GOODRX HOLDINGS, INC. You should read the following discussion and analysis of our financial condition and results of operations together with Part II, Item 6, "Selected Financial Data" and our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. 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" and in other parts of this Annual Report on Form 10-K. A discussion of the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 has been reported previously in our final prospectus datedSeptember 22, 2020 filed with theSEC onSeptember 24, 2020 pursuant to Rule 424(b)(4) (File No. 333-248465) of the Securities Act (the "Prospectus"), under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." Overview
Our mission is to help Americans get the healthcare they need at a price they
can afford. To achieve this, we are building the leading, consumer-focused
digital healthcare platform in
Healthcare consumers inthe United States face an increasing number of challenges. These include a lack of affordability, transparency, and access to care. Additionally, healthcare professionals' lack of access to current prescription pricing and out of pocket consumer cost information exacerbate the challenges that healthcare consumers face.GoodRx was founded to solve these challenges. We started with a price comparison tool for prescriptions, offering consumers free access to lower prices on their medication. Today, our expanded platform also provides access to brand medication savings programs, affordable and convenient medical provider consultations and lab tests via our telehealth offerings, GoodRx Care and theGoodRx Telehealth Marketplace , and other healthcare related content. Whether a consumer is insured or uninsured, young or old, or suffers from an acute or a chronic ailment, we strive to be at the consumer's side throughout their healthcare journey. We believe that our offerings provide significant savings to consumers, and can help drive greater medication adherence, faster treatment and better patient outcomes that also benefit the broader healthcare ecosystem and its stakeholders. These all contribute to a healthier, happier society. We believe our financial results reflect the significant market demand for our offerings and the value that we provide to the broader healthcare ecosystem. Our revenue grew 42% for the year endedDecember 31, 2020 to$550.7 million , up from$388.2 million for the year endedDecember 31, 2019 . In the year endedDecember 31, 2020 , net loss was$293.6 million , compared to net income of$66.0 million in the year endedDecember 31, 2019 . Net loss for the year endedDecember 31, 2020 was impacted by$383.4 million of stock-based compensation expense and payroll tax expense related to stock-based compensation in connection with equity awards made to the Co-Chief Executive Officers in connection with the IPO, and a$41.7 million charge related to a charitable stock donation in support of our philanthropic endeavors. Adjusted EBITDA was$203.4 million in the year endedDecember 31, 2020 , up from$159.8 million in the year endedDecember 31, 2019 . We have been focusing on capital efficiency and delivering on a cash generative monetization model since inception. Cash flow provided by operating activities grew 58% in the year endedDecember 31, 2020 to$131.3 million , up from$83.3 million in the year endedDecember 31, 2019 . Adjusted EBITDA is a non-GAAP financial measure. For a reconciliation of Adjusted EBITDA to the most directly comparable GAAP financial measure, information about why we consider Adjusted EBITDA useful and a discussion of the material risks and limitations of these measures, please see Part II, Item 6, "Selected Financial Data - Non-GAAP Financial Measures" included elsewhere in this Annual Report on Form 10-K. 79 -------------------------------------------------------------------------------- Impact of COVID-19GoodRx continues to closely monitor how the spread of COVID-19 is affecting its employees, customers and business operations. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders, and business shutdowns. In particular for our business, governmental authorities have also recommended, and in certain cases, required, that elective or other medical appointments be suspended or cancelled to avoid non-essential patient exposure to medical environments and potential infection. These and other measures have not only negatively impacted consumer spending and business spending habits, they have adversely impacted and may further impact our workforce and operations and the operations of healthcare professionals, pharmacies, consumers, PBMs and others in the broader healthcare ecosystem. Although certain of these measures are beginning to ease in some geographic regions, overall measures to contain the COVID-19 outbreak may remain in place for a significant period of time, and certain geographic regions are experiencing a resurgence of COVID-19 infections. The duration and severity of this pandemic is unknown and the extent of the business disruption and financial impact depend on factors beyond our knowledge and control. Various government measures, community self-isolation practices and shelter-in-place requirements, as well as the perceived need by individuals to continue such practices to avoid infection, have generally reduced the extent to which consumers visit healthcare professionals in-person, seek treatment for certain conditions or ailments, and receive and fill prescriptions. Consumers may also increasingly elect to receive prescriptions by mail order instead of at the pharmacy, which could have an adverse impact on our prescription offering. In addition, many pharmacies and healthcare providers have reduced staffing, closed locations or otherwise limited operations, and many prescribing healthcare professionals have reduced or postponed treatment of certain patients. The number of Monthly Active Consumers decreased and our prescription offering experienced a decline in activity in the second quarter of 2020 as compared to the first quarter of 2020 as many consumers avoided visiting healthcare professionals and pharmacies in-person, which we believe has had a similar effect across the industry. The number of Monthly Active Consumers then sequentially increased in the third and fourth quarters of 2020 as the number of physician visits increased and as consumers partially resumed their interaction with the healthcare system. Even though we saw improved activity in our prescription offering in the third and fourth quarters of 2020, we believe COVID-19 continues to have an adverse impact on our prescription offerings and continued improvement in future periods remains uncertain. Any decrease in the number of consumers seeking to fill prescriptions could negatively impact demand for and use of certain of our offerings, particularly our prescription offering, which would have an adverse effect on our business, financial condition and results of operations. Conversely, pandemics, epidemics and outbreaks may significantly and temporarily increase demand for our telehealth offerings. COVID-19 has significantly accelerated the awareness and use of our telehealth offerings, including demand for our GoodRx Care offering and the utilization of ourGoodRx Telehealth Marketplace . While we have experienced a significant increase in demand for the telehealth offerings, there can be no assurance that the levels of interest, demand and use of our telehealth offerings will continue at current levels or will not decrease during or after the pandemic. Any such decrease could have an adverse effect on our growth and the success of our telehealth offerings. Additionally, while the potential economic impact brought by, and the duration of any pandemic, epidemic or outbreak of an infectious disease, including COVID-19, may be difficult to assess or predict, the widespread COVID-19 pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. The full extent to which the outbreak of COVID-19 will continue to impact our business, results of operations and financial condition is still unknown and will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the outbreak of COVID-19 has subsided, we may experience materially adverse impacts to our business as a result of its global economic impact, including any recession that has occurred or may occur in the future. 80 -------------------------------------------------------------------------------- For additional information, see Part I, Item 1A, "Risk Factors-Risks Related to Our Business-A pandemic, epidemic or outbreak of an infectious disease inthe United States , including the outbreak of COVID-19, could impact our business."
Seasonality
We typically experience stronger consumer demand during the first and fourth quarters of each year, which coincide with generally higher consumer healthcare spending, doctor office visits, annual benefit enrollment season, and seasonal cold and flu trends. This seasonality may impact revenue and sales and marketing expense. The rapid growth of our business may have masked these trends to date, and we expect the impact of seasonality to be more pronounced in the future. However, in 2020 we saw the impact of the COVID-19 pandemic further disrupt these trends. This disruption has continued in 2021 and may continue in future periods. Initial Public Offering OnSeptember 25, 2020 , we completed our IPO by issuing 28,615,034 shares of our Class A common stock at a price to the public of$33 per share, resulting in net proceeds to us of$886.9 million , after deducting the underwriting discount of$52.5 million and offering expenses of$4.9 million . Additionally, certain existing stockholders sold an aggregate of 11,192,657 shares.
Private Placement
OnSeptember 25, 2020 , we completed the sale of 3,030,303 shares of our Class A common stock at a purchase price of$33 per share toSLP Geology Aggregator, L.P. , resulting in proceeds to us of$100.0 million .SLP Geology Aggregator, L.P. is an investment fund associated withSilver Lake Partners .
Recent Developments
OnMarch 8, 2021 , we entered into a definitive agreement to acquire 100% of the outstanding equity interests ofHealthiNation, Inc. ("HealthiNation") for approximately$75.0 million in cash, subject to customary adjustments and payable at closing of the acquisition. HealthiNation is a leading provider of engaging and informative health video content across all main categories of healthy living. The proposed acquisition will allow us to supplement and expand the services currently available under our existing pharmaceutical manufacturer solutions platform. We expect to fully fund the proposed acquisition with available cash on hand, but may also opt to fund a portion or all of the consideration through borrowings under our existing line of credit. The proposed acquisition is expected to close in the latter half of the second quarter of 2021, subject to a number of customary conditions, including but not limited to, resolution of any due diligence findings and no material adverse changes occurring in HealthiNation. 81 -------------------------------------------------------------------------------- Key Financial and Operating Metrics
We use Monthly Active Consumers and Adjusted EBITDA to assess our performance, make strategic and offering decisions and build our financial projections.
Monthly Active Consumers
We define Monthly Active Consumers as the number of unique consumers who have used aGoodRx code to purchase a prescription in a given calendar month and have saved money compared to the list price of the medication. A unique consumer who uses aGoodRx code more than once in a calendar month to purchase prescription medications is only counted as one Monthly Active Consumer in that month. A unique consumer who uses aGoodRx code in two or three calendar months within a quarter will be counted as a Monthly Active Consumer in each such month. Monthly Active Consumers do not include subscribers to our subscription offerings, consumers of our pharmaceutical manufacturer solutions offering, or consumers who used our telehealth offerings. When presented for a period longer than a month, Monthly Active Consumers is averaged over the number of calendar months in such period. For example, a unique consumer who uses aGoodRx code twice in January, but who did not use our prescription offering again in February or March, is counted as 1 in January and as 0 in both February and March, thus contributing 0.33 to our Monthly Active Consumers for such quarter (average of 1, 0 and 0). A unique consumer who uses aGoodRx code in January and in March, but did not use our prescription offering in February, would be counted as 1 in January, 0 in February and 1 in March, thus contributing 0.66 to our Monthly Active Consumers for such quarter. Monthly Active Consumers from acquired companies are only included beginning in the first full quarter following the acquisition. Beginning in the fourth quarter of 2020, our Monthly Active Consumers number includes consumers we acquired through the acquisition of Scriptcycle inAugust 2020 . Three Months EndedMar. 31 Jun. 30 Sept. 30 Dec. 31 Mar. 31 Jun. 30 Sept. 30 Dec. 31 Mar. 31 Jun. 30 Sept. 30 Dec. 31 Mar. 31 Jun. 30 Sept. 30 Dec. 31 Mar. 31 Jun. 30 Sept. 30 Dec. 31 2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 2018 2019 2019 2019 2019 2020 2020 2020 2020 (in thousands) Monthly Active Consumers 718 852 981 1,138 1,279 1,309 1,455 1,710 2,020 2,170 2,413 2,750 3,188 3,513 3,787 4,272 4,875 4,418 4,895 5,644 The number of Monthly Active Consumers is a key indicator of the scale of our consumer base and a gauge for our marketing and engagement efforts. We believe that this metric reflects our scale, growth and engagement with consumers. The number of average Monthly Active Consumers grew 34% in the year endedDecember 31, 2020 to 5.0 million, compared to 3.7 million in the year endedDecember 31, 2019 . Adjusted EBITDA Adjusted EBITDA is a key measure we use to assess our financial performance and is also used for internal planning and forecasting purposes. We believe Adjusted EBITDA is helpful to investors, analysts and other interested parties because it can assist in providing a more consistent and comparable overview of our operations across our historical financial periods. In addition, this measure is frequently used by analysts, investors and other interested parties to evaluate and assess performance.
Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP measures and are presented for supplemental informational purposes only and should not be considered as alternatives or substitutes to financial information presented in accordance with GAAP.
For more information about Adjusted EBITDA and Adjusted EBITDA Margin, including
the definition and limitations of such measures, and a reconciliation of
Adjusted EBITDA to net (loss) income, the most comparable financial measure
calculated in accordance with GAAP, see Part II, Item 6, "Selected Financial
Data" included in Part II of this Annual Report on Form 10-K.
82--------------------------------------------------------------------------------
The following table presents our Adjusted EBITDA and Adjusted EBITDA Margin for
the periods indicated:
Year Ended December 31,
2020 2019
(dollars in thousands)
Adjusted EBITDA $ 203,449 $ 159,802
Adjusted EBITDA Margin 36.9 % 41.2 %
Adjusted EBITDA grew 27% in the year ended December 31, 2020 to $203.4 million ,
compared to $159.8 million in the year ended December 31, 2019 as our business
continued to grow. Adjusted EBITDA margin decreased from 41.2% to 36.9% due to
an increase in cost of revenue relative to revenue due primarily to continued
investments in product development and technology, growth of our telehealth
offering, as well as investments in our general and administrative
infrastructure as we prepared for our IPO and to operate as a public company.
We expect our Adjusted EBITDA and Adjusted EBITDA Margin to fluctuate primarily based on the level of our investments in sales and marketing and product development and technology relative to changes in revenue.
We generally expect to continue to invest in sales and marketing in the near-term, but will continue to evaluate the impact of COVID-19 on our business and actively manage our sales and marketing spend, including investment in consumer acquisition, which is largely variable, as market conditions change. We also intend to continue to invest in product development and technology to continue to improve our platform, introduce new offerings and scale existing ones. Additionally, we expect to continue to invest in our general and administrative infrastructure to support our operations as a public company.
Components of our Results of Operations
Revenue
Our revenue is primarily derived from prescription transactions revenue that is generated when pharmacies fill prescriptions for consumers, and from other revenue streams such as our subscription offerings, from pharmaceutical manufacturers and affiliates, and our telehealth offerings. All of our revenue has been generated inthe United States .
• Prescription transactions revenue: Consists primarily of revenue
generated from PBMs when a prescription is filled with a GoodRx code
provided through our platform. The majority of our contracts with PBMs
provide for fees that represent a percentage of the fees that the PBM
charges to the pharmacy, and a minority of our contracts provide for a
fixed fee per transaction. Our percentage of fee contracts often alsoinclude a minimum fixed fee per transaction. We expect the revenue
contribution from contracts with fixed fee arrangements to remain
largely stable over the medium term, and do not expect that changes in
revenue contribution from fixed fee versus percentage of fee
arrangements will materially impact our revenue. Certain contracts also
provide that the amount of fees we receive is based on the volume of
prescriptions filled each month.
• Other revenue: Consists primarily of subscription revenue from oursubscription offerings, including Gold and Kroger Savings, revenue
generated from pharmaceutical manufacturers for advertising and
integrating onto our platform their affordability solutions to our
consumers and advertising in direct mailers, and revenue generated by
our telehealth offerings that allow consumers to access healthcare
professionals online.
83
--------------------------------------------------------------------------------
Expenses
We incur the following expenses directly related to our cost of revenue and operating expenses:
• Cost of revenue: Consists primarily of costs related to outsourced
consumer support, healthcare provider costs for GoodRx Care, personnel
costs including salaries, benefits, bonuses and stock-based compensation
expense, for our consumer support employees, hosting and cloud costs,
merchant account fees, processing fees and allocated overhead. Cost ofrevenue is largely driven by the growth of our visitor, subscriber and
active consumer base, as well as our telehealth offerings. Our cost of
revenue as a percentage of revenue may vary based on the relative growth
rates of our various offerings.
• Product development and technology: Consists primarily of personnel
costs, including salaries, benefits, bonuses and stock-based
compensation expense, for employees involved in product development
activities, third-party services and contractors related to product
development, information technology and software-related costs, and
allocated overhead. Product development and technology expenses are
primarily driven by increases in headcount required to support andfurther develop our various products. We capitalize certain qualified
costs related to the development of internal-use software, which may
also cause product development and technology expenses to vary fromperiod to period. We expect product development and technology expenses
will increase on an absolute dollar basis as we continue to grow our
platform and product offerings.
• Sales and marketing: Consists primarily of advertising and marketing
expenses for consumer acquisition and retention, as well as personnel
costs, including salaries, benefits, bonuses, stock-based compensation
expense and sales commissions, for sales and marketing employees,
third-party services and contractors, and allocated overhead. Sales and
marketing expenses are primarily driven by investments to grow and
retain our consumer base and may fluctuate based on the timing of our
investments in consumer acquisition and retention. Over the near to
medium term, we expect to increase our spending on sales and marketing.
• General and administrative: Consists primarily of personnel costsincluding salaries, benefits, bonuses and stock-based compensation
expense for our executive, finance, accounting, legal, and human
resources functions, as well as professional fees, occupancy costs,
change in fair value of contingent consideration, charitable donations
and other general overhead costs. We have incurred, and expect to
continue to incur, additional general and administrative costs in
compliance, legal, investor relations, insurance, and professional
services related to our compliance and reporting obligations as a public
company. We have incurred, and also expect to incur, additional generaland administrative costs in connection with the vesting and settlement
of RSUs, including the grant of restricted stock unit awards covering an
aggregate of 12,316,533 shares of Class B common stock to each of our
Co-Chief Executive Officers in connection with our IPO in particular. We
also anticipate that as we continue to grow as a company our general and
administrative costs will increase on an absolute dollar basis.
• Depreciation and amortization: Consists of depreciation of property and
equipment and amortization of capitalized internal-use software costs
and intangible assets. Our depreciation and amortization changes
primarily based on changes in our property and equipment, intangible
assets, and capitalized software balances.
Other (Income) Expense
Our other (income) expense consists of the following:
• Other (income) expense, net: Consists primarily of third-party
transaction expenses related to the modification of our debt facilities.
• Loss on extinguishment of debt: Consists of losses recognized due to
extinguishment of debt.
• Interest expense: Consists primarily of interest expense associated with
the Credit Facilities (as defined below), including amortization of debt
issuance costs and discounts.
84
--------------------------------------------------------------------------------
• Interest income: Consists primarily of interest income earned on excess
cash held in interest-bearing accounts.
Income Tax Benefit (Expense)
Our income tax benefit (expense) consists of federal and state income taxes. Our effective income tax rates for the year endedDecember 31, 2020 was 3.2% and for the year endedDecember 31, 2019 was 20.4%. The change in our effective income tax rate for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 was primarily due to non-deductible stock-based compensation expense for the Founders Awards made in connection with the IPO. The tax effects of the non-deductible officers' compensation were offset by excess tax benefits related to the exercise of stock options and tax benefits fromU.S. federal and state tax credits. Our effective income tax rate differed from theU.S. statutory tax rate of 21% primarily due to officers' compensation limitations, stock-based compensation tax deductions, andU.S. federal and state tax credits. Results of Operations
The following table summarizes key components of our results of operations for
the years ended
Year Ended December 31,
2020 2019
(in thousands)
Revenue:
Prescription transactions revenue $ 488,257 $ 364,582
Other revenue 62,443 23,642
Total revenue 550,700 388,224
Costs and operating expenses:
Cost of revenue, exclusive of depreciation and
amortization
presented separately below 29,587 14,016
Product development and technology 61,816 29,300 Sales and marketing 255,135 176,967 General and administrative 461,451 14,692 Depreciation and amortization 18,430 13,573 Total costs and operating expenses 826,419 248,548 Operating (loss) income (275,719 ) 139,676 Other (income) expense: Other (income) expense, net (22 ) 2,967 Loss on extinguishment of debt - 4,877 Interest income (160 ) (715 ) Interest expense 27,913 49,569 Total other expense, net 27,731 56,698 (Loss) income before income taxes (303,450 ) 82,978 Income tax benefit (expense) 9,827 (16,930 ) Net (loss) income$ (293,623 ) $ 66,048 85
--------------------------------------------------------------------------------
Year Ended
Revenue
Year Ended December 31, Change
2020 2019 $ %
(dollars in thousands)
Prescription transactions revenue $ 488,257 $ 364,582 $ 123,675 34 %
Other revenue 62,443 23,642 38,801 164 %
Total revenue $ 550,700 $ 388,224 $ 162,476 42 %
Prescription transactions revenue for the year ended December 31, 2020 increased
$123.7 million , or 34%, compared to the year ended December 31, 2019 , driven
primarily by a 34% increase in the number of our average Monthly Active
Consumers. We believe prescription transactions revenue continues to be impacted
by COVID-19. Scriptcycle active consumers are also included in our Monthly
Active Consumers number beginning in the fourth quarter of 2020, the first full
quarter post its acquisition.
Other revenue for the year ended December 31, 2020 increased $38.8 million , or
164%, compared to the year ended December 31, 2019 . This increase was primarily
due to an increase in subscription revenue as a result of an increase in the
number of subscribers in the year ended December 31, 2020 compared to the year
ended December 31, 2019 , an increase in revenue from our pharmaceutical
manufacturers offering, and an increase in telehealth revenue driven by GoodRx
Care and the launch of the GoodRx Telehealth Marketplace in March 2020 .
Costs and operating expenses
Cost of revenue, exclusive of depreciation and amortization
Year Ended December 31, Change
2020 2019 $ %
(dollars in thousands)Cost of revenue, exclusive of depreciation
and amortization$ 29,587 $ 14,016 $ 15,571 111 % As a percentage of total revenue 5 % 4 % Cost of revenue for the year endedDecember 31, 2020 increased$15.6 million , or 111%, compared to the year endedDecember 31, 2019 . This increase was primarily due to a$7.1 million increase in provider cost related to our telehealth offerings driven by an increase in the number of online provider visits, a$3.5 million increase in outsourced and in-house personnel related consumer support expense to support our growth, and other increases in allocated overhead, hosting and cloud expenses, and merchant fees.
Product development and technology
Year Ended December 31, Change
2020 2019 $ %
(dollars in thousands)
Product development and technology
As a percentage of total revenue 11 % 8 % Product development and technology expenses for the year endedDecember 31, 2020 increased by$32.5 million , or 111%, compared to the year endedDecember 31, 2019 . This increase was primarily due to increases in product development related personnel expenses of$23.8 million due to higher headcount and an increase in stock-based compensation expense related to awards made in connection with and after our IPO. The increase in product development and technology expense was also due to an increase in allocated overhead of$4.6 million to support our product development efforts and an increase in third-party services and contractor expenses related to product development of$4.1 million . 86
--------------------------------------------------------------------------------
Sales and marketing
Year Ended December 31, Change
2020 2019 $ %
(dollars in thousands)
Sales and marketing $ 255,135 $ 176,967 $ 78,168 44 %
As a percentage of total revenue 46 % 46 %
Sales and marketing expenses for the year ended December 31, 2020 increased by
$78.2 million , or 44%, compared to the year ended December 31, 2019 . This
increase was primarily due to a $58.7 million increase in advertising expenses
and a $14.1 million increase in sales and marketing related personnel expenses
due to higher headcount and an increase in stock-based compensation expense
related to awards made in connection with and after our IPO.
We continue to evaluate the impact of COVID-19 on our business and actively manage our consumer acquisition spending according to market conditions.
General and administrative
Year Ended December 31, Change
2020 2019 $ %
(dollars in thousands)
General and administrative $ 461,451 $ 14,692 $ 446,759 3,041 %As a percentage of total revenue 84 % 4 % General and administrative expenses for the year endedDecember 31, 2020 increased by$446.8 million , or 3,041%, compared to the year endedDecember 31, 2019 . This increase was primarily due to$383.4 million of expense related to the Founders Awards made in connection with the IPO as further described in Note 15 of our audited consolidated financial statements, made up of$373.0 million of stock based compensation and$10.4 million payroll tax related to this award, and a$41.7 million charge related to a charitable stock donation in support of our philanthropic endeavors. The increase in general and administrative expense was also due to a$10.3 million increase in other executive and administrative related personnel expenses due to higher headcount and an increase in stock-based compensation expense related to awards made in connection with and after our IPO, and a$9.0 million increase in insurance and professional and other fees to support our growth, preparation for our IPO, and operations as a public company after our IPO. Depreciation and amortization Year Ended December 31, Change 2020 2019 $ % (dollars in thousands)
Depreciation and amortization
As a percentage of total revenue 3 % 3 %
Depreciation and amortization expenses for the year ended December 31, 2020
increased by $4.9 million , or 36%, compared to the year ended December 31, 2019 .
This increase was due primarily to a $2.6 million increase in capitalized
software amortization due to higher capitalized costs for platform improvements
and the introduction of new products and features and a $1.5 million increase in
intangible assets amortization as a result of intangible asset additions from
our 2019 and 2020 acquisitions. We expect depreciation to increase over the near
term due to $21.8 million of tangible assets placed in service towards the end
of the fourth quarter of 2020 related to our new office facility in Santa
Monica .
87--------------------------------------------------------------------------------
Other (income) expense, net
Year Ended December 31, Change
2020 2019 $ %
(dollars in thousands)
Other (income) expense, net $ (22 ) $ 2,967 $ (2,989 ) (101 )%As a percentage of total revenue 0 % 1 % Other expenses decreased by$3.0 million compared to 2019 due to third-party transaction expenses related to an amendment to the First Lien Credit Agreement inNovember 2019 .
Loss on extinguishment of debt
Year Ended December 31, Change
2020 2019 $ %
(dollars in thousands)
Loss on extinguishment of debt $ - $ 4,877
As a percentage of total revenue 0 % 1 % In 2019, we recognized a loss of$4.9 million related to prepayment penalties and the write-off of unamortized loan fees upon the extinguishment of our Second Lien Term Loan Facility (as defined below) inNovember 2019 . Interest income Year Ended December 31, Change 2020 2019 $ % (dollars in thousands) Interest income$ (160 ) $ (715 ) $ 555 (78 )%
As a percentage of total revenue 0 % 0 %
The decrease in interest income was primarily due to lower interest rates during
the year ended December 31, 2020 , compared to the year ended December 31, 2019 .
Interest expense
Year Ended December 31, Change
2020 2019 $ %
(dollars in thousands)
Interest expense $ 27,913 $ 49,569 $ (21,656 ) (44 )%As a percentage of total revenue 5 % 13 % Interest expense for the year endedDecember 31, 2020 decreased by$21.7 million , or 44%, compared to the year endedDecember 31, 2019 primarily due to theNovember 2019 amendment to increase the amount of the First Lien Term Loan Facility in order to repay all amounts outstanding under the Second Lien Term Loan Facility, which bore interest at a higher rate than the First Lien Term Loan Facility, as further described below, as well as due to lower average debt balances and lower interest rates. 88
--------------------------------------------------------------------------------
Income tax benefit (expense)
Year Ended December 31, Change
2020 2019 $ %
(dollars in thousands)
Income tax benefit (expense)
Effective income tax rate 3 % 20 %
For the year ended December 31, 2020 , we had an income tax benefit of $9.8
million , compared to income tax expense of $16.9 million for the year ended
December 31, 2019 and an effective income tax rate of 3% and 20%, respectively.
This difference was due primarily to the pre-tax loss for the year ended
December 31, 2020 as a result of $373.0 million of stock-based compensation
expense related to the Founders Awards made in connection with the IPO and a
$41.7 million charge related to a charitable stock donation in support of our
philanthropic endeavors. The tax effects of the non-deductible Founders Awards
stock-based compensation expense were partially offset by excess tax benefits
related to the exercise of stock options and tax benefits from U.S. federal and
state tax credits.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through net cash provided by operating activities, equity issuances, and borrowings under our long-term debt arrangements. Our primary requirements for liquidity and capital are to finance working capital, capital expenditures and general corporate purposes. Our principal sources of liquidity are expected to be our cash and cash equivalents and borrowings available under our$100.0 million secured asset-based Revolving Credit Facility. As ofDecember 31, 2020 , we had cash and cash equivalents of$968.7 million and$90.9 million available under the Revolving Credit Facility. We believe that our net cash provided by operating activities, cash on hand and availability under the Revolving Credit Facility will be adequate to meet our operating, investing and financing needs for at least the next 12 months. Our future capital requirements will depend on many factors, including our revenue growth, the timing and extent of investments to support such growth, the expansion of sales and marketing activities, and many other factors as described in Part I, Item 1A, "Risk Factors". We historically have not had any off-balance sheet arrangements nor do we currently have any off-balance sheet arrangements as defined underSEC rules. If necessary, we may borrow funds under our Revolving Credit Facility to finance our liquidity requirements, subject to customary borrowing conditions. To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds; however, such financing may not be available on favorable terms, or at all. In particular, the widespread COVID-19 pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, reducing our ability to access capital. If we are unable to raise additional funds when or on the terms desired, our business, financial condition and results of operations could be adversely affected. In light of the large number of RSUs subject to the Founders Awards that were granted in connection with our IPO inSeptember 2020 , we have incurred and anticipate that we will incur substantial additional stock-based compensation and expend substantial funds to satisfy tax withholding and remittance obligations as these RSUs vest over time. The grant date fair value of the Founders Awards was$533.3 million . Given the Company's stock price for the post IPO period, all of the stock price goals with respect to the Performance-Vesting Founders Awards, (see Note 15 of our consolidated financial statements) were achieved inOctober 2020 . As a result, all 16,422,044 Performance-Vesting Founders Awards vested during the year endedDecember 31, 2020 . During the year endedDecember 31, 2020 , the Company has recognized a cumulative$373.0 million of stock-based compensation expense related to the Founders Awards, of which$53.2 million related to the Time-Vesting Founders Awards and$319.8 million related to the Performance-Vesting Founders Awards. AtDecember 31, 2020 , there was$160.3 million of total 89
-------------------------------------------------------------------------------- unrecognized stock-based compensation cost related to the time-vesting portion of the Founders Awards, which is expected to be recognized over the weighted average remaining service period of 2.1 years. In addition, as a result of the Founders Awards, and the Performance-Vesting Founders Awards in particular, a large number of shares of Class B common stock will be issued on the settlement date. On the settlement dates for the RSUs, we plan to withhold shares and remit income taxes on behalf of the holders of such Founders Awards at applicable statutory rates, which we refer to as net settlement, which may result in substantial tax withholding obligations. As an employee earns compensation, both the employer and the employee are liable for some portion ofSocial Security taxes and Medicare taxes (collectively referred to as "FICA" taxes) on the compensation. FICA taxes are generally due in the period when the substantial risk of forfeiture lapses. As the Performance-Vesting Founders Awards vested inOctober 2020 , the Company accelerated the settlement of 0.7 million RSUs during the fourth quarter of 2020 sufficient to satisfy FICA tax withholding obligations due in the year of vesting. The remaining non-accelerated 15.7 million Performance-Vesting Founders Awards shares will not be issued until three years from the vesting date or, if earlier, a change in control event, as defined in the RSU agreements governing the Founders Awards. Assuming an approximate 47% income tax withholding rate and stock price of$65.00 per share at settlement, for the 15.7 million Performance-Vesting Founders Award shares that vested and have yet to be settled as described in the preceding paragraph, we estimate that our cash obligation on behalf of our Co-Founders to the relevant tax authorities to satisfy income tax withholding obligations would be approximately$481.7 million , and we would deliver an aggregate of approximately 8.3 million shares of our Class B common stock to net settle these awards, after withholding an aggregate of approximately 7.4 million shares of our Class B common stock. The actual amount of the income tax obligations and the number of shares to be delivered could be higher or lower, depending on the price of our Class A common stock upon settlement and the applicable income tax withholding rates then in effect.
Credit Facilities
InOctober 2018 ,GoodRx, Inc. , our wholly owned subsidiary, as borrower, andGoodRx Intermediate Holdings, LLC , entered into a first lien credit agreement with various lenders ("First Lien Credit Agreement"). The FirstLien Credit Agreement provided for a$40.0 million Revolving Credit Facility and a$545.0 million senior secured term loan facility ("First Lien Term Loan Facility" and, together with the Revolving Credit Facility, the "Credit Facilities"). InNovember 2019 , the First Lien Term Loan Facility was amended to increase the amount of the facility to$700.0 million . Additionally, inMay 2020 , the Revolving Credit Facility was amended to increase the amount of the facility to$100.0 million . The Revolving Credit Facility and the First Lien Term Loan Facility under the First Lien Credit Agreement are collateralized by substantially all of our assets, including our intellectual property, and 100% of the equity interest ofGoodRx, Inc. The First Lien Credit Agreement that governs the Revolving Credit Facility and the First Lien Term Loan Facility contains certain affirmative and negative covenants, including, among other things, restrictions on indebtedness, liens, fundamental changes, repurchases of stock, dividends and other distributions.GoodRx, Inc. is restricted from making dividend payments, loans or advances toGoodRx Intermediate Holdings, LLC andGoodRx Holdings, Inc. In addition,GoodRx, Inc. is subject to a financial covenant wherebyGoodRx, Inc. is required to maintain a First Lien Net Leverage Ratio (as defined in the FirstLien Credit Agreement) not to exceed 8.2 to 1.0. AtDecember 31, 2020 , we were in compliance with the covenants under the First Lien Credit Agreement.
Revolving Credit Facility
Loans under the Revolving Credit Facility bear interest at a rate per annum equal to the LIBO Screen Rate (as defined in the First Lien Credit Agreement) plus a variable margin rate, which is based on our most recently determined First Lien Net Leverage Ratio (as defined in the First Lien Credit Agreement), that ranges from 2.50% to 3.00%. The Revolving Credit Facility has a variable commitment fee, which is based on the Company's most recently determined First Lien Net Leverage Ratio (as defined in the First Lien Credit Agreement), and ranges from 0.25% to 0.50% per annum. In addition, the Revolving Credit Facility has a fixed fronting fee of 0.125% per annum of our aggregate undrawn and disbursed but unreimbursed letters of credit. The Revolving Credit Facility expires onOctober 11, 2024 . As ofDecember 31, 2020 , there was no outstanding principal balance under the Revolving Credit Facility. 90 -------------------------------------------------------------------------------- Under the terms of a lease agreement entered into duringSeptember 2019 ,GoodRx, Inc. assigned to the landlord drawdown rights against the Revolving Credit Facility for up to$9.0 million to meet the contractual line of credit requirement in the lease agreement. The landlord can draw on the Revolving Credit Facility in the event of the Company's default on rent or damages to the building. The assigned rights to the landlord will be held for the initial three years of the lease term, and subject to certain conditions, the letter of credit will decrease thereafter by up to 10% per year based upon the original amount to no less than$2 million . This outstanding letter of credit to the landlord reduces our available borrowings under the Revolving Credit Facility by an amount equal to the value of assigned rights. There were outstanding letters of credit issued against the Revolving Credit Facility for$9.1 million as ofDecember 31, 2020 , which reduces the Company's available borrowings under the Revolving Credit Facility to$90.9 million .
First Lien Term Loan Facility
The First Lien Term Loan Facility accrues interest at a rate per annum equal to the LIBO Screen Rate (as defined in the First Lien Credit Agreement) plus a variable margin rate, which is based on the Company's most recently determined Net Leverage Ratio (as defined in the First Lien Credit Agreement), that ranges from 2.75% to 3.00% per annum. The First Lien Credit Agreement requires quarterly principal payments fromMarch 2019 throughSeptember 2025 , with any remaining unpaid principal and any accrued and unpaid interest due on the maturity date ofOctober 10, 2025 .
The effective interest rate on the First Lien Term Loan Facility was 3.97% for
the year ended
The carrying value of the First Lien Term Loan Facility was$666.9 million , net of unamortized debt issuance costs and discount of$14.2 million , as ofDecember 31, 2020 .
Second Lien Term Loan Facility
Concurrent with the above First Lien Credit Agreement,GoodRx, Inc. , as borrower, andGoodRx Intermediate Holdings, LLC entered into a second lien credit agreement with various lenders (the "Second Lien Credit Agreement"). The Second Lien Credit Agreement provided for a$200.0 million secured term loan facility (the "Second Lien Term Loan Facility") that accrued interest at a rate per annum equal to the LIBO Screen Rate (as defined in the SecondLien Credit Agreement) plus a margin of 7.50% per annum. In connection with the amendment to increase the amount of the First Lien Term Loan Facility inNovember 2019 , we repaid all amounts outstanding and owed under the Second Lien Term Loan Facility, using the proceeds from the amendment to the First Lien Term Loan Facility and existing cash resources, including$200.0 million in principal amount outstanding, approximately$0.1 million of accrued interest and a$2.0 million prepayment penalty. Holding Company Status We are a holding company that does not conduct any business operations of our own. As a result, we are largely dependent upon cash distributions and other transfers from our subsidiaries to meet our obligations and to make future dividend payments, if any. The First Lien Credit Agreement contains covenants restricting payments of dividends by our subsidiaries, includingGoodRx, Inc. , unless certain conditions are met. These covenants provide for certain exceptions for specific types of payments. Based on these restrictions, all of the net assets ofGoodRx, Inc. were restricted pursuant to the terms of the Credit Facilities as ofDecember 31, 2020 . Since the restricted net assets ofGoodRx, Inc. and its subsidiaries exceed 25% of our consolidated net assets, in accordance with Regulation S-X, refer to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for condensed parent company financial information ofGoodRx Holdings, Inc. 91
--------------------------------------------------------------------------------
Cash Flows
Year Ended December 31,
2020 2019
(in thousands)
Net cash provided by operating activities $ 131,341 Net cash used in investing activities (91,617 )
(37,055 )
Net cash provided by (used in) financing activities 905,817
(54,781 ) Net change in cash$ 945,541 $ (8,550 )
Net cash provided by operating activities
Net cash provided by operating activities was$131.3 million for the year endedDecember 31, 2020 consisting of$293.6 million of net loss, adjusted for$457.4 million of non-cash expenses, made up primarily from the combination of stock-based compensation of$397.3 million , including$373.0 million of stock-based compensation related to the Founders Awards made in connection with the IPO and a charitable stock donation of$41.7 million in support of our philanthropic endeavors. These non-cash expenses were partially offset by$32.5 million of net cash used as a result of changes in operating assets and liabilities. The changes in operating assets and liabilities were primarily driven by an increase in income taxes receivable due to our third and fourth quarter tax benefit and increases in accrued expenses and other current liabilities, accounts receivable, accounts payable, and prepaid expenses due to our growing operations. Net cash provided by operating activities was$83.3 million for the year endedDecember 31, 2019 consisting of$66.0 million of net income, adjusted for$22.1 million of non-cash expenses, partially offset by$4.8 million of net cash used as a result of changes in operating assets and liabilities. The changes in operating assets and liabilities were primarily driven by increases in accounts receivable, partially offset by an increase in our accrued expenses and other current liabilities due to our growing operations.
Net cash used in investing activities
Net cash used in investing activities of$91.6 million for the year endedDecember 31, 2020 was related to$55.8 million in cash consideration, net of cash acquired, related to the acquisition of Scriptcycle,$20.6 million for capital expenditures, due primarily to leasehold improvements and furniture and fixtures related to our new office facility inSanta Monica, California , and$15.3 million for capitalized software. Net cash used in investing activities of$37.1 million for the year endedDecember 31, 2019 was related to$31.3 million in cash consideration, net of cash acquired, related to our 2019 acquisitions,$4.3 million for capitalized software, and$1.4 million for capital expenditures.
Net cash provided by (used in) financing activities
Net cash provided by financing activities of$905.8 million for the year endedDecember 31, 2020 was related to$886.9 million in net proceeds from our IPO,$100.0 million in proceeds from our private placement inSeptember 2020 , and$6.0 million from exercise of options, partially offset by a net$7.0 million in long-term debt principal payments,$78.7 million for employee taxes paid related to net share settlement of equity awards, and payments of$1.3 million for debt issuance costs related to increasing the amount of our line of credit inMay 2020 . Net cash used in financing activities of$54.8 million for the year endedDecember 31, 2019 was primarily related to$211.8 million in long-term debt payments and payments of$2.2 million for debt issuance costs and prepayment penalties, partially offset by$154.6 million in proceeds from long-term debt and$4.7 million in proceeds from issuance of common stock and exercise of options. 92
--------------------------------------------------------------------------------
Contractual Obligations and Commitments
The following table summarizes our contractual obligations and commitments as ofDecember 31, 2020 : Less than Total 1 year 1-3 years 3-5 years Thereafter (in thousands)
Principal payments on long-term debt (1)
14,058$ 660,039 $ - Interest on long-term debt (2) 93,072 19,646 38,681 34,745 - Operating lease obligations (3) 51,519 4,539 9,841 9,343 27,796 Purchase commitments (4) 8,988 4,168 4,520 300 - Credit fee payments (5) 4,145 466 909 821 1,949 Total$ 838,850 $ 35,848 $ 68,009 $ 705,248 $ 29,745
(1) Long-term debt represents borrowings under the Credit Facilities. Under the
Credit Facilities we are required to pay quarterly principal payments of
0.25% of the outstanding principal balance of the First Lien Term Loan
Facility through
accrued and unpaid interest due on
any outstanding principal balance of the Revolving Credit Facility on
October 11, 2024 .
(2) Our long-term debt bears a floating interest rate based on LIBO. Theinterest obligation on long-term debt included in the table above is based
on the interest rate in effect at
(3) Operating lease obligations relate to our office space facilities. These
lease terms expire on various dates through 2031. The majority of the lease
agreements are renewable at the end of the lease period.
(4) Effective from July 1, 2020 , the Company entered into an addendum to our
agreement with a third-party, pursuant to which we committed to spend an
aggregate of
after
auto renewal. In
with another third-party, pursuant to which we committed to spend an
aggregate of at least $3.3 million annually between January 2021 and
December 2022 on cloud hosting services.
(5) We are required to pay a commitment fee of 0.25% based on the unused portion
and 2.625% on the used portion of the Revolving Credit Facility. As of
million in standby letters of credit as security for our operating lease
obligations.
Recent Accounting Pronouncements
See Note 2 to our audited consolidated financial statements appearing elsewhere
in this Annual Report on Form 10-K for further information on certain accounting
standards adopted in 2020 and recent accounting announcements that have not yet
been required to be implemented and may be applicable to our future operations.
Critical Accounting Policies and Estimates
Our audited consolidated financial statements and the related notes thereto
included elsewhere in this Annual Report on Form 10-K are prepared in accordance
with GAAP. The preparation of consolidated financial statements also requires us
to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, costs and expenses and related disclosures. We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. Actual results could differ
significantly from our estimates. To the extent that there are differences
between our estimates and actual results, our future financial statement
presentation, financial condition, results of operations and cash flows will be
affected.
We believe that the accounting policies described below involve a significant
degree of judgment and complexity. Accordingly, we believe these are the most
critical to aid in fully understanding and evaluating
93--------------------------------------------------------------------------------
our consolidated financial condition and results of operations. For further information, see Note 2 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Revenue Recognition
Our revenue is primarily derived from prescription transaction fees generated when pharmacies fill prescriptions for consumers. We also generate other revenue from subscription, pharmaceutical manufacturer solutions and telehealth services. OnJanuary 1, 2019 , we adopted ASC 606, Revenue from contracts with customers, on a modified retrospective basis. The adoption of ASC 606 was applied to all contracts at the date of initial application and did not have a material impact on our revenue recognition.
Prescription Transactions Revenue
Prescription transactions revenue is primarily generated from PBMs, or customers, when a prescription is filled with aGoodRx code provided through our platform, and saves money compared to the list price in that pharmacy. In our contracts with customers, the nature of our promise is to direct prescription volume through our platform, which may include marketing through our apps, websites andGoodRx cards. These activities are not distinct from each other and are not separate performance obligations. Our performance obligation is to connect consumers with pharmacies that are contracted with our customers. We have no performance obligation to fill prescriptions. Contracts with PBMs provide that we are entitled to either a percentage of fees the PBM charges the pharmacy or fixed amount per type of medication prescription, when a consumer uses aGoodRx code provided through our platform. Our performance obligation is satisfied upon the completion of pharmacies filling prescriptions. We recognize revenue for the estimated fee due from the customers at a point in time when a prescription is filled. We receive reporting from customers of the number of prescriptions and amount of consideration to which we are entitled at a prescription level. Certain arrangements with PBMs provide that the amount of consideration we are entitled to is based on the volume of prescription fills each month. In addition, the amount of consideration to which we are entitled may be adjusted in the event that a fill is determined ineligible, or based upon other adjustments allowed under our contracts with customers. We estimate the amount we expect to be entitled to using the expected value method based on the historical experience of the number of prescriptions filled, ineligible fills and applicable rates.
Other Revenue
Other revenue consists of subscription revenue from our subscription offerings, revenue generated from pharmaceutical manufacturers for advertising and integrating onto our platform their affordability solutions to our consumers and advertising in direct mailers, and revenue generated by GoodRx Care and theGoodRx Telehealth Marketplace . Subscription revenue consists of subscriptions to Gold and Kroger Savings. For Gold, subscribers purchase a monthly subscription that provides access to lower prices for prescriptions and telehealth. Subscribers can cancel theirGoodRx Gold subscription at any time. We recognize revenue for Gold over the subscription period. For Kroger Savings, subscribers pay an annual upfront fee for a subscription that provides access to lower prices on prescriptions at Kroger pharmacies. At the commencement of the subscription term, subscribers pay the annual fee to us which we share with Kroger. Kroger Savings subscription fees are generally nonrefundable to the subscriber after the first 30 days, unless we cancel the subscription, in which case the subscriber is entitled to a pro rata refund. We recognize revenue for Kroger Savings over the subscription period, net of the fee shared with Kroger. 94 -------------------------------------------------------------------------------- Pharmaceutical manufacturer solutions revenue consists primarily of revenue generated through advertisements placed in apps, websites and direct mailers for pharmaceutical manufacturers. Customers may purchase advertisements for a fixed fee that appear on our apps and websites for a specified period of time, and revenue is recognized over the term of the arrangement. Customers may also purchase advertisements for which we charge fees on a cost-per-click basis, or they may purchase advertisements placed in our direct mailers. Revenue for these arrangements is recognized at a point-in-time when the advertisement is clicked or when the direct mailer is shipped. Telehealth revenue consists primarily of revenue generated from consumers who complete a telehealth visit with a member of our network of qualified healthcare professionals. Consumers pay a fee per telehealth visit and we recognize the fee as revenue at a point-in-time when the visit is complete.
Stock-Based Compensation
Stock-based compensation cost is allocated to cost of revenue, product development and technology, sales and marketing, and general and administrative expense in the consolidated statements of operations. Compensation cost for stock options, restricted stock units and restricted stock awards granted to employees is based on the fair value of these awards at the date of grant. We recognize compensation cost over the requisite service period, which is generally the vesting period of the award. For awards that vest based on continued service, compensation cost is recognized on a straight-line basis over the requisite service period. For awards with performance vesting conditions, compensation cost is recognized on a graded vesting basis when it is probable the performance condition will be achieved. Stock-based compensation cost for awards that contain market vesting conditions is recognized on a graded vesting basis over the requisite service period, even if the market condition is not satisfied. For our awards with market conditions, the requisite service period is the longer of the service period, performance period or derived service period from a Monte Carlo simulation model. For awards that contain service, performance and market vesting conditions, the Company commences recognition of stock-based compensation cost once it is probable that the performance condition will be achieved. If the performance condition is an initial public offering or a change in control event, the performance condition is not probable of being achieved for accounting purposes until the event occurs. Once it is probable that the performance condition will be achieved, the Company recognizes stock-based compensation cost over the remaining requisite service period under a graded vesting model, with a cumulative adjustment for the portion of the service period that occurred for the period prior to the performance condition becoming probable of being achieved. Thereafter, expense is recognized even if the market condition was not or is not achieved, provided the employee continues to satisfy the service condition. To the extent that the market vesting conditions are achieved earlier than the end of the requisite service period, then stock-based compensation cost is accelerated. Forfeitures are recognized when they occur. Determining the fair value of stock-based awards requires judgment. The Black-Scholes option-pricing model is used to estimate the fair value of stock options with service and performance vesting conditions, while the fair value of our common stock at the date of grant is used to measure the fair value of restricted stock units and restricted stock awards with service and performance conditions. For awards with market vesting conditions, the fair value is estimated using a Monte Carlo simulation model that incorporates the likelihood of achieving the market condition.
The valuation of stock-based compensation awards using the Black-Scholes option-pricing model or the Monte Carlo simulation model require the input of subjective assumptions, which include:
• For periods prior to our IPO, because there was no public market for our
common stock, the fair value of the common stock underlying our
stock-based awards was determined by our board of directors. Our board
of directors determined the common stock fair value at the stock option
grant date by considering several objective and subjective factors, as
discussed below. The fair value was determined in accordance with
applicable elements of the practice aid issued by the
of Certified Public Accountants, Valuation of
Equity Securities Issued as Compensation. Following our IPO, the fair
value of common stock is determined on the grant date using the closing
price of our publicly-traded common stock.
• Expected volatility is based on historical volatilities of a publicly
traded peer group based on daily price observations over a period
equivalent to the expected term of the stock option grants.
95
--------------------------------------------------------------------------------
• The expected term for service and performance vesting conditions is
based on historical and estimates of future exercise behavior. For
awards with market conditions, the term is derived from the Monte Carlo
simulation model.
• The risk-free interest rate is based on the U.S. Treasury yield of
treasury bonds with a maturity that approximates the expected term of
the options.
• The dividend yield is based on our current expectations of dividend payouts.
We used a Monte Carlo simulation model to calculate the grant date fair value of
the Performance-Vesting Founders Awards and the derived service period. The
primary inputs used in the Monte Carlo simulation model were volatility of 55%
and our estimated cost of equity of 11%. We then applied a 20% discount for lack
of marketability ("DLOM") to the value of the RSUs as the issuance of the shares
for these awards is deferred by three-years from the applicable vesting date, or
earlier, upon a qualifying change in control or to satisfy tax withholding
requirements. The Company utilized the Finnerty Model to calculate the DLOM
using inputs, including length of holding period, volatility and dividend yield,
with volatility considered as a significant Level 3 input in the fair value
hierarchy. The grant date fair value of the Time-Vesting Founders Awards was
estimated based on the fair value of our common stock on the date of grant.
The assumptions used in the Black-Scholes option-pricing model and the Monte
Carlo simulation model represent management's best estimates. These estimates
involve inherent uncertainties and the application of management's judgment. If
factors change and different assumptions are used, stock-based compensation
could be materially different in the future.
Common Stock Valuation
Subsequent to the completion of our IPO inSeptember 2020 , the fair value of common stock was determined on the grant date using the closing price of the Company's common stock. Prior to the IPO, given our common stock was not publicly traded, our board of directors exercised significant judgment in determining the fair value of our common stock on the date of each stock-based grant, with input from management and based on several objective and subjective factors. In determining the fair market value of our common stock, our board of directors considered the following:
• the prices of our redeemable convertible preferred stock sold to outside
investors in arms-length transactions;
• the rights, preferences and privileges of our redeemable convertible
preferred stock relative to our common stock;
• our operating and financial performance;
• our stage of development and current business conditions and projections
affecting our business, including the introduction of new products and
services;
• the hiring of key personnel;
• the likelihood of achieving a liquidity event for the shares of common
stock underlying these stock options, such as an initial public offering
or sale of our company, in light of prevailing market conditions;
• any adjustment necessary to recognize a lack of a liquid trading market
for our common stock;
• the market performance of comparable publicly traded companies; and
• the overall U.S. economic, regulatory and capital market conditions.
In valuing our common stock, we first determined the equity value using both the
income and market approach valuation methods. In addition, we also considered
values implied by sales of preferred and common stock, if applicable. We then
allocated the equity value to our classes of stock using an option-pricing model
("OPM") or Probability Weighted Expected Return Method ("PWERM").
96
--------------------------------------------------------------------------------
The income approach estimates equity value based on the expectation of future
cash flows that a company will generate. These future cash flows, and an assumed
terminal value, are discounted to their present values using a discount rate
based on a weighted-average cost of capital that reflects the risks inherent in
the cash flows. The market approach estimates equity value based on a comparison
of the subject company to comparable public companies in a similar line of
business. From the comparable companies, a representative market value multiple
is determined and then applied to the subject company's financial forecasts to
estimate the value of the subject company.
Once we determined an equity value, we used a combination of approaches to
allocate the equity value to each of our classes of stock. We used the OPM, and
more recently also used the OPM in combination with the PWERM. The OPM allocates
values to each equity class by creating a series of call options on our equity
value, with exercise prices based on the liquidation preferences, participation
rights, and strike prices of the equity instruments. Using the PWERM, the value
of our common stock was estimated based upon a probability-weighted analysis of
varying values for our common stock assuming possible future events, which
included an IPO, merger or sale, dissolution, or continued operation as a
private company. In determining the estimated fair value of our common stock, we
considered the fact that our stockholders could not freely trade our common
stock in the public markets. Accordingly, we also applied a lack of
marketability discount to the equity value.
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 for an acquisition and allocate the purchase price to its respective net tangible and intangible assets. 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, costs, and cash flows, discount rates and selection of comparable companies. For material acquisitions, we may engage the assistance of valuation specialists in concluding on fair value measurements of certain assets acquired or liabilities assumed in a business combination.
Jumpstart Our Business Startups Act of 2012
Under the JOBS Act, an "emerging growth company" can take advantage of an
extended transition period for complying with new or revised accounting
standards. This provision allows an "emerging growth company" to delay the
adoption of new or revised accounting standards that have different transition
dates for public and private companies until those standards would otherwise
apply to private companies. We meet the definition of an "emerging growth
company" and have elected to use this extended transition period. As a result of
this election, our timeline to comply with these standards will in many cases be
delayed as compared to other public companies that are not eligible to take
advantage of this election or have not made this election. Therefore, our
consolidated financial statements may not be comparable to those of companies
that comply with the public company effective dates for these standards.
97--------------------------------------------------------------------------------
© Edgar Online, source
