Fair value at March 31, 2021 |
|
$ |
|
|
|
Fair value at December 31, 2021 |
|
$ |
|
|
|
Adjustment for Anvil acquisition |
|
|
( |
) |
|
Foreign currency translation |
|
|
( |
) |
|
Fair value at March 31, 2022 |
|
$ |
|
|
The valuation of the contingent consideration was derived using estimates of the probability of achievement within specified time periods based on projections of future revenue metrics per the terms of the applicable agreements. These include estimates of the Company’s assessment of the probability of meeting such results, with the probability-weighted earn-out using a Monte Carlo Simulation Model then discounted to estimate fair value. Fair value is estimated using the probability weighted cash flow estimate closer to the measurement date. The various operating performance measures included in these contingent consideration agreements primarily relate to product revenue. As these are unobservable inputs, the contingent consideration liabilities are included in Level 3 inputs.
During the three months ended March 31, 2022, as a result of assessing the probabilities of payment for the potential contingent consideration for The Anvil Group (International) Limited, Anvil Worldwide Limited and The Anvil Group Limited (collectively, “Anvil”) through June 30, 2023, the Company recognized a decrease in the fair value of Anvil’s contingent consideration obligation in the amount of $
The Company estimates the fair value of the convertible senior notes based on market-observable inputs (Level 2). As of March 31, 2022 and December 31, 2021, the fair value of the 2026 Notes was determined to be $
(7) Goodwill and Intangible Assets, Net
The following table displays the changes in the gross carrying amount of goodwill (in thousands):
|
|
|
|
|
|
|
Balance at December 31, 2021 |
|
$ |
|
|
|
Acquisition initial value adjustment |
|
|
( |
) |
|
Foreign currency translation |
|
|
( |
) |
|
Balance at March 31, 2022 |
|
$ |
|
|
There were
15
Intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
As of March 31, 2022 |
|
|||||
|
|
|
Gross carrying amount |
|
|
Weighted average life (years) |
|
Accumulated amortization |
|
|
Net carrying amount |
|
|||
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology |
|
$ |
|
|
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Tradenames |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Customer relationships |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Total intangible assets |
|
$ |
|
|
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2021 |
|
|||||
|
|
|
Gross carrying amount |
|
|
Weighted average life (years) |
|
|
Accumulated amortization |
|
|
Net carrying amount |
|
||||
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology |
|
$ |
|
|
|
|
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Tradenames |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Customer relationships |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Total intangible assets |
|
$ |
|
|
|
|
|
|
|
$ |
( |
) |
|
$ |
|
|
Amortization expense for intangible assets was $
The expected amortization of the intangible assets, as of March 31, 2022, for each of the next five years and thereafter is as follows (in thousands):
|
|
|
|
|
|
|
2022 (for the remaining nine months) |
|
$ |
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
2025 |
|
|
|
|
|
2026 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
$ |
|
|
(8) Business Combinations
The Company accounted for the following acquisitions using the acquisition method of accounting for business combinations under ASC 805, Business Combinations, which required that the assets acquired and liabilities assumed be recognized on the balance sheet at their fair values as of the acquisition date. The excess of the purchase price over the net fair value of the assets and liabilities was recorded as goodwill. This goodwill includes the know-how of the assembled workforce, the ability of the workforce to further improve technology and product offerings, customer relationships and the expected cash flows resulting from these efforts. Goodwill may also include expected synergies resulting from the complementary strategic fit these businesses bring to existing operations.
Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives and the expected future cash flows and related discount rates, can materially impact the Company’s results of operations. Significant inputs used for the model included the amount of cash flows, the expected period of the cash flows and the discount rates. Significant estimation was required by management in determining the fair value of the customer relationship intangible assets, deferred revenue and contingent consideration liabilities. The significant estimation is primarily due to the judgmental nature of the inputs to the valuation models used to measure the fair value of these intangible assets, deferred revenue and contingent consideration liabilities, as well as the sensitivity of the respective fair values to the underlying significant assumptions. The Company used the income approach to measure the fair value of these intangible assets, a discounted cash flow approach for deferred revenue and a Monte Carlo simulation model to measure the fair value of the contingent consideration liabilities. The significant assumptions used to estimate the fair value of the intangible assets, deferred revenue and contingent consideration
16
liabilities included forecasted revenues from existing customers, existing customer attrition rates, estimated costs required to fulfill the deferred revenue obligation and forecasted revenues for the contingent consideration earnout period. When estimating the significant assumptions to be used in the valuation the Company includes a consideration of current industry information, market and economic trends, historical results of the acquired business, nature of the performance obligations associated with the deferred revenue and other relevant factors. These significant assumptions are forward-looking and could be affected by future economic and market conditions. The valuation of the contingent consideration was derived using estimates of the probability of achievement within specified time periods based on projections of future revenue metrics per the terms of the applicable agreements. These include estimates of the Company’s assessment of the probability of meeting such results, with the probability-weighted earn-out using a Monte Carlo Simulation Model then discounted to estimate fair value. Fair value is estimated using the probability weighted cash flow estimate closer to the measurement date. The various operating performance measures included in these contingent consideration agreements primarily relate to product revenue.
The business acquisitions discussed below are included in the Company’s results of operations from their respective dates of acquisition.
2021 Acquisitions
During the year ended December 31, 2021, the Company acquired Red Sky Technologies Inc., xMatters Holdings, Inc. and The Anvil Group (International) Limited, Anvil Worldwide Limited and The Anvil Group Limited. These acquisitions were not material and neither the investment in the assets nor the results of operations of these acquisitions were significant to the Company’s consolidated financial position or results of operations, and thus pro forma information is not required to be presented.
Red Sky Technologies Inc.
On
xMatters Holdings, Inc.
On April 6, 2021, the Company and xMatters Holdings, Inc. (“xMatters”) signed a definitive agreement pursuant to which the Company agreed to purchase all of the issued and outstanding shares of stock of xMatters. This acquisition closed on
17
The following table summarizes the estimated fair value of the assets acquired and the liabilities assumed, which were recorded as of the acquisition date, as well as the aggregate consideration for the acquisition of xMatters made by the Company (in thousands):
|
|
|
xMatters |
|
|
|
Assets acquired |
|
|
|
|
|
Accounts receivable |
|
$ |
|
|
|
Property and equipment |
|
|
|
|
|
Trade names |
|
|
|
|
|
Acquired technology |
|
|
|
|
|
Customer relationships |
|
|
|
|
|
Goodwill |
|
|
|
|
|
Other assets |
|
|
|
|
|
Total assets acquired |
|
|
|
|
|
Liabilities assumed |
|
|
|
|
|
Accounts payable |
|
|
|
|
|
Accrued expenses |
|
|
|
|
|
Deferred revenue |
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
Other liabilities |
|
|
|
|
|
Net assets acquired |
|
$ |
|
|
|
Consideration paid |
|
|
|
|
|
Cash paid, net of cash acquired |
|
$ |
|
|
|
Fair value of common stock issued |
|
|
|
|
|
Total |
|
$ |
|
|
The weighted average useful life of all identified acquired intangible assets is
The goodwill balance is primarily attributed to the anticipated synergies from the acquisition and expanded market opportunities with respect to the integration of xMatters’ products with the Company's other solutions. The Company believes that the factors listed above in relation to the purchase of xMatters support the amount of goodwill recorded as a result of the purchase price paid for the acquisition, in relation to other acquired tangible and intangible assets. The resulting goodwill from the xMatters acquisition is not deductible for income tax purposes.
For the year ended December 31, 2021, the Company incurred transaction costs of $
The Anvil Group (International) Limited, Anvil Worldwide Limited and The Anvil Group Limited
On
18
As the Company finalizes its estimation of the fair value of the assets acquired and liabilities assumed, additional adjustments may be recorded during the measurement period (a period not to exceed 12 months). The initial accounting is incomplete as of March 31, 2022 for the acquired assets and liabilities as the Company is currently in the process of completing the assessment of valuation inputs and assumptions as well as completing the assessment of the tax attributes of the business combination. The finalization of the acquisition accounting valuation assessment may result in a change in the valuation of the deferred tax assets and liabilities, deferred revenue and intangible assets, along with the opening working capital accounts, which could have a material impact on the Company’s results of operations and financial position.
During the three months ended March 31, 2022, the Company recognized an increase of $
The following table summarizes the preliminary estimated fair value of the assets acquired and the liabilities assumed, which were recorded as of the acquisition date, as well as the aggregate consideration for the acquisition of Anvil made by the Company (in thousands):
|
|
|
Anvil |
|
|
|
Assets acquired |
|
|
|
|
|
Accounts receivable |
|
$ |
|
|
|
Property and equipment |
|
|
|
|
|
Trade names |
|
|
|
|
|
Acquired technology |
|
|
|
|
|
Customer relationships |
|
|
|
|
|
Goodwill |
|
|
|
|
|
Other assets |
|
|
|
|
|
Total assets acquired |
|
|
|
|
|
Liabilities assumed |
|
|
|
|
|
Accounts payable |
|
|
|
|
|
Accrued expenses |
|
|
|
|
|
Deferred revenue |
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
Other liabilities |
|
|
|
|
|
Net assets acquired |
|
$ |
|
|
|
Consideration paid |
|
|
|
|
|
Cash paid, net of cash acquired |
|
$ |
|
|
|
Consideration loan notes issued |
|
|
|
|
|
Contingent consideration |
|
|
|
|
|
Total |
|
$ |
|
|
The weighted average useful life of all identified acquired intangible assets is
The goodwill balance is primarily attributed to the anticipated synergies from the acquisition and expanded market opportunities with respect to the integration of Anvil’s products with the Company's other solutions. The acquisition of Anvil will bring in house the expertise and experience to manage medical and travel-related situations for the Company’s travel risk management offerings to new and existing customers. The Company believes that the factors listed above in relation to the purchase of Anvil support the amount of goodwill recorded as a result of the purchase price paid for the acquisition, in relation to other acquired tangible and intangible assets. The resulting goodwill from the Anvil acquisition is not deductible for income tax purposes.
For the year ended December 31, 2021, the Company incurred transaction costs of $
19
(9) Convertible Senior Notes
Adoption of ASU 2020-06
On January 1, 2022, the Company adopted ASU 2020-06 and applied it to its Convertible Senior Notes using the modified retrospective method. Adoption of ASU 2020-06 resulted in an adjustment to convertible senior notes, deferred tax liabilities, additional paid-in capital and accumulated deficit. The Company recognized the cumulative effect of initially applying ASU 2020-06 as an adjustment to the opening balance of accumulated deficit. Comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
The cumulative effect of the changes made to the Company’s consolidated January 1, 2022 balance sheet for the adoption of ASU 2020-06 was as follows (in thousands):
|
|
|
Balance at |
|
|
Adjustments Due |
|
|
Balance at |
|
|||
|
|
|
December 31, 2021 |
|
|
to ASU 2020-06 |
|
|
January 1, 2022 |
|
|||
|
BALANCE SHEET |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible senior notes, current |
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
Convertible senior notes, non-current |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Additional paid-in capital |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Accumulated deficit |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
0% Convertible Senior Notes Due 2026
In March 2021, the Company issued $
The 2026 Notes are governed by an Indenture between the Company, as issuer, and U.S. Bank National Association, as trustee (the “2026 Notes Indenture”). The 2026 Notes are unsecured and rank: senior in right of payment to the Company’s indebtedness that is expressly subordinated in right of payment to the 2026 Notes; equal in right of payment to the Company’s existing and future indebtedness that is not so subordinated, including its 1.50% convertible senior notes due 2022 (see 1.50% Convertible Senior Notes Due 2022 below) and 0.125% convertible senior notes due 2024 (see 0.125% Convertible Senior Notes Due 2024 below); effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness and other liabilities incurred by the Company’s subsidiaries.
Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of common stock, at the Company’s election.
The 2026 Notes have an initial conversion rate of
Holders may convert all or a portion of their 2026 Notes prior to the close of business on the business day immediately preceding December 15, 2025, in multiples of $1,000 principal amount, only under the following circumstances:
|
|
• |
during any calendar quarter commencing after the calendar quarter ending on June 30, 2021 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least |
20
|
|
• |
during the five business day period after any |
|
|
• |
if the Company calls such notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date, but only with respect to the notes called (or deemed called) for redemption; or |
|
|
• |
upon the occurrence of specified corporate events. |
As of March 31, 2022, the 2026 Notes are not yet convertible. The 2026 Notes are classified as long-term on the condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021 as it is the Company’s intent to settle all of the debt at maturity or to settle in shares if exercised by the debt holder prior to maturity.
The 2026 Notes are not redeemable by the Company prior to March 20, 2024. The Company may redeem for cash all or any portion of the 2026 Notes, at its option, on or after March 20, 2024 if the last reported sale price of the Company's common stock has been at least
The 2026 Notes consist of the following (in thousands):
|
|
|
As of |
|
|
As of |
|
||
|
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
||
|
Liability component: |
|
|
|
|
|
|
|
|
|
Principal |
|
$ |
|
|
|
$ |
|
|
|
Less: debt discount, net of amortization |
|
|
( |
) |
|
|
( |
) |
|
Net carrying amount |
|
$ |
|
|
|
$ |
|
|
|
Equity component (1) |
|
|
— |
|
|
|
|
|
|
(1) |
Upon adoption of ASU 2020-06, the Company no longer separately presents the embedded conversion feature in equity. As of December 31, 2021, the equity component was recorded in the consolidated balance sheet within additional paid-in capital, net of $ |
The following table sets forth total interest expense recognized related to the 2026 Notes (in thousands):
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Amortization of debt discount and transaction costs |
|
$ |
|
|
|
$ |
|
|
Effective interest rates were
The fair value of the 2026 Notes, which was determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, quoted price of the 2026 Notes in an over-the-counter market (Level 2), and carrying value of debt instruments (prior to the adoption of ASU 2020-06, carrying value excluded the equity component of the Company’s 2026 Notes classified in equity) were as follows (in thousands):
|
|
|
As of March 31, 2022 |
|
|
As of December 31, 2021 |
|
||||||||||
|
|
|
Fair Value |
|
|
Carrying Value |
|
|
Fair Value |
|
|
Carrying Value |
|
||||
|
2026 Notes |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
21
In connection with the issuance of the 2026 Notes, the Company entered into capped call transactions with certain counterparties affiliated with the initial purchasers and other financial institutions. The capped call transactions are expected generally to reduce potential dilution to the Company’s common stock upon any conversion of the 2026 Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted 2026 Notes, as the case may be, with such reduction and/or offset subject to a cap. Under the capped call transactions, the Company purchased capped call options that in the aggregate relate to the total number of shares of the Company’s common stock underlying the 2026 Notes, with an initial strike price of approximately $
Based on the closing price of the Company’s common stock of $
0.125% Convertible Senior Notes Due 2024
In December 2019, the Company issued $
The 2024 Notes are governed by an Indenture between the Company, as issuer, and U.S. Bank National Association, as trustee (the “2024 Notes Indenture”). The 2024 Notes are unsecured and rank: senior in right of payment to the Company’s indebtedness that is expressly subordinated in right of payment to the 2024 Notes; equal in right of payment to the Company’s existing and future indebtedness that is not so subordinated, including its 2026 Notes and 2022 Notes; effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness and other liabilities incurred by the Company’s subsidiaries.
Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of common stock, at the Company’s election. The Company’s current intention is to settle the conversion in shares of common stock if a conversion were to occur.
The 2024 Notes have an initial conversion rate of
Holders may convert all or a portion of their 2024 Notes prior to the close of business on the business day immediately preceding June 15, 2024, in multiples of $1,000 principal amount, only under the following circumstances:
|
|
• |
during any calendar quarter commencing after the calendar quarter ending on March 31, 2020 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least |
|
|
• |
during the five business day period after any |
|
|
• |
if the Company calls such notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or |
|
|
• |
upon the occurrence of specified corporate events. |
22
As of January 1, 2022, the 2024 Notes were not convertible at the option of the debt holder. The 2024 Notes are classified as long-term on the condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021 as it is the Company’s intent to settle all of the debt at maturity or to settle in shares if exercised by the debt holder prior to maturity.
The 2024 Notes are not redeemable by the Company prior to December 20, 2022. The Company may redeem for cash all or any portion of the 2024 Notes, at its option, on or after December 20, 2022 if the last reported sale price of the Company's common stock has been at least
The 2024 Notes consist of the following (in thousands):
|
|
|
As of |
|
|
As of |
|
||
|
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
||
|
Liability component: |
|
|
|
|
|
|
|
|
|
Principal |
|
$ |
|
|
|
$ |
|
|
|
Less: debt discount, net of amortization |
|
|
( |
) |
|
|
( |
) |
|
Net carrying amount |
|
$ |
|
|
|
$ |
|
|
|
Equity component (1) |
|
|
— |
|
|
|
|
|
|
(1) |
Upon adoption of ASU 2020-06, the Company no longer separately presents the embedded conversion feature in equity. As of December 31, 2021, the equity component was recorded in the consolidated balance sheet within additional paid-in capital, net of $ |
The following table sets forth total interest expense recognized related to the 2024 Notes (in thousands):
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
|
|
$ |
|
|
|
$ |
|
|
|
Amortization of debt discount and transaction costs |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Effective interest rates were
The fair value of the 2024 Notes, which was determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, quoted price of the 2024 Notes in an over-the-counter market (Level 2), and carrying value of debt instruments (prior to the adoption of ASU 2020-06, carrying value excluded the equity component of the Company’s 2024 Notes classified in equity) were as follows (in thousands):
|
|
|
As of March 31, 2022 |
|
|
As of December 31, 2021 |
|
||||||||||
|
|
|
Fair Value |
|
|
Carrying Value |
|
|
Fair Value |
|
|
Carrying Value |
|
||||
|
2024 Notes |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
In connection with the issuance of the 2024 Notes, the Company entered into capped call transactions with certain counterparties affiliated with the initial purchasers and other financial institutions. The capped call transactions are expected generally to reduce potential dilution to the Company’s common stock upon any conversion of the 2024 Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted 2024 Notes, as the case may be, with such reduction and/or offset subject to a cap. Under the capped call transactions, the Company purchased capped call options that in the aggregate relate to the total number of shares of the Company’s common stock underlying the 2024 Notes, with an initial strike price of approximately $
Based on the closing price of the Company’s common stock of $
23
1.50% Convertible Senior Notes Due 2022
In November 2017, the Company issued $
Based on the market price of the Company’s common stock during the
The 2022 Notes consist of the following (in thousands):
|
|
|
As of |
|
|
As of |
|
||
|
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
||
|
Liability component: |
|
|
|
|
|
|
|
|
|
Principal |
|
$ |
|
|
|
$ |
|
|
|
Less: debt discount, net of amortization |
|
|
— |
|
|
|
— |
|
|
Net carrying amount |
|
$ |
|
|
|
$ |
|
|
|
Equity component (1) |
|
|
— |
|
|
|
( |
) |
|
(1) |
Upon adoption of ASU 2020-06, the Company no longer separately presents the embedded conversion feature in equity. As of December 31, 2021, the equity component was recorded in the consolidated balance sheet within additional paid-in capital, net of $ |
The following table sets forth total interest expense recognized related to the 2022 Notes (in thousands):
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
|
|
$ |
— |
|
|
$ |
|
|
|
Amortization of debt discount and transaction costs |
|
|
— |
|
|
|
|
|
|
|
|
$ |
— |
|
|
$ |
|
|
Effective interest rates were
The fair value of the 2022 Notes, which was determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, quoted price of the 2022 Notes in an over-the-counter market (Level 2), and carrying value of debt instruments (prior to the adoption of ASU 2020-06, carrying value excluded the equity component of the Company’s convertible notes classified in equity) were as follows (in thousands):
|
|
|
As of March 31, 2022 |
|
|
As of December 31, 2021 |
|
||||||||||
|
|
|
Fair Value |
|
|
Carrying Value |
|
|
Fair Value |
|
|
Carrying Value |
|
||||
|
2022 Notes |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
24
In connection with the issuance of the 2022 Notes, the Company entered into capped call transactions with certain counterparties affiliated with the initial purchasers and others. The capped call transactions are expected generally to reduce potential dilution to the Company’s common stock upon any conversion of the 2022 Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted 2022 Notes, as the case may be, with such reduction and/or offset subject to a cap Under the capped call transactions, the Company purchased capped call options that in the aggregate relate to the total number of shares of the Company’s common stock underlying the 2022 Notes, with an initial strike price of approximately $
Based on the closing price of the Company’s common stock of $
The following table summarizes the Company’s debt obligations as of March 31, 2022 (in thousands):
|
|
|
Remainder of 2022 |
|
|
2023-2024 |
|
|
2025-2026 |
|
|
Total |
|
||||
|
Debt obligations |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Debt obligations include the principal amount of the 2026 Notes, 2024 Notes and 2022 Notes but exclude interest payments to be made under the 2026 Notes, 2024 Notes and 2022 Notes. Although the
(10) Stockholders’ Equity
Preferred Stock
As of March 31, 2022, the Company had authorized
Common Stock
As of March 31, 2022, the Company had authorized
(11) Stock Plans and Stock-Based Compensation
The Company’s 2016 Equity Incentive Plan (the “2016 Plan”) became effective on September 15, 2016. The 2016 Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights and performance share awards to employees, directors and consultants of the Company. The number of shares of common stock reserved for issuance under the 2016 Plan will automatically increase on January 1 of each year by
2016 Employee Stock Purchase Plan
The Company’s Employee Stock Purchase Plan (the “2016 ESPP”) became effective on September 15, 2016. The number of shares reserved for issuance under the 2016 ESPP will automatically increase on January 1 of each year by the lesser of
The 2016 ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount of up to
25
On each purchase date, eligible employees will purchase the Company’s stock at a price per share equal to
For the three months ended March 31, 2022 and 2021,
The fair value of shares issuable under the 2016 ESPP is determined using the Black-Scholes option pricing model with the following weighted average assumptions:
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Employee Stock Purchase Plan: |
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|
|
|
|
|
Expected term (in years) (1) |
|
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|
|
|
|
|
|
Expected volatility (2) |
|
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|
||
|
Risk-free interest rate (3) |
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|
|
|
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|
||
|
Dividend rate (4) |
|
|
|
|
|
|
||
|
(1) |
The expected term represents the contractual term of the 2016 ESPP; |
|
(2) |
The expected volatility of the Company’s common stock on the date of grant is based on the weighted average of the Company’s historical volatility as a public company, the implied volatility of publicly-traded options on the Company’s common stock and the volatilities of publicly traded peer companies that are reasonably comparable to the Company’s own operations; |
|
(3) |
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the expected term of the grant; and |
|
(4) |
The expected dividend yield is assumed to be |
Stock Options
Stock option awards are granted with an exercise price equal to the fair market value of the Company’s common stock at the date of grant based on the closing market price of its common stock as reported on The Nasdaq Global Market. The option awards generally vest over
There were
The total intrinsic value of options exercised for the three months ended March 31, 2022 and 2021 was less than $
Total unrecognized compensation cost related to nonvested stock options was less than $
The following table summarizes the Company’s stock option activity:
|
|
|
Stock options outstanding |
|
|
Weighted average exercise price |
|
||
|
Outstanding at December 31, 2021 |
|
|
|
|
|
$ |
|
|
|
Exercised |
|
|
( |
) |
|
|
|
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
|
Outstanding at March 31, 2022 |
|
|
|
|
|
|
|
|
26
Stock options outstanding, vested and expected to vest and exercisable are as follows:
|
|
|
As of March 31, 2022 |
|
|||||||||
|
|
|
Number of shares |
|
|
Remaining contractual life (years) |
|
|
Weighted- average exercise price |
|
|||
|
Outstanding |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
Vested and expected to vest |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable |
|
|
|
|
|
|
|
|
|
|
|
|
Vested and nonvested stock option activity was as follows:
|
|
|
Vested |
|
|
Nonvested |
|
||||||||||
|
|
|
Options outstanding |
|
|
Weighted average exercise price |
|
|
Options outstanding |
|
|
Weighted average exercise price |
|
||||
|
Outstanding at March 31, 2022 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Restricted Stock Units
During the three months ended March 31, 2022, the Company granted
As of March 31, 2022, there was $
Performance-Based Restricted Stock Units
On February 9, 2022, the Compensation Committee of the Company’s Board of Directors approved a modification to the performance thresholds of the Company’s performance-based restricted stock unit (“PSU”) awards which affected
During the three months ended March 31, 2022, the Company granted
27
During the three months ended March 31, 2022 and 2021, the Company recognized a credit of $(
The following table summarizes the Company’s RSU and PSU activity:
|
|
|
Number of Shares |
|
|
|
Outstanding at December 31, 2021 |
|
|
|
|
|
Granted |
|
|
|
|
|
Vested |
|
|
( |
) |
|
Forfeited |
|
|
( |
) |
|
Outstanding at March 31, 2022 |
|
|
|
|
Market-Based Grants
During the three months ended March 31, 2022, the Company issued market-based grants, which are payable in cash to partially settle a vendor contract. The grants vest contingent upon the achievement of pre-determined market and service conditions. Cash payment at settlement will range from
Stock-Based Compensation Expense
The Company recorded the total stock-based compensation expense as follows (in thousands):
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Cost of revenue |
|
$ |
|
|
|
$ |
|
|
|
Sales and marketing |
|
|
|
|
|
|
|
|
|
Research and development |
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
Stock-based compensation expense is recognized over the award’s expected vesting schedule, which is reduced for forfeitures.
(12) Basic and Diluted Net Loss per Share
Basic net loss per common share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by giving effect to all potential dilutive shares of common stock. Basic and diluted net loss per share of common stock were the same for all periods presented as the impact of all potentially dilutive securities outstanding was anti-dilutive. The Company uses the if converted method for convertible senior notes for calculating any potential dilutive effect on diluted loss per share.
28
The following common equivalent shares were excluded from the diluted net loss per share calculation because their inclusion would have been anti-dilutive:
|
|
|
As of March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Convertible senior notes |
|
|
|
|
|
|
|
|
|
Stock-based compensation grants |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
In connection with the issuance of the 2026 Notes in
Reserve for Unissued Shares of Common Stock
The Company is required to reserve and keep available out of its authorized but unissued shares of common stock such number of shares sufficient for the exercise of all shares granted and available for grant under the Company’s 2008 Equity Incentive Plan, 2016 Plan and 2016 ESPP. The amount of such shares of the Company’s common stock reserved for these purposes at March 31, 2022 was
(13) Income Taxes
The Company is subject to income tax in the United States as well as other tax jurisdictions in which it conducts business. Earnings from non-U.S. activities are subject to local country income tax. The Company does not provide for U.S. deferred income taxes on the undistributed earnings of its foreign subsidiaries as such earnings are reinvested indefinitely.
The Company’s tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter, the Company updates its estimate of the annual effective tax rate, and if the estimated annual tax rate changes, the Company makes a cumulative adjustment in that quarter. The Company’s quarterly tax provision, and its quarterly estimate of its annual effective tax rate, are subject to significant volatility due to several factors, including the Company’s ability to accurately predict its pre-tax income and loss in multiple jurisdictions.
For the three months ended March 31, 2022 and 2021, the Company recorded a benefit from income taxes of $
As of March 31, 2022, the Company had gross tax-effected unrecognized tax provision of $
29
(14) Segment information
The Company operates as
(15) Revenue Recognition
The following table disaggregates the Company’s revenue by geography which provides information as to the major source of revenue (in thousands):
|
|
|
Three Months Ended March 31, |
|
|||||
|
Primary Geographic Markets |
|
2022 |
|
|
2021 |
|
||
|
United States |
|
$ |
|
|
|
$ |
|
|
|
International |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
The following table presents the Company’s revenues disaggregated by revenue source (in thousands):
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Subscription services |
|
$ |
|
|
|
$ |
|
|
|
Professional services |
|
|
|
|
|
|
|
|
|
Software licenses and other |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
Contract Assets
The Company does not have material amounts of contract assets since revenue is recognized as control of goods is transferred or as services are performed. There are a small number of professional services that may occur over a period of time, but that period of time is generally very short in duration. Any contract assets that may arise are recorded in other assets in the Company’s condensed consolidated balance sheet net of an allowance for credit losses.
Contract Liabilities
The Company’s contract liabilities consist of advance payments and deferred revenue. The Company’s contract liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. The Company classifies advance payments and deferred revenue as current or noncurrent based on the timing of when it expects to recognize revenue. Generally, all contract liabilities are expected to be recognized within one year and are included in deferred revenue in the Company’s condensed consolidated balance sheet. The noncurrent portion of deferred revenue is included and separately disclosed in the Company’s condensed consolidated balance sheet.
Deferred Costs
Current deferred costs, which primarily consist of deferred sales commissions, were $
30
Deferred Revenue
During the three months ended March 31, 2022 and 2021, $
During the three months ended March 31, 2022 and 2021, $
As of March 31, 2022, approximately $
As of March 31, 2022, approximately $
(16) Leases
The Company’s leases relate primarily to office facilities that expire on various dates from
The Company records its right-of-use (“ROU”) asset within other assets (long term) and its operating lease liabilities within other current and long-term liabilities.
Additional information related to the Company’s leases is as follows (in thousands, except lease term and discount rate):
|
|
|
As of |
|
|
As of |
|
||
|
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
||
|
Balance sheet information |
|
|
|
|
|
|
|
|
|
ROU assets |
|
$ |
|
|
|
$ |
|
|
|
Lease liabilities, current |
|
$ |
|
|
|
$ |
|
|
|
Lease liabilities, non-current |
|
|
|
|
|
|
|
|
|
Total lease liabilities |
|
$ |
|
|
|
$ |
|
|
|
Supplemental data |
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term |
|
|
|
|
|
|
||
|
Weighted average discount rate |
|
|
|
% |
|
|
|
% |
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Cash paid for amounts included in lease liabilities |
|
$ |
|
|
|
$ |
|
|
|
ROU assets obtained in exchange for new lease obligations |
|
|
|
|
|
|
|
|
31
Maturities of lease liabilities as of March 31, 2022 were as follows (in thousands):
|
Year ending December 31, |
|
|
|
|
|
2022 (for the remaining nine months) |
|
$ |
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
2025 |
|
|
|
|
|
2026 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
Total undiscounted lease payments |
|
|
|
|
|
Less: imputed interest |
|
|
( |
) |
|
Total lease liabilities |
|
$ |
|
|
The following table presents components of lease expense (in thousands):
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Operating lease expense |
|
$ |
|
|
|
$ |
|
|
|
Short-term lease expense(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Sublease income |
|
|
( |
) |
|
|
— |
|
|
Total lease expense |
|
$ |
|
|
|
$ |
|
|
|
(1) |
|
(17) Commitments and Contingencies
Litigation
In April 2022, a putative class action lawsuit was filed in the United States District Court for the Central District of California against the Company, Jaime Ellertson, Patrick Brickley, and David Meredith (the Company’s former Chief Executive Officer) by Sylebra Capital Partners Master Fund Ltd, Sylebra Capital Parc Master Fund, and Sylebra Capital Menlo Master Fund. The lawsuit alleges violations of the federal securities laws by the Company and certain of its officers and directors arising out of purported misrepresentations in the information the Company provided to investors regarding the Company’s organic and inorganic revenue growth, the status of integrating acquisitions, and the impact of COVID-19 on the Company’s business, which allegedly artificially inflated the price of the Company’s stock during the period November 4, 2019 to February 24, 2022. The Company is not able to estimate the amount of the loss allegedly suffered by members of the putative class or the amount of legal costs and internal efforts associated with defending the Company and the Company’s officers and directors. The Company believes that the allegations and claims made in this lawsuit are wholly without merit and intends to defend the action vigorously. Even if the Company were to prevail, this litigation could continue to be costly and time-consuming and divert the attention of the Company’s management and key personnel from the Company’s business operations. During the course of the litigation, the Company anticipates announcements of the results of hearings and motions, and other interim developments related to the litigation. If securities analysts or investors regard these announcements as negative, the market price of the Company’s common stock may decline. If the Company is unsuccessful in defending itself in this litigation, this lawsuit could materially and adversely affect the Company’s business, financial condition, results of operations and cash flows.
From time to time the Company may become involved in other legal proceedings or be subject to claims arising in the ordinary course of business. Although the results of ordinary course litigation and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not have a material adverse effect on its business, financial condition, results of operations or cash flows. Regardless of the outcome, litigation can have an adverse impact because of defense and settlement costs, diversion of management resources and other factors.
32
Employee Contracts
The Company has entered into employment contracts with certain of the Company’s executive officers which provide for at-will employment. However, under the provisions of the contracts, the Company would incur severance obligations of up to twelve months of the executive’s annual base salary for certain events, such as involuntary terminations.
(18) Subsequent Event
2022 Strategic Realignment
On May 3, 2022, the Board of Directors of the Company approved a program (the “2022 Strategic Realignment”) to strategically realign the Company’s resources in order to accelerate and grow the Company’s investments in the Company’s largest growth opportunities while streamlining the Company’s operations. This program is in support of the 2022 strategic initiatives to simplify the Company’s business and accelerate the integration of recent acquisitions, and will help to drive the financial outcomes of sustainable growth and improved profitability and cash flow. The 2022 Strategic Realignment program includes a targeted realignment and reduction of headcount, facilities and other third-party spend.
The 2022 Strategic Realignment charges will result in future cash expenditures of approximately $
33
|
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (i) our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and (ii) our audited consolidated financial statements and the related notes and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended December 31, 2021 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 25, 2022. This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are often identified by the use of words such as “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would” or the negative or plural of these words or similar expressions or variations. Such forward-looking statements include, but are not limited to, statements with respect to our outlook; the impact of new accounting standards; our ability to service our debt; our business strategy, including with respect to potential acquisitions; plans and objectives of future operations; the length and severity of the COVID-19 pandemic and its impact on the global economy and our financial results; expected expenses, cash charges and cost savings; and our future financial and business performance. The events described in these forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, our ability to implement and achieve cost savings and the other operational and personnel changes described herein, and those discussed in the section titled “Risk Factors”, set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021, Part II, Item 1A of this Quarterly Report on Form 10-Q and in our other SEC filings. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
Overview
Everbridge is a global software company that provides enterprise software applications that automate and accelerate organizations’ operational response to critical events in order to keep people safe and organizations running. During public safety threats including severe weather conditions, active shooter situations, terrorist attacks or a pandemic, as well as critical business events such as IT outages, cyber-attacks, product recalls or supply-chain interruptions, global customers rely on our Critical Event Management platform to quickly and reliably aggregate and assess threat data, locate people at risk and responders able to assist, automate the execution of pre-defined communications processes and track progress on executing response plans. Our customers use our platform to identify and assess hundreds of different types of threats to their organizations, people, assets or brand. Our solutions enable organizations to deliver intelligent, contextual messages to, and receive verification of delivery from, hundreds of millions of recipients, across multiple communications modalities such as voice, SMS and e-mail, in over 200 countries and territories, in several languages and dialects – all simultaneously. Our Critical Event Management platform is comprised of a comprehensive set of software applications packaged for organizations to address five core use cases, safeguarding: Business Operations, People Resilience, Digital Operations, Smart Security, and Public Safety. Everbridge’s individual products, addressing the full spectrum of tasks an organization requires to manage a critical event, include Mass Notification, Safety Connection, IT Alerting, Visual Command Center, Public Warning, Community Engagement, Risk Center, Crisis Management, CareConverge, Control Center, 911 Connect, Travel Risk Management, SnapComms and E911. We believe that our broad suite of integrated, enterprise applications delivered via a single global platform is a significant competitive advantage in the market for Critical Event Management solutions, which we refer to generally as CEM.
Our customer base has grown from 867 customers at the end of 2011 to more than 6,224 customers as of March 31, 2022. We provide our applications to customers of varying sizes, including enterprises, small businesses, non-profit organizations, educational institutions and governmental agencies. Our customers span a wide variety of industries including technology, energy, financial services, healthcare and life sciences, manufacturing, media and entertainment, retail, higher education and professional services.
We sell all of our critical event management applications on a subscription basis. We generally enter into contracts that range from one to three years in length, with an average contract duration of 1.8 years as of March 31, 2022, and generally bill and collect payment annually in advance. We derive most of our revenue from subscriptions to applications. On average, 95% of the revenue that we recognized in each of the eight most recently completed quarters was generated from contracts entered into in prior quarters or renewals of those contracts; the balance of the revenue that we recognized in each such quarter was generated from contracts entered into with new customers or new contracts, other than renewals, entered into with existing customers in such quarter. We derived approximately 42% of our revenue in 2021 from sales of our Mass Notification application. Our pricing model is based on the number of applications subscribed to and, per application, the number of people, locations and things connected to our platform as well as the volume of communications. We also offer premium services including data feeds for social media, threat intelligence and weather. We generate additional revenue by expanding the number of applications that our customers subscribe to and the number of contacts and devices connected to our platform.
34
We generated revenue of $100.4 million and $82.2 million for the three months ended March 31, 2022 and 2021, respectively, representing a period-over-period increase of 22%. We had net losses of $19.1 million and $21.8 million for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022 and 2021, 21% and 23% of our customers, respectively, were located outside of the United States. These customers generated 28% and 30% of our total revenue for the three months ended March 31, 2022 and 2021, respectively.
We have focused on rapidly growing our business and believe that the future growth of our business is dependent on many factors, including our ability to increase the functionality of our platform and applications, expand our customer base, accelerate adoption of our applications beyond Mass Notification within our existing customer base and expand our international presence. Our future growth will also depend on the growth in the market for critical event management solutions and our ability to effectively compete. In order to further penetrate the market for critical event management solutions and capitalize on what we believe to be a significant opportunity, we intend to continue to invest in research and development, build-out our data center infrastructure and services capabilities and hire additional sales representatives, both domestically and internationally, to drive sales to new customers and incremental sales of new applications to existing customers. Nevertheless, we expect to continue to incur losses in the near term and, if we are unable to achieve our growth objectives, we may not be able to achieve profitability.
Recent Developments
2022 Strategic Realignment
On May 3, 2022, our Board of Directors approved a program (the “2022 Strategic Realignment”) to strategically realign our resources in order to accelerate and grow our investments in our largest growth opportunities while streamlining our operations. This program is in support of the 2022 strategic initiatives to simplify our business and accelerate the integration of recent acquisitions, and will help to drive the financial outcomes of sustainable growth and improved profitability and cash flow. The 2022 Strategic Realignment program includes a targeted realignment and reduction of headcount, facilities and other third-party spend.
Performance-Based Restricted Stock Unit Modification
On February 9, 2022, the Compensation Committee of our Board of Directors approved a modification to the performance thresholds of our performance-based restricted stock unit (“PSU”) awards which affected 785 grantees and excluded our Named Executive Officers for 2021. The modified PSUs vest based on certain revenue growth thresholds which range from 1% to 40% compounded annual growth over the measurement period. The modification date fair value for the PSUs was $55.31. Incremental stock-based compensation expense of $17.5 million will be recognized over the remaining service periods of the PSUs.
Impacts of COVID-19 to Our Business
During the three months ended March 31, 2022, financial results and operations for our Americas and international geographies were not significantly impacted by the COVID-19 pandemic. We have taken, and continue to take, a variety of measures to ensure the availability and functioning of our critical infrastructure, to promote the safety and security of our employees and to support the communities in which we operate. These measures include requiring remote working arrangements for employees where practicable, among other modifications. We are following evolving public and private sector policies and initiatives to reduce the transmission of COVID-19, such as the imposition of travel restrictions, the promotion of social distancing and the adoption of work-from-home arrangements. All of these policies and initiatives have been and may continue to impact our operations. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required or that we determine are in the best interests of our employees, customers, suppliers and stockholders. Due to the evolving nature of the situation, we are not able at this time to estimate the future impact of the pandemic on our financial results and operations, but the impact could be material during any future period affected either directly or indirectly by this pandemic. Due to our primarily subscription-based business model, the effect of the coronavirus may not be fully reflected in our results of operations until future periods, if at all. See Part I-Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on February 25, 2022, for information on risks associated with pandemics in general and COVID-19 specifically. The extent of the future impact of COVID-19 on our operational and financial performance will depend on certain developments, including new information which may emerge concerning the duration and severity of the outbreak, impact of vaccinations and virus variants, international actions taken or which may be taken in the future to contain and treat it, impact on our customers and our sales cycles, and impact on our employees, all of which are highly uncertain and cannot be predicted.
Presentation of Financial Statements
Our consolidated financial statements include the accounts of our wholly-owned subsidiaries. Business acquisitions are included in our consolidated financial statements from the date of the acquisition. Our purchase accounting resulted in all assets and liabilities of acquired businesses being recorded at their estimated fair values on the acquisition dates. All intercompany balances and transactions have been eliminated in consolidation.
35
We report our financial results as one operating segment. Our operating results are regularly reviewed on a consolidated basis by our chief executive officer, who is our chief operating decision maker (“CODM”), principally to make strategic decisions regarding how we allocate our resources and to assess our consolidated operating performance. Patrick Brickley, Executive Vice President, Chief Financial Officer and Treasurer and Interim Co-Chief Executive Officer, and Vernon Irvin, Executive Vice President, Chief Revenue Officer and Interim Co-Chief Executive Officer are our interim CODMs.
Adoption of Accounting Standards Update 2020-06
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. We adopted the standard on January 1, 2022 using the modified retrospective approach. Upon adoption of ASU 2020-06, we no longer separately present in equity the embedded conversion feature of the 0% convertible senior notes due March 15, 2026 (the “2026 Notes”), 0.125% convertible senior notes due December 15, 2024 (the “2024 Notes”) and 1.50% convertible senior notes due November 1, 2022 (the “2022 Notes”) (collective, the “Convertible Senior Notes”). Instead, we account for the Convertible Senior Notes wholly as debt. Applying the separation models prior to the adoption of ASU 2020-06 to the Convertible Senior Notes involved the recognition of a debt discount, which was amortized to interest expense via the effective interest method. The elimination of the cash conversion model will reduce reported interest expense in periods subsequent to adoption.
During the three months ended March 31, 2022, we recognized amortization of deferred costs in interest expense based on ASU 2020-06. As we adopted the standard using the modified retrospective approach, periods prior to our adoption have not been recast and are not directly comparable. See Notes 2 and 9 in the notes to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional discussion of the impact of the adoption of ASU 2020-06.
Components of Results of Operations
Revenue
We derive most of our revenue from the sale of subscriptions to our critical event management and enterprise safety applications.
We generally bill and collect payment for our subscriptions annually in advance. All revenue billed in advance of services being delivered is recorded in deferred revenue. The initial subscription period typically ranges from one to three years. We offer varying levels of customer support based on customer needs and the complexity of their businesses, including the level of usage by a customer in terms of minutes or the amount of data used to transmit the notifications. Our pricing model is based on the number of applications subscribed to and, per application, the number of people, locations and things connected to our platform as well as the volume of communications. We also offer premium services including data feeds for social media, threat intelligence and weather. We generate additional revenue by expanding the number of premium features and applications that our customers subscribe to and the number of contacts connected to our platform. Our revenue growth in the near-term may be adversely affected by our ability to integrate our recent acquisitions, drive new client adoption and sales of our full suite of solutions.
We also sell professional services, which primarily consist of fees for deployment and optimization services as well as training. In addition, we also sell our software and related post contract support for on premises usage.
Cost of Revenue
Cost of revenue includes expenses related to the fulfillment of our subscription services, consisting primarily of employee-related expenses for data center operations and customer support, including salaries, bonuses, benefits and stock-based compensation expense. Cost of revenue also includes hosting costs, messaging costs and depreciation and amortization. As we add data center capacity and support personnel in advance of anticipated growth, our cost of revenue will increase and, if anticipated revenue growth does not occur, our gross profit will be adversely affected. We expect expenses to increase during fiscal year 2022 as a result of the 2022 Strategic Realignment. After the 2022 Strategic Realignment is implemented, we expect a reduction in operational costs.
Operating Expenses
Operating expenses consist of sales and marketing, research and development and general and administrative expenses. Salaries, bonuses, stock-based compensation expense and other personnel costs are the most significant components of each of these expense categories. We include stock-based compensation expense incurred in connection with the grant of stock options, restricted stock units, performance-based restricted stock units, market-based grants and our employee stock purchase plan within the applicable operating expense category based on the equity award recipient’s functional area.
36
Sales and Marketing
Sales and marketing expense primarily consists of employee-related expenses for sales, marketing and public relations employees, including salaries, bonuses, commissions, benefits and stock-based compensation expense. Sales and marketing expense also includes trade show, market research, advertising and other related external marketing expense as well as office and software related costs to support sales. We defer certain sales commissions related to acquiring new customers or services and amortize these expenses ratably over the period of benefit that we have determined to be four years. Sales commissions attributable to professional services are expensed within twelve months of selling the service to the customer. We plan to continue to expand our sales and marketing functions to grow our customer base and increase sales to existing customers. This growth will include adding sales personnel and expanding our marketing activities to continue to generate additional leads and build brand awareness. We expect expenses to increase during fiscal year 2022 as a result of the 2022 Strategic Realignment. After the 2022 Strategic Realignment is implemented, we expect a reduction in operational costs.
Research and Development
Research and development expense primarily consists of employee-related expenses for research and development staff, including salaries, bonuses, benefits and stock-based compensation expense. Research and development expense also includes the cost of certain third-party services, office related costs to support research and development activities, software subscriptions and hosting costs. We capitalize certain software development costs that are attributable to developing new applications and adding incremental functionality to our platform and amortize these costs over the estimated life of the new application or incremental functionality, which is generally three years. We focus our research and development efforts on improving our applications, developing new applications and delivering new functionality. We expect expenses to increase during fiscal year 2022 as a result of the 2022 Strategic Realignment. After the 2022 Strategic Realignment is implemented, we expect a reduction in operational costs.
General and Administrative
General and administrative expense primarily consists of employee-related expenses for administrative, legal, finance and human resource personnel, including salaries, bonuses, benefits and stock-based compensation expense. General and administrative expense also includes professional fees, insurance premiums, corporate expenses, transaction-related costs, office-related expenses, facility costs, depreciation and amortization and software license costs. In the near term, we expect our general and administrative expense to increase on an absolute dollar basis as we continue to incur the costs associated with being a publicly traded company. We expect expenses to increase during fiscal year 2022 as a result of the 2022 Strategic Realignment. After the 2022 Strategic Realignment is implemented, we expect a reduction in operational costs.
Interest and Investment Income
Interest income consists of interest earned on our cash balances held at financial institutions. Investment income consist of interest earned on our short-term investments which consist of U.S. treasuries, U.S. government agency obligations and money market funds.
Interest Expense
Interest expense consists of interest on our outstanding debt obligations including amortization of debt discounts and offering costs.
Loss on Extinguishment of Convertible Notes and Capped Call Modification
Loss on extinguishment of convertible notes and capped call modification relates to the partial extinguishment of our 2022 Notes and modification of a 2022 Notes capped call agreement.
Other Expense, Net
Other expense, net consists primarily of realized foreign currency gains and losses.
37
Results of Operations
The following tables set forth our results of operations for the periods presented and as a percentage of our total revenue for those periods. The period-to-period comparison of our historical results is not necessarily indicative of the results that may be expected in the future (in thousands):
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Revenue |
|
$ |
100,375 |
|
|
$ |
82,210 |
|
|
Cost of revenue(1) |
|
|
31,857 |
|
|
|
25,280 |
|
|
Gross profit |
|
|
68,518 |
|
|
|
56,930 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
Sales and marketing(1) |
|
|
41,816 |
|
|
|
34,527 |
|
|
Research and development(1) |
|
|
23,559 |
|
|
|
18,079 |
|
|
General and administrative(1) |
|
|
22,336 |
|
|
|
22,562 |
|
|
Total operating expenses |
|
|
87,711 |
|
|
|
75,168 |
|
|
Operating loss |
|
|
(19,193 |
) |
|
|
(18,238 |
) |
|
Other expense, net |
|
|
(958 |
) |
|
|
(9,364 |
) |
|
Loss before income taxes |
|
|
(20,151 |
) |
|
|
(27,602 |
) |
|
Benefit from income taxes |
|
|
1,078 |
|
|
|
5,813 |
|
|
Net loss |
|
$ |
(19,073 |
) |
|
$ |
(21,789 |
) |
|
(1) |
Includes stock-based compensation expense and depreciation and amortization of acquired intangible assets as follows (in thousands): |
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
$ |
817 |
|
|
$ |
999 |
|
|
Sales and marketing |
|
|
1,295 |
|
|
|
3,742 |
|
|
Research and development |
|
|
1,723 |
|
|
|
2,028 |
|
|
General and administrative |
|
|
2,249 |
|
|
|
5,916 |
|
|
Total |
|
$ |
6,084 |
|
|
$ |
12,685 |
|
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Depreciation and amortization expense |
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
$ |
6,094 |
|
|
$ |
4,852 |
|
|
Sales and marketing |
|
|
224 |
|
|
|
231 |
|
|
Research and development |
|
|
191 |
|
|
|
176 |
|
|
General and administrative |
|
|
8,925 |
|
|
|
5,584 |
|
|
Total |
|
$ |
15,434 |
|
|
$ |
10,843 |
|
38
The following table sets forth our condensed consolidated statements of operations as a percentage of revenue (1):
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Revenue |
|
|
100 |
% |
|
|
100 |
% |
|
Cost of revenue |
|
|
32 |
% |
|
|
31 |
% |
|
Gross profit |
|
|
68 |
% |
|
|
69 |
% |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
42 |
% |
|
|
42 |
% |
|
Research and development |
|
|
23 |
% |
|
|
22 |
% |
|
General and administrative |
|
|
22 |
% |
|
|
27 |
% |
|
Total operating expenses |
|
|
87 |
% |
|
|
91 |
% |
|
Operating loss |
|
|
(19 |
)% |
|
|
(22 |
)% |
|
Other expense, net |
|
|
(1 |
)% |
|
|
(11 |
)% |
|
Loss before income taxes |
|
|
(20 |
)% |
|
|
(34 |
)% |
|
Benefit from income taxes |
|
|
1 |
% |
|
|
7 |
% |
|
Net loss |
|
|
(19 |
)% |
|
|
(27 |
)% |
|
(1) |
Columns may not add up to 100% due to rounding. |
Comparison of the Three Months Ended March 31, 2022 and 2021
Revenue
|
|
|
Three Months Ended March 31, |
|
|
Change |
|
||||||||||
|
(dollars in thousands) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
|
Revenue |
|
$ |
100,375 |
|
|
$ |
82,210 |
|
|
$ |
18,165 |
|
|
|
22.1 |
% |
Revenue increased by $18.2 million for the three months ended March 31, 2022 compared to the same period in 2021. The increase was due to a $18.2 million increase in sales of our products driven by expansion of our customer base from 5,748 customers as of March 31, 2021 to 6,224 customers as of March 31, 2022, including increased sales to larger organizations with greater numbers of contacts and locations.
Cost of Revenue
|
|
|
Three Months Ended March 31, |
|
|
Change |
|
||||||||||
|
(dollars in thousands) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
|
Cost of revenue |
|
$ |
31,857 |
|
|
$ |
25,280 |
|
|
$ |
6,577 |
|
|
|
26.0 |
% |
|
Gross margin % |
|
|
68 |
% |
|
|
69 |
% |
|
|
|
|
|
|
|
|
Cost of revenue increased by $6.6 million for the three months ended March 31, 2022 compared to the same period in 2021. The increase was primarily due to a $4.1 million increase in employee-related costs associated with our increased headcount from 374 employees as of March 31, 2021 to 511 employees as of March 31, 2022 net of a reduction in stock-based compensation expense as a result of expected reduced performance metric achievement, a $1.2 million increase in depreciation and amortization expense attributed to our fixed assets, acquired intangibles and capitalized software, a $0.9 million increase in hosting, software and messaging costs and other costs as well as a $0.4 million increase in office related expenses.
Gross margin percentage decreased due to our continued investment in personnel to support our growth.
39
Operating Expenses
Sales and Marketing Expense
|
|
|
Three Months Ended March 31, |
|
|
Change |
|
||||||||||
|
(dollars in thousands) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
|
Sales and marketing |
|
$ |
41,816 |
|
|
$ |
34,527 |
|
|
$ |
7,289 |
|
|
|
21.1 |
% |
|
% of revenue |
|
|
42 |
% |
|
|
42 |
% |
|
|
|
|
|
|
|
|
Sales and marketing expense increased by $7.3 million for the three months ended March 31, 2022 compared to the same period in 2021. The increase was primarily due to a $4.8 million increase in employee-related costs, which includes stock-based compensation, associated with our increased headcount from 505 employees as of March 31, 2021 to 663 employees as of March 31, 2022 net of a reduction in stock-based compensation expense as a result of expected reduced performance metric achievement. The remaining increase was principally the result of a $1.6 million increase in advertising-related costs and trade show expenses, as well as a $0.6 million increase in office related expenses to support the sales team and a $0.3 million increase in software expenses.
Research and Development Expense
|
|
|
Three Months Ended March 31, |
|
|
Change |
|
||||||||||
|
(dollars in thousands) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
|
Research and development |
|
$ |
23,559 |
|
|
$ |
18,079 |
|
|
$ |
5,480 |
|
|
|
30.3 |
% |
|
% of revenue |
|
|
23 |
% |
|
|
22 |
% |
|
|
|
|
|
|
|
|
Research and development expense increased by $5.5 million for the three months ended March 31, 2022 compared to the same period in 2021. The increase was primarily due to a $6.7 million increase in employee-related costs, which includes stock-based compensation, associated with our increased headcount from 365 employees as of March 31, 2021 to 593 employees as of March 31, 2022 net of a reduction in stock-based compensation expense as a result of expected reduced performance metric achievement, a $0.7 million increase in software related costs and a $0.3 million increase in office related expenses partially offset by a $0.3 million decrease in professional services to support research and development activities. A total of $2.2 million of internally developed software costs during the three months ended March 31, 2021 and $4.1 million of internally developed software costs during the three months ended March 31, 2022 were capitalized, resulting in a $1.9 million offset to the increase in the first quarter of 2022.
General and Administrative Expense
|
|
|
Three Months Ended March 31, |
|
|
Change |
|
||||||||||
|
(dollars in thousands) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
|
General and administrative |
|
$ |
22,336 |
|
|
$ |
22,562 |
|
|
$ |
(226 |
) |
|
|
(1.0 |
)% |
|
% of revenue |
|
|
22 |
% |
|
|
27 |
% |
|
|
|
|
|
|
|
|
General and administrative expense decreased by $0.2 million for the three months ended March 31, 2022 compared to the same period in 2021. The decrease was primarily due to a $2.6 million decrease in employee-related costs resulting from a reduction in stock-based compensation expense due to expected reduced performance metric achievement partially offset by increased employee-related costs due to increased headcount from 171 employees as of March 31, 2021 to 214 employees as of March 31, 2022, a $1.2 million decrease in credit loss expense and a $0.1 million decrease in our contingent consideration obligation. These decreases were offset by a $3.3 million increase in depreciation and amortization and a $0.4 million increase in professional services and office related expenses to support the administrative team.
Other Expense, Net
|
|
|
Three Months Ended March 31, |
|
|
Change |
|
||||||||||
|
(dollars in thousands) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
|
Other expense, net |
|
$ |
(958 |
) |
|
$ |
(9,364 |
) |
|
$ |
8,406 |
|
|
|
89.8 |
% |
|
% of revenue |
|
|
(1 |
)% |
|
|
(11 |
)% |
|
|
|
|
|
|
|
|
40
Other expense, net decreased by $8.4 million for the three months ended March 31, 2022 compared to the same period in 2021 primarily due to a $5.3 million decrease in interest expense related to our convertible senior notes resulting from our adoption of ASU 2020-06 (see Notes 2 and 9 in the notes to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of the impact of the adoption of ASU 2020-06), a $2.9 million decrease in loss on extinguishment of convertible notes and capped call modification and a $0.2 million decrease in other income (expense), net.
Income Taxes
|
|
|
Three Months Ended March 31, |
|
|
Change |
|
||||||||||
|
(dollars in thousands) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
|
Benefit from income taxes |
|
$ |
1,078 |
|
|
$ |
5,813 |
|
|
$ |
(4,735 |
) |
|
|
(81.5 |
)% |
|
% of revenue |
|
|
1 |
% |
|
|
7 |
% |
|
|
|
|
|
|
|
|
A portion of the losses incurred during the three months ended March 31, 2022 are expected to be realized in some jurisdictions during the year or recognized as a deferred tax asset as of December 31, 2022. Losses incurred for other operating jurisdictions required a valuation allowance. An income tax benefit of $1.1 million was recorded during the three months ended March 31, 2022 primarily attributable to losses benefited in foreign jurisdictions. The change in income tax benefit of $4.7 million for the three months ended March 31, 2022 as compared to the same period in 2021 was related to the change in valuation allowance and the realization of losses against deferred tax liabilities established for prior acquisitions.
Other Metrics
We regularly monitor a number of financial and operating metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions. Our other business metrics may be calculated in a manner different than similar other business metrics used by other companies (in thousands):
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Adjusted EBITDA |
|
$ |
2,553 |
|
|
$ |
5,283 |
|
|
Adjusted gross profit |
|
|
72,486 |
|
|
|
60,533 |
|
|
Free cash flow |
|
|
1,525 |
|
|
|
15,501 |
|
41
|
|
• |
Adjusted EBITDA. Adjusted EBITDA represents our net loss before interest and investment (income) expense, net, (benefit from) provision for income taxes, depreciation and amortization expense, loss on extinguishment of convertible notes and capped call modification, change in fair value of contingent consideration and stock-based compensation expense. We do not consider these items to be indicative of our core operating performance. The items that are non-cash include depreciation and amortization expense, loss on extinguishment of convertible notes and capped call modification, change in fair value of contingent consideration and stock-based compensation expense. Adjusted EBITDA is a measure used by management to understand and evaluate our core operating performance and trends and to generate future operating plans, make strategic decisions regarding the allocation of capital and invest in initiatives that are focused on cultivating new markets for our solutions. In particular, the exclusion of certain expenses in calculating adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis. Adjusted EBITDA is not a measure calculated in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). We believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. Nevertheless, use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these limitations are: (1) although depreciation and amortization are non-cash charges, the capitalized software that is amortized will need to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; (2) adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; (3) adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation; (4) adjusted EBITDA does not reflect tax payments or receipts that may represent a reduction or increase in cash available to us; and (5) other companies, including companies in our industry, may calculate adjusted EBITDA or similarly titled measures differently, which reduces the usefulness of the metric as a comparative measure. Because of these and other limitations, you should consider adjusted EBITDA alongside our other GAAP-based financial performance measures, net loss and our other GAAP financial results. The following table presents a reconciliation of adjusted EBITDA to net loss, the most directly comparable GAAP measure, for each of the periods indicated (in thousands): |
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Net loss |
|
$ |
(19,073 |
) |
|
$ |
(21,789 |
) |
|
Interest and investment expense, net |
|
|
1,238 |
|
|
|
6,427 |
|
|
Benefit from income taxes |
|
|
(1,078 |
) |
|
|
(5,813 |
) |
|
Depreciation and amortization |
|
|
15,434 |
|
|
|
10,843 |
|
|
Loss on extinguishment of convertible notes and capped call modification |
|
|
— |
|
|
|
2,888 |
|
|
Change in fair value of contingent consideration |
|
|
(52 |
) |
|
|
42 |
|
|
Stock-based compensation |
|
|
6,084 |
|
|
|
12,685 |
|
|
Adjusted EBITDA |
|
$ |
2,553 |
|
|
$ |
5,283 |
|
42
|
|
• |
Adjusted Gross Profit. Adjusted gross profit represents gross profit plus amortization of acquired intangibles and stock-based compensation. Adjusted gross profit is a measure used by management to understand and evaluate our core operating performance and trends and to generate future operating plans. The exclusion of stock-based compensation expense and amortization of acquired intangibles facilitates comparisons of our operating performance on a period-to-period basis. In the near term, we expect these expenses to continue to negatively impact our gross profit. Adjusted gross profit is not a measure calculated in accordance with GAAP. We believe that adjusted gross profit provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. Nevertheless, our use of adjusted gross profit has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. You should consider adjusted gross profit alongside our other GAAP-based financial performance measures, gross profit and our other GAAP financial results. The following table presents a reconciliation of adjusted gross profit to gross profit, the most directly comparable GAAP measure, for each of the periods indicated (in thousands): |
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Gross profit |
|
$ |
68,518 |
|
|
$ |
56,930 |
|
|
Amortization of acquired intangibles |
|
|
3,151 |
|
|
|
2,604 |
|
|
Stock-based compensation |
|
|
817 |
|
|
|
999 |
|
|
Adjusted gross profit |
|
$ |
72,486 |
|
|
$ |
60,533 |
|
|
|
• |
Free Cash Flow. Free cash flow represents net cash from operating activities minus capital expenditures and capitalized software development costs. Free cash flow is a measure used by management to understand and evaluate our core operating performance and trends and to generate future operating plans. The exclusion of capital expenditures and amounts capitalized for internally-developed software facilitates comparisons of our operating performance on a period-to-period basis and excludes items that we do not consider to be indicative of our core operating performance. Free cash flow is not a measure calculated in accordance with GAAP. We believe that free cash flow provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. Nevertheless, our use of free cash flow has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. You should consider free cash flow alongside our other GAAP-based financial performance measures, net cash provided by operating activities, and our other GAAP financial results. The following table presents a reconciliation of free cash flow to net cash for operating activities, the most directly comparable GAAP measure, for each of the periods indicated (in thousands): |
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Net cash provided by operating activities |
|
$ |
7,702 |
|
|
$ |
19,808 |
|
|
Capital expenditures |
|
|
(1,847 |
) |
|
|
(1,812 |
) |
|
Capitalized software development costs |
|
|
(4,330 |
) |
|
|
(2,495 |
) |
|
Free cash flow |
|
$ |
1,525 |
|
|
$ |
15,501 |
|
43
Additional Supplemental Non-GAAP Financial Measures
To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide investors with certain additional supplemental non-GAAP financial measures, including non-GAAP cost of revenue, non-GAAP gross profit, non-GAAP sales and marketing expense, non-GAAP research and development expense, non-GAAP general and administrative expense, non-GAAP total operating expenses, non-GAAP operating income (loss) and non-GAAP net income (loss), which we collectively refer to as non-GAAP financial measures. These non-GAAP financial measures exclude all or a combination of the following (as reflected in the following reconciliation tables): stock-based compensation expense, amortization of acquired intangibles, change in fair value of contingent consideration, accretion of interest on convertible senior notes and loss on extinguishment of convertible notes and capped call modification and the tax impact of such adjustments. The tax impact of such adjustments was determined by recalculating the estimated annual effective tax rate utilizing non-GAAP pre-tax income estimated for the year and then applying the recalculated estimated annual effective tax rate to year-to-date non-GAAP income. The presentation of the non-GAAP financial measures is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. We use these non-GAAP financial measures for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons. We believe that these non-GAAP financial measures provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to metrics used by our management in its financial and operational decision making. While our non-GAAP financial measures are an important tool for financial and operational decision making and for evaluating our own operating results over different periods of time, you should consider our non-GAAP financial measures alongside our GAAP financial results.
We exclude stock-based compensation expense which can vary based on plan design, share price, share price volatility, and the expected lives of equity instruments granted. We believe that providing non-GAAP financial measures that exclude stock-based compensation expense allow for more meaningful comparisons between our operating results from period to period because stock-based compensation expense does not represent a cash expenditure. We believe that excluding the impact of amortization of acquired intangibles allows for more meaningful comparisons between operating results from period to period as the intangibles are valued at the time of acquisition and are amortized over a period of several years after the acquisition. We believe that excluding the change in fair value of contingent consideration allows for more meaningful comparisons between operating results from period to period as it is non-operating in nature. We believe that excluding the impact of accretion of interest on convertible senior notes allows for more meaningful comparisons between operating results from period to period as accretion of interest on convertible senior notes relates to interest cost for the time value of money and are non-operating in nature. We believe that excluding loss on extinguishment of convertible notes and capped call modification allows for more meaningful comparisons between operating results from period to period as losses on the extinguishment of convertible notes and capped call modifications are non-operating in nature. We do not engage in the repurchase of convertible notes on a regular basis or in the ordinary course of business. Accordingly, we believe that excluding these expenses provides investors and management with greater visibility of the underlying performance of our business operations, facilitates comparison of our results with other periods and may also facilitate comparison with the results of other companies in our industry.
There are limitations in using non-GAAP financial measures because the non-GAAP financial measures are not prepared in accordance with GAAP, may be different from non-GAAP financial measures used by other companies and exclude expenses that may have a material impact upon our reported financial results. Further, stock-based compensation expense has been and will continue to be for the foreseeable future a significant recurring expense in our business and an important part of the compensation provided to our employees.
44
The following table reconciles our GAAP to non-GAAP financial measures (in thousands):
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Cost of revenue |
|
$ |
31,857 |
|
|
$ |
25,280 |
|
|
Amortization of acquired intangibles |
|
|
(3,151 |
) |
|
|
(2,604 |
) |
|
Stock-based compensation |
|
|
(817 |
) |
|
|
(999 |
) |
|
Non-GAAP cost of revenue |
|
$ |
27,889 |
|
|
$ |
21,677 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
68,518 |
|
|
$ |
56,930 |
|
|
Amortization of acquired intangibles |
|
|
3,151 |
|
|
|
2,604 |
|
|
Stock-based compensation |
|
|
817 |
|
|
|
999 |
|
|
Non-GAAP gross profit |
|
$ |
72,486 |
|
|
$ |
60,533 |
|
|
Non-GAAP gross margin |
|
|
72.2 |
% |
|
|
73.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
$ |
41,816 |
|
|
$ |
34,527 |
|
|
Stock-based compensation |
|
|
(1,295 |
) |
|
|
(3,742 |
) |
|
Non-GAAP sales and marketing |
|
$ |
40,521 |
|
|
$ |
30,785 |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
$ |
23,559 |
|
|
$ |
18,079 |
|
|
Stock-based compensation |
|
|
(1,723 |
) |
|
|
(2,028 |
) |
|
Non-GAAP research and development |
|
$ |
21,836 |
|
|
$ |
16,051 |
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
$ |
22,336 |
|
|
$ |
22,562 |
|
|
Amortization of acquired intangibles |
|
|
(8,387 |
) |
|
|
(5,255 |
) |
|
Change in fair value of contingent consideration |
|
|
52 |
|
|
|
(42 |
) |
|
Stock-based compensation |
|
|
(2,249 |
) |
|
|
(5,916 |
) |
|
Non-GAAP general and administrative |
|
$ |
11,752 |
|
|
$ |
11,349 |
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
87,711 |
|
|
$ |
75,168 |
|
|
Amortization of acquired intangibles |
|
|
(8,387 |
) |
|
|
(5,255 |
) |
|
Change in fair value of contingent consideration |
|
|
52 |
|
|
|
(42 |
) |
|
Stock-based compensation |
|
|
(5,267 |
) |
|
|
(11,686 |
) |
|
Non-GAAP operating expenses |
|
$ |
74,109 |
|
|
$ |
58,185 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
$ |
(19,193 |
) |
|
$ |
(18,238 |
) |
|
Amortization of acquired intangibles |
|
|
11,538 |
|
|
|
7,859 |
|
|
Change in fair value of contingent consideration |
|
|
(52 |
) |
|
|
42 |
|
|
Stock-based compensation |
|
|
6,084 |
|
|
|
12,685 |
|
|
Non-GAAP operating income (loss) |
|
$ |
(1,623 |
) |
|
$ |
2,348 |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(19,073 |
) |
|
$ |
(21,789 |
) |
|
Amortization of acquired intangibles |
|
|
11,538 |
|
|
|
7,859 |
|
|
Change in fair value of contingent consideration |
|
|
(52 |
) |
|
|
42 |
|
|
Stock-based compensation |
|
|
6,084 |
|
|
|
12,685 |
|
|
Accretion of interest on convertible senior notes |
|
|
1,158 |
|
|
|
6,313 |
|
|
Loss on extinguishment of convertible notes and capped call modification |
|
|
— |
|
|
|
2,888 |
|
|
Income tax adjustments |
|
|
(250 |
) |
|
|
(36 |
) |
|
Non-GAAP net income (loss) |
|
$ |
(595 |
) |
|
$ |
7,962 |
|
Liquidity and Capital Resources
To date, we have financed our operations primarily through cash from sales to our customers, along with equity issuances and debt financing arrangements. Our principal source of liquidity is cash and cash equivalents totaling $492.1 million as of March 31, 2022. We have generated significant losses since inception and expect to continue to generate losses for the foreseeable future.
45
We believe that our cash and cash equivalent balances and the cash flows generated by our operations will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. However, our belief may prove to be incorrect, and we could utilize our available financial resources sooner than we currently expect. We believe that our financial resources will allow us to manage the anticipated impact of COVID-19 on our business operations for the foreseeable future, which could include delays in payments from our customers. The challenges posed by COVID-19 on our business could evolve rapidly. We will continue to evaluate our financial position in light of future developments, particularly those relating to COVID-19. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in the section of Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 and this Quarterly Report on Form 10-Q titled “Risk Factors.” We cannot assure you that we will be able to raise additional capital on acceptable terms or at all. In addition, if we fail to meet our operating plan during the next 12 months, our liquidity could be adversely affected.
Material Cash Requirements and Contractual Obligations
We expect to use cash primarily for operating activities, such as expansion of our sales and marketing operations, research and development activities and other working capital needs, such as salaries, bonuses, and other personnel cost and data center hosting costs, as well as payments for acquisitions of businesses and interest payments on our convertible senior notes. We expect to continue to finance our operations primarily through cash from sales to our customers and may consider future equity issuances and debt financing arrangements. Our commitments to settle contractual obligations include $825.0 million principal amount of indebtedness under the 2026 Notes, 2024 Notes and 2022 Notes (see Note 9 of the notes to consolidated financial statements) and lease obligations of $22.9 million (see Note 16 of the notes to condensed consolidated financial statements).
Cash Flows
The following table summarizes our cash flows (in thousands):
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Cash, cash equivalents and restricted cash at beginning of period |
|
$ |
492,758 |
|
|
$ |
475,630 |
|
|
Cash provided by operating activities |
|
|
7,702 |
|
|
|
19,808 |
|
|
Cash used in investing activities |
|
|
(6,224 |
) |
|
|
(36,708 |
) |
|
Cash provided by financing activities |
|
|
1,129 |
|
|
|
284,792 |
|
|
Effects of exchange rates on cash, cash equivalents and restricted cash |
|
|
(356 |
) |
|
|
(315 |
) |
|
Cash, cash equivalents and restricted cash at end of period |
|
$ |
495,009 |
|
|
$ |
743,207 |
|
Sources of Funds
Our sources of funds include cash from sales to our customers, along with equity issuances and debt financing arrangements including our 2026 Notes, 2024 Notes and 2022 Notes.
Uses of Funds
Our historical uses of cash have primarily consisted of cash used for operating activities, such as expansion of our sales and marketing operations, research and development activities and other working capital needs.
Operating Activities
Our net loss and cash flows provided by or used in operating activities are significantly influenced by our investments in headcount and infrastructure to support our growth, marketing and sponsorship expenses, and our ability to bill and collect in a timely manner. Our net loss has been significantly greater than our use of cash for operating activities due to the inclusion of non-cash expenses and charges.
46
Operating activities generated $7.7 million in cash in the three months ended March 31, 2022, primarily as a result of non-cash operating expenses of $20.2 million and $6.5 million in cash provided as a result of changes in operating assets and liabilities which was offset by our net loss of $19.1 million. Specifically, we recognized non-cash charges aggregating to $15.4 million for depreciation and amortization of intangible assets, capitalized software development costs and property and equipment, $6.1 million for stock-based compensation, $4.0 million for amortization of deferred commissions, $1.2 million related to the accretion of interest on our convertible senior notes, $0.2 million for provision for credit losses, offset by $6.6 million for deferred income taxes and $0.1 million change in the fair value of our contingent consideration obligation. The net change in operating assets and liabilities of $6.5 million reflected an $11.4 million decrease in accounts receivable, an $8.0 million increase in deferred revenue a $3.2 million increase in accrued expenses and a $1.8 million decrease in other assets. These amounts were offset by a $6.2 million increase in deferred cost, a $6.1 million decrease in accounts payable, a $2.4 million increase in prepaid expenses, a $1.9 million decrease in accrued payroll and employee related liabilities and a $1.3 million decrease in other liabilities.
Operating activities generated $19.8 million in cash in the three months ended March 31, 2021, primarily as a result of non-cash operating expenses of $31.2 million and $10.4 million in cash provided as a result of changes in operating assets and liabilities which was offset by our net loss of $21.8 million. Specifically, we recognized non-cash charges aggregating to $12.7 million for stock-based compensation, $10.8 million for depreciation and amortization of intangible assets, capitalized software development costs and property and equipment, $6.3 million related to the accretion of interest on our convertible senior notes, $3.7 million for amortization of deferred commissions, $2.9 million loss on extinguishment of convertible notes and capped call modification, $1.6 million for provision for credit losses, offset by $6.7 million for deferred income taxes and $0.1 million in other non-cash adjustments. The net change in operating assets and liabilities of $10.4 million reflected an $11.5 million decrease in accounts receivable, an $8.4 million increase in deferred revenue and a $3.0 million increase in accrued expenses. These amounts were offset by a $3.5 million increase in deferred cost, a $2.8 million increase in other assets, a $2.1 million decrease in accrued employee related expenses due to timing of payments to employees, a $2.0 million net decrease in other liabilities, a $1.2 million increase in prepaid expenses for upfront payments made for prepaid software and insurance and a $0.9 million decrease in accounts payable.
Investing Activities
Our investing activities consist primarily of capital expenditures for capitalized software development costs, business acquisitions, property and equipment expenses and purchase and sales of short-term investments.
Investing activities used $6.2 million in cash in the three months ended March 31, 2022, which consists of a $4.3 million investment in software development, a $1.8 million in purchases of property and equipment and $0.1 million in other investing activities.
Investing activities used $36.7 million in cash in the three months ended March 31, 2021, which consists of $32.4 million of cash paid for the acquisition of Red Sky Technologies Inc., a $2.5 million investment in software development and $1.8 million in purchases of property and equipment.
Financing Activities
Cash generated by financing activities includes proceeds from the issuance of common stock from our follow-on public offering, borrowings under our convertible senior notes, proceeds from the partial termination of convertible note capped call hedges, proceeds from the exercise of employee stock options and contributions to our employee stock purchase plan. Cash used in financing activities includes payments for debt and offering issuance costs, purchases of convertible notes capped call hedges, extinguishment of debt, payment of contingent consideration and employee withholding liabilities from the exercise of restricted stock units.
Financing activities provided $1.1 million of cash in the three months ended March 31, 2022, which reflects $1.7 million from the issuance of stock under our employee stock purchase plan offset by a $0.6 million payment for employee withholding taxes related to the issuance of restricted stock units.
Financing activities provided $284.8 million of cash in the three months ended March 31, 2021, which reflects proceeds of $330.3 million from our 2026 Notes offering after deducting debt issuance cost and the cost for the capped call transactions entered into in connection with the 2026 Note offering, $2.5 million from the issuance of stock under our employee stock purchase plan and $1.6 million from the exercise of stock options. These amounts were offset by a $48.0 million payment for the repurchase of 2022 Notes offset by cash received for the partial termination of the 2022 Notes capped call options and a $1.6 million payment for employee withholding taxes related to the issuance of restricted stock units.
47
Critical Accounting Estimates
Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of our condensed consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates. The future effects of the COVID-19 pandemic on our results of operations, cash flows, and financial position are unclear; however, we believe we have used reasonable estimates and assumptions in preparing the condensed consolidated financial statements.
Except for the adoption of ASU 2020-06, there have been no changes to our critical accounting estimates described in the Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 25, 2022, that have had a material impact on our condensed consolidated financial statements and related notes.
Recently Issued Accounting Pronouncements
See Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a summary of recently issued and adopted accounting pronouncements.
|
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk. |
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates and foreign exchange rates as well as, to a lesser extent, inflation.
Interest Rate Risk
Our investment portfolio is exposed to market risk from changes in interest rates. The fair market value of fixed rate securities may be adversely impacted by fluctuations in interest rates while income earned on floating rate securities may decline as a result of decreases in interest rates. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. We attempt to ensure the safety and preservation of our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in investment grade securities. We have historically maintained a relatively short average maturity for our investment portfolio, and we believe a hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not change the fair value of our interest sensitive financial instruments by a material amount. In addition, if a 100 basis point change in overall interest rates were to occur in 2022, our interest income would not change significantly in relation to amounts we would expect to earn, based on our cash, cash equivalents, and investments as of March 31, 2022.
Changes in interest rates may also impact gains or losses from the conversion of our outstanding convertible senior notes. In March 2021, we issued $375 million in aggregate principal amount of our 2026 Notes. In December 2019, we issued $450 million in aggregate principal amount of our 2024 Notes. In November 2017, we issued $115 million in aggregate principal amount of our 2022 Notes, of which $8 thousand remain outstanding. The 2026 Notes, 2024 Notes and 2022 Notes are convertible under certain circumstances, including trading price conditions related to our common stock, and upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock, or a combination of cash and shares of our common stock, at our election. In the second quarter of 2018, the last reported sale price of our common stock was at least 130% of the conversion price of the 2022 Notes for at least 20 trading days during a period of 30 consecutive trading days ending on, and including, the last trading day of the quarter, resulting in the 2022 Notes becoming convertible at the option of the holder during the third quarter of 2018. Based on the market price of the Company’s common stock during the 30 trading days preceding March 31, 2022, the 2022 Notes were not convertible at the option of the debt holder from April 1, 2022 through May 1, 2022. The 2026 Notes and 2024 Notes were not convertible at March 31, 2022.
Upon conversion, we are required to record a gain or loss for the difference between the fair value of the debt to be extinguished and its corresponding net carrying value. The fair value of the debt to be extinguished depends on our then-current incremental borrowing rate. If our incremental borrowing rate at the time of conversion is higher or lower than the implied interest rate of the 2026 Notes, 2024 Notes and 2022 Notes, we will record a gain or loss in our consolidated statement of operations during the period in which the 2026 Notes, 2024 Notes and 2022 Notes are extinguished. An incremental borrowing rate that is a hypothetical 100 basis points lower than the implicit interest rate upon conversion of the 2026 Notes, 2024 Notes and 2022 Notes would result in a loss of approximately $8.3 million.
48
We are exposed to interest rate risk in the ordinary course of our business. Our cash, cash equivalents and investments include cash in readily available checking and money market accounts and marketable securities. These securities are not dependent on interest rate fluctuations that may cause the principal amount of these assets to fluctuate.
We had cash and cash equivalents of $492.1 million as of March 31, 2022, which consisted of bank deposits and money market funds. To date, fluctuations in interest income have not been significant.
We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure.
Foreign Currency Exchange Risk
We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than our functional currency, the U.S. dollar, principally British Pounds, Euro, Norwegian Krone, Swedish Kronor and other foreign currencies. Movements in foreign currencies in which we transact business could significantly affect future net earnings. We do not currently engage in any hedging activity to reduce our potential exposure to currency fluctuations, although we may choose to do so in the future. A hypothetical 10% change in foreign exchange rates during any of the periods presented would not have had a material impact on our consolidated financial statements. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in foreign currency rate.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition or results of operations historically. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.
|
Item 4. |
Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.
Changes in Internal Control
There were no changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. In response to the COVID-19 pandemic, our employees began working from home starting in March 2020. Management is continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact to their design and operating effectiveness.
Inherent Limitations on Effectiveness of Controls
Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our global organization have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
49
PART II—OTHER INFORMATION
|
Item 1. |
Legal Proceedings. |
In April 2022, a putative class action lawsuit was filed in the United States District Court for the Central District of California against the Company, Jaime Ellertson, Patrick Brickley, and David Meredith (the Company’s former Chief Executive Officer) by Sylebra Capital Partners Master Fund Ltd, Sylebra Capital Parc Master Fund, and Sylebra Capital Menlo Master Fund. The lawsuit alleges violations of the federal securities laws by us and certain of our officers and directors arising out of purported misrepresentations in the information we provided to investors regarding our organic and inorganic revenue growth, the status of integrating acquisitions, and the impact of COVID-19 on our business, which allegedly artificially inflated the price of our stock during the period November 4, 2019 to February 24, 2022. We are not able to estimate the amount of the loss allegedly suffered by members of the putative class or the amount of legal costs and internal efforts associated with defending ourselves and our officers and directors. We believe that the allegations and claims made in this lawsuit are wholly without merit and intend to defend the action vigorously. Even if we were to prevail, this litigation could continue to be costly and time-consuming and divert the attention of our management and key personnel from our business operations. During the course of the litigation, we anticipate announcements of the results of hearings and motions, and other interim developments related to the litigation. If securities analysts or investors regard these announcements as negative, the market price of our common stock may decline. If we are unsuccessful in defending ourselves in this litigation, this lawsuit could materially and adversely affect our business, financial condition, results of operations, and cash flows.
From time to time, we may become involved in other legal proceedings or be subject to claims arising in the ordinary course of our business. Except for the claim described above, we are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, financial condition, results of operations or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
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Item 1A. |
Risk Factors. |
We operate in a rapidly changing environment that involves a number of risks, which could materially affect our business, financial condition or future results, some of which are beyond our control. Except as set forth below, during the three months ended March 31, 2022, there have been no material changes in our risk factors from those disclosed in Part I-Item 1A under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on February 25, 2022.
Implementation of our 2022 Strategic Realignment or simplification strategies may not be successful, which could affect our ability to increase our revenues or could reduce our profitability.
On May 3, 2022, our Board of Directors approved a program (the “2022 Strategic Realignment”) to strategically realign our resources in order to accelerate and grow our investments in our largest growth opportunities while streamlining our operations. This program is in support of the 2022 strategic initiatives to simplify our business and accelerate the integration of recent acquisitions, and will help to drive the financial outcomes of sustainable growth and improved profitability and cash flow. The 2022 Strategic Realignment program includes a targeted realignment and reduction of headcount, facilities and other third-party spend. We expect to record in the aggregate approximately $5 million to $9 million in restructuring charges associated with the 2022 Strategic Realignment and $8 million to $12 million in business transformation costs associated with the 2022 Strategic Realignment. A significant portion of these charges will result in future cash expenditures, and the program is expected to be substantially completed by the first half of fiscal 2023.
Although we believe that the 2022 Strategic Realignment will reduce overhead costs, enhance operational simplicity, and result in improved Adjusted EBITDA, we cannot guarantee that the 2022 Strategic Realignment will achieve or sustain the targeted benefits, or that the benefits, even if achieved, will be adequate to meet our long-term profitability and operational expectations. Risks associated with the continuing impact of the 2022 Strategic Realignment also include additional unexpected costs and negative impacts on our cash flows from operations and liquidity, employee attrition beyond our intended reduction in force and adverse effects on employee morale, diversion of management attention, adverse effects to our reputation as an employer, which could make it more difficult for us to hire new employees in the future, and potential failure or delays to meet operational and growth targets due to the loss of qualified employees. If we do not realize the expected benefits or synergies of the 2022 Strategic Realignment, our business, financial condition, cash flows and results of operations could be negatively impacted.
Activist investor actions threatened or commenced against us could cause us to incur substantial costs, divert management’s attention and resources, cause uncertainty about the strategic direction of our business and adversely affect our business, financial position and results of operations.
In connection with the upcoming 2022 Annual Meeting of our Shareholders (the “2022 Annual Meeting”), Ancora Holdings Group, LLC (together with its affiliates, “Ancora”), has announced that it intends to withhold support for four directors nominated by the Board of Directors for reelection. In addition, Ancora has made multiple public statements in recent months regarding the Company’s strategy, Board of Directors and management team. These types of actions pursued by Ancora or other shareholders, including any future proxy contests, could conflict with our strategic direction, could divert the attention of our Board of Directors, management, and employees, be costly and time-consuming, and may disrupt the momentum in our business and operations, as well as our ability to execute our strategic plan. These types of actions may also create perceived uncertainties as to the future direction of our business or strategy, which may be exploited by our competitors and may make it more difficult to attract and retain qualified personnel, and may impact our relationship with investors, vendors, customers and other third parties. These types of actions could also impact the market price and the volatility of our common stock. In addition, we may choose to initiate, or may become subject to, litigation as a result of shareholder actions, which would serve as a further distraction to our Board of Directors, senior management and employees and could require us to incur significant additional costs.
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Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds. |
(a) Recent Sales of Unregistered Equity Securities
None
(b) Use of Proceeds
None
(c) Issuer Purchase of Equity Securities
None
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Item 3. |
Defaults Upon Senior Securities. |
None
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Item 4. |
Mine Safety Disclosures. |
Not applicable
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Item 5. |
Other Information. |
None
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Item 6. |
Exhibits. |
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Incorporated by Reference |
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Exhibit No. |
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Exhibit Description |
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Filed Herewith |
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Form |
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File No. |
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Exhibit |
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Filing Date |
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3.1 |
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Sixth Amended and Restated Certificate of Incorporation of Everbridge, Inc. |
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10-Q |
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001-37874 |
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3.1 |
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8/9/21 |
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3.2 |
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10-Q |
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001-37874 |
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3.2 |
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8/9/21 |
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31.1 |
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X |
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31.2 |
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X |
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32.1* |
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X |
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32.2* |
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X |
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101.INS |
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Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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X |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema Document |
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X |
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101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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X |
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101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document |
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X |
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101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document |
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X |
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101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document
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X |
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104 |
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Cover Page Interactive Data File - the cover page interactive data is embedded within the Inline XBRL document or included within the Exhibit 101 attachments. |
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X |
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* |
This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Everbridge, Inc. |
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Date: May 9, 2022 |
By: |
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/s/ Patrick Brickley |
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Patrick Brickley |
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Executive Vice President, Chief Financial Officer and Interim Co-Chief Executive Officer |
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Date: May 9, 2022 |
By: |
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/s/ Vernon Irvin |
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Vernon Irvin |
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Executive Vice President, Chief Revenue Officer and Interim Co-Chief Executive Officer |
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