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 businesses running. During public safety threats including active shooter situations, terrorist attacks or severe weather conditions, as well as critical business events such as IT outages, cyber-attacks or other incidents such as 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 that address the full spectrum of tasks an organization has to perform to manage a critical event, including Mass Notification, Safety Connection, Incident Management, IT Alerting, Visual Command Center, Public Warning, Community Engagement, Risk Center, Crisis Management,Secure Collaboration, and Control Center . 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 5,600 customers as ofDecember 31, 2020 . As ofDecember 31, 2020 , our customers were based in 70 countries and included eight of the 10 largestU.S. cities, nine of the 10 largestU.S. -based investment banks, 47 of the 50 busiest North American airports, nine of the 10 largest global consulting firms, eight of the 10 largest global automakers, nine of the 10 largestU.S. -based health care providers, and seven of the 10 largest technology companies in the world. 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 1.9 years as ofDecember 31, 2020 , and generally bill and collect payment annually in advance. We derive most of our revenue from subscriptions to applications. Over 83% 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 50% of our revenue in 2020 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. We generated revenue of$271.1 million in 2020,$200.9 million in 2019,$147.1 million in 2018 and$104.4 million in 2017, representing year-over-year increases of 35% in 2020, 37% in 2019 and 41% in 2018. We had net losses of$93.4 million ,$52.3 million ,$47.5 million and$19.6 million in 2020, 2019, 2018 and 2017, respectively. 61 -------------------------------------------------------------------------------- As ofDecember 31, 2020 , and 2019, 24% and 23% of our customers, respectively, were located outside ofthe United States and these customers generated 26% and 22% of our total revenue for the years endedDecember 31, 2020 and 2019, 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
Business Combinations
OnFebruary 7, 2020 , we entered into a Stock Purchase Agreement with Connexient pursuant to which we purchased all of the issued and outstanding shares of stock of Connexient for a base consideration of$20.2 million . We paid$11.5 million in cash at closing and paid the remaining purchase price with 96,611 newly issued shares of our common stock. On the date of this acquisition, the average price of the Company's common stock on the Nasdaq Global Market was$93.32 per share. We acquired Connexient to expand our customer base and for its strategic technology assets to enhance our CEM suite of solutions to broaden support for Internet of Things ("IoT") applications. OnFebruary 25, 2020 , we entered into a Stock Purchase Agreement withCNL Software for a base consideration of approximately$35.7 million . We paid approximately$19.8 million in cash at closing and paid the remaining purchase price with 153,217 newly issued shares of our common stock. On the date of this acquisition, the average price of our common stock on the Nasdaq Global Market was$104.10 per share. We acquiredCNL Software to expand our customer base and for its strategic technology assets to enhance our CEM suite of solutions to broaden support for IoT applications. OnMarch 19, 2020 , we entered into a Stock Purchase Agreement with one2many pursuant to which we purchased all of the issued and outstanding shares of stock of one2many for a base consideration of$13.1 million . We paid$5.5 million in cash at closing, acquired purchase liabilities of$2.0 million and paid the remaining purchase price with 52,113 newly issued shares of our common stock. On the date of this acquisition, the average price of our common stock on the Nasdaq Global Market was$104.95 per share. In addition to the base purchase price, there is also a potential contingent payment of up to approximately$15.0 million that can be earned by the sellers based on revenue metrics during the period ofMarch 1, 2020 throughFebruary 28, 2021 . The potential contingent payment includes an amount payable to us if a certain revenue threshold is not met during the period ofMarch 1, 2020 throughFebruary 28, 2021 . We acquired one2many to expand our customer base and for its cell broadcast technology to enhance our public warning applications. OnMay 27, 2020 , we entered into a Stock Purchase Agreement with Techwan pursuant to which we purchased all of the issued and outstanding shares of stock of Techwan for a base consideration of$15.5 million . We paid$9.4 million in cash at closing, acquired purchase liabilities of$0.1 million and paid the remaining purchase price with 38,425 newly issued shares of our common stock. In addition, in accordance with the Stock Purchase Agreement, 6,779 shares of our common stock were reserved and are expected to be issued to the sellers inNovember 2021 subject to the provisions in the Stock Purchase Agreement. On the date of this acquisition, the average price of our common stock on the Nasdaq Global Market was$132.05 per share. In addition to the base purchase price, there is also a potential contingent payment of up to approximately$7.0 million that can be earned by the sellers based on revenue metrics during the period ofApril 1, 2020 throughMarch 31, 2021 . We acquired Techwan to expand our customer base and for its strategic technology assets to enhance our CEM suite of solutions. 62 -------------------------------------------------------------------------------- OnAugust 4, 2020 , we entered into a Stock Purchase Agreement with SnapComms pursuant to which we purchased all of the issued and outstanding shares of stock of SnapComms for a base consideration of$34.4 million . We paid$13.6 million in cash and issued 121,858 newly issued shares of our common stock at closing. On the date of this acquisition, the average price of our common stock on the Nasdaq Global Market was$145.13 per share. On the first anniversary of the acquisition date, we expect to pay deferred consideration of approximately$3.3 million in cash and shares of our common stock subject to the provisions in the Stock Purchase Agreement. In addition to the base purchase price, there is also a potential contingent payment of up to approximately$5.0 million that can be earned by the sellers based on revenue metrics during the period ofApril 1, 2020 throughMarch 31, 2021 . We acquired SnapComms to expand our customer base and for its internal communications software to enhance our CEM suite of solutions. OnJanuary 15, 2021 , we entered into a Stock Purchase Agreement with Red Sky pursuant to which we purchased all of the issued and outstanding shares of stock of Red Sky for a base consideration of$55.4 million , net of cash acquired. We paid$32.4 million in cash, net of cash acquired, and issued 162,820 newly issued shares of our common stock at closing. In addition to the base purchase price, there is also a potential contingent payment of up to approximately$30 million that can be earned by the sellers based on certain revenue targets throughJune 30, 2021 . We acquired Red Sky to expand our customer base and for its E911 incident response solutions platform to enhance our CEM suite of solutions.
Impacts of COVID-19 to Our Business
During the year endedDecember 31, 2020 , financial results and operations for ourAmericas and international geographies were not significantly impacted by the COVID-19 pandemic. We are taking 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 speed with which the situation is developing, we are not able at this time to estimate the future impact of COVID-19 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 "Risk Factors" included in Part I, Item 1A included herein which includes 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, 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. In the first quarter of 2020, 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. In the second quarter of 2020, we launched several additional software solutions, including (1) 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; (2) COVID-19 Shield: Contact Tracing, a solution for corporate, government and healthcare organizations to supplement or complement existing manual contact tracing efforts; and (3) 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. In the fourth quarter of 2020, we announced COVID-19 Shield: Vaccine Distribution, an extension to our CEM platform offering risk insights, logistics awareness and vaccine appointment management. These new products were built off of our existing platforms. 63 --------------------------------------------------------------------------------
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 executive officer, who is our chief operating decision maker, principally to make strategic decisions regarding how we allocate our resources and to assess our consolidated operating performance.
Components of Results of Operations
Revenue
We derive substantially all 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.
We also sell professional services, which primarily consist of fees for deployment and optimization services as well as training. In addition, on occasion we may sell our software and related post contract support for on premises usage which is outside of our core business and is not a significant revenue stream for us.
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.
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
64
-------------------------------------------------------------------------------- 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 inthe United States and worldwide and grow our marketing staff.
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.
Loss on Extinguishment of Convertible Notes
Loss on Extinguishment of Convertible Notes relates to the partial extinguishment of our 2022 Notes.
Other Expense, Net
Other expense, net consists primarily of realized foreign currency gains and losses.
65
--------------------------------------------------------------------------------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 results of operations for the years endedDecember 31, 2020 and 2019 reflects the adoption of ASU 2016-02, Leases ("Topic 842"). See Note 18 of the notes to consolidated financial statements for more information. Financial data for the year endedDecember 31, 2018 does not reflect the adoption of Topic 842. 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, 2020 2019 2018 Revenue$ 271,141 $ 200,882 $ 147,094 Cost of revenue(1) 83,028 63,535 46,810 Gross profit 188,113 137,347 100,284 Operating expenses: Sales and marketing(1) 123,330 87,731 69,608 Research and development(1) 62,512 50,024 41,305 General and administrative(1) 74,485 46,820 31,462 Total operating expenses 260,327 184,575 142,375 Operating loss (72,214 ) (47,228 ) (42,091 ) Other expense, net (23,449 ) (4,597 ) (4,628 ) Loss before income taxes (95,663 ) (51,825 ) (46,719 ) Benefit from (provision for) income taxes 2,267 (425 ) (796 ) Net loss$ (93,396 ) $ (52,250 ) $ (47,515 )
(1) Includes stock-based compensation expense and depreciation and amortization
of acquired intangible assets as follows (in thousands):
Year Ended December 31,
2020 2019 2018
Stock-based compensation expense:
Cost of revenue $ 2,954 $ 1,966 $ 2,306
Sales and marketing 15,946 9,983 9,282
Research and development 8,703 7,820 7,106
General and administrative 19,152 13,720 7,131
Total $ 46,755 $ 33,489 $ 25,825
Year Ended December 31,
2020 2019 2018
Depreciation and amortization expense:
Cost of revenue $ 12,165 $ 9,434 $ 7,741
Sales and marketing 932 752 384
Research and development 597 502 309
General and administrative 17,065 8,983 5,259
Total $ 30,759 $ 19,671 $ 13,693
66
--------------------------------------------------------------------------------
The following table sets forth our consolidated statements of operations as a
percentage of revenue (1):
Year Ended December 31,
2020 2019 2018
Revenue 100 % 100 % 100 %
Cost of revenue 31 % 32 % 32 %
Gross profit 69 % 68 % 68 %
Operating expenses:
Sales and marketing 45 % 44 % 47 %
Research and development 23 % 25 % 28 %
General and administrative 27 % 23 % 21 %
Total operating expenses 96 % 92 % 97 %
Operating loss (27 )% (24 )% (29 )%
Other expense, net (9 )% (2 )% (3 )%
Loss before income taxes (35 )% (26 )% (32 )%
Benefit from (provision for) income taxes 1 % * (1 )%
Net loss (34 )% (26 )% (32 )%
(1) Columns may not add up to 100% due to rounding.
* Represents less than 0.5% of revenue.
Year Ended
Revenue
Year Ended December 31 , Change(dollars in thousands) 2020 2019 $ % Revenue$ 271,141 $ 200,882 $ 70,259 35.0 % Revenue increased by$70.3 million in 2020 compared to 2019. The increase was due to a$70.3 million increase in sales of our solutions driven by expansion of our customer base from 5,024 customers as ofDecember 31, 2019 to 5,613 as ofDecember 31, 2020 , including increased sales to larger organizations with greater numbers of contacts and locations. Cost of Revenue Year Ended December 31, Change (dollars in thousands) 2020 2019 $ % Cost of revenue$ 83,028 $ 63,535 $ 19,493 30.7 % Gross margin % 69 % 68 % Cost of revenue increased by$19.5 million in 2020 compared to 2019. The increase was primarily due to a$10.6 million increase in employee-related costs, which includes stock-based compensation, associated with our increased headcount from 238 employees as ofDecember 31, 2019 to 332 employees as ofDecember 31, 2020 and a$5.8 million increase in hosting, software and messaging costs. The remaining increase was principally the result of a$2.7 million increase in depreciation and amortization expense attributable to our acquired intangible assets and a$0.4 million increase attributed to office related expenses to support revenue generating activities.
Gross margin percentage increased in 2020 as compared to 2019 due to revenue growth outpacing the increase in cost.
67
--------------------------------------------------------------------------------
Operating Expenses
Sales and Marketing Expense
Year Ended December 31, Change
(dollars in thousands) 2020 2019 $ %
Sales and marketing $ 123,330 $ 87,731 $ 35,599 40.6 %
% of revenue 45 % 44 %
Sales and marketing expense increased by $35.6 million in 2020 compared to 2019.
The increase was primarily due to a $30.5 million increase in employee-related
costs, which includes stock-based compensation, associated with our increased
headcount from 345 employees as of December 31, 2019 to 482 employees as of
December 31, 2020 . The remaining increase was principally the result of a
$3.0 million increase in trade show and advertising costs and a $2.1 million
increase attributed to office related expenses to support the sales team.
Research and Development Expense
Year Ended December 31, Change
(dollars in thousands) 2020 2019 $ %
Research and development $ 62,512 $ 50,024 $ 12,488 25.0 %
% of revenue 23 % 25 %
Research and development expense increased by $12.5 million in 2020 compared to
2019. The increase was primarily due to a $9.2 million increase in
employee-related costs, which includes stock-based compensation, associated with
our increased headcount from 252 employees as of December 31, 2019 to
363 employees as of December 31, 2020 , a $3.8 million increase in professional
services, a $1.0 million increase in hosting and software related cost and an
increase of $0.5 million in office related expenses to support research and
development activities. In addition, a total of $8.5 million of
internally-developed software costs during 2020 and $6.5 million of
internally-developed software costs during 2019 were capitalized, resulting in a
$2.0 million offset to the increase during 2020.
General and Administrative Expense
Year Ended December 31, Change
(dollars in thousands) 2020 2019 $ %
General and administrative $ 74,485 $ 46,820 $ 27,665 59.1 %
% of revenue 27 % 23 %
General and administrative expense increased by $27.7 million in 2020 compared
to 2019. The increase was primarily due to a $9.0 million increase in
employee-related costs, which includes stock-based compensation, associated with
our increased headcount from 113 employees as of December 31, 2019 to
167 employees as of December 31, 2020 and an $8.1 million increase in
depreciation and amortization. The remaining increase was due to a $4.2 million
increase in the change in fair value of contingent consideration obligation, a
$2.8 million increase in office related expenses to support the administrative
team, a $2.0 million increase in credit loss expense, a $1.2 million increase in
software subscription costs and a $0.4 million increase in other general and
administrative expenses.
Other Expense, Net
Year Ended December 31, Change
(dollars in thousands) 2020 2019 $ %
Other expense, net $ 23,449 $ 4,597 $ 18,852 410.1 %
% of revenue 9 % 2 %
68
-------------------------------------------------------------------------------- Other expense, net increased by$18.9 million in 2020 compared to 2019 primarily due to a$16.7 million increase in interest expense related to our convertible senior notes and a decrease of$2.5 million of interest income due to lower interest rates on our investment balance, partially offset by a decrease of$1.0 million in losses related to the partial extinguishment and conversions of our 2022 Notes. Income Taxes Year Ended December 31, Change (dollars in thousands) 2020 2019 $ %
Benefit from (provision for) income taxes
1 % (0 )%
Income tax expense decreased by $2.7 million in 2020 compared to 2019. During
2020, deferred tax liabilities were recognized in connection with the purchase
price accounting for our acquisitions. Certain of such deferred tax liabilities
will be a source of future taxable income to realize a portion of our deferred
tax assets, which resulted in a tax benefit of approximately $1.5 million
related to U.S. acquired entities and a tax benefit of approximately $1.8
million related to non-U.S. acquisitions recognized during 2020 which is the
primary reason for the decrease in our income tax provision from 2019 to 2020.
Year Ended
For a discussion regarding our financial condition and results of operations for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 , please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 , filed with theSEC onFebruary 28, 2020 . 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, 2020 2019 2018
Adjusted EBITDA
2,895 (2,771 ) (6,925 )
• Adjusted EBITDA. Adjusted EBITDA represents our net loss before interestand investment (income) expense, net, (benefit from) provision for
income taxes, depreciation and amortization expense, loss on
extinguishment of convertible notes, 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, 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 incalculating 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
69
--------------------------------------------------------------------------------
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 thepotentially 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,
2020 2019 2018
Net loss $ (93,396 ) $ (52,250 ) $ (47,515 )
Interest and investment expense, net 22,082 2,979 4,504
(Benefit from) provision for income taxes (2,267 ) 425
796
Depreciation and amortization 30,759 19,671
13,693
Loss on extinguishment of convertible notes 446 1,406 - Change in fair value of contingent consideration 3,665 (550 ) (250 ) Stock-based compensation 46,755 33,489 25,825 Adjusted EBITDA$ 8,044 $ 5,170 $ (2,947 ) • Adjusted Gross Margin. Adjusted gross margin represents gross profit
plus amortization of acquired intangibles and stock-based compensation.
Adjusted gross margin 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 margin is not a measure calculated in
accordance with GAAP. We believe that adjusted gross margin provides
useful information to investors and others in understanding andevaluating our operating results in the same manner as our management
and board of directors. Nevertheless, our use of adjusted gross margin
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 margin 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 margin to gross profit, the most
directly comparable GAAP measure, for each of the periods indicated (in
thousands):
Year Ended December 31,
2020 2019 2018
Gross profit $ 188,113 $ 137,347 $ 100,284
Amortization of acquired intangibles 4,157 2,114 1,268
Stock-based compensation 2,954 1,966 2,306
Adjusted gross margin $ 195,224 $ 141,427 $ 103,858
70
--------------------------------------------------------------------------------
• 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 togenerate 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 usefulinformation 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 tablepresents 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,
2020 2019 2018
Net cash provided by operating activities
(3,257 ) (5,269 ) (1,721 )
Capitalized software development costs (9,651 ) (7,819 ) (8,499 )
Free cash flow $ 2,895 $ (2,771 ) $ (6,925 ) 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 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. The tax impact of such adjustments
is not material. 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
71
--------------------------------------------------------------------------------
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 allows for more meaningful
comparisons between operating results from period to period as losses on the
extinguishment of convertible notes 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.
72
--------------------------------------------------------------------------------The following table reconciles our GAAP to non-GAAP financial measures:
Year Ended December 31,
2020 2019 2018
Cost of revenue $ 83,028 $ 63,535 $ 46,810
Amortization of acquired intangibles (4,157 ) (2,114 ) (1,268 )
Stock-based compensation (2,954 ) (1,966 ) (2,306 )
Non-GAAP cost of revenue $ 75,917 $ 59,455 $ 43,236
Gross profit $ 188,113 $ 137,347 $ 100,284
Amortization of acquired intangibles 4,157 2,114 1,268
Stock-based compensation 2,954 1,966 2,306
Non-GAAP gross profit $ 195,224 $ 141,427 $ 103,858
Non-GAAP gross margin 72.00 % 70.40 % 70.61 %
Sales and marketing $ 123,330 $ 87,731 $ 69,608
Stock-based compensation (15,946 ) (9,983 ) (9,282 )
Non-GAAP sales and marketing $ 107,384 $ 77,748 $ 60,326
Research and development $ 62,512 $ 50,024 $ 41,305
Stock-based compensation (8,703 ) (7,820 ) (7,106 )
Non-GAAP research and development $ 53,809 $ 42,204 General and administrative$ 74,485 $ 46,820 $ 31,462 Amortization of acquired intangibles (15,979 ) (8,301 ) (4,667 ) Change in fair value of contingent consideration (3,665 ) 550
250
Stock-based compensation (19,152 ) (13,720 ) (7,131 ) Non-GAAP general and administrative$ 35,689 $ 25,349
Total operating expenses$ 260,327 $ 184,575 $ 142,375 Amortization of acquired intangibles (15,979 ) (8,301 ) (4,667 ) Change in fair value of contingent consideration (3,665 ) 550 250 Stock-based compensation (43,801 ) (31,523 ) (23,519 ) Non-GAAP operating expenses$ 196,882 $ 145,301 $ 114,439 Operating loss$ (72,214 ) $ (47,228 ) $ (42,091 ) Amortization of acquired intangibles 20,136 10,415
5,935
Change in fair value of contingent consideration 3,665 (550 ) (250 ) Stock-based compensation 46,755 33,489 25,825 Non-GAAP operating loss$ (1,658 ) $ (3,874 ) $ (10,581 ) Net loss$ (93,396 ) $ (52,250 ) $ (47,515 ) Amortization of acquired intangibles 20,136 10,415
5,935
Change in fair value of contingent consideration 3,665 (550 ) (250 ) Stock-based compensation
46,755 33,489 25,825
Accretion of interest on convertible senior notes 22,161 5,711
4,616
Loss on extinguishment of convertible notes 446 1,406 - Non-GAAP net loss$ (233 ) $ (1,779 ) $ (11,389 )
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$467.2 million as ofDecember 31, 2020 . We have generated significant losses since inception and expect to continue to generate losses for the foreseeable future. 73 -------------------------------------------------------------------------------- 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.
Cash Flows
The following table summarizes our cash flows (in thousands):
Year Ended December 31,
2020 2019 2018
Cash, cash equivalents and restricted cash at
beginning of period $ 539,662 $ 60,068 $ 103,051
Cash provided by operating activities 15,803 10,317 3,295
Cash used in investing activities (85,185 ) (24,574 ) (48,413 ) Cash provided by financing activities 5,054 494,101
3,099
Effects of exchange rates on cash, cash equivalents and restricted cash 296 (250 ) (964 ) Cash, cash equivalents and restricted cash at end of period$ 475,630 $ 539,662 $ 60,068 AtDecember 31, 2020 ,$10.6 million of the$475.6 million of cash, cash equivalents and restricted cash was held by foreign subsidiaries. Our intention is to indefinitely reinvest foreign earnings in our foreign subsidiaries. If these earnings were used to fund domestic operations, they would be subject to additional income taxes upon repatriation. Sources of Funds Follow-On Public Offering InJanuary 2019 , we completed a follow-on public offering in which we sold 2,645,000 shares of our common stock, which included 345,000 shares sold pursuant to the exercise by the underwriters of an option to purchase additional shares, at a public offering price of$55.25 per share. We received net proceeds of$139.1 million , after deducting underwriting discounts and commissions.
Convertible Senior Notes
InDecember 2019 , we issued$450.0 million aggregate principal amount of the 2024 Notes, including$75.0 million in principal amount of Notes issued upon exercise in full by the initial purchasers of their option to purchase additional 2024 Notes. The 2024 Notes have an initial conversion rate of 8.8999 shares of common stock per$1,000 principal amount of 2024 Notes. This represents an initial effective conversion price of approximately$112.36 per share of common stock and approximately 4.0 million shares issuable upon conversion. Throughout the term of the 2024 Notes, the conversion rate may be adjusted upon the occurrence of certain events. Holders of the 2024 Notes will not receive any cash payment representing accrued and unpaid interest, if any, upon conversion of a 2024 Note, except in limited circumstances. Accrued but unpaid interest will be deemed to be paid by cash, shares of our common stock or a combination of cash and shares of our common stock paid or delivered, as the case may be, to the holder upon conversion of a 2024 Note. 74 -------------------------------------------------------------------------------- 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$112.36 per share, which corresponds to the initial conversion price of the 2024 Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the 2024 Notes, and have a cap price of approximately$166.46 . The cost of the purchased capped calls was$44.9 million . InNovember 2017 , we completed a public offering of$115.0 million aggregate principal amount of the 2022 Notes, including$15.0 million in principal amount of 2022 Notes issued upon exercise in full by the underwriters of their option to purchase additional 2022 Notes. The 2022 Notes have an initial conversion rate of 29.6626 shares of common stock per$1,000 principal amount of 2022 Notes. This represents an initial effective conversion price of approximately$33.71 per share of common stock and initially approximately 3.4 million shares issuable upon conversion. Throughout the term of the 2022 Notes, the conversion rate may be adjusted upon the occurrence of certain events. Holders of the 2022 Notes will not receive any cash payment representing accrued and unpaid interest, if any, upon conversion of a 2022 Note, except in limited circumstances. Accrued but unpaid interest will be deemed to be paid by cash, shares of our common stock or a combination of cash and shares of our common stock paid or delivered, as the case may be, to the holder upon conversion of a 2022 Note. In connection with the issuance of the 2022 Notes, we purchased capped call options that in the aggregate relate to the total number of shares of our common stock underlying the 2022 Notes, with an initial strike price of approximately$33.71 per share, which corresponds to the initial conversion price of the 2022 Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the 2022 Notes, and have a cap price of approximately$47.20 . The cost of the purchased capped calls was$12.9 million .
Based on the market price of our common stock during the 30 trading days
preceding
During fiscal year 2019, we paid
During fiscal year 2020, we issued 362,029 shares upon the conversion of
approximately
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. Operating activities provided$15.8 million in net cash in 2020, primarily from$116.1 million in non-cash operating expenses, which was partially offset by our net loss of$93.4 million and by a$6.9 million decrease in changes in operating assets and liabilities. Specifically, we recognized non-cash charges aggregating$46.8 million for stock-based compensation expense,$30.8 million for depreciation and amortization of intangible assets, capitalized software development costs and property and equipment,$22.2 million of accretion on the convertible notes,$12.6 million in amortization of commissions,$3.7 million related to the change in fair value of contingent consideration,$3.1 million for the increase in our provision for credit losses and sales return reserve and a$0.4 million loss on extinguishment of convertible notes, offset by$3.5 million for deferred income taxes. The change in operating assets 75 -------------------------------------------------------------------------------- and liabilities reflected a$25.0 million increase in deferred revenue, a$22.6 million increase in accounts receivable, an$18.9 million increase in deferred costs due to timing of payments made for commissions, a$7.4 million increase in other liabilities, a$4.0 million increase in prepaid expenses, a$3.5 million increase in accrued employee-related expenses due to timing of payments, a$1.5 million increase in accounts payable due to the timing of payments made and a$1.1 million increase in accrued expenses due to timing of payments made to vendors, partially offset by a$0.1 million decrease in other assets. Operating activities provided$10.3 million in net cash in 2019, primarily from$68.2 million in non-cash operating expenses, which was partially offset by a$5.7 million decrease in changes in operating assets and liabilities and by our net loss of$52.3 million . Specifically, we recognized non-cash charges aggregating$33.5 million for stock-based compensation expense,$19.7 million for depreciation and amortization of intangible assets, capitalized software development costs and property and equipment,$8.0 million in amortization of commissions,$5.7 million of accretion on the convertible notes,$1.4 million loss on extinguishment of convertible notes and$0.7 million for the increase in our provision for credit losses and sales return reserve, offset by$0.6 million related to the change in fair value of contingent consideration. The change in operating assets and liabilities reflected a$25.6 million increase in accounts receivable, a$15.3 million increase in deferred cost due to timing of payments made for commissions, a$3.5 million increase in prepaid expenses, a$1.4 million decrease in other liabilities, and a$1.3 million decrease in accrued expenses due to timing of payments made to vendors. These changes were partially offset by a$29.7 million increase in deferred revenue, a$5.3 million increase in accounts payable due to the timing of payments made, a$4.5 million increase in accrued employee-related expenses due to timing of payments and a$1.8 million decrease in other assets.
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$85.2 million in 2020, which consisted primarily of$55.1 million of cash paid for the acquisitions of Connexient,CNL Software , one2many, Techwan and SnapComms,$17.1 million of cash paid for the purchase of intangible assets,$9.7 million of investment in software development and$3.3 million in purchases of property and equipment. Investing activities used$24.6 million in 2019, which consisted primarily of our acquisitions ofNC4 Inc. andNC4 Public Sector LLC (collectively, "NC4") andMissionMode Solutions, Inc. for an aggregate of$58.4 million , investment in software development of$7.8 million , our purchase of property and equipment of$5.3 million , and purchase of short-term investments of$2.0 million . These were offset by cash provided of$47.8 million in maturities of our short-term investments and$1.1 million attributed to a landlord reimbursement.
Financing Activities
Cash generated by financing activities includes proceeds from the issuance of common stock from our follow-on public offering, borrowings under the 2024 Notes and 2022 Notes, 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, extinguishment of debt, payment of contingent consideration and employee withholding liabilities from the exercise of market based restricted stock units. Financing activities provided$5.1 million of cash in 2020, which reflects$8.2 million from the exercise of stock options and$3.4 million from the issuance of stock under our employee stock purchase plan. These amounts were offset by a$6.4 million payment for restricted stock unit employee withholding taxes. Financing activities provided$494.1 million of cash in 2019, which reflects proceeds of$392.4 million from our 2024 Notes offering after deducting debt issuance cost and the cost for the capped call transactions entered into in connection with the note offering,$139.1 million from our common stock offering,$17.4 million from the exercise of stock options and$2.3 million from the issuance of stock under our employee stock purchase plan. These amounts were offset by a$52.0 million payment for the 20 percent repurchase of our 2022 Notes offset by cash received for 76 --------------------------------------------------------------------------------
the partial termination of the 2022 Notes capped call options and a
Contractual Obligations and Commitments
The following table summarizes our commitments to settle contractual obligations
as of
Less than 1 to 3 3 to 5 More than
1 Year Years Years 5 Years Total
Debt obligations (1) $ - $ 79,795 $ 450,000 $ - $ 529,795
Operating leases (2) 5,558 10,373 3,564 2,769 22,264
$ 5,558 $ 90,168 $ 453,564 $ 2,769 $ 552,059 (1) Debt obligations include the principal amount of the 2024 Notes and 2022
Notes but exclude interest payments to be made under the 2024 Notes and 2022
Notes. Although the 2024 Notes and 2022 Notes mature in 2024 and 2022,
respectively, they can be converted into cash and shares of our common stock
prior to maturity if certain conditions are met. Any conversion prior to
maturity can result in repayments of the principal amounts sooner than the
scheduled repayments as indicated in the table. The 2024 Notes and 2022
Notes balance excludes
discount capitalized on our balance sheet and shown net of our debt
obligations. Please see Note 9 of the notes to our consolidated financial
statements for more information on the terms of the 2024 Notes and 2022
Notes.
(2) Operating leases include total future minimum rent payments under
non-cancelable operating lease agreements as described in Note 18 of our
consolidated financial statements.
The commitment amounts are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions and the approximate timing of the actions under the contracts. The commitment amounts do not include obligations under agreements that we can cancel without a significant penalty.
Backlog
We generally sell all of 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 ofDecember 31, 2020 , and generally bill and collect payment annually in advance. Since we bill many of our customers at the beginning of each contract year, there can be amounts that we have not yet been contractually able to invoice. Until such time as these amounts are invoiced, they are not recorded in revenue, deferred revenue or elsewhere in our consolidated financial statements. We expect that the amount of backlog relative to the total value of our subscription agreements will change from year to year for several reasons, including the specific timing and duration of customer agreements, varying invoicing cycles of agreements, the specific timing of customer renewals and changes in customer financial circumstances. In addition, because revenue for any period is a function of revenue recognized from deferred revenue under contracts in existence at the beginning of the period, as well as contracts that are renewed and new customer contracts that are entered into during the period, backlog at the beginning of any period is not necessarily indicative of future performance. Our presentation of backlog may also differ from that of other companies in our industry. Due to these factors, as well as variances in billing arrangements with customers, we do not utilize backlog as a key management metric internally.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial
partnerships, including entities sometimes referred to as structured finance or
special purpose entities that were established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited
purposes. We do not engage in off-balance sheet financing arrangements. In
addition, we do not engage in trading activities involving non-exchange traded
contracts.
77
--------------------------------------------------------------------------------
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance withU.S. GAAP. The preparation of our consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of revenue, assets, liabilities, costs and expenses. 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. Our most critical accounting policies are summarized below.
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
On occasion we may sell software and related post contract support for on
premises usage as well as professional services, hardware and hosting which is
outside of our core business and is not a significant revenue stream for us. 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.
78
--------------------------------------------------------------------------------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.
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 option awards and restricted stock unit
awards ("RSUs") based on the fair value of the award and on a straight-line
basis over the vesting period of the award based on the estimated portion of the
award that is expected to vest.
Inherent in the valuation and recording of stock-based compensation for option
awards, 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 our option awards when they are granted. For RSUs, our board
of directors determines the fair value based on the closing price of our common
stock as reported on the Nasdaq Global Market on the date of grant. We primarily
use the daily historical volatility of companies we consider to be our peers. To
determine our peer companies, we use the following criteria: software or
software-as-a-service companies; similar histories and relatively comparable
financial leverage; sufficient public company trading history; and in similar
businesses and geographical markets. We use the peers' stock price volatility
over the expected life of our granted options to calculate the expected
volatility. The expected term of employee option awards is determined using the
average midpoint between vesting and the contractual term for outstanding
awards, because we do not yet have a sufficient history of option exercises. We
consider this appropriate as we expect to see changes to our equity structure in
the future and there is no other method that would be more indicative of
exercise activity. The risk-free interest rate is based on the rate on U.S.
Treasury securities with maturities consistent with the estimated expected term
of the awards. We have not paid dividends and do not anticipate paying a cash
dividend in the foreseeable future and, accordingly, use an expected dividend
yield of zero.
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
79
--------------------------------------------------------------------------------
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. We
have assessed the probability of achievement of the award as highly probable
based on past performance of achievement of 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.
In 2018, we granted market-based RSUs that vest upon satisfaction of certain
market-based conditions. These RSUs were valued using the Monte-Carlo simulation
model. These RSUs vested based on our common stock achieving certain stock price
thresholds. The fair value was based on values calculated under the Monte Carlo
simulation model on the grant date. We recognized the compensation expense
associated with the market-based RSUs over the implied requisite service period
subject to acceleration based on meeting the market-based condition. No
market-based RSUs were granted during the years ended December 31, 2020 and
2019.
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 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
Goodwill represents the excess of the aggregate purchase price paid over the fair value of the net assets acquired in our business combinations.Goodwill is not amortized and is tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We performed our 80 --------------------------------------------------------------------------------
annual impairment assessment on
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 endedDecember 31, 2020 , we first performed a qualitative assessment to determine whether it was necessary to perform the two-step quantitative analysis. Based on the qualitative assessment we determined it was unlikely that our reporting unit fair value was less than its carrying value and the two-step impairment test was not required. Based on the results of our most recent annual qualitative assessment performed onNovember 30, 2020 , there was no impairment of goodwill recorded.
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 of the 2022 Notes in 2019 and 2022 Note
conversions in 2020 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
81
--------------------------------------------------------------------------------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.
© Edgar Online, source
