GTY TECHNOLOGY HOLDINGS INC. FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with the financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K filed with theSEC onMarch 13, 2020 . Certain statements in this Quarterly Report on Form 10-Q are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements involve a number of risks, uncertainties and other factors that could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors which could materially affect such forward-looking statements can be found in the section entitled "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , our Quarterly Report for the quarter endedMarch 31, 2020 and elsewhere in this Form 10-Q. Investors are urged to consider these factors carefully in evaluating any forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date hereof and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Certain statements in the following discussions are based on non-GAAP financial measures. A "non-GAAP financial measure" is a numerical measure of a registrant's historical or future financial performance, financial position or cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the statements of comprehensive income, balance sheets or statements of cash flows of the issuer; or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented. The Company includes non-GAAP financial measures in Management's Discussion and Analysis, as the Company's management believes that these measures and the information they provide are useful to investors because they permit investors to view the Company's performance using the same tools that management uses and to better evaluate the Company's ongoing business performance. In order to better align the Company's reported results with the internal metrics used by the Company's management to evaluate business performance as well as to provide better comparisons to prior periods and peer data, non-GAAP measures exclude the impact of purchase accounting related to the Acquisition. See "Reconciliation of Non-GAAP Revenues" below for more information and reconciliations of such measures to the nearest comparable
GAAP measures. OverviewGTY Technology Holdings Inc. ("GTY", "we," or the "Company") is a public sector company that offers a cloud-based suite of solutions primarily for North American state and local governments. Our six wholly-owned subsidiaries areBonfire Interactive Ltd. ("Bonfire"),CityBase, Inc. ("CityBase"), eCivis, Inc. ("eCivis"),Open Counter Enterprises Inc. ("Open Counter"),Questica Inc. ("Questica"), and Sherpa Government Solutions ("Sherpa"). Through our operating subsidiaries, we serve some of the fastest growing segments in the government technology sector, including procurement, payments, grants management, permitting, and budgeting. We were formed onAugust 11, 2016 for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses (the "business combination"). Until the business combination, we did not engage in any operations nor generate any revenues. We recognized an opportunity to replace costly legacy systems with scalable and efficient Software as a Service, or SaaS, products. Our search led to the acquisition (the "Acquisition") of Bonfire, CityBase, eCivis, Open Counter, Questica, and Sherpa onFebruary 19, 2019 (the "Closing Date"). Our customers are primarily located inthe United States andCanada , including counties, municipalities, special districts, law enforcement agencies and public school districts. We plan to increase our customer base by leveraging our comprehensive product portfolio with our existing customer base, investing in direct sales to new customers, and utilizing partnerships with complementary products and services. 33 Table of Contents We have historically signed a high percentage of agreements with new customers, as well as renewal agreements with existing customers, in the second and third quarters of each year and usually during the last month of the quarter. This can be attributed to buying patterns typical in the public sector. As the terms of most of our customer agreements are measured in full year increments, agreements initially entered into in any given month of any quarter will generally come up for renewal at that same time in subsequent years. This seasonality is reflected in our invoicing and cash flows with our highest collections occurring in the second and third quarters and lower collections in the first and fourth quarters. Our variable consideration or usage fee revenue is also dependent on the payment patterns of our customers' constituents. Historically, a high percentage of these usage fees have been earned in the second and fourth quarters of each year. This seasonality is also reflected in our revenues and cash flows during the respective periods. The Acquisition was accounted for as a business combination under GAAP and resulted in a change in accounting basis as of the date of the Acquisition. As a result, our condensed consolidated financial statements for the period beginning onFebruary 19, 2019 are presented on a different basis than that for the periods beforeFebruary 19, 2019 , and therefore are not comparable. As a result of the application of the acquisition method of accounting, our condensed consolidated financial statements and certain presentations are separated into two distinct periods to indicate the different ownership and accounting basis between the periods presented: (i) the period before the consummation of the Acquisition, which includes the period fromJanuary 1, 2019 to the Closing Date ("2019 Predecessor Period"), and (ii) the periods on and after the consummation of the acquisition, which includes the period including and after the Closing Date toSeptember 30, 2019 ("2019 Successor Period"), and the three months and nine months endedSeptember 30, 2020 . Expansion and Further Penetration of Our Customer Base. We employ a strategy that focuses on acquiring new customers and growing our relationships with existing customers over time. We believe significant opportunity exists for us to acquire new customers as well as expand the use of our platforms by selling additional products and increasing the number of users within our current customers' organizations. Investment in Growth. We plan to continue to invest in our business so that we can capitalize on our market opportunity. We intend to continue to grow our sales and marketing team to acquire new customers and to increase sales to existing customers. We intend to continue to grow our research and development team to extend the functionality and range of our applications. We also intend to invest in new and improved IT solutions to support our business. However, we expect our sales and marketing expenses and research and development expenses as a percentage of revenues to decrease over time as we grow our revenues and gain economies of scale by increasing our customer base and increase sales to our existing customer base. We believe that these investments will contribute to our long-term growth, although they may adversely affect our profitability in the near term. Leveraging Partnerships. We plan to continue to strengthen and expand our relationships with technology vendors, professional services firms, and resellers. These relationships enable us to increase the speed of deployment and offer a wider range of integrated services to our customers. We intend to support these existing relationships, seek additional relationships and further expand our channel of resellers to help us increase our presence in existing markets and to expand into new markets. Our business and results of operations will be significantly affected by our success in leveraging and expanding these relationships. Market Adoption of Our Platforms. A key focus of our sales and marketing efforts is creating market awareness about the benefits of our cloud-based SaaS platforms. The market for SaaS solutions is less mature than the market for on-premise software applications, and potential customers may be slow or unwilling to migrate from their legacy solutions. Our business and operating results will be significantly affected by the degree to and speed with which organizations adopt our solutions.
Key Components of our Results of Operations
Revenues
Subscription, support and maintenance. We provide software hosting services that
provide customers with access to software related support and updates during the
term of the arrangement. Revenues are recognized ratably over the contract
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term as the customer simultaneously receives and consumes the benefits of the subscription service. The first year of subscription fees are typically payable within 30 days after the execution of a contract, and thereafter upon renewal. We initially record subscription fees as contract liabilities and recognize revenues on a straight-line basis over the term of the agreement.
Our contracts may include variable consideration in the form of usage fees, which are included in the transaction price in the period in which the usage occurs and the fee is known.
Subscription, support and maintenance revenues also includes on-premise support or maintenance pertaining to license sales. Revenues from on-premise support are recognized on a straight-line basis over the support period.
Revenues from subscription, support and maintenance comprised approximately 72%
of total revenues for the nine months ended
Professional services. Our professional services contracts generate revenues on a time and materials or fixed fee basis. Revenues are recognized as the services are rendered for time and materials contracts. Revenues are recognized when the milestones are achieved and accepted by the customer or on a proportional performance basis for fixed fee contracts. Training revenues are recognized as the services are performed. Revenues from professional services comprised approximately 24% of total revenues for the nine months endedSeptember 30, 2020 . License. Revenues from distinct licenses are recognized upfront when the software is made available to the customer, which normally coincides with contract execution, as this is when the customer has the risks and rewards of the right to use the software. Revenues from licenses comprised approximately 4% of total revenues for the nine months endedSeptember 30, 2020 . Asset sales. Revenues from asset sales are recognized when the asset, typically a kiosk, has been received by the client and is fully operational and ready to accept transactions, which is when the customer obtains control and has the risks and rewards of the asset. Revenues from asset sales comprised less than 1% of total revenues for the nine months endedSeptember 30, 2020 .
Cost of Revenues
Cost of revenues primarily consists of salaries and benefits of personnel relating to our hosting operations and support, implementation, and grants research. Cost of revenues includes data center costs including depreciation of the Company's data center assets, third-party licensing costs, consulting fees, and the amortization of acquired technology from recent acquisitions.
Operating Expenses
Sales and marketing
Sales and marketing expenses consist primarily of personnel costs of our sales
and marketing employees, including salaries, sales commissions and incentives
and benefits, travel and related costs, outside consulting fees, marketing
programs, including lead generation, and costs of advertising and trade shows.
We defer sales commissions and amortize them ratably over the expected customer
life. We expect sales and marketing expenses will increase as we expand our
direct sales teams and increase sales through our strategic relationships and
resellers.
Research and development
Research and development expenses consist primarily of salaries and benefits
associated with our engineering, product and quality assurance personnel.
Research and development expenses also include the cost of third-party
contractors. Other than internal-use software development costs that qualify for
capitalization, research and development costs are expensed as incurred. We
expect research and development costs to increase as we develop new solutions
and make improvements to our existing platforms.
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General and administrative
General and administrative expenses consist primarily of salaries and benefits
with our executive, finance, legal, human resources, compliance and other
administrative personnel, accounting, auditing and legal professional services
fees, recruitment costs, and other corporate-related expenses. We expect that
general and administrative expenses will increase, but at a slower rate than
sales and marketing and research and development, as we incur the costs of
compliance associated with being a publicly-traded company, including legal,
audit and consulting fees.
Restatement of Previously Issued Financial Statements
In the Company's condensed financial statements as of and for the three months endedMarch 31, 2020 andJune 30, 2020 , we previously reported a current contingent liability of$10 million associated with an earnout as part of the Questica Acquisition. The earnout was actually settled inMarch 2020 with a transfer of 1,550,388 exchangeable shares to the former owners of Questica.
We
should have reduced the current contingent liability by
While this adjustment decreased current liabilities and increased total equity by$10 million , it would not have affected any previously reported operating results, net income, earnings per share, cash flows or total assets as of and for the three and six months endedMarch 31, 2020 andJune 30, 2020 .
Results of Operations
We accounted for the Acquisition as a business combination, which resulted in a new basis of accounting. Refer to Note 4 of the notes to our condensed consolidated financial statements for additional information. As a result of the Acquisition, our condensed consolidated financial statements for the period afterFebruary 19, 2019 is presented on a different basis than that for the periods beforeFebruary 19, 2019 due to the application of purchase accounting as ofFebruary 19, 2019 and, therefore, are not comparable.
The Acquisition resulted in the following principal impacts for the period subsequent to the Acquisition date:
A reduction in revenues in the three and nine months ended
? and the 2019 Successor Period as a result of the contract liabilities at the
Acquisition date being recorded at fair value, an amount less than its then
carrying value;
Increased amortization expense resulting from recording of intangible assets at
fair value. We record amortization of acquired developed technology in cost of
? revenues, amortization of customer relationships in sales and marketing
expenses, and amortization of covenants not to compete and tradename intangible
assets in general and administrative expenses;
Contingent consideration issued as part of the Acquisition was recorded at fair
? value each period with changes in fair value recorded in general and
administrative costs; and
? Transaction costs were expensed as incurred as a separate line item in our
condensed consolidated statement of operations;
We believe reviewing our operating results by combining the results of the 2019
Predecessor Period and 2019 Successor Period ("S/P Combined Period") is more
useful in discussing our overall operating performance when compared to the nine
months ended September 30, 2020 .
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Three Months Ended
Total revenues
Our total revenues were$12.6 million for the three months endedSeptember 30, 2020 . Excluding the$0.1 million impact of purchase accounting, our total non-GAAP revenues for the three months endedSeptember 30, 2020 was$12.7 million compared to$9.8 million for the three months endedSeptember 30, 2019 , representing a 30% increase. This increase was driven by an increase in the number of customers, an increase in the number of users added by existing customers and an increase in the number of products purchased by existing customers. The change in revenues for each operating segment is provided in the following table (in thousands, except percentages): Generally Accepted Accounting Principles ("GAAP") Non-GAAP Total Total Increase / Increase / Total Total Increase / Increase / Revenues Revenues (Decrease) (Decrease) Revenues Revenues (Decrease) (Decrease) 2020 2019 in Dollars in % 2020 2019 in Dollars in % Bonfire$ 2,100 $ 1,174 $ 926 79 %$ 2,100 $ 1,310 $ 790 60 % CityBase 1,903 1,551 352 23 % 2,031 1,708 323 19 % eCivis 1,878 1,638 240 15 % 1,878 1,857 21 1 % Open Counter 669 407 262
64 % 669 532 137 26 %
Questica 4,389 3,083 1,306 42 % 4,389 3,450 939 27 %
Sherpa 1,648 901 747 83 % 1,648 901 747 83 %
Total $ 12,587 $ 8,754 $ 3,833 44 % $ 12,715 $ 9,758 $ 2,957 30 %
A reconciliation of non-GAAP revenues and other non-GAAP financial measures is included in the section titled "Reconciliation of Non-GAAP Financial Measures" in this Quarterly Report on Form 10-Q.
Total cost of revenues
Our total cost of revenues for the three months endedSeptember 30, 2020 increased primarily as a result of headcount additions to support our revenue growth and share-based compensation resulting from the grant of restricted stock units. The change in cost of revenues for each operating segment is due to the following (in thousands, except percentages): Total Cost of Total Cost of Increase / Increase / Revenues Revenues (Decrease) (Decrease) 2020 2019 in Dollars in % Bonfire $ 369 $ 277 $ 92 33 % CityBase 1,289 958 331 35 % eCivis 821 454 367 81 % Open Counter 143 105 38 36 % Questica 927 653 274 42 % Sherpa 1,071 136 935 688 % Total $ 4,620 $ 2,583$ 2,037 79 % Bonfire
Bonfire's total cost of revenues increased primarily due to a$0.04 million or 17% increase in salaries and benefits, a$0.03 million increase in share-based compensation associated with the issuance of restricted stock units and a$0.03 million increase in amortization of internal-use software. The increase in salaries and benefits was primarily driven by a 5% increase in average headcount fromSeptember 30, 2019 toSeptember 30, 2020 . Hosting tools and services were materially consistent with the comparative year-over-year period. 37 Table of Contents CityBase
CityBase's total cost of revenues increased primarily due to a
eCivis
eCivis' total cost of revenues increased primarily due to a$0.2 million or 64% increase in salaries and benefits and a$0.1 million increase in third-party contractors. The increase in salaries and benefits was primarily driven by a 37% increase in average headcount fromSeptember 30, 2019 toSeptember 30, 2020 to support its professional services backlog.
Open Counter
Open Counter's total cost of revenues was materially consistent year-over-year.
Questica
Questica's total cost of revenues increased primarily due to a
The increase in salaries and benefits was primarily driven by a 35% increase in average headcount fromSeptember 30, 2019 toSeptember 30, 2020 to support its professional services backlog.
Sherpa
Sherpa's total cost of revenues increased primarily due to a$0.4 million increase in salaries and benefits, a$0.4 million increase in royalty payments and a$0.1 million increase in share-based compensation expense associated with the issuance of restricted stock units. The increase in royalty payments was due to an increase in third-party sales of license products to two enterprise customers.
Operating expenses (sales and marketing, general and administrative, and research and development)
Our operating expenses (including sales and marketing, general and administrative and research and development expenses) for the three months endedSeptember 30, 2020 have decreased due primarily to the restructuring plan implemented in March of 2020. The change in operating expenses for each operating segment is due to the following (in thousands, except percentages): Total Total Operating Operating Increase / Increase / Expenses Expenses (Decrease) (Decrease) 2020 2019 in Dollars in % Bonfire$ 1,940 $ 2,188 $ (248) (11) % CityBase 3,271 3,631 (360) (10) % eCivis 1,541 1,348 193 14 % Open Counter 696 615 81 13 % Questica 2,147 1,978 169 9 % Sherpa 522 544 (22) (4) % Corporate 1,437 2,022 (585) (29) % Total$ 11,554 $ 12,326 $ (772) (6) % Bonfire
Bonfire's total operating expense decreased primarily due to a$0.2 million or 15% decrease in sales and marketing expenses. The decrease in sales and marketing expenses was due primarily to a$0.1 million decrease in travel and trade 38 Table of Contents shows resulting from the COVID-19 pandemic and a$0.1 million or 12% decrease in salaries and wages. The decrease in salaries and wages was due primarily to a 21% decrease in average headcount fromSeptember 30, 2019 toSeptember 30, 2020 driven mainly by ourMarch 2020 restructuring.
CityBase
CityBase's total operating expense decreased primarily due to a$0.3 million or 20% decrease in research and development expenses and a$0.2 million or 14% decrease in general and administrative expenses and offset by a$0.1 million or 23% increase in sales and marketing. The decrease in research and development expenses was primarily due to a$0.5 million or 32% decrease in salaries and wages and partially offset by a$0.2 million increase in share-based compensation associated with the issuance of restricted stock units. The decrease in salaries and wages was due primarily to a 34% decrease in average headcount fromSeptember 30, 2019 toSeptember 30, 2020 . The decrease in general and administrative expenses is due primarily to a$0.2 million or 30% decrease in salaries and wages. The decrease in salaries and wages was due primarily to a 26% decrease in average headcount fromSeptember 30, 2019 toSeptember 30, 2020 . The increase in sales and marketing was due primarily to a$0.2 million increase in share-based compensation associated with the issuance of stock options and a$0.1 million or 27% increase in salaries and wages. The increase in salaries and wages was due primarily to a 17% increase in average headcount fromSeptember 30, 2019 toSeptember 30, 2020 . These increases were partially offset by a$0.2 million decrease in travel and marketing largely resulting
from the COVID-19 pandemic. eCivis eCivis' total operating expense increased primarily due to a$0.2 million or 86% increase in general and administrative expenses. The increase in general and administrative costs was primarily driven by a$0.2 million increase in share-based compensation associated with the issuance of restricted stock units.
Open Counter
Open Counter's total operating expenses was materially consistent year-over-year.
Questica
Questica's total operating expenses increased primarily due to a$0.2 million increase in share-based compensation expense associated with the issuance of restricted stock units. Sherpa
Sherpa's total operating expenses was materially consistent year-over-year.
Corporate
Corporate expenses are primarily comprised of outside services including legal, accounting and consulting fees, payroll and related expenses, corporate insurance, and share-based compensation. Corporate expenses decreased by$0.6 million due primarily to a$0.5 million decrease in salaries and wages and a$0.1 million decrease in travel costs largely resulting from the COVID-19 pandemic. The decrease in salaries and wages is due primarily to a 52% decrease in average headcount fromSeptember 30, 2019 toSeptember 30, 2020 driven mainly by ourMarch 2020 restructuring.
Other operating expenses
Amortization of intangible assets
Amortization of intangible assets consists of the amortization of finite lived
intangibles resulting from the Acquisition as described in Note 5 of the notes
to our condensed consolidated financial statements.
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Acquisition costs
Acquisition costs consists primarily of Acquisition transaction costs, capital
market advisory fees, and bonuses incurred as a result of the transaction or a
change in control.
Restructuring costs
On March 30, 2020 , the Company implemented a global restructuring plan which
resulted in an approximate 10% reduction of the Company's workforce. This
action was intended to streamline the Company's operational reporting and reduce
operating cash outflows. The Company recorded pre-tax restructuring charges of
approximately $3.7 million which is comprised of one-time employee termination
benefits paid over a weighted average period of approximately 10 months.
Change in fair value of contingent consideration
The change in fair value of contingent consideration consists of any adjustments to the contingent consideration liability since the Acquisition.
Other income (expense)
Interest income (expense)
Interest income (expense) is primarily comprised of the investments held by GTY
Corporate offset by interest under our credit facility executed in
Loss on repurchase/issuance of shares
Loss on repurchase/issuance of shares is comprised of the difference in fair value between the price in which shares are issued and the market value on the date of grant as described in Note 12 of the notes to our condensed consolidated financial statements. Other income (loss)
Other income (loss) is comprised primarily of unrealized gains and losses
associated with transactions in currencies that are not denominated in
Nine Months Ended
Total revenues Our total revenues were$35.0 million for the nine months endedSeptember 30, 2020 . Excluding the$0.6 million impact of purchase accounting, our total non-GAAP revenues for the nine months endedSeptember 30, 2020 was$35.6 million compared to$28.5 million for the S/P Combined Period, representing a 25% increase. This increase was driven by an increase in the number of customers, an increase in the number of users added by existing customers and an increase in the number of products purchased by existing customers. The change in revenues for each operating segment is provided in the following table (in thousands, except percentages): 40 Table of Contents Generally Accepted Accounting Principles ("GAAP") Non-GAAP February 19, January 01, 2019 2019 Total through through
Total Increase / Increase / Total Total Increase / Increase /
Revenues September 30, February 18, Revenues (Decrease) (Decrease) Revenues Revenues (Decrease) (Decrease)
2020 2019 2019 2019 in Dollars in % 2020 2019 in Dollars in %
Bonfire $ 5,503 $ 2,385 $ 593 $ 2,978 $ 2,525 85 % $ 5,526 $ 3,498 $ 2,028 58 %
CityBase 5,957 4,634 820 5,454 503 9 % 6,352 5,833 519 9 %
eCivis 4,831 3,200 673 3,873 958 25 % 4,851 4,622 229 5 %
Open Counter 1,907 929 298 1,227 680 55 % 1,907 1,642 265 16 %
Questica 12,319 6,311 1,913 8,224 4,095 50 % 12,470 9,680 2,790 29 %
Sherpa 4,510 2,575 631 3,206 1,304 41 % 4,510 3,262 1,248 38 %
Total $ 35,027 $ 20,034 $ 4,928 $ 24,962 $ 10,065 40 % $ 35,616 $ 28,537 $ 7,079 25 %
A reconciliation of non-GAAP revenues and other non-GAAP financial measures is included in the section titled "Reconciliation of Non-GAAP Financial Measures" in this Quarterly Report on Form 10-Q.
Total cost of revenues
Our total cost of revenues for the nine months endedSeptember 30, 2020 increased primarily as a result of headcount additions to support our revenue growth and share-based compensation resulting from the grant of restricted stock units. The change in cost of revenues for each operating segment is due to the following (in thousands, except percentages): ` February 19, January 01, Total Cost 2019 2019 Total Cost of through through of Increase / Increase / Revenues September 30, February 18, Revenues (Decrease) (Decrease) 2020 2019 2019 2019 in Dollars in % Bonfire$ 1,120 $ 643 $ 124$ 767 $ 353 46 % CityBase 4,419 3,168 746 3,914 505 13 % eCivis 2,274 1,087 267 1,354 920 68 % Open Counter 427 263 51 314 113 36 % Questica 2,609 1,468 296 1,764 845 48 % Sherpa 2,692 461 130 591 2,101 355 % Total$ 13,541 $ 7,090 $ 1,614 $ 8,704 $ 4,837 56 % Bonfire
Bonfire's total cost of revenues increased primarily due to a$0.2 million or 35% increase in salaries and benefits, a$0.1 million increase in share-based compensation expense associated with the issuance of restricted stock units, and a$0.05 increase in amortization of capitalized internal-use software. The increase in salaries and benefits was primarily driven by a 12% increase in average headcount fromSeptember 30, 2019 toSeptember 30, 2020 . Hosting tools and services were materially consistent with the comparative year-over-year period.
CityBase
CityBase's total cost of revenues increased primarily due to a
eCivis
eCivis' total cost of revenues increased primarily due to a$0.7 million or 68% increase in salaries and benefits and a$0.1 million increase in share-based compensation associated with the issuance of restricted stock units. The increase in salaries and benefits was primarily driven by a 34% increase in average headcount fromSeptember 30, 2019 toSeptember 30, 2020 to support its professional services backlog. 41 Table of Contents Open Counter Open Counter's total cost of revenues increased primarily due to a$0.1 million increase in salaries and benefits. The increase in salaries and benefits was primarily driven by a 33% increase in average headcount fromSeptember 30 ,
2019 toSeptember 30, 2020 . Questica
Questica's total cost of revenues increased primarily due to a$0.5 million or 36% increase in salaries and benefits and$0.2 million increase in share-based compensation resulting from the issuance of restricted stock units. The increase in salaries and benefits was primarily driven by a 46% increase in average headcount fromSeptember 30, 2019 toSeptember 30, 2020 to support its professional services backlog.
Sherpa
Sherpa's total cost of revenues increased primarily due to a
Operating expenses (sales and marketing, general and administrative, and research and development)
Our operating expenses (including sales and marketing, general and administrative and research and development expenses) for the nine months endedSeptember 30, 2020 have increased primarily due to increases in headcount resulting from growth in the business. The change in operating expenses for each operating segment is due to the following (in thousands, except percentages): February 19, January 01, 2019 2019 Operating through through Operating Increase / Increase / Expenses September 30, February 18, Expenses (Decrease) (Decrease) 2020 2019 2019 2019 in Dollars in % Bonfire$ 6,259 $ 7,559 $ 1,178 $ 8,737 $ (2,478) (28) % CityBase 11,526 8,791 1,518 10,309 1,217 12 % eCivis 4,816 2,976 575 3,551 1,265 36 % Open Counter 2,300 1,289 202 1,491 809 54 % Questica 6,555 4,440 1,103 5,543 1,012 18 % Sherpa 1,419 1,180 147 1,327 92 7 % Corporate 5,511 6,265 - 6,265 (754) (12) % Total$ 38,386 $ 32,500 $ 4,723 $ 37,223 $ 1,163 3 % Bonfire Bonfire's total operating expenses decreased due to a$1.4 million or 29% decrease in sales and marketing expenses, a$0.8 million or 31% decrease in general and administrative expenses, and a$0.3 million or 20% decrease in research and development expenses. The decrease in sales and marketing expenses and general and administrative expenses were primarily driven by a$0.8 million and$0.7 million decrease, respectively, in share-based compensation associated with the issuance of stock options from the Acquisition. Sales and marketing also decreased by$0.3 million and$0.2 million due to a decrease in travel and marketing and a decrease in salaries and wages, respectively. The decrease in research and development expenses was primarily driven by a$0.3 million increase in capitalization of internal-use software associated with the development of new products.
CityBase
CityBase's total operating expenses increased due to a$1.4 million or 94% increase in sales and marketing expenses, a$0.5 million or 14% increase in general and administrative expenses and offset by a$0.7 million or 14% decrease in research and development expenses. The increase in sales and marketing was due to a$0.8 million or 66% increase in 42
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salaries and wages and a$0.7 million increase in share-based compensation expense and offset partially by a decrease in travel. The increase in salaries and wages was driven by a 53% increase in average headcount fromSeptember 30, 2019 toSeptember 30, 2020 and the increase share-based compensation expense was due to the issuance of restricted stock units. The$0.5 million increase in general and administrative expenses was due primarily by a$1.4 million increase in share-based compensation expense, offset largely by a decrease in third-party costs. The$0.7 million decrease in research and development expenses was due primarily to a$0.9 million or 22% decrease in salaries and wages and a$0.2 million decrease in third-party expenses and partially offset by a$0.4 million increase in share-based compensation expense. The decrease in salaries and wages was driven by a 20% decrease in average headcount fromSeptember 30, 2019 toSeptember 30, 2020 largely attributable to theMarch 2020 restructuring.
eCivis
eCivis total operating expenses increased due to a$0.9 million or 84% increase in general and administrative expenses, a$0.2 million or 17% increase in sales and marketing expenses, and a$0.1 million or 13% increase in research and development expenses. The increase in general and administrative expenses was due to a$0.4 million increase in share-based compensation, a$0.3 million increase in salaries and benefits and a$0.2 million increase in third-party costs. The increase in sales and marketing expenses was due primarily to a$0.2 million increase in salaries and wages driven by a 28% increase in average headcount fromSeptember 30, 2019 toSeptember 30, 2020 . The increase in research and development expenses was due primarily to a$0.1 million increase in salaries and wages driven by a 9% increase in average headcount fromSeptember 30, 2019 toSeptember 30, 2020 .
Open Counter
Open Counter's total operating expenses increased primarily due to a
Questica
Questica's total operating expenses increased primarily due to a$0.9 million increase in share-based compensation associated with the issuance of restricted stock units. Sherpa
Sherpa's total operating expenses increased largely due to an increase in share-based compensation expense associated with the issuance of restricted stock units.
Corporate
Corporate expenses decreased by$0.8 million primarily due to a$0.6 million decrease in legal fees and a$0.5 million decrease in accounting and consulting fees and offset by a$0.3 million increase in share-based compensation expense. The increase in share-based compensation is due to the issuance of restricted stock units. The decrease in legal, accounting and consulting fees is largely due to operational efficiencies gained with the corporate hiring.
Other operating expenses
Amortization of intangible assets
Amortization of intangible assets consists of the amortization of finite lived
intangibles resulting from the Acquisition as described in Note 5 of the notes
to our condensed consolidated financial statements.
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Acquisition costs
Acquisition costs consists primarily of Acquisition transaction costs, capital
market advisory fees, and bonuses incurred as a result of the transaction or a
change in control.
Restructuring costs
On March 30, 2020 , the Company implemented a global restructuring plan which
resulted in an approximate 10% reduction of the Company's workforce. This
action was intended to streamline the Company's operational reporting and reduce
operating cash outflows. The Company recorded pre-tax restructuring charges of
approximately $3.7 million which is comprised of one-time employee termination
benefits paid over a weighted average period of approximately 10 months.
Change in fair value of contingent consideration
The change in fair value of contingent consideration consists of any adjustments to the contingent consideration liability since the Acquisition.
Other income (expense)
Interest income (expense)
Interest income (expense) is primarily comprised of the investments held by GTY Corporate offset by interest under our credit facility executed in February of 2020.
Loss on repurchase/issuance of shares
Loss on repurchase/issuance of shares is comprised of the difference in fair value between the price in which shares are issued and the market value on the date of grant as described in Note 12 of the notes to our condensed consolidated financial statements. Other income (loss)
Other income (loss) is comprised primarily of unrealized gains and losses
associated with transactions in currencies that are not denominated in
Reconciliation of Non-GAAP Revenues
To supplement our condensed consolidated financial statements, which are prepared in accordance withU.S. generally accepted accounting principles, or GAAP, we have provided certain financial measures that have not been prepared in accordance with GAAP defined as "non-GAAP financial measures," which include (i) non-GAAP revenues, (ii) non-GAAP gross profit and non-GAAP gross margin and (iii) non-GAAP loss from operations. We use these non-GAAP financial measures internally in analyzing our financial results and believe these metrics are useful to investors, as a supplement to the corresponding GAAP measure, in evaluating our ongoing operational performance and trends. However, it is important to note that particular items we exclude from, or include in, our non-GAAP financial measures may differ from the items excluded from, or included in, similar non-GAAP financial measures used by other companies in the same industry. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures. Non-GAAP Revenues. Non-GAAP revenues are defined as GAAP revenues adjusted for the impact of purchase accounting resulting from its business combination which reduced its acquired contract liabilities to fair value. The Company believes that presenting non-GAAP revenues is useful to investors as it eliminates the impact of the purchase accounting adjustments to revenues to allow for a direct comparison between current and future periods. 44
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Non-GAAP Gross profit and Non-GAAP Gross margin. Non-GAAP gross profit is defined as GAAP gross profit adjusted for the impact of purchase accounting resulting from its business combination and share-based compensation included in cost of revenues. Non-GAAP gross margin is defined as non-GAAP gross profit divided by non-GAAP revenues. The Company believes that presenting non-GAAP gross profit and margin is useful to investors as it eliminates the impact of the purchase accounting adjustments to allow for a direct comparison between periods. Non-GAAP Loss from operations. Non-GAAP loss from operations is defined as GAAP loss from operations adjusted for the impact of purchase accounting to revenues resulting from its business combination, the amortization of acquired intangible assets, share-based compensation, acquisition related costs, restructuring charges and the change in fair value of contingent consideration. The Company believes that presenting non-GAAP loss from operations is useful to investors as it eliminates the impact of certain non-cash and acquisition related expenses to allow a direct comparison of loss from operations between all periods presented.
Below is a reconciliation of non-GAAP revenues, non-GAAP gross profit and non-GAAP gross margin and non-GAAP loss from operations to their most directly comparable GAAP financial measures (in thousands, except percentages):
Three Months Ended
September 30, June 30, September 30,
2020 2020 2019
Revenues $ 12,587 $ 11,164 $ 8,754
Purchase accounting adjustment to revenue 128
146 1,004
Non-GAAP Revenues $ 12,715 $ 11,310 $ 9,758
Gross Profit $ 7,967 $ 6,770 $ 6,171Purchase accounting adjustment to revenue 128 146 1,004 Share-based compensation 225
132 -
Non-GAAP Gross Profit $ 8,320 $ 7,048 $ 7,175
Gross Margin 63 % 61 % 70 %
Non-GAAP Gross Margin 65 % 62 % 74 %
Loss from operations $ (7,272) $ (7,801) $ (9,615)
Purchase accounting adjustment to revenue 128 146 1,004
Amortization of intangibles 3,683 3,642 3,830
Share-based compensation 2,024 1,019 556
Acquisition costs - - 442
Restructuring charges 2 198 -Change in fair value of contingent consideration - - (812) Non-GAAP Loss from operations$ (1,435) $ (2,796) $ (4,595) 45 Table of Contents Nine Months Ended September 30, 2020 2019 Revenues - Successor Period $ 35,027 $ 20,034 Revenues - Predecessor Period - 4,928 Pro forma as Adjusted Revenues 35,027 24,962 Purchase accounting adjustment to revenue 589 3,575 Non-GAAP Pro forma as Adjusted Revenues $
35,616 $ 28,537
Gross Profit - Successor Period $ 21,486 $ 12,944 Gross Profit - Predecessor Period - 3,314 Pro forma as Adjusted Gross Profit 21,486 16,258 Purchase accounting adjustment to revenue 589 3,575 Share-based compensation 575 - Non-GAAP Pro forma as Adjusted Gross Profit $
22,650 $ 19,833
Gross Margin - Successor Period 61 % 65 % Gross Margin - Predecessor Period N/A % 67 % Pro forma as Adjusted Gross Margin 61 % 65 % Non-GAAP Pro forma as Adjusted Gross Margin 64 % 69 % Loss from operations - Successor Period$ (31,593) $ (61,330) Loss from operations - Predecessor Period - (1,555) Pro forma as Adjusted Loss from operations (31,593) (62,885) Purchase accounting adjustment to revenue 589 3,575 Amortization of intangibles 10,998 9,427 Share-based compensation 6,338 2,928 Acquisition costs - 33,342 Restructuring charges 3,666 -
Change in fair value of contingent consideration 29 (849)
Non-GAAP Pro forma as Adjusted Loss from operations
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Below is a reconciliation of non-GAAP revenues to revenues by operating segment (in thousands, except percentages):
Three Months Ended September 30,
Open Total
Bonfire CityBase eCivis Counter Questica Sherpa RevenuesSuccessor Revenues 2020$ 2,100 $ 1,903 $ 1,878 $ 669 $ 4,389 $ 1,648 $ 12,587 Purchase accounting adjustment to revenues - 128 - - - - 128 Non-GAAP Revenues 2020$ 2,100 $ 2,031 $ 1,878 $ 669 $ 4,389 $ 1,648 $ 12,715 Pro forma Revenues - S/P combined Period 2019$ 1,174 $ 1,551 $ 1,638 $ 407 $ 3,083 $ 901 $ 8,754 Purchase accounting
adjustment to revenues 136 157 219 125 367 - 1,004 Non-GAAP Pro forma as Adjusted Revenues 2019$ 1,310 $ 1,708 $ 1,857 $ 532 $ 3,450 $ 901 $ 9,758 % change 60 % 19 % 1 % 26 % 27 % 83 % 30 % Nine Months Ended September 30, Open Total Bonfire CityBase eCivis Counter Questica Sherpa Revenues Successor Revenues 2020$ 5,503 $ 5,957 $ 4,831 $ 1,907 $ 12,319 $ 4,510 $ 35,027 Purchase accounting adjustment to revenues 23 395 20 - 151 - 589 Non-GAAP Revenues 2020$ 5,526 $ 6,352 $ 4,851 $ 1,907 $ 12,470 $ 4,510 $ 35,616 Pro forma Revenues - S/P combined Period 2019$ 2,978 $ 5,454 $ 3,873 $ 1,227 $ 8,224 $ 3,206 $ 24,962 Purchase accounting adjustment to revenues 520 379 749 415 1,456 56 3,575 Non-GAAP Pro forma as Adjusted Revenues 2019$ 3,498 $ 5,833 $ 4,622 $ 1,642 $ 9,680 $ 3,262 $ 28,537 % change 58 % 9 % 5 % 16 % 29 % 38 % 25 %
Liquidity and Capital Resources
As ofSeptember 30, 2020 , we had a cash balance of approximately$6.2 million . ThroughSeptember 30, 2020 , our liquidity needs were satisfied through proceeds from our initial public offering that were released from the Trust Account (see Note 12-Shareholders' Equity-to the unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q), proceeds from the PIPE Transaction (as defined below), proceeds from ourJune 2019 registered direct offering, proceeds from ourFebruary 2020 debt facility and loan proceeds from the Paycheck Protection Program. Our unaudited condensed consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. As reflected in the condensed consolidated financial statements, we had an accumulated deficit of approximately$116.6 million and current liabilities exceeded current assets atSeptember 30, 2020 . We also reported a net loss of approximately$31.6 million and approximately$13.5 million net cash used in operating activities for the nine months endedSeptember 30, 2020 . These factors raise substantial doubt about our ability to continue as a going concern. 47
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We are attempting to further expand our customer base; scale up production of various products; and increase revenues; however, our cash position may not be sufficient to support our daily operations through the next twelve months from the date of filing this 10-Q. Our ability to continue as a going concern is dependent upon our ability to raise additional funds by way of a public or private offering and our ability to further generate sufficient revenues. While we believe in the viability of our platforms, and in our ability to raise additional funds by way of a public or private offering, there can be no assurances to that effect.
COVID-19 Update
InDecember 2019 , the emergence of a novel coronavirus, or COVID-19, was reported and inMarch 2020 , theWorld Health Organization , orWHO , characterized COVID-19 as a pandemic. We responded by immediately restricting non-essential travel and enabled work-from-home protocols. Shortly thereafter, and in line with guidance provided by government agencies and international organizations, we restricted all travel, mandated a work-from-home policy across our global workforce, and moved all in-person customer-facing events to virtual ones. We expect these restrictions to stay in effect during the fourth quarter of 2020. We also responded by launching the GTY COVID Emergency Response Program, where a number of GTY products were offered free for a few months to allow our customers to move quickly to solve their infrastructure problems and prevent interruption to government services. As a result of the pandemic, we have seen purchasing decisions being deferred or delayed, delays in services revenue due to the delayed implementation of projects, and an impact on new business pipeline and large deals. We have also seen a decrease in travel-related expenses and advertising and trade show expenses. We expect to see similar impacts in the fourth quarter of 2020. The broader implications of the global emergence of COVID-19 on our business, operating results, and overall financial performance remain uncertain and they depend on certain developments, including the duration and spread of the outbreak, impact on our customers and our sales cycles, impact on our partners or employees, and impact on the economic environment and financial markets, all of which are uncertain and cannot be predicted. We are conducting business as usual with certain limitations to employee travel, employee work locations, and marketing events, among other modifications. We have observed other companies taking precautionary and preemptive actions to address COVID-19, and the effects it has had and is expected to have on business and the economy. During the first three quarters of 2020, we have seen certain new and existing customers halt or decrease investment in infrastructure, and we expect that certain of our current and potential customers will take actions to reduce operating expenses and moderate cash flows, including by delaying sales and requesting extended billing and payment terms. We will continue to actively monitor the situation and may take further actions that alter our business operations, as may be required by federal, state, or local authorities, or that we determine are in the best interests of our employees, customers, partners, suppliers, and stockholders.
PIPE Transaction
Immediately prior to the closing of the business combination (the "Closing"), pursuant to subscription agreements (the "Subscription Agreements"), dated as of various dates fromJanuary 9, 2019 throughFebruary 12, 2019 , by and among GTY Cayman and certain institutional and accredited investors party thereto (the "Subscribed Investors "), GTY Cayman issued to theSubscribed Investors an aggregate of 12,853,098 Class A ordinary shares of GTY for$10.00 per share, for an aggregate cash purchase price of approximately$126.3 million , including three such Subscription Agreements with certain CityBase holders (includingMichael Duffy , the chief executive officer of CityBase) for an aggregate of 380,937 Class A ordinary shares of GTY Cayman at a price of$10.00 per share, for an aggregate cash purchase price of approximately$3.8 million (the "PIPE Transaction"). The Class A ordinary shares of GTY Cayman issued to theSubscribed Investors were cancelled and exchanged on a one-for-one basis for shares of Company common stock at the Closing.
Historical Cash Flows
The following table sets forth a summary of our cash flows for the periods indicated (amounts in thousands):
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Successor Predecessor
February 19, 2019 January 1, 2019
Nine Months Ended through through
September 30, September 30, February 18,
2020 2019 2019Net cash (used in) provided by operating activities $ (13,530) $ (49,843) $ 284 Net cash (used in) provided by investing activities $ (2,850) $ 37,230 $ 1,516 Net cash provided by (used in) financing activities $ 14,136
$ 29,529 $ (539)
Our net loss and cash flows from operating activities are significantly influenced by the Acquisition and our investments in headcount and infrastructure to support anticipated growth.
For the nine months endedSeptember 30, 2020 , net cash used in operations was$13.5 million resulting from our net loss of$31.6 million and changes in operating assets and liabilities of$0.7 million , offset by net non-cash expenses of$18.7 million . The$18.7 million of non-cash expenses was comprised of$11.0 million of amortization of intangible assets acquired as a result of the Acquisition,$6.3 million from share-based compensation resulting from our issuance of stock options and restricted stock units and a$1.4 million loss on issuance of shares, offset by$2.1 million of deferred tax benefits related to the tax and book basis difference on the amortization of intangible assets. The changes in operating assets and liabilities of$0.7 million was comprised primarily of a$1.4 million increase in accounts receivable, a$1.2 million decrease in accounts payable and a$1.6 million increase in prepaid expenses, offset by a$4.7 million increase in contract and other long-term liabilities. For the 2019 Successor Period, net cash used in operations was$49.8 million resulting from our net loss of$59.2 million and changes in operating assets and liabilities of$0.6 million and offset by net non-cash expenses of$9.9 million . The$9.9 million of non-cash expenses was comprised of$9.4 million of amortization of intangible assets acquired as a result of the Acquisition and$2.9 million from share-based compensation offset by$2.8 million of deferred tax benefits related to the tax and book basis difference on the amortization of intangible assets. The changes in operating assets and liabilities of$0.6 million was comprised, in part, by a "Make Whole" payment of$0.8 million in conjunction with an agreement for investors to buy a portion of the Acquisition Redemption Shares at a price less than the previously agreed redemption price. For the 2019 Predecessor Period, net cash provided by operations was$0.3 million resulting from our changes in operating assets and liabilities of$1.6 million and net non-cash expenses of$0.4 million offset by our net loss of$1.7 million . The$1.6 million of net cash flows provided as a result of changes in our operating assets and liabilities was primarily due to a$2.2 million decrease in accounts receivable resulting from seasonality in billings, offset by a$0.8 million decrease in accounts payable. The$0.4 million of non-cash expenses was primarily comprised of$0.2 million of depreciation of property and equipment.
Our primary investing activities have consisted of investments in marketable
securities and capital expenditures. In
For the nine months endedSeptember 30, 2020 , cash used in investing activities was$2.9 million resulting largely from$2.5 million of capital expenditures associated with lease improvements and furniture purchases at Questica's new facility. For the 2019 Successor Period, cash provided by investing activities was$37.2 million resulting from$217.6 million of proceeds from cash held in a trust and offset primarily due to the Acquisition which had a cash purchase price of$179.4 million net of cash acquired and$1.0 million of capital expenditures and capitalization of internal-use software. 49 Table of Contents
For the 2019 Predecessor Period, cash provided by investing activities was
Net Cash Provided By (Used in) Financing Activities
For the nine months endedSeptember 30, 2020 , cash provided by financing activities was$14.1 million primarily due to$11.3 million of proceeds from the issuance of our term loan, net of issuance costs and$3.2 million of proceeds from loans provided under the Payment Protection Program, offset by$0.4 million in repayments of finance lease obligations. For the 2019 Successor Period, cash provided by financing activities was$29.5 million primarily as a result of the private placement of Class A shares of$125.3 million and proceeds received from the successful registered direct offering of common stock of$25.5 million , net of costs and offset primarily by the redemption of shares in the amount of$114.0 million and$5.2 million of common stock repurchases.
For the 2019 Predecessor Period, cash used in financing activities was
Critical Accounting Policies and Use of Estimates
See Note 4 of the notes to our unaudited condensed consolidated financial statements.
Recent Accounting Pronouncements
The impact of recently issued accounting standards is set forth in Note 4, Summary of Significant Accounting Policies, of the notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
We are not party to any off-balance sheet transactions. Other than the guarantees described in Note 7. Related Party Transactions to the unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q, we have no guarantees or obligations other than those which arise out of normal business operations.
Contractual Obligations and Commitments
As ofSeptember 30, 2020 , there were no significant changes to our contractual obligations from those presented as ofDecember 31, 2019 in our Current Report on Form 10-K filed with theSEC onMarch 13, 2020 .
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