EXPENSIFY, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 (the "2021 Annual Report"). This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" in our 2021 Annual Report and in other parts of this Quarterly Report on Form 10-Q. See "Special Note Regarding Forward-Looking Statements."
OVERVIEW
Expensify is a cloud-based expense management software platform that helps the smallest to the largest businesses simplify the way they manage money. Every day, people from all walks of life in organizations around the world useExpensify to scan and reimburse receipts from flights, hotels, coffee shops, office supplies and ride shares. Since our founding in 2008, we have added over 10 million members to our community and processed and automated over 1.2 billion expense transactions on our platform as ofMarch 31, 2022 , freeing people to spend less time managing expenses and more time doing the things they love. For the quarter endedMarch 31, 2022 , an average of 706,000 paid members across 200 countries and territories usedExpensify to make money easy.
IMPACT OF COVID-19
As a result of the COVID-19 pandemic, we temporarily closed our offices, asked
our employees to work remotely and implemented travel restrictions, all of which
represent a disruption in how we operate our business. The operations of our
customers, the majority of which are small and medium businesses ("SMBs"), were
likewise disrupted. The outsized impact of the pandemic on SMBs was evident in
2020 as an abnormal percentage of our customers stopped adding new members to
our platform, ceased (or paused) operations and/or scaled back or terminated
subscriptions to the Expensify platform.
Business travel, traditionally a significant driver of expenses on our platform,
has been severely curtailed during the pandemic with complex regional effects as
lockdowns were put in place and altered rapidly. As a result of the pull-back in
travel related expenses and other expenses that were not generated in a work
from home environment, many of our customers that remained on our platform had
fewer employees incurring expenses on a monthly basis in 2020. After a steady
increase in paid members over multiple years, the average number of paid members
on our platform declined 15% from 742,000 in the quarter ended March 31, 2020 to
633,000 in the quarter ended September 30, 2020 and we have rebounded to 706,000
paid members in the quarter ended March 31, 2022 . Our activity is still
recovering from May 2020 as the United States and certain other parts of the
world continue to rebound from COVID-19. The amount of expenses incurred by the
paid members remaining on our platform has also declined as a result of the
factors stated above. While activity decreased and remains at lower levels than
pre-pandemic, our revenue only declined until the quarter ended June 30, 2020 .
This initial adverse impact on revenue was mitigated by the prevalence of our
annual contracts and minimum user requirements in those contracts as well as a
price change that became effective in May 2020 . We introduced the Expensify Card
in 2020, immediately before the pandemic. Given the decline in the volume of
expenses and potential customers' reluctance to adopt a new card in this unusual
environment, growth from monetizing the transactions from the Expensify Card has
taken longer than anticipated, but the rate of adoption is increasing despite
the COVID headwinds.
While the full lasting impact of the COVID-19 pandemic on the global economy and
SMBs in particular remains uncertain, we believe that use of our platform will
increase as economies reopen and business travel resumes, which we have started
to see.
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While uncertainty remains on many fronts, we are confident that the pandemic has also had a positive impact on the way we operate our business. We have fully embraced the distributed workforce and reimagined how we use our existing office space. As demand for expense management slowed during the pandemic, we invested in building our platform outside of our core expense management features, which will result in a more diversified range of use cases that is better insulated against similar shocks in the future.
See the section titled "Risk Factors" in our 2021 Annual Report for further discussion of the possible impact of the COVID-19 pandemic on our business.
Key Business Metrics and Non-GAAP Financial Measures
We review the following key metrics and non-GAAP financial measures to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions. Accordingly, we believe that these key business metrics and non-GAAP financial measures provide useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management team. These key business metrics and non-GAAP financial measures are presented for supplemental informational purposes only, should not be considered a substitute for financial information presented in accordance with GAAP, and may be different from similarly titled metrics or measures presented by other companies.
KEY BUSINESS METRICS
Paid Members
We believe that our ability to increase the number of paid members on our platform will drive our success as a business. Companies pay for subscriptions on behalf of employees and contractors who use the platform, whom we refer to as paid members. We define paid members as the average number of users (employees, contractors, volunteers, team members, etc.) who are billed on Collect or Control plans during any particular quarter. For SMBs or sole proprietors with only one employee, the business owner may also be the only paid member. While the full lasting impact of the COVID-19 pandemic on the global economy and SMBs in particular remains uncertain, and the resulting impact on our number of paid members, remains uncertain, there have been signs of recovery as the economy has slowly reopened. See the section titled "Impact of COVID-19" above for additional information.
The following table sets forth the average number of paid members for the three
months ended
Three months ended Paid members (in thousands)March 31, 2022 706 March 31, 2021 633 NON-GAAP FINANCIAL MEASURES
Adjusted EBITDA and Adjusted EBITDA Margin
We define adjusted EBITDA as net income from operations excluding provision for
income taxes, interest and other expenses, net, depreciation and amortization
and stock-based compensation. We define adjusted EBITDA margin as adjusted
EBITDA divided by total revenue for the same period. We are focused on
profitable growth and we consider adjusted EBITDA to be an important measure
because it helps illustrate underlying trends in our business that could
otherwise be masked by the
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effect of the income or expenses that are not indicative of the core operating
performance of our business.
Three months ended March 31,
2022 2021
(in thousands, except percentages)
Adjusted EBITDA $ 10,992 $ 13,422
Adjusted EBITDA margin 27 % 45 %
Non-GAAP Net Income and Non-GAAP Net Income Margin
We define non-GAAP net income as net income from operations in accordance with
US GAAP excluding stock-based compensation and bonus costs related to our
initial pubic offering ("IPO"), which we consider to be the discretionary cash
bonuses paid to our employees during 2021. Refer to "Part II, Item 7.
Management's Discussion and Analysis of Financial Conditions and Results of
Operations - Liquidity and Capital Resources" in our 2021 Annual Report for
further detail over the discretionary cash bonuses paid to employees in 2021. We
define non-GAAP net income margin as non-GAAP net income divided by total
revenue for the same period. We are focused on profitable growth and we consider
non-GAAP net income to be an important measure because it helps illustrate
underlying trends in our business that could otherwise be masked by the effect
of stock-based compensation and the one-time IPO-related discretionary cash
bonus costs. Both expenses are not considered indicative of the core operating
performance of our business. IPO-related bonus costs impacted the second, third
and fourth fiscal quarters of 2021, but are not expected to impact future
periods beginning with the first quarter of 2022.
Three months ended March 31,
2022 2021
(in thousands, except percentages)
Non-GAAP net income $ 7,291 $ 8,753
Non-GAAP net income margin 18 % 29 %
Limitations and Reconciliations of Non-GAAP Financial Measures
Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as substitutes for financial information presented under GAAP. There are a number of limitations related to the use of non-GAAP financial measures versus comparable financial measures determined under GAAP. For example, other companies in our industry may calculate these non-GAAP financial measures differently or may use other measures to evaluate their performance. All of these limitations could reduce the usefulness of these non-GAAP financial measures as analytical tools. Investors are encouraged to review the related GAAP financial measures and the reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures and to not rely on any single financial measure to evaluate our business.
The following tables reconcile the most directly comparable GAAP financial measure to each of these non-GAAP financial measures.
Adjusted EBITDA and Adjusted EBITDA Margin
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Three months ended March 31,
2022 2021
(in thousands, except percentages)
Net (loss) income $ (7,376) $ 8,043
Net (loss) income margin (18) % 27 %
Add:
Provision for income taxes 1,632 2,762
Interest and other expenses, net 902 737
Depreciation and amortization 1,167 1,170
Stock-based compensation 14,667 710
Adjusted EBITDA $ 10,992 $ 13,422
Adjusted EBITDA margin 27 % 45 %
Non-GAAP net income and non-GAAP net income margin
Three months ended March 31,
2022 2021
(in thousands, except percentages)
Net (loss) income $ (7,376) $ 8,043
Net (loss) income margin (18) % 27 %
Add:
Stock-based compensation 14,667 710
IPO-related bonus expense - -
Non-GAAP net income $ 7,291 $ 8,753
Non-GAAP net income margin 18 % 29 %
Components of Results of Operations
Revenue
We generate revenue from subscription fees based on the usage of our expense reporting cloud-based platform under arrangements paid monthly in arrears that are either month-to-month that can be terminated by either party without penalty at any time or annual arrangements based on a minimum number of monthly members. Annual subscription customers who wish to terminate their contracts before the end of the term are required to pay the remaining obligation in full plus any fees or penalties set forth in the agreement. InMay 2020 , we updated our terms of service whereby annual contracts became non-cancelable. We charge our customers subscription fees for access to our platform based on the number of monthly active members and level of service. The contractual price is based on either negotiated fees or rates published on our website. We generate most of our revenue from customers who have a credit card or debit card on file with us that is automatically charged each month. Virtually all of our customers have a standard terms of service contract, with the few exceptions on bespoke service contracts. Our contracts with our customers include two performance obligations: access to the hosted software service, inclusive of all features available within the platform and related customer support. We account for the platform access and the support as a combined performance obligation because they have the same pattern of transfer over the same period and are therefore delivered concurrently. We satisfy our performance obligation over time each month as we provide platform access and support 25
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services to customers and as such recognize revenue over time. We recognize revenue net of applicable taxes imposed on the related transaction.
Beginning inAugust 2021 , we offer a cashback rewards program to all customers based on volume ofExpensify card transactions and SaaS subscription tier. Cashback rewards are earned on a monthly basis and paid out the following month. We consider our cashback payments to customers as consideration payable to a customer under the scope of ASC 606 and it is therefore recorded as contra revenue within Revenue on the consolidated statements of income. We also record a cashback rewards liability that represents the consideration payable to customers for earned cashback rewards. The cashback rewards liability is impacted over time by customers meeting eligibility requirements in conjunction with the SaaS subscription tier of the customer and the timing of payments to customers. Cost of Revenue,Net Cost of revenue, net primarily consists of expenses related to hosting the company's service, including the costs of data center capacity, credit card processing fees, third-party software license fees, outsourcing costs to support customer service and outsourcing costs to support and process our patented scanning technology SmartScan, net of consideration from a vendor. Additional costs include amortization expense on capitalized software development costs and personnel-related expenses, including stock-based compensation and employee costs attributable to supporting our customers and maintenance of our platform. The consideration from a vendor is related to the Expensify Card. We use a third-party vendor to issue Expensify Cards and process the related transactions. When purchases are made with the Expensify Card, a fee is charged by the card network to the merchant (also known as "Interchange"). The vendor is contractually entitled to the Interchange through its relationships with the card network and card issuing bank. The vendor keeps a portion of the Interchange for their services, and our agreement with the vendor results in us receiving the remainder of the Interchange minus the amount retained by the vendor (our remainder portion, the "Expensify Interchange Amount"). The vendor also charges us fees (the "Vendor Fees") for the services it provides to us. Due to the nature of the vendor agreement, we do not record theExpensify Interchange Amount as revenue. Instead, the net of theExpensify Interchange Amount and Vendor Fees are paid to us, and we record it as "consideration from a vendor", a contra-expense in Cost of revenue, net. The following summarizes these various amounts for the periods presented: Three months endedMarch 31, 2022
2021
(in thousands)
Expensify Interchange Amount $ 1,220 $ 488
Vendor Fees (97)
(32)
Consideration from a Vendor $ 1,123$ 456 OPERATING EXPENSES Research and Development Research and development expenses consist primarily of personnel-related expenses, including stock-based compensation, incurred related to the planning and preliminary project stage and post-implementation stage of new products or enhancing existing products or services. We capitalize certain software development costs that are attributable to developing or adding significant functionality to our internal-use software during the application development stage of the projects. All research and development expenses, excluding capitalized software development costs, are expensed as incurred. We believe delivering new functionality is critical to attract new customers and expand our relationships with existing customers. We expect to continue to make investments in and expand our 26
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product and service offerings to enhance our customers' experience and satisfaction and to attract new customers. We expect research and development expenses will increase as we expand our research and development team to develop new products and product enhancements.
Sales and Marketing
Sales and marketing expenses primarily consist of personnel-related expenses, including stock-based compensation, advertising expenses, branding and public relations expenses and referral fees for strategic partners and other benefits that we provide to our referral and affiliate partners. We expect sales and marketing expenses will increase as we expand our sales efforts to pursue our market opportunity. General and Administrative General and administrative expenses primarily consist of personnel-related expenses, including stock-based compensation, for executive management and any employee time allocated to administrative functions, including finance and accounting, legal and human resources. In addition to personnel-related expenses, general and administrative expenses consist of rent, utilities, depreciation on property and equipment, amortization of finance lease right-of-use assets and external professional services, including accounting, audit, tax, finance, legal and compliance, human resources and information technology. We expect that general and administrative expenses will continue to increase as we scale our business and as we incur additional costs associated with being a publicly traded company, including legal, audit, business insurance and consulting fees.
Interest and Other Expenses, Net
Interest and other expenses, net, consist primarily of interest paid under our
credit facilities with Canadian Imperial Bank of Commerce ("CIBC"). It also
includes realized gains and losses on foreign currency transactions and foreign
currency remeasurement.
Provision for Income Taxes
Income taxes primarily consist of income taxes in
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The results of operations presented below should be reviewed in conjunction with the consolidated financial statements and notes included elsewhere in this Quarterly Report on Form 10-Q.
The following table sets forth our results of operations for the periods
presented:
Three months ended March 31,
2022 2021
(inthousands, except share and per
share data)
Revenue $ 40,370 $ 29,720
Cost of revenue, net(1) 14,133 7,637
Gross margin 26,237 22,083
Operating expenses:
Research and development(1) 3,701 1,097
General and administrative(1) 14,006 6,367
Sales and marketing(1) 13,372 3,077
Total operating expenses 31,079 10,541
(Loss) income from operations (4,842) 11,542
Interest and other expenses, net (902) (737)
(Loss) income before income taxes (5,744) 10,805
Provision for income taxes (1,632) (2,762)
Net (loss) income $ (7,376) $ 8,043
Less: income allocated to participating securities - (5,547)
Net (loss) income attributable to Class A, LT10 and LT50 common stockholders
$ (7,376) $ 2,496 Net (loss) income per share attributable to Class A, LT10 and LT50 common stockholders: Basic$ (0.09) $ 0.08 Diluted$ (0.09) $ 0.06 Weighted-average shares of common stock used to compute net (loss) income per share attributable to Class A, LT10 and LT50 common stockholders: Basic 80,147,208 29,522,409 Diluted 80,147,208 40,576,339
(1)Includes stock-based compensation expense as follows:
Three months ended March 31,
2022 2021
(in thousands)
Cost of revenue, net $ 4,908 $ 188
Research and development 2,708 154
General and administrative 4,975 304
Sales and marketing 2,076 64
Total stock-based compensation expense $ 14,667 $ 710
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COMPARISON OF THE THREE MONTHS ENDED
Revenue
Three months ended March 31, Change
2022 2021 Amount %
(in thousands, except percentages)
Revenue $ 40,370 $ 29,720 $ 10,650 36 %
Revenue increased by $10.7 million , or 36%, for the three months ended March 31,
2022 compared to the same period in 2021, primarily due to (i) an increase in
the number of paid members and reimbursement activity, which was the result of
increased demand for business travel due to continued lifting of travel
restrictions globally and higher rates of returning the office compared to the
same period in 2021 when the COVID-19 vaccines did not yet have widespread
availability and distribution and (ii) an increase in average fees per paid
member due to an increase in the number of pay-per-use members, who have a
higher average fee per member than our annual members, compared to the same
period in 2021.
Cost of Revenue, Net and Gross Margin
Three months ended March 31, Change
2022 2021 Amount %
(in thousands, except percentages)
Cost of revenue, net $ 14,133 $ 7,637 $ 6,496 85 %
Gross margin 26,237 22,083 $ 4,154 19 %
Gross margin % 64 % 74 %
Cost of revenue, net increased by $6.5 million , or 85%, for the three months
ended March 31, 2022 compared to the same period in 2021. Cost of revenue, net
increased primarily due to the recognition of $4.9 million of stock-based
compensation costs during the three months ended March 31, 2022 primarily
related to the RSUs granted in September and November of 2021 to employees
directly engaged in supporting our customers and providing maintenance of our
platform. In addition to increased stock-based compensation, Cost of revenue,
net increased due to a higher volume of payment processing fees directly related
to an increase in reimbursement activity, increased efforts in support and
implementation services, and increased outsourcing activities related to
maintaining the platform. These increases were partially offset by consideration
from a vendor, which reduced Cost of revenue, net by $1.1 million and $0.5
million for the three months ended March 31, 2022 and 2021, respectively. This
increase in consideration from a vendor was driven primarily by the increased
adoption and spend captured from members using the Expensify Card.
Gross margin decreased to 64% for the three months ended March 31, 2022 compared
to 74% in the same period in 2021. Although revenue increased by 36% for the
same period, Cost of revenue, net increased at a higher rate due to the factors
described in the preceding paragraph.
Research and Development
Three months ended March 31, Change
2022 2021 Amount %
(in thousands, except percentages)
Research and development $ 3,701 $ 1,097 $ 2,604 237 %
Research and development expenses increased by $2.6 million , or 237%, for the
three months ended March 31, 2022 compared to the same period in 2021 primarily
due to the recognition of $2.7 million of stock-based compensation costs during
the three months ended March 31, 2022 primarily related to
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the RSUs granted in September and November of 2021 to employees directly engaged
in the planning and preliminary project stage and post-implementation stage of
new products and features. Increases to Research and development expenses were
partially offset by decreased employee time spent in the planning and
preliminary project stage and post-implementation stage of new products and
features primarily due to an increase in employee focus on the customer support
and sales and marketing of recently developed products and services such as the
Free Plan and our Expensify Card.
Sales and Marketing
Three months ended March 31, Change
2022 2021 Amount %
(in thousands, except percentages)
Sales and marketing $ 13,372 $ 3,077 $ 10,295 335 %
Sales and marketing expenses increased by $10.3 million , or 335%, for the three
months ended March 31, 2022 compared to the same period in 2021 primarily due to
an increase in advertising spend to gain further brand awareness and increased
employee focus on marketing initiatives related to our recently developed
products and services such as the Free Plan and our Expensify Card in addition
to continued reduction of our advertising and other sales and marketing expenses
during the three months ended March 31, 2021 in direct result of the COVID-19
pandemic. Furthermore, sales and marketing expenses were higher due to the
recognition of $2.1 million of stock-based compensation costs during the three
months ended March 31, 2022 primarily related to the RSUs granted in September
and November of 2021 to employees directly engaged in sales and marketing
activities during the three months ended March 31, 2022 .
General and Administrative
Three months ended March 31, Change
2022 2021 Amount %
(in thousands, except percentages)
General and administrative $ 14,006 $ 6,367 $ 7,639 120 %
General and administrative expenses increased by $7.6 million , or 120%, for the
three months ended March 31, 2022 compared to the same period in 2021, primarily
due to increased compensation to our officers and the recognition of
$5.0 million of stock-based compensation costs during the three months ended
March 31, 2022 primarily related to the RSUs granted in September and November
of 2021 to employees directly engaged in general and administrative activities.
Furthermore, general and administrative expenses increased due to additional
employee time and professional service costs incurred for accounting, auditing
and legal services as a result of our continued requirements as a public entity
compared to the same period in 2021.
Interest and Other Expenses, Net
Three months ended March 31, Change
2022 2021 Amount %
(in thousands, except percentages)
Interest and other expenses, net $ (902) $ (737) $ (165) 22 %
(1,054) (646)
Interest and other expenses, net increased by $0.2 million , or 22%, for the
three months ended March 31, 2022 compared to the same period in 2021. The
increase was primarily driven by the 2021 amended term loan entered into by the
Company in September 2021 , which resulted in additional interest expense for the
Company during the three months ended March 31, 2022 compared to the same period
in 2021.
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Provision for Income Taxes
Three months ended March 31, Change
2022 2021 Amount %
(in thousands, except percentages)
Provision for income taxes $ (1,632) $ (2,762) $ 1,130 (41) %
We recorded a provision for income taxes of $1.6 million during the three months
ended March 31, 2022 compared to a $2.8 million provision for income taxes for
the same period in 2021. We follow the asset and liability method of accounting
for income taxes, whereby we recognize deferred income taxes for the tax
consequences of temporary differences between the financial statement carrying
amounts and the tax basis of the assets and liabilities. Valuation allowances
are recorded to reduce deferred tax assets when it is more likely than not that
a tax benefit will not be realized. During the three months ended March 31,
2022 , we recorded a valuation allowance of $2.4 million . No valuation allowance
was recorded during the three months ended March 31, 2021 . The provision for
income taxes reflects taxable income earned and taxed in U.S. federal and state
and non-U.S. jurisdictions.
During the three months ended March 31, 2022 and 2021, our effective income tax
rate was (28.4)% and 25.6%, respectively. The effective income tax rate differs
from the statutory rate in 2022 primarily due to the change in valuation
allowance. The effective income tax rate differs from the statutory rate in 2021
primarily due to state taxes and stock-based compensation resulting from
incentive stock options granted during the period.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through our cash flow from operations, sales of our equity securities and borrowings under our credit facilities. InNovember 2021 , upon completion of our IPO, we received aggregate net proceeds of approximately$57.5 million after deducting underwriting discounts and commissions of approximately$4.9 million and offering costs of approximately$8.0 million . As ofMarch 31 2022 , we had$101.1 million in cash and cash equivalents. As ofMarch 31, 2022 , we had$67.7 million in outstanding indebtedness. Our future capital requirements will depend on many factors, including revenue growth and costs incurred to support growth in our business and our need to respond to business opportunities, challenges or unforeseen circumstances. We believe that our existing cash resources will be sufficient to finance our continued operations, growth strategy and the additional expenses we expect to incur for at least the next 12 months.
CASH FLOWS
The following table summarizes our cash flows for the periods indicated:
Three months ended March 31,
2022 2021
(in thousands)
Net cash provided by operating activities $ 11,223 $ 9,909
Net cash used by investing activities (673) (953)
Net cash provided by financing activities 218 (1,083)
Net increase in cash, cash equivalents and restricted cash $ 10,768
CASH PROVIDED BY OPERATING ACTIVITIES
During the three months ended
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reimbursement activity and increases in other liabilities. The timing of the settlement of certain operating liabilities and receipt of certain operating assets can affect the amounts reported as net cash provided by operating activities on the consolidated statements of cash flows. The main offsets to net cash provided by operating activities were an increased net loss primarily due to the recognition of stock-based compensation costs as a result of the RSUs granted to certain employees in September andNovember 2021 , the increases in settlement assets, which represent increased expense reimbursement activity, and the timing of settlement of accounts payable and accrued expenses and other liabilities. Net cash provided by operating activities increased for the three months endedMarch 31, 2022 compared to the same period in 2021 primarily due to increases in settlement liabilities partially offset by the increases in settlement assets, which was primarily driven by increased expense reimbursement activity.
CASH USED IN INVESTING ACTIVITIES
During the three months endedMarch 31, 2022 , cash used in investing activities was$0.7 million , primarily consisting of software development costs and the purchase of property and equipment related to the build-out of our offices inPortland andSan Francisco . Net cash used in investing activities decreased for the three months endedMarch 31, 2022 compared to the same period in 2021, primarily due to a decrease in software development costs. Software development costs decreased due to additional time spent by employees during the three months endedMarch 31, 2022 on the customer support and sales and marketing of recently developed products and services such as the Free Plan and our Expensify Card. The Free Plan resulted in higher software development costs for the same period in 2021 as it was still in the application development stage.
CASH PROVIDED BY FINANCING ACTIVITIES
During the three months endedMarch 31, 2022 , cash provided by financing activities was$0.2 million , primarily consisting of proceeds from exercises of stock options, including the vesting of early exercised common stock, which was partially offset by principal payments of our term loan and finance leases.
Net cash provided by financing activities increased for the three months ended
CREDIT FACILITIES
Amortizing Term Mortgage
Under the amortizing term mortgage agreement with CIBC for our commercial building inPortland, Oregon , the Company borrowed$8.3 million inAugust 2019 , which requires interest and principal payments be made each month over a 30-year period. Interest accrues at a fixed rate of 5% per year untilAugust 2024 , at which point the interest rate changes to the Wall Street Journal Prime Rate minus 0.25% for the remaining term of the mortgage. The borrowings are secured by the building. As ofMarch 31, 2022 , the outstanding balance of the amortizing term mortgage was$7.9 million .
Loan and Security Agreement
Our loan and security agreement with CIBC, as amended and restated inSeptember 2021 (the "2021 Amended Term Loan"), includes a$75.0 million term loan, consisting of a$45.0 million initial term loan with an option at a later date to enter into an additional$30.0 million delayed term loan, and a$25.0 million revolving line of credit. Approximately$23.5 million of the loan proceeds were used to immediately repay the remaining balances under the amortizing and non-amortizing term loans at the time of the amendment and restatement inSeptember 2021 as well as the commitment fees and any 32
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other debt issuance costs associated with the amended agreement. The remaining proceeds from the initial term loan went towards our normal business operations.
The loan and security agreement was originally entered into inMay 2018 . The initial term loan of$45.0 million entered into by the Company inSeptember 2021 is payable over a 60 month period with principal and accrued interest payments due each quarter thereafter, which commences with the first payment due onSeptember 30, 2021 . Quarterly principal payments are fixed and escalate throughout the term. The amounts borrowed are payable with interest at the bank's reference rate plus 2.25% (5.75% as ofMarch 31, 2022 ) and continuing on a quarterly basis through the end of the term loan. The borrowings are secured by substantially all our assets. As ofMarch 31, 2022 , the outstanding balance of the 2021 Amended Term Loan and revolving line of credit was$44.8 million and$15.0 million , respectively. The term loan and revolving line of credit mature inSeptember 2026 andSeptember 2024 , respectively.
See Note 4 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further information.
Certain Covenants
We are subject to customary covenants under our loan and security agreement, which unless waived by CIBC, restrict our and our subsidiaries' ability to, among other things incur additional indebtedness, create or incur liens, permit a change of control or merge or consolidate with other companies, sell or transfer assets, pay dividends or make distributions, make acquisitions, investments or loans, or payments and prepayments of subordinated indebtedness, subject to certain exceptions. We must also maintain certain financial covenants: for the first year, a total annual recurring revenue leverage ratio not to exceed 0.8 to 1.0, tested on the last day of each fiscal quarter, and maintaining liquidity at times not less than$10.0 million , in each case as defined in the loan and security agreement; and thereafter, a total EBITDA net leverage ratio, tested each quarter, of not less than 5.00 to 1.00 fromSeptember 30, 2022 through and includingJune 30, 2023 , not less than 4.00 to 1.00 fromSeptember 30, 2023 through and includingJune 30, 2024 , and not less than 3.00 to 1.00 fromSeptember 30, 2024 and thereafter, and a fixed charge coverage ratio of not less than 1.10 to 1.00, tested on the last day of each calendar quarter. If we fail to perform our obligations under these and other covenants, CIBC's credit commitments could be terminated and any outstanding borrowings, together with accrued interest, under the credit or loan agreements could be declared immediately due and payable.
As of
Contractual Obligations and Commitments
As of
Indemnification Agreements
In the ordinary course of business, we enter into agreements of varying scope
and terms whereby we agree to indemnify customers, issuing banks, card networks,
vendors, and other parties with respect to certain matters, including, but not
limited to, losses arising out of the breach of such agreements, services to be
provided by us or from intellectual property infringement claims made by third
parties. In addition, we have entered into indemnification agreements with our
directors and certain officers and employees that will require us, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status or service as directors, officers, or employees. No demands have
been made upon us to provide indemnification under such agreements and there are
no claims that we are aware of that could have a material effect on our
condensed consolidated balance sheets,
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condensed consolidated statements of income, condensed consolidated statements of convertible preferred stock and stockholders' equity (deficit), or condensed consolidated statements of cash flows.
Off-Balance Sheet Arrangements
During the periods presented, we did not have, and we do not currently have, any off-balance sheet financing arrangements or 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.
Critical Accounting Estimates
Our condensed consolidated financial statements included elsewhere herein have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. For our accounting policies, see Note 2 in the audited consolidated financial statements within our 2021 Annual Report and Note 1 in our condensed consolidated financial statements contained elsewhere herein for a description of our significant accounting policies.
EMPLOYEE AND EMPLOYEE-RELATED EXPENSES
Allocating our employee and employee-related expenses, which consist of contractor costs, employee salary and wages, stock-based compensation and travel and other employee-related costs, to their appropriate financial statement line items on the consolidated statements of income, requires us to make estimates and judgments as a result of our generalist model and organizational structure. We base our estimates for allocating employee and employee related expenses on our internal productivity and team management tools. Management reviews the estimates each reporting period to evaluate the estimate of the allocated amounts to each expense financial statement line item in the consolidated financial statements.
REVENUE RECOGNITION
The Company generates revenue from subscription fees paid by its customers to
access and use the Company's hosted software services, as well as standard
customer support. The Company adopted Accounting Standard Update ("ASU") No.
2014-09, Revenue from Contracts with Customers ("Topic 606") as of January 1,
2019 , utilizing the full retrospective method of transition.
Revenue is recognized when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.
The Company's contracts are either month-to-month arrangements billed monthly in arrears based on a specified number of members or annual arrangements billed monthly in arrears based on a minimum number of monthly members. Month-to-month contracts can be terminated by either party at any time without penalty. Prior toMay 2020 , annual subscription customers who wish to terminate their contracts before the end of the term are required to pay the remaining obligation in full plus any fees or penalties set forth in the agreement. As ofMay 2020 , annual contracts are noncancelable. The Company charges its customers subscription fees for access to its platform based on the number of monthly members and level of service. The contractual price per member is based on either negotiated fees or rates published on the Company's website. The Company's contracts with customers include two performance obligations: access to the hosted software service ("SaaS"), inclusive of all features available within the platform and related customer support. The SaaS and the 34
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support are accounted for as a combined performance obligation because they have the same pattern of transfer over the same period and, therefore, are delivered concurrently. The Company satisfies its performance obligation over time each month as it provides the SaaS and support services to customers and as such generally recognizes revenue monthly based on the number of monthly members and contractual rate per member. Certain annual contracts provide the customer the option to increase the minimum number of members and extend the contract term on a prospective basis or to purchase members beyond the minimum contracted number of members at a higher rate for a particular month. These options are accounted for when the customer exercises the option as they do not represent a material right and are accounted for as a contract modification. Revenue is recognized net of applicable taxes imposed on the related transaction. The Company charges the customer on a monthly basis, in arrears, with typical payment terms being 30 days. A contract asset is the right to consideration for transferred goods or services and arises when the amount of revenue recognized exceeds amounts billed to a customer. As a result of a price increase in 2020 that was applicable to certain annual contracts and is being billed incrementally by the Company over a twelve month period endedMay 2021 , the Company recorded revenue for such contracts on a straight line basis over the twelve month period affected by the price increase. This resulted in contract assets that consist of unbilled receivables for revenue recognized in excess of billings. The contract asset will decrease as the price increase is applied to the amounts billed to customers, over the twelve month period. The Company had no contract assets remaining for unbilled receivables as ofMarch 31, 2022 . Since the Company's performance obligation is satisfied monthly, at any reporting period, the Company has no unsatisfied, or partially unsatisfied, performance obligations. COMMON STOCK VALUATIONS Prior to the IPO, given the absence of a public trading market for our common stock, and in accordance with theAmerican Institute of Certified Public Accountants Accounting and Valuation Guide , Valuation of Privately-Held Company Equity Securities Issued as Compensation, our board of directors exercised its reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of fair value of our common stock underlying the stock options and RSUs, including:
•independent third-party valuations of our common stock;
•the expected price range of our common stock upon IPO determined by bankers;
•the rights, preferences and privileges of our convertible preferred stock relative to those of our common stock;
•our financial condition, results of operations and capital resources;
•the likelihood and timing of achieving a liquidity event, such as an initial public offering or sale of the company, given prevailing market conditions;
•the lack of marketability of our common stock;
•our estimates of future financial performance;
•valuations of comparable companies;
•the hiring or loss of key personnel;
•the status of our development, product introduction and sales efforts;
•industry information, such as market growth and volume and macro-economic events; and
•additional objective and subjective factors relating to our business.
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To determine the fair value of our common stock, we first determined our enterprise value and then allocated that enterprise value to our common stock and common stock equivalents. Our enterprise value was estimated using two generally accepted approaches: the income approach and the market approach.
The income approach estimates enterprise value based on the estimated present value of future cash flows the business is expected to generate over its remaining life. The estimated present value is calculated using a discount rate reflective of the risks associated with an investment in a similar company in a similar industry or having a similar history of revenue growth. The market approach measures the value of a business through an analysis of recent sales or offerings of comparable investments or assets, and in our case, focused on comparing us to a group of our peer companies. In applying this method, valuation multiples are derived from historical operating data of the peer company group. We then apply multiples to our operating data to arrive at a range of indicated values of the company. For each valuation, we prepared a financial forecast to be used in the computation of the value of invested capital for both the income approach and market approach. The financial forecast considered our past results and expected future financial performance. The risk associated with achieving this forecast was assessed in selecting the appropriate discount rate. There is inherent uncertainty in these estimates as the assumptions used are highly subjective and subject to changes as a result of new operating data and economic and other conditions that impact our business. As an additional indicator of fair value, we provided weighting to arm's-length transactions involving issuances of our securities near the respective valuation dates.
Following our initial public offering, it has not been necessary to estimate the fair value of our common stock, as our shares are traded in the public market.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation under the fair value recognition and measurement provisions of GAAP. Those provisions require all stock-based awards granted to employees, including stock options and restricted stock units, to be measured based on fair value at the date of grant, with the resulting expense generally recognized in the consolidated statements of income over the period during which the employee is required to perform service in exchange for the award.
The Company utilizes the Black-Scholes option pricing model to determine the estimated fair value of stock options.
The Black-Scholes option pricing model requires management to make a number of
assumptions, including the fair value and expected volatility of the Company's
underlying common stock, expected life of the award, risk-free interest rate and
expected dividend yield. The fair value of common stock is determined by the
Board of Directors based on a number of factors, including independent
third-party valuations of our common stock, which consider estimates of our
future performance and valuations of comparable companies. The Company also
considers prices at which others have purchased our stock, and the likelihood
and timing of achieving a liquidity event. When awards are granted or revalued
between the dates of valuation reports, the Company considers the change in
common stock fair value and the amount of time that lapsed between the two
reports to determine whether to use the latest common stock valuation or an
interpolation between two valuation dates for purposes of valuing stock-based
awards. Subsequent to the completion of the IPO, the fair value of the Company's
underlying common stock is determined by the closing price, on the date of
grant, of its Class A common stock, which is traded on the Nasdaq Global Select
Market.
All RSUs granted to employees before the effectiveness of the IPO Registration
Statement were measured based on the fair value of the underlying common stock
on the grant date, which was consistent with the factors described within the
Black-Scholes option pricing model. All RSUs granted
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to employees after the effectiveness of the IPO Registration Statement are measured based on the fair value of the underlying common stock on the grant date, which is determined by the closing price, on the date of the grant, of its Class A common stock, which is traded on the Nasdaq Global Select Market.
Refer to Note 5 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further detail over stock-based compensation and the stock incentive plans of the Company.
Recent Accounting Pronouncements
See Note 1 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the date of this Quarterly Report on Form 10-Q.
Emerging Growth Company Status
We are an "emerging growth company," as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period to enable us to comply with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (1) are no longer an emerging growth company or (2) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
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