EVERBRIDGE, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those contained in or implied by any forward-looking statements. Factors that could cause or contribute to these differences include those under "Risk Factors" included in Part I, Item 1A or in other parts of this Annual Report on Form 10-K.
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
6,100 customers as of
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 1.9 years as of
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We generated revenue of
As of
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
On
In
On
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On
In
Impacts of COVID-19 to Our Business
During the year ended
Since 2020, (1) we launched COVID-19 Shield, a new set of coronavirus protection solutions designed to protect the safety of employees and customers, maintain business operations, safeguard supply chains, and reduce costs and liabilities stemming from the impact of the global coronavirus pandemic; (2) we launched COVID-19 Return to Work, a software solution designed to help businesses and governments navigate the complexity of operating during the next phase of the COVID-19 pandemic and prepare to bring back the workforce and reopen society; (3) we launched COVID-19 Shield: Contact Tracing, a solution for corporate, government and healthcare organizations to supplement or complement existing manual contact tracing efforts; (4) we launched Control Center, a physical security information management software platform, which includes features designed to help organizations return to work by integrating and managing data and analytics from video cameras, thermal cameras, badge access and other building systems, and by automating the response to help organizations ensure the safety and protection of employees, as well as compliance with social distancing and personal protective equipment policies; and (5) we launched COVID-19 Shield: Vaccine Distribution, an extension to our CEM platform offering risk insights, logistics awareness and vaccine appointment management. These products were built off of our existing platforms.
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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.
We report our financial results as one operating segment. Our operating results
are regularly reviewed on a consolidated basis by our chief operating decision
maker ("CODM"), principally to make strategic decisions regarding how we
allocate our resources and to assess our consolidated operating performance. Our
CODM was
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.
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 and our employee stock purchase plan within the applicable operating expense category based on the equity award recipient's functional area.
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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.
In the near term, we expect our sales and marketing expense to increase on an
absolute dollar basis as we hire new sales representatives in
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. In the near term, we expect our research and development expense to increase on an absolute dollar basis as we continue to increase the functionality of our platform and applications.
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.
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
Interest Expense
Interest expense consists of interest on our outstanding debt obligations including amortization of debt discounts and offering costs.
Gain (Loss) on Extinguishment of Debt and Capped Call Modification
Gain (loss) on extinguishment of debt and capped call modification relates to the partial extinguishment of our 1.50% convertible senior notes due 2022, modification of a 2022 Notes capped call agreement and extinguishment of consideration loan notes issued in connection with our Anvil acquisition.
Other Expense, Net
Other expense, net consists primarily of realized foreign currency gains and losses.
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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):
Year Ended December 31,
2021 2020 2019
Revenue $ 368,433 $ 271,141 $ 200,882
Cost of revenue(1) 114,216 83,028 63,535
Gross profit 254,217 188,113 137,347
Operating expenses:
Sales and marketing(1) 161,337 123,330 87,731
Research and development(1) 81,647 62,512 50,024
General and administrative(1) 87,482 74,485 46,820
Total operating expenses 330,466 260,327 184,575
Operating loss (76,249 ) (72,214 ) (47,228 )
Other expense, net (31,126 ) (23,449 ) (4,597 )
Loss before income taxes (107,375 ) (95,663 ) (51,825 )
Benefit from (provision for) income taxes 12,579 2,267 (425 ) Net loss
$ (94,796 ) $ (93,396 ) $ (52,250 )
(1) Includes stock-based compensation expense and depreciation and amortization
of acquired intangible assets as follows (in thousands):
Year Ended December 31,
2021 2020 2019
Stock-based compensation expense:
Cost of revenue $ 3,669 $ 2,954 $ 1,966
Sales and marketing 16,152 15,946 9,983
Research and development 8,297 8,703 7,820
General and administrative 15,977 19,152 13,720
Total $ 44,095 $ 46,755 $ 33,489
Year Ended December 31,
2021 2020 2019
Depreciation and amortization expense:
Cost of revenue $ 21,508 $ 12,165 $ 9,434
Sales and marketing 930 932 752
Research and development 710 597 502
General and administrative 30,020 17,065 8,983
Total $ 53,168 $ 30,759 $ 19,671
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The following table sets forth our consolidated statements of operations as a
percentage of revenue (1):
Year Ended December 31,
2021 2020 2019
Revenue 100 % 100 % 100 %
Cost of revenue 31 % 31 % 32 %
Gross profit 69 % 69 % 68 %
Operating expenses:
Sales and marketing 44 % 45 % 44 %
Research and development 22 % 23 % 25 %
General and administrative 24 % 27 % 23 %
Total operating expenses 90 % 96 % 92 %
Operating loss (21 )% (27 )% (24 )%
Other expense, net (8 )% (9 )% (2 )%
Loss before income taxes (29 )% (35 )% (26 )%
Benefit from (provision for) income taxes 3 % 1 % (0 )%
Net loss (26 )% (34 )% (26 )%
(1) Columns may not add up to 100% due to rounding.
Year Ended
Revenue
Year Ended December 31, Change
(dollars in thousands) 2021 2020 $ %
Revenue $ 368,433 $ 271,141 $ 97,292 35.9 %
Revenue increased by
Cost of Revenue
Year Ended December 31, Change
(dollars in thousands) 2021 2020 $ %
Cost of revenue $ 114,216 $ 83,028 $ 31,188 37.6 %
Gross margin % 69 % 69 %
Cost of revenue increased by
Gross margin percentage remained flat in 2021 as compared to 2020.
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Operating Expenses Sales and Marketing Expense
Year Ended December 31, Change
(dollars in thousands) 2021 2020 $ %
Sales and marketing $ 161,337 $ 123,330 $ 38,007 30.8 %
% of revenue 44 % 45 %
Sales and marketing expense increased by
Research and Development Expense
Year Ended December 31, Change
(dollars in thousands) 2021 2020 $ %
Research and development $ 81,647 $ 62,512 $ 19,135 30.6 %
% of revenue 22 % 23 %
Research and development expense increased by
General and Administrative Expense
Year Ended December 31, Change
(dollars in thousands) 2021 2020 $ %
General and administrative $ 87,482 $ 74,485 $ 12,997 17.4 %
% of revenue 24 % 27 %
General and administrative expense increased by
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Other Expense, Net
Year Ended December 31, Change
(dollars in thousands) 2021 2020 $ %
Other expense, net $ 31,126 $ 23,449 $ 7,677 32.7 %
% of revenue 8 % 9 %
Other expense, net increased by
Income Taxes
Year Ended December 31, Change
(dollars in thousands) 2021 2020 $ %
Benefit from income taxes $ 12,579 $ 2,267 $ 10,312 454.9 %
% of revenue 3 % 1 %
Income tax benefit increased by
Year Ended
For a discussion regarding our financial condition and results of operations for
the year ended
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):
Year Ended December 31,
2021 2020 2019
Adjusted EBITDA
2,441 2,895 (2,771 )
• 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, (gain) loss on
extinguishment of debt 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, (gain) loss on extinguishment of debt and capped
call modification, change in fair value of
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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):
Year Ended December 31,
2021 2020 2019
Net loss $ (94,796 ) $ (93,396 ) $ (52,250 )
Interest and investment expense, net 35,559 22,082 2,979
(Benefit from) provision for income taxes (12,579 ) (2,267 ) 425 Depreciation and amortization
53,168 30,759 19,671
(Gain) loss on extinguishment of debt and
capped call modification (7,181 ) 446 1,406
Change in fair value of contingent
consideration (7,046 ) 3,665 (550 )
Stock-based compensation 44,095 46,755 33,489
Adjusted EBITDA $ 11,220 $ 8,044 $ 5,170
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• 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):
Year Ended December 31,
2021 2020 2019
Gross profit $ 254,217 $ 188,113 $ 137,347
Amortization of acquired intangibles 12,109 4,157 2,114
Stock-based compensation 3,669 2,954 1,966
Adjusted gross profit $ 269,995 $ 195,224 $ 141,427
• 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):
Year Ended December 31,
2021 2020 2019
Net cash provided by operating activities
(5,055 ) (3,257 ) (5,269 )
Capitalized software development costs (14,697 ) (9,651 ) (7,819 ) Free cash flow
$ 2,441 $ 2,895 $ (2,771 )
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 (gain) loss on extinguishment of
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debt and capped call modification and the tax impact of such adjustments. The tax impact of such adjustments was determined by recalculating current and deferred taxes utilizing non-GAAP pre-tax income for the year and analyzing changes in valuation allowance post purchase accounting. The tax impact was considered immaterial for fiscal years 2020 and 2019; however, the prior period tax impact presentation has been recast to align with our 2021 reporting presentation. 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 (gain) loss on extinguishment of debt and capped call modification allows for more meaningful comparisons between operating results from period to period as gains and losses on extinguishment of debt and capped call modification 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.
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The following table reconciles our GAAP to non-GAAP financial measures (in
thousands):
Year Ended December 31,
2021 2020 2019
Cost of revenue $ 114,216 $ 83,028 $ 63,535
Amortization of acquired intangibles (12,109 ) (4,157 ) (2,114 )
Stock-based compensation (3,669 ) (2,954 ) (1,966 )
Non-GAAP cost of revenue $ 98,438 $ 75,917 $ 59,455
Gross profit $ 254,217 $ 188,113 $ 137,347
Amortization of acquired intangibles 12,109 4,157 2,114
Stock-based compensation 3,669 2,954 1,966
Non-GAAP gross profit $ 269,995 $ 195,224 $ 141,427
Non-GAAP gross margin 73.28 % 72.00 % 70.40 %
Sales and marketing $ 161,337 $ 123,330 $ 87,731
Stock-based compensation (16,152 ) (15,946 ) (9,983 )
Non-GAAP sales and marketing $ 145,185 $ 107,384 $ 77,748
Research and development $ 81,647 $ 62,512 $ 50,024
Stock-based compensation (8,297 ) (8,703 ) (7,820 )
Non-GAAP research and development $ 73,350 $ 53,809 $ 42,204
General and administrative $ 87,482 $ 74,485 $ 46,820
Amortization of acquired intangibles (28,350 ) (15,979 ) (8,301 )
Change in fair value of contingent
consideration 7,046 (3,665 ) 550
Stock-based compensation (15,977 ) (19,152 ) (13,720 )
Non-GAAP general and administrative $ 50,201 $ 35,689 $ 25,349
Total operating expenses $ 330,466 $ 260,327 $ 184,575
Amortization of acquired intangibles (28,350 ) (15,979 ) (8,301 )
Change in fair value of contingent
consideration 7,046 (3,665 ) 550
Stock-based compensation (40,426 ) (43,801 ) (31,523 )
Non-GAAP operating expenses $ 268,736 $ 196,882 $ 145,301
Operating loss $ (76,249 ) $ (72,214 ) $ (47,228 )
Amortization of acquired intangibles 40,459 20,136 10,415
Change in fair value of contingent
consideration (7,046 ) 3,665 (550 )
Stock-based compensation 44,095 46,755 33,489
Non-GAAP operating income (loss) $ 1,259 $ (1,658 ) $ (3,874 )
Net loss $ (94,796 ) $ (93,396 ) $ (52,250 )
Amortization of acquired intangibles 40,459 20,136 10,415
Change in fair value of contingent
consideration (7,046 ) 3,665 (550 )
Stock-based compensation 44,095 46,755 33,489
Accretion of interest on convertible senior
notes 35,271 22,161 5,711
(Gain) loss on extinguishment of debt and
capped call modification (7,181 ) 446 1,406
Income tax adjustments (1,278 ) (669 ) (63 )
Non-GAAP net income (loss) $ 9,524 $ (902 ) $ (1,842 ) 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
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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 this Annual Report on Form 10-K 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
Cash Flows
The following table summarizes our cash flows (in thousands):
Year Ended December 31,
2021 2020 2019
Cash, cash equivalents and restricted cash at
beginning of period $ 475,630 $ 539,662 $ 60,068
Cash provided by operating activities 22,193 15,803 10,317
Cash used in investing activities (281,836 ) (85,185 ) (24,574 )
Cash provided by financing activities 276,344 5,054 494,101
Effects of exchange rates on cash, cash
equivalents and restricted cash 427 296 (250 )
Cash, cash equivalents and restricted cash at
end of period $ 492,758 $ 475,630 $ 539,662 At
Sources of Funds
Follow-On Public Offering
In
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Convertible Senior Notes
In
The 2026 Notes have an initial conversion rate of 5.5341 shares of common stock
per
In connection with the issuance of the 2026 Notes, we purchased capped call
options that in the aggregate relate to the total number of shares of our common
stock underlying the 2026 Notes, with an initial strike price of approximately
In
The 2024 Notes have an initial conversion rate of 8.8999 shares of common stock
per
In connection with the issuance of the 2024 Notes, we purchased capped call
options that in the aggregate relate to the total number of shares of our common
stock underlying the 2024 Notes, with an initial strike price of approximately
During fiscal year 2019, we paid
During fiscal year 2020, we issued 362,029 shares upon the conversion of
approximately
In connection with the issuance of the 2026 Notes in
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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 as well as payments for acquisitions of businesses, purchases of convertible note caped call hedges and repurchases of convertible notes.
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.
Operating activities generated
Operating activities generated
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
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Investing activities used
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
Financing activities provided
Backlog
We generally sell our critical communications 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 1.9 years as of
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with
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Revenue Recognition
We derive our revenues primarily from subscription services and professional services. We recognize revenue in accordance with FASB ASC 606, Revenue from Contracts with Customers. We determine 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, we satisfy a performance obligation.
Subscription Services Revenues
Subscription services revenues primarily consist of fees that provide customers access to one or more of our 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 our 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. Our subscription contracts are generally two years or longer in length, billed annually in advance, and non-cancelable.
Professional Services Revenues
Professional services revenues primarily consist of fees for deployment and optimization services, as well as training. The majority of our 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
We also sell software and related post contract support for on premises usage as well as professional services, hardware and hosting. Our 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 our other similar contracts, the applications sold, customer demographics, geographic locations, and the number and types of users within our 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 our contracts with customers contain multiple performance obligations. For these contracts, we account 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. We determine the standalone selling prices based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our 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 purchased.
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Allowance for Credit Losses
Allowance for credit risk for accounts receivables and contract assets is established based on various factors including credit profiles of our customers, historical payments and current economic trends. We review the allowance for accounts receivables and contract assets by assessing individual accounts receivable or unbilled contract assets over a specific aging and amount. All other balances are pooled based on historical collection experience. The estimate of expected credit losses is based on information about past events, current economic conditions, and forecasts of future economic conditions that affect the collectability. Accounts receivable and contract assets are written-off on a case by case basis, net of any amounts that may be collected. If our estimate of uncollectible accounts is too low, credit loss expense may increase in future periods, and if it is too high, credit loss expense may decrease in future periods.
Deferred Costs
Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. These costs are deferred and then amortized on a straight-line basis over a 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 determined the period of benefit by taking into consideration our customer contracts, our technology and other factors. Amortization of deferred commissions is included in sales and marketing expenses in the accompanying consolidated statements of operations.
Stock-Based Compensation
We recognize compensation expense for restricted stock unit awards ("RSUs") based on the fair value of the award and on a straight-line basis over the vesting period based on the estimated portion of the RSU that is expected to vest. Our board of directors determines the fair value of RSUs based on the closing price of our common stock as reported on the Nasdaq Global Market on the date of grant.
We grant performance-based RSUs ("PSUs"), that vest upon satisfaction of certain performance-based conditions. The PSUs generally vest based on us achieving certain revenue growth thresholds. The vesting of the PSUs is subject to the employee's continued employment with us through the date of achievement. The fair value is based on the value of our common stock at the date of issuance and the probability of achieving the performance metric. Compensation cost is recognized under the accelerated method and is adjusted in future periods for subsequent changes in the expected outcome of the performance related conditions.
We recognize compensation expense for our employee stock purchase plan ("ESPP")
based on the fair value of the award and on a straight-line basis over the term
based on the estimated portion of the ESPP that is expected to vest. Inherent in
the valuation and recording of stock-based compensation for ESPP, are several
estimates that we made in regard to valuation and expense that will be incurred.
We use the Black-Scholes option pricing model to measure the fair value of ESPP.
Expected volatility is based on a combination of historical stock price
volatility and implied volatility of our common stock. The risk-free interest
rate is based on the rate on
Business Combinations
The results of businesses acquired in a business combination are included in our consolidated financial statements from the date of the acquisition. Purchase accounting results in assets and liabilities of an acquired business being recorded at their estimated fair values on the acquisition date. Any excess consideration over the fair value of assets acquired and liabilities assumed is recognized as goodwill.
We perform valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination in order to record the tangible and intangible assets acquired and liabilities assumed based on our best estimate of fair value. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates and selection of comparable companies. Significant estimation is required in determining the fair value of the customer relationship intangible assets, deferred revenue and contingent
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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. We use 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 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 we include 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. We engage the assistance of valuation specialists in concluding on fair value measurements in connection with determining fair values of assets acquired and liabilities assumed in a business combination.
The valuation of the contingent consideration is 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 our 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.
Transaction costs associated with business combinations are expensed as incurred and are included in general and administrative expense in our consolidated statements of operations and comprehensive loss.
Goodwill Impairment
To determine the number of operating segments and reporting units that are present, we analyzed whether there is any customer, product or geographic information that drives the chief operating decision maker's (our chief executive officer) decisions on how to allocate resources and whether any segment management exists. Management has concluded that operating decisions are made at the consolidated company level and there is no segment management in place that reviews results of operations with the chief operating decision maker.
In assessing goodwill for impairment, an entity has the option to assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, it is more likely than not that the fair value of the reporting unit is greater than its carrying value, then performing the two-step impairment test is unnecessary. An entity can choose not to perform a qualitative assessment for any of its reporting units and proceed directly to the use of the two-step impairment test.
When assessing goodwill for impairment for the year ended
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Capitalized Software Development Costs
We capitalize certain costs related to the development of our platform and other software applications for internal use. In accordance with authoritative guidance, we begin to capitalize our costs to develop software when preliminary development efforts are successfully completed, management has authorized and committed project funding, and it is probable that the project will be completed and the software will be used as intended. We stop capitalizing these costs when the software is substantially complete and ready for its intended use, including the completion of all significant testing. These costs are amortized on a straight-line basis over the estimated useful life of the related asset, generally estimated to be three years. We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditure will result in additional functionality and expense costs incurred for maintenance and minor upgrades and enhancements. Costs incurred prior to meeting these criteria together with costs incurred for training and maintenance are expensed as incurred and recorded within product development expenses in our consolidated statements of operations. We exercise judgment in determining the point at which various projects may be capitalized, in assessing the ongoing value of the capitalized costs and in determining the estimated useful lives over which the costs are amortized. To the extent that we change the manner in which we develop and test new features and functionalities related to our platform, assess the ongoing value of capitalized assets or determine the estimated useful lives over which the costs are amortized, the amount of internal-use software development costs we capitalize and amortize could change in future periods.
Convertible Senior Notes
Significant judgment is required in determining the liability component of the related convertible senior notes as well as the balance sheet classification of the elements of the convertible senior notes. We accounted for the convertible senior notes, the partial repurchase and conversions of the 2022 Notes as separate liability and equity components, determining the fair value of the respective liability components based on an estimate of the fair value of a similar liability without a conversion option and assigning the residual value to the equity component.
We estimated the fair value of the liability component of the convertible senior notes using a discounted cash flow model with a risk adjusted yield for similar debt instruments, absent any embedded conversion feature. In estimating the risk adjusted yield, we utilized both an income and market approach. For the income approach, we used a convertible bond pricing model, which included several assumptions including volatility and the risk-free rate. For the market approach, we performed an evaluation of issuances of convertible debt securities issued by other comparable companies. Additionally, a detailed analysis of the terms of the convertible senior notes transactions was required to determine existence of any derivatives that may require separate mark-to-market accounting under applicable accounting guidance.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, refer to Note 2 of our consolidated financial statements included in this Annual Report on Form 10-K.
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