FIVE9, INC. You should read the following discussion in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Overview We are a pioneer and leading provider of intelligent cloud software for contact centers, facilitating more than seven billion call minutes between our more than 2,000 clients and their customers per year. We believe we achieved this leadership position through our expertise and technology, which has empowered us to help organizations of all sizes transition from legacy on-premise contact center systems to our cloud solution. Our solution, comprised of our Virtual Contact Center, or VCC, cloud platform and applications, allows simultaneous management and optimization of customer interactions across voice, chat, email, web, social media and mobile channels, either directly or through our application programming interfaces, or APIs. Our VCC cloud platform matches each customer interaction with an appropriate agent resource and delivers relevant customer data to the agent in real-time through integrations with adjacent enterprise applications, such as customer relationship management, or CRM, software, to optimize the customer experience and improve agent productivity. Unlike legacy on-premise contact center systems, our solution requires minimal up-front investment, can be rapidly deployed and adjusted depending on our client's requirements. Since founding our business in 2001, we have focused exclusively on delivering cloud contact center software. We initially targeted smaller contact center opportunities with our telesales team and, over time, invested in expanding the breadth and depth of the functionality of our cloud platform to meet the evolving requirements of our clients. In 2009, we made a strategic decision to expand our market opportunity to include larger contact centers. This decision drove further investments in research and development and the establishment of our field sales team to meet the requirements of these larger contact centers. We believe this shift has helped us diversify our client base, while significantly enhancing our opportunity for future revenue growth. To complement these efforts, we have also focused on building client awareness and driving adoption of our solution through marketing activities, which include internet advertising, digital marketing campaigns, social media, trade shows, industry events, telemarketing and out of home campaigns. We provide our solution through a SaaS business model with recurring subscriptions. We offer a comprehensive suite of applications delivered on our VCC cloud platform that are designed to enable our clients to manage and optimize interactions across inbound and outbound contact centers. We primarily generate revenue by selling subscriptions and related usage of our VCC cloud platform. We charge our clients monthly subscription fees for access to our solution, primarily based on the number of agent seats, as well as the specific functionalities and applications our clients deploy. We define agent seats as the maximum number of named agents allowed to concurrently access our solution. Our clients typically have more named agents than agent seats, and multiple named agents may use an agent seat, though not simultaneously. Substantially all of our clients purchase both subscriptions and related telephony usage from us. A small percentage of our clients subscribe to our platform but purchase telephony usage directly from wholesale telecommunications service providers. We do not sell telephony usage on a stand-alone basis to any client. The related usage fees are based on the volume of minutes for inbound and outbound interactions. We also offer bundled plans, generally for smaller deployments, where the client is charged a single monthly fixed fee per agent seat that includes both subscription and unlimited usage in the contiguous 48 states and, in some cases,Canada . We offer monthly, annual and multiple-year contracts to our clients, generally with 30 days' notice required for reductions in the number of agent seats. Increases in the number of agent seats can be provisioned almost immediately. Our clients, therefore, are able to adjust the number of agent seats used to meet their changing contact center volume needs. Our larger clients typically choose annual contracts, which generally include an implementation and ramp period of several months. Fixed subscription fees, including bundled plans, are generally billed monthly in advance, while related usage fees are billed in arrears. For each of the three and six months endedJune 30, 2021 , subscription and related usage fees accounted for 92% of our revenue. For the three and six months endedJune 30, 2020 subscription and related usage fees accounted for 92% and 91%, respectively, of our revenue. The remainder was comprised of professional services revenue from the implementation and optimization of our solution. 33 -------------------------------------------------------------------------------- Table of Contents Proposed Merger with Zoom OnJuly 16, 2021 , we entered into the Merger Agreement. The Merger Agreement provides for the merger of Merger Sub with and into our company, with our company surviving the Merger and continuing as a wholly owned subsidiary of Zoom. Subject to the terms and conditions of the Merger Agreement, each issued and outstanding share of our common stock will be cancelled and automatically converted into the right to receive 0.5533 shares of Zoom Class A Common Stock (with cash being paid, without interest and less applicable withholding taxes, in lieu of any fractional shares of Zoom Class A Common Stock). The shares of Zoom Class A Common Stock to be issued in connection with the Merger will be listed on Nasdaq. The Merger is intended to qualify as a reorganization forU.S. federal income tax purposes. As a result of the Merger, we will cease to be a publicly traded company. The Merger Agreement contains customary representations, warranties and covenants.. Under the terms of the Merger Agreement, the completion of the Merger is subject to certain customary closing conditions, including, among others: (i) the approval of the Company's stockholders; (ii) the approval for listing on Nasdaq of the Zoom Class A Common Stock to be issued in the Merger; (iii) the effectiveness of a registration statement on Form S-4 filed by Zoom registering the Zoom Class A Common Stock to be issued in connection with the Merger; (iv) the accuracy of the parties' respective representations and warranties in the Merger Agreement, subject to specified materiality qualifications; (v) compliance by the parties with their respective covenants in the Merger Agreement in all material respects; (vi) the receipt of various domestic and foreign regulatory approvals; (vii) the receipt by each party of opinions to the effect that the Merger will qualify as a reorganization forU.S. federal income tax purposes; and (viii) the absence of a material adverse effect with respect to the Company and its subsidiaries on or after the date of the Merger Agreement that is continuing as of immediately prior to the closing. The Mergers are anticipated to close in the first half of the 2022 calendar year, subject to stockholder approval, receipt of required regulatory approvals, and other customary closing conditions. The Company cannot predict with certainty, however, whether and when all of the required closing conditions will be satisfied or if the Merger will close. Each of us and Zoom may terminate the Merger Agreement under certain specified circumstances, including if (i) the Merger is not consummated on or beforeJanuary 16, 2022 , subject to two extensions of three months each in order to obtain required regulatory (including telecommunications-related) approvals and one additional extension of three months in order to obtain certain required telecommunications-related approvals, (ii) the approval of our stockholders is not obtained, and (iii) our Board of Directors makes an adverse recommendation change with respect to the proposed transaction or terminates the Merger Agreement to enter into a superior acquisition proposal. In certain circumstances in connection with the termination of the Merger Agreement, including if our Board of Directors changes or withdraws its recommendation of the Merger to its stockholders or terminates the Merger Agreement to enter into an agreement with respect to a superior acquisition proposal, we will be required to pay Zoom a termination fee of$450 million in cash. The foregoing summary of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Merger Agreement, which is filed as Exhibit 2.1 of our Current Report on Form 8-K filed onJuly 19, 2021 and incorporated by reference herein. Effects of COVID-19 InDecember 2019 , a novel coronavirus disease known as COVID-19 was reported and onMarch 11, 2020 , theWorld Health Organization , orWHO , characterized COVID-19 as a pandemic. This pandemic has resulted in a widespread health crisis that has significantly harmed theU.S. and global economies and caused significant fluctuation in financial markets, including those on which our common stock and our convertible senior notes trade, and may impact demand for our solution. In accordance with the various social distancing and other office closure orders and recommendations of applicable government agencies, all of our employees transitioned to work-from-home operations and we canceled all business travel by our employees except where necessary and properly authorized, which changed how we operate our business. Our clients and business partners also continue to be subject to various and changing social distancing and office closure orders and recommendations and travel restrictions and prohibitions, which have changed the way we interact with our clients and business partners. Recently, we have re-opened ourU.S. offices for employees to voluntarily return, subject to capacity restrictions and applicable government regulations. Appropriate measures are being taken to protect the health of employeeswho return to the office. We have also reinstated business travel on a voluntary basis and subject to prior approval. 34 -------------------------------------------------------------------------------- Table of Contents COVID-19 had a moderately positive impact on our 2020 and three and six months endedJune 30, 2021 financial results due to the shift from brick-and-mortar to virtual. The severity and duration of the COVID-19 pandemic, and its impact on theU.S. and global economy remains uncertain, but we believe that there may be a continuing net benefit to us longer term. Key GAAP Operating Results Our revenue increased to$143.8 million and$281.7 million for the three and six months endedJune 30, 2021 from$99.8 million and$194.9 million for the three and six months endedJune 30, 2020 . Revenue growth was primarily attributable to our larger clients, driven by an increase in our sales and marketing activities and our improved brand awareness. For each of the three and six months endedJune 30, 2021 and 2020, no single client accounted for more than 10% of our total revenue. As ofJune 30, 2021 , we had over 2,000 clients across multiple industries. Our clients' subscriptions generally range in size from fewer than 10 agent seats to approximately 4,000 agent seats. We had a net loss of$16.5 million and$28.9 million in the three and six months endedJune 30, 2021 , compared to a net loss of$16.1 million and$23.5 million in the three and six months endedJune 30, 2020 . We have continued to make significant expenditures and investments, including in sales and marketing, research and development and infrastructure. We primarily evaluate the success of our business based on revenue growth and the efficiency and effectiveness of our investments. The growth of our business and our future success depend on many factors, including our ability to continue to expand our base of larger clients, grow revenue from our existing client base, innovate and expand internationally. While these areas represent significant opportunities for us, they also pose risks and challenges that we must successfully address in order to sustain the growth of our business and improve our operating results, including the impact of the COVID-19 pandemic. Due to our continuing investments to grow our business, increase our sales and marketing efforts, pursue new opportunities, enhance our solution and build our technology, we expect our cost of revenue and operating expenses to increase in absolute dollars in the long term. However, we expect cost of revenue and certain operating expenses to fluctuate as a percentage of revenue in the near term taking into consideration the impact of COVID-19 and the macroeconomic environment. Key Operating and Non-GAAP Financial Performance Metrics In addition to measures of financial performance presented in our condensed consolidated financial statements, we monitor the key metrics set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies. Annual Dollar-Based Retention Rate We believe that our Annual Dollar-Based Retention Rate provides insight into our ability to retain and grow revenue from our clients, and is a measure of the long-term value of our client relationships. Starting with the fourth quarter of 2020, we revised our Annual Dollar-Based Retention Rate calculation to be based on Net Revenue, rather than Net Invoicing. Our Annual Dollar-Based Retention Rate is calculated by dividing our Retained Net Revenue by our Retention Base Net Revenue on a monthly basis, which we then average using the rates for the trailing twelve months for the period being presented. We define Retention Base Net Revenue as recurring net revenue from all clients in the comparable prior year period, and we define Retained Net Revenue as recurring net revenue from that same group of clients in the current period. We define recurring net revenue as net subscription and related usage revenue. The following table shows our Annual Dollar-Based Retention Rate based on Net Revenue for the periods presented: Twelve Months EndedJune 30, 2021 June 30, 2020 Annual Dollar-Based Retention Rate 123%
111%
Our Dollar-Based Retention Rate improved year-over-year primarily due to our larger clients increasing their number of agent seats.
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Adjusted EBITDA
We monitor adjusted EBITDA, a non-GAAP financial measure, to analyze our
financial results and believe that it is useful to investors, as a supplement to
U.S. GAAP measures, in evaluating our ongoing operational performance and
enhancing an overall understanding of our past financial performance. We believe
that adjusted EBITDA helps illustrate underlying trends in our business that
could otherwise be masked by the effect of the income or expenses that we
exclude from adjusted EBITDA. Furthermore, we use this measure to establish
budgets and operational goals for managing our business and evaluating our
performance. We also believe that adjusted EBITDA provides an additional tool
for investors to use in comparing our recurring core business operating results
over multiple periods with other companies in our industry.
Adjusted EBITDA should not be considered in isolation from, or as a substitute
for, financial information prepared in accordance with U.S. GAAP, and our
calculation of adjusted EBITDA may differ from that of other companies in our
industry. We compensate for the inherent limitations associated with using
adjusted EBITDA through disclosure of these limitations, presentation of our
financial statements in accordance with U.S. GAAP and reconciliation of adjusted
EBITDA to the most directly comparable U.S. GAAP measure, net loss. We calculate
adjusted EBITDA as net loss before (1) depreciation and amortization,
(2) stock-based compensation, (3) interest income, expense and other, (4) loss
on early extinguishment of debt, (5) acquisition-related transaction costs and
one-time integration costs, (6) COVID-19 relief bonus for employees, (7)
contingent consideration expense, (8) (benefit from) provision for income taxes,
and (9) other items that do not directly affect what we consider to be our core
operating performance.
The following table shows a reconciliation of net loss to adjusted EBITDA for
the periods presented (in thousands):
Three Months Ended Six Months Ended
June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
Net loss $ (16,530) $
(16,052)
9,651 6,243 18,414 11,213
Stock-based compensation (2) 24,901 16,791 45,809 30,585
Interest expense 2,118 5,734 4,056 9,218
Loss on early extinguishment of debt - 5,794 - 5,794
Other expense and interest (income) 353 (829) 178 (1,901)
Acquisition-related transaction costs
and one-time integration costs 973 1,637 2,067 1,966
COVID-19 relief bonus for employees - 1,817 - 1,817
Contingent consideration expense 2,700 - 5,200 -
Benefit from income taxes (135) (2,876) (652) (2,807)
Adjusted EBITDA $ 24,031 $ 18,259 $ 46,210 $ 32,396 (1)Depreciation and amortization expenses included in our results of operations are as follows (in thousands):
Three Months Ended Six Months Ended
June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
Cost of revenue $ 7,825 $ 5,120 $ 14,912 $ 9,060
Research and development 729 497 1,325 963
Sales and marketing 1 2 2 3
General and administrative 1,096 624 2,175 1,187
Total depreciation and
amortization $ 9,651 $
6,243
(2)See Note 7 to the condensed consolidated financial statements for stock-based compensation expense included in our results of operations for the periods presented.
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Key Components of Our Results of Operations
Revenue
Our revenue consists of subscription and related usage as well as professional
services. We consider our subscription and related usage to be recurring
revenue. This recurring revenue includes fixed subscription fees for the
delivery and support of our VCC cloud platform, as well as related usage fees.
The related usage fees are generally based on the volume of minutes for inbound
and outbound client interactions. We also offer bundled plans, generally for
smaller deployments, where the client is charged a single monthly fixed fee per
agent seat that includes both subscription and unlimited usage in the contiguous
48 states and, in some cases, Canada . We offer monthly, annual and multiple-year
contracts for our clients, generally with 30 days' notice required for
reductions in the number of agent seats. Increases in the number of agent seats
can be provisioned almost immediately. Our clients, therefore, are able to
adjust the number of agent seats used to meet their changing contact center
volume needs. Our larger clients typically choose annual contracts, which
generally include an implementation and ramp period of several months.
Fixed subscription fees, including plans with bundled usage, are generally
billed monthly in advance, while variable usage fees are billed in arrears.
Fixed subscription fees are recognized on a straight-line basis over the
applicable term, which is predominantly the monthly contractual billing period.
Support activities include technical assistance for our solution and upgrades
and enhancements on a when and if available basis, which are not billed
separately. Variable subscription related usage fees for non-bundled plans are
billed in arrears based on client-specific per minute rate plans and are
recognized as actual usage occurs. We generally require advance deposits from
clients based on estimated usage. All fees, except usage deposits, are
non-refundable.
In addition, we generate professional services revenue from assisting clients in
implementing our solution and optimizing use. These services include application
configuration, system integration and education and training services.
Professional services are primarily billed on a fixed-fee basis and are
typically performed by us directly. In limited cases, our clients choose to
perform these services themselves or engage their own third-party service
providers to perform such services. Professional services are recognized as the
services are performed using the proportional performance method, with
performance measured based on labor hours, provided all other criteria for
revenue recognition are met.
Cost of Revenue
Our cost of revenue consists primarily of personnel costs, including stock-based
compensation, fees that we pay to telecommunications providers for usage,
Universal Service Fund , or USF, contributions and other regulatory costs,
depreciation and related expenses of the servers and equipment, costs to build
out and maintain co-location data centers, costs of public cloud-based data
centers, allocated office and facility costs and amortization of acquired
technology. Cost of revenue can fluctuate based on a number of factors,
including the fees we pay to telecommunications providers, which vary depending
on our clients' usage of our VCC cloud platform, the timing of capital
expenditures and related depreciation charges and changes in headcount. We
expect to continue investing in our network infrastructure and operations and
client support function to maintain high quality and availability of services,
which investments will result in absolute dollar increases in cost of revenue
but percentage of revenue declines in the long-term through economies of scale.
In the near-term, however, we expect cost of revenue to increase both in
absolute dollars and as a percentage of revenue, primarily due to increased
investments in public cloud.
Operating Expenses
We classify our operating expenses as research and development, sales and
marketing, and general and administrative expenses.
Research and Development. Our research and development expenses consist
primarily of salary and related expenses, including stock-based compensation,
for personnel related to the development of improvements and expanded features
for our services, as well as quality assurance, testing, product management and
allocated overhead. We expense research and development expenses as they are
incurred except for internal use software development costs that qualify for
capitalization. We believe that continued investment in our solution is
important for our future growth, and we expect our research and development
expenses to increase in absolute dollars and as a percentage of revenue in the
near term and fluctuating in the longer term.
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Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and related expenses, including stock-based compensation, for personnel
in sales and marketing, sales commissions, as well as advertising, marketing,
corporate communications, travel costs and allocated overhead. We believe it is
important to continue investing in sales and marketing to continue to generate
revenue growth, and we expect sales and marketing expenses to increase in
absolute dollars over the long term and fluctuate as a percentage of revenue as
we continue to support our growth initiatives.
General and Administrative. General and administrative expenses consist
primarily of salary and related expenses, including stock-based compensation,
for management, finance and accounting, legal, information systems and human
resources personnel, professional fees, compliance costs, other corporate
expenses and allocated overhead. We expect that general and administrative
expenses will fluctuate in absolute dollars and as a percentage of revenue in
the near term, but to increase in absolute dollars and decline as a percentage
of revenue over time.
Results of Operations for the Three and Six Months Ended June 30, 2021 and 2020
Based on the condensed consolidated statements of operations and comprehensive
loss set forth in this Quarterly Report on Form 10-Q, the following table sets
forth our operating results as a percentage of revenue for the periods
indicated:
Three Months Ended Six Months Ended
June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
Revenue 100 % 100 % 100 % 100 %
Cost of revenue 45 % 43 % 44 % 42 %
Gross profit 55 % 57 % 56 % 58 %
Operating expenses:
Research and development 17 % 17 % 17 % 17 %
Sales and marketing 32 % 32 % 32 % 32 %
General and administrative 16 % 16 % 16 % 16 %
Total operating expenses 65 % 65 % 65 % 65 %
Loss from operations (10) % (8) % (9) % (7) %
Other (expense) income, net:
Interest expense (1) % (6) % (1) % (5) %
Loss on early extinguishment of debt - % (6) % - % (3) %
Other (expense) and interest income (1) % 1 % - % 2 %
Total other (expense) income, net (2) % (11) % (1) % (6) %
Loss before income taxes (12) % (19) % (10) % (13) %
Benefit from income taxes (1) % (3) % - % (1) %
Net loss (11) % (16) % (10) % (12) %
Revenue
Three Months Ended Six Months Ended
$ % $ %
June 30, 2021 June 30, 2020 Change Change June 30, 2021 June 30, 2020 Change Change
(in thousands, except percentages)
Revenue $ 143,782 $ 99,792 $ 43,990 44 % $ 281,664 $ 194,880 $ 86,784 45 %
The increase in revenue for the three and six months ended June 30, 2021
compared to the same periods of 2020 was primarily attributable to our larger
clients, driven by an increase in our sales and marketing activities and our
improved brand awareness.
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Cost of Revenue
Three Months Ended Six Months Ended
$ % $ %
June 30, 2021 June 30, 2020 Change Change June 30, 2021 June 30, 2020 Change Change
(in thousands, except percentages)
Cost of revenue $ 64,395 $ 42,453 $ 21,942 52 % $ 124,198 $ 82,490 $ 41,708 51 %
% of Revenue 45 % 43 % 44% 42%
The increase in cost of revenue for the three and six months ended June 30, 2021
compared to the same periods of 2020 was primarily due to a $5.2 million and
$12.6 million increase in personnel costs, including stock-based compensation
costs, driven mainly by increased headcount and a higher fair value of employee
equity awards due primarily to our increased stock price, a $5.7 million and
$10.0 million increase in depreciation, data center and public cloud costs to
support our growing capacity needs, a $4.9 million and $7.3 million increase in
third-party hosted software costs driven by increased client activities, a $3.3
million and $7.0 million increase in USF contributions and other federal
telecommunication service fees due primarily to increased client usage and an
increase in the USF contribution rate, a $1.2 million and $3.1 million increase
in amortization expense due to the acquisitions of Virtual Observer in April
2020 and Inference in November 2020 , and a $0.1 million and $1.8 million
increase in office, facilities and related costs.
Gross Profit
Three Months Ended Six Months Ended
$ % $ %
June 30, 2021 June 30, 2020 Change Change June 30, 2021 June 30, 2020 Change Change
(in thousands, except percentages)Gross profit$ 79,387 $ 57,339 $ 22,048 38 %$157,466 $112,390 $45,076 40% % of Revenue 55 % 57 % 56% 58% The increase in gross profit for the three and six months endedJune 30, 2021 compared to the same periods of 2020 was primarily due to increases in subscription and related revenues. The decrease in gross margin for the three and six months endedJune 30, 2021 , compared to the same periods of 2020, was primarily due to the increase in depreciation, data center and public cloud costs to support our growing capacity needs, the increase in amortization expense from the acquisition of certain intangible assets fromVirtual Observer and Inference, and from an increase in stock-based compensation costs, driven by increased headcount and a higher fair value of employee equity awards primarily due to our increased stock price. Operating Expenses Research and Development Three Months Ended Six Months Ended $ % $ % June 30, 2021 June 30, 2020 Change Change June 30, 2021 June 30, 2020 Change Change (in thousands, except percentages)
Research and development$ 24,648 $ 17,208 $ 7,440 43 %$46,769 $32,397 $14,372 44% % of Revenue 17 % 17 % 17% 17% The increase in research and development expenses for the three and six months endedJune 30, 2021 compared to the same periods of 2020 was primarily due to a$6.1 million and$11.8 million increase in personnel-related costs including stock-based compensation costs, driven mainly by increased headcount and a higher fair value of employee equity awards due primarily to our increased stock price, and a$0.4 million and$0.8 million increase in office, facilities and related costs. 39 -------------------------------------------------------------------------------- Table of Contents Sales and Marketing Three Months Ended Six Months Ended $ % $ % June 30, 2021 June 30, 2020 Change Change June 30, 2021 June 30, 2020 Change Change (in thousands, except percentages)
Sales and marketing$ 46,024 $ 32,231 $ 13,793 43 %$90,823 $62,391 $28,432 46% % of Revenue 32 % 32 % 32% 32% The increase in sales and marketing expenses for the three and six months endedJune 30, 2021 compared to the same periods of 2020 was primarily due to a$9.1 million and$18.2 million increase in personnel-related costs, including stock-based compensation costs driven mainly by increased headcount and higher fair value equity awards due primarily to our increased stock price, a$1.9 million and$3.7 million increase in sales commission expenses driven by the growth in sales and bookings of our solution, and a$0.9 million and$2.1 million increase in facilities and related costs. The remaining net increase in sales and marketing expenses was primarily due to the execution of our growth strategy to acquire new clients, increase the number of agent seats within our existing client base, and increased advertising and other marketing expenses to increase our brand awareness. General and Administrative Three Months Ended Six Months Ended $ % $ % June 30, 2021 June 30, 2020 Change Change June 30, 2021 June 30, 2020 Change Change (in thousands, except percentages)
General and administrative
$ 6,780 42 %$45,154 $30,787 $14,367 47% % of Revenue 16 % 16 % 16% 16% The increase in general and administrative expenses for the three and six months endedJune 30, 2021 compared to the same periods of 2020 was primarily due to a$3.7 million and$7.6 million increase in personnel costs including stock-based compensation costs, driven mainly by increased headcount and a higher fair value of equity awards due primarily to our increased stock price, a$2.7 million and$5.2 million increase in contingent consideration expense from the Inference acquisition, and a$0.2 million and$1.3 million increase in legal and other professional service costs mainly related to our corporate activities. Other (Expense) Income, Net Three Months Ended Six Months Ended $ % $ % June 30, 2021 June 30, 2020 Change Change June 30, 2021 June 30, 2020 Change Change (in thousands, except percentages) Interest expense$ (2,118) $ (5,734) $ 3,616 (63) %$ (4,056) $ (9,218) $ 5,162 (56) % Loss on early extinguishment of debt - (5,794)$ 5,794 (100) % - (5,794)$ 5,794 (100) % Other (expense) and interest income (353) 829 (1,182) (143) % (178) 1,901 (2,079) (109) % Total other (expense) income, net$ (2,471) $ (10,699) $ 8,228 (77) %$ (4,234) $ (13,111) $ 8,877 (68) % % of Revenue (2) % (11) % (1) % (6) % The decrease in interest expense for the three and six months endedJune 30, 2021 , compared to the same periods of 2020, was primarily due to our adoption of ASU 2020-06, which resulted in the elimination of the debt discounts that were amortized to interest expense over the contractual term of the convertible senior notes prior toJanuary 1, 2021 , and due to the 2023 Note Repurchase Transactions and other 2023 convertible senior note settlements, which resulted in the decrease in contractual interest expense due to the reduction in the aggregate outstanding principal amount of our 2023 convertible senior notes. The decrease in interest expense was offset in 40 -------------------------------------------------------------------------------- Table of Contents part by the increase in contractual interest expense due to the issuance of the 2025 convertible senior notes in May andJune 2020 . See Note 6 to the condensed consolidated financial statements for further details. The decrease in other (expense) and interest income for the three and six months endedJune 30, 2021 , compared to the same periods of 2020, was primarily from lower interest income on our marketable investments. Liquidity and Capital Resources To date, we have financed our operations primarily through sales of our solution, net proceeds from our equity and debt financings, including the issuance of our 2025 convertible senior notes in May andJune 2020 and of our 2023 convertible senior notes inMay 2018 , and lease facilities. As ofJune 30, 2021 , we had$529.5 million in working capital, which included$175.2 million in cash and cash equivalents and$463.7 million in short-term and long-term marketable investments. In May andJune 2020 , we issued$747.5 million aggregate principal amount of our 2025 convertible senior notes in a private offering. The 2025 convertible senior notes mature onJune 1, 2025 and are our senior unsecured obligations. The 2025 convertible senior notes bear interest at a fixed rate of 0.50% per annum, payable semiannually in arrears onJune 1 andDecember 1 of each year, beginningDecember 1, 2020 . In addition, under the terms of the 2025 convertible senior notes, we are obligated to pay additional interest on the 2025 convertible senior notes at a rate equal to 0.500% per annum for the period fromJune 13, 2021 throughJuly 8, 2021 , after which such additional interest is no longer payable. The total net proceeds from the offering, after deducting initial purchasers' discounts and commissions and estimated debt issuance costs, were approximately$728.8 million . InMay 2018 , we issued$258.8 million aggregate principal amount of our 2023 convertible senior notes in a private offering. The 2023 convertible senior notes mature onMay 1, 2023 and are our senior unsecured obligations. The 2023 convertible senior notes bear interest at a fixed rate of 0.125% per annum, payable semiannually in arrears onMay 1 andNovember 1 of each year. The total net proceeds from the offering, after deducting the initial purchasers' discounts and estimated debt issuance costs, were approximately$250.8 million . As ofJune 30, 2021 , after giving effect to the 2023 Note Repurchase Transactions and other settlements upon conversion requests, approximately$41.3 million aggregate principal amount of 2023 convertible senior notes remained outstanding. For additional information regarding the convertible senior notes and related transactions, see Note 6 to the condensed consolidated financial statements included in this report. We believe our existing cash and cash equivalents will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Our future capital requirements will depend on many factors including our growth rate, continuing market acceptance of our solution, client retention, our ability to gain new clients, the timing and extent of spending to support research and development efforts, the outcome of any pending or future litigation or other claims by third parties or governmental entities, the expansion of sales and marketing activities and personnel, the introduction of new and enhanced offerings, and the impact of the COVID-19 pandemic on these or other factors. We may also acquire or invest in complementary businesses, technologies and intellectual property rights, which may increase our use of cash and future capital requirements, both to pay acquisition costs and to support our combined operations. We may raise additional capital through equity or engage in debt financings at any time to fund these or other requirements. However, we may not be able to raise additional capital through equity or debt financings when needed on terms acceptable to us or at all, depending on our financial performance, market conditions and other factors, including the length and severity of the impact of the COVID-19 pandemic on general economic conditions and potential future impacts on the financial markets. If we are unable to raise additional capital as needed, our business, operating results and financial condition could be harmed. In addition, if our operating performance during the next twelve months is below our expectations, our liquidity and ability to operate our business also could be harmed. If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders would be diluted. If we raise additional funds through the incurrence of additional indebtedness, we will be subject to increased debt service obligations and could also be subject to restrictive covenants and other operating restrictions that could negatively impact our ability to operate our business. Under the terms of the Merger Agreement, we have agreed to various covenants and agreements, including, among others, agreements to conduct our business in the ordinary course during the period between the execution of the Merger Agreement and the effective time of the Merger. Outside of certain limited exceptions, we may not take, authorize, commit, resolve, or agree to do certain actions without Zoom's consent, including: acquiring businesses and disposing of significant assets, making capital expenditures in excess of those as set forth in a capital budget provided to Zoom prior to execution of the Merger Agreement, issuing additional capital stock or securities 41
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Table of Contents convertible into capital stock, or incurring additional indebtedness. We do not believe these restrictions will prevent us from meeting our ongoing operating expenses, working capital needs, or capital expenditure requirements.
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