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    KNBE   US49926T1043

KNOWBE4, INC.

(KNBE)
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KNOWBE4 : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

05/26/2021 | 05:22pm EDT
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes to those statements included elsewhere in this
Quarterly Report on Form 10-Q. As discussed in "Cautionary Note Regarding
Forward-Looking Statements," in addition to historical financial information,
the following discussion and analysis may contain forward-looking statements
regarding our expectations of future performance, liquidity and capital
resources, our plans, estimates, beliefs and expectations that involve risks,
uncertainties and assumptions. Our actual results and timing of selected events
may differ materially from those anticipated or implied in these forward-looking
statements as a result of many factors, including those discussed under "Risk
Factors" and elsewhere in this Quarterly Report on Form 10-Q.
Overview
KnowBe4 has developed the leading security awareness platform enabling
organizations to assess, monitor and minimize the ongoing cybersecurity threat
of social engineering attacks. Our platform is designed to drive awareness,
change human behavior and enable a security-minded culture that results in a
reduction of social engineering risks. The KnowBe4 platform is designed to be
powerful, yet highly scalable, intuitive and easy to deploy, in order to reduce
the administrative burden of managing social engineering risk on security and IT
professionals. Customers typically deploy our platform quickly across their
entire organization to monitor and reduce the cybersecurity risk associated with
their employees' behavior.
Our flagship product, Kevin Mitnick Security Awareness Training, or KMSAT,
focuses on enabling organizations to assess their social engineering risks and
providing security awareness training to mitigate these risks. KnowBe4
Compliance Manager, or KCM, enables organizations to manage compliance and audit
cycles and PhishER, our security orchestration and automation product, enables
security operations teams to prioritize and automate security workstreams in
order to respond to and remediate social engineering attacks.
We generate substantially all of our revenue from the sale of subscriptions to
access our cloud-based platform. Subscription sales are primarily generated by
our inside sales representatives and our network of channel partners. Our
platform is priced individually by product then based on the subscription tier
and number of subscribed users. This pricing model allows us to offer
organizations flexibility to meet their individual needs without compromising
the overall value of our platform. For KMSAT and PhishER, the number of
subscribed users typically includes all or a majority of the employees of the
customer organization. For KCM, the number of subscribed users typically
includes the employees responsible for the administration of governance and
compliance functions within the customer organization. KMSAT and KCM each
feature premium tiers, which offer customers access to additional features,
including many of our APIs and AI functionality. Additionally, the premium tiers
of KMSAT offer customers access to more differentiated content options,
including highly produced, serialized content, interactive modules, games and
compliance modules.
Generally, the subscription terms of our customer contracts range from one to
three years and are invoiced on an annual basis. A substantial majority of our
revenue is recognized over the period of the subscription. For our KMSAT
product, a portion of revenue earned from subscriptions is recognized at the
point-in-time that the customer's subscription begins. Revenue recognized at
contract inception relates to our customer's ability to download content from
our platform, which represents a separate performance obligation.
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Key Business Metrics
We regularly monitor a number of financial and operating metrics, including the
following key metrics, in order to measure our current performance and estimate
our future performance, as follows:
                                                  March 31,                     Change
                                             2021           2020          Amount          %
                                                         (dollars in thousands)
Number of customers                          38,975         31,823        

7,152 22.5 % Annual recurring revenue (in thousands) $ 222,270 $ 157,919 $ 64,351 40.7 %



Number of Customers
We believe that our ability to increase and retain the number of customers on
our platform is an indicator of our market penetration, the growth of our
business and potential future business opportunities. Increasing awareness of
our platform and products, combined with further overall awareness of the need
to address the human risk within cybersecurity, has continued to expand our
customer base to include organizations of all sizes across all industries. We
define a customer as a separate and distinct buying entity, such as a company,
an educational or government institution or a distinct business unit of a large
company that has an active contract with us to access our platform. We do not
consider our channel partners as separate customers as our contracts are
executed with the end user, and we treat Managed Service Providers ("MSPs"), who
may purchase our products on behalf of multiple companies, as a single customer.
As our customer base grows and as our market penetration increases, we do not
expect to continue to grow at the same year-over-year rate.
Annual Recurring Revenue
We believe that annual recurring revenue ("ARR") is a key metric to measure our
business performance because it reflects our ability to acquire new customers
and to maintain and expand our relationship with existing customers. We define
ARR as the annualized value of all contractual subscription agreements as of the
end of the period. We perform this calculation on an individual contract basis
by dividing the total dollar amount of a contract by the total contract term
stated in months and multiplying this amount by twelve to annualize. Calculated
ARR for each individual contract is then aggregated to arrive at total ARR. ARR
does not have a standardized meaning and therefore may not be comparable to
similarly titled measures presented by other companies. ARR should be viewed
independently of revenue, deferred revenue and remaining performance obligations
and is not intended to be combined with or to replace any of those items.
Specifically, ARR, as calculated under the definition herein, does not adjust
for the timing impact of revenue recognition for specific performance
obligations identified within a contract. ARR is not a forecast and the active
contracts at the date used in calculating ARR may or may not be extended by our
customers. We expect ARR in total dollars to continue to grow as we execute on
our growth strategies and increase our market penetration, but we do not expect
to continue to grow at the same year-over-year rate as we become a larger, more
mature business.
Non-GAAP Financial Measures
In addition to our results determined in accordance with U.S. generally accepted
accounting principles ("GAAP"), we believe the following non-GAAP measures are
useful in evaluating our operating performance. We believe that non-GAAP
financial information, when taken collectively, may be helpful to investors
because it provides consistency and comparability with past financial
performance. However, non-GAAP financial information is presented for
supplemental informational purposes only, has limitations as an analytical tool,
and should not be considered in isolation or as a substitute for financial
information presented in accordance with GAAP. Other companies, including
companies in our industry, may calculate similarly-titled non-GAAP measures
differently or may use other measures to evaluate their performance, all of
which could reduce the usefulness of our non-GAAP financial measures as tools
for comparison. A reconciliation is provided below for each non-GAAP financial
measure to the most directly comparable financial measure stated in accordance
with GAAP. Investors are encouraged to review the related GAAP financial
measures and the reconciliation of these non-GAAP financial
                                       29
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measures to their most directly comparable GAAP financial measures and not to
rely on any single financial measure to evaluate our business.
Non-GAAP Operating Income (Loss)
We define non-GAAP operating income (loss) as GAAP operating income (loss)
excluding stock-based compensation expense, amortization of acquired intangible
assets and acquisition and integration related costs. Costs associated with
acquisitions and integration include legal, accounting and other professional
fees, changes in the fair value of contingent consideration obligations and
other costs related to the transition of the acquired business. We believe
non-GAAP operating income (loss) provides our management and investors
consistency and comparability with our past financial performance and
facilitates period-to-period comparisons of operations, as this metric generally
eliminates the effects of certain variables unrelated to our overall operating
performance.
                                                                 Three Months Ended March 31,
                                                                  2021                   2020
                                                                        (in thousands)
Operating income (loss)                                     $        2,765          $     (1,518)
Add: Stock-based compensation expense                                1,659                   703
Add: Amortization of acquired intangible assets                        175                    83
Add: Acquisition and integration related costs                       1,311                     -
Non-GAAP operating income (loss)                            $        5,910  

$ (732)



Free Cash Flow
We define free cash flow as net cash provided by operating activities, the most
directly comparable financial measure calculated in accordance with GAAP, less
purchases of property, equipment, amounts capitalized for internal-use software
and principal payments on finance leases. We believe that free cash flow is a
meaningful indicator of liquidity to management and investors about the amount
of cash generated from our operations that, after the investments in property,
equipment and capitalized internal-use software, can be used for strategic
initiatives.
                                                    Three Months Ended March 31,
                                                         2021                    2020
                                                           (in thousands)
Net cash provided by operating activities    $        21,852                  $ 13,929
Less: Purchases of property and equipment               (519)               

(2,670)

Less: Capitalized internal-use software                 (362)               

(867)

Less: Principal payments on finance leases               (10)                       (6)
Free Cash Flow                               $        20,961                  $ 10,386


Components of Our Operating Results
Revenue
We derive substantially all of our revenue from subscription services fees paid
by customers for access to our cloud-based platform, which includes support
services and feature upgrades throughout the duration of the customer's
contract. While contracts with our customers do not provide the customer with
the right to take possession of software operating on our global cloud-based
platform, certain arrangements allow our customers the ability to download and
use our content within their own learning management systems. Our content is
only available to customers throughout the duration of their subscription and is
accessed through our cloud-based platform. Subscription services fees and access
to content for download are considered separate performance obligations.
Invoiced amounts are allocated between subscription services fees and access to
content and are recorded as deferred revenue and revenue, respectively. Deferred
revenue primarily consists of amounts invoiced to
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customers for our subscription services and is generally recognized ratably over
the subscription period while revenue related to content downloads is recognized
at contract inception.
Subscription terms typically range from one year to three years and generally
begin on the date access to our platform is made available to the customer. Our
subscriptions are generally invoiced upfront for the duration of the contract
term or in annual installments. Our arrangements are primarily noncancellable
and nonrefundable. We collect our receivables in advance of the subscription
service period and often issue renewal invoices in advance of the renewal
service period.
Because we recognize revenue ratably over the terms of our subscription
contracts, a substantial portion of the revenue that we report in each period is
attributable to the recognition of deferred revenue relating to agreements that
we entered into during previous periods. Consequently, increases or decreases in
new sales or renewals in any one period may not be immediately reflected as
revenue for that period. Accordingly, the effect of downturns in sales and
market acceptance of our platform, and potential changes in our rate of
renewals, may not be fully reflected in our results of operations until future
periods.
Cost of Revenue and Gross Margin
Cost of revenue consists of costs associated with delivering our platform and
providing support. These costs include employee-related costs such as salaries
and bonuses, stock-based compensation expense and benefits costs associated with
our operations and support personnel, costs associated with third-party hosting
services, amortization of capitalized internal-use software and content and
allocated overhead. We expect cost of revenue to increase in absolute dollars
and as a percentage of revenue, relative to the extent of the growth of our
business.
Gross margin is gross profit expressed as a percentage of total revenue. Our
gross margin has been and will continue to be affected by various factors,
including the timing and amount of costs associated with supporting our platform
and the extent to which we expand our customer success team and develop
additional content to be hosted on our platform. We intend to continue to invest
additional resources in our platform, content development and support services
which we expect to result in steady gross margin over time.
Operating Expenses
Sales and Marketing
Sales and marketing expenses consist primarily of employee-related costs,
including salaries and wages, stock-based compensation expenses and sales
commissions, costs of general marketing programs and promotional activities,
travel-related expenses and allocated overhead. Sales commissions earned by our
sales force that are considered to be incremental to the cost of acquiring a
customer are deferred and amortized over the estimated period of benefit.
Marketing programs consist of advertising, events, including our KB4-CON
customer conference, which has historically been held during the second quarter
of each year, corporate communications, brand building and product marketing
activities. We expect our sales and marketing expenses to increase on an
absolute dollar basis as we continue to make significant investments in our
sales and marketing organization to drive additional revenue, increase market
share and expand our global customer base.
Technology and Development
Technology and development costs consist primarily of research and development
activities, non-capitalizable costs of developing content and certain overhead
allocations. These costs include employee-related costs, consulting services,
expenses related to the design, development, testing and enhancements of our
subscription services. Technology and development costs are expensed as
incurred. From a unit cost standpoint, our technology and development costs are
lower primarily due to favorable costs of living in the geographic locations in
which our offices are based. We expect that our technology and development
expenses will increase in absolute dollars and may increase as a percentage of
our revenue as we continue to enhance our platform functionality and develop new
content and features. Additionally, our technology and development expense may
fluctuate as a percentage of our revenue from period to period depending on the
timing of development.
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General and Administrative
General and administrative expenses consist primarily of employee-related costs
for accounting, finance, legal, IT and human resources personnel and also
include expenses related to consulting services, audit fees, tax services, legal
services and other general corporate items. Our general and administrative costs
also include our investment in internal initiatives and tools which we believe
promotes our corporate culture and helps us attract and retain talent. We expect
our general and administrative expenses to increase in absolute dollars in
future periods as we continue to expand our operations, hire additional
personnel and incur costs to support the requirements of being a public company.
Interest and Other Income
Interest and other income primarily consists of interest earned on overnight
cash deposits and fluctuates with market rates of interest and overall cash
balances.
Interest Expense
Interest expense primarily relates to fees incurred to enter into the Revolving
Credit Facility with Bank of America on March 12, 2021, which provides for a
$100.0 million revolving credit facility.
Income Tax Benefit (Expense)
Income tax benefit (expense) consists of federal and state income taxes in the
United States and income taxes in certain foreign jurisdictions. Our provision
for income taxes has not historically been significant to our business as we
have incurred operating losses to date. We maintain a valuation allowance on our
U.S. federal, state and certain foreign deferred tax assets as we have concluded
that it is not more likely than not that the deferred assets will be realized.
Results of Operations
The following table is a summary of our consolidated statements of operations:
                                                                     Three Months Ended March 31,
                                                                      2021                   2020
                                                                            (in thousands)
Revenues, net                                                  $        53,550          $     39,178
Cost of revenues(1)                                                      7,343                 6,043
Gross profit                                                            46,207                33,135
Operating expenses:
Sales and marketing(1)                                                  23,071                19,627
Technology and development(1)                                            5,742                 4,906
General and administrative(1)                                           14,629                10,120
Total operating expenses                                                43,442                34,653
Operating income (loss)                                                  2,765                (1,518)
Other income (expense):
Interest income                                                             18                   125
Interest expense                                                          (196)                  (13)
Other (expense) income                                                    (143)                   33
Income (loss) before income tax (expense) benefit                        2,444                (1,373)
Income tax (expense) benefit                                              (244)                   12
Net income (loss)                                              $         2,200          $     (1,361)


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________________

(1)Amounts include stock-based compensation expense as follows:

                                                    Three Months Ended March 31,
                                                          2021                     2020
                                                           (in thousands)
Cost of revenues                           $              53                      $  21
Sales and marketing                                      889                        151
Technology and development                               140                         70
General and administrative                               577                        461
Total stock-based compensation expense     $           1,659                

$ 703

The following table is a summary of our consolidated statements of operations as a percentage of our total revenues for the periods:

                                                  Three Months Ended March 31,
                                                       2021                   2020
Revenues, net                                                   100.0  %     100.0  %
Cost of revenues                                                 13.7  %      15.4  %
Gross profit                                                     86.3  %      84.6  %

Operating expenses:
Sales and marketing                                              43.1  %      50.1  %
Technology and development                                       10.7  %      12.5  %
General and administrative                                       27.3  %      25.8  %
Total operating expenses                                         81.1  %      88.5  %

Operating income (loss)                                           5.2  %      (3.9) %

Other income (expense):
Interest income                                                     -  %       0.3  %
Interest expense                                                 (0.4) %         -  %
Other (expense) income                                           (0.3) %       0.1  %

Income (loss) before income tax expense                           4.6  %      (3.5) %

Income tax (expense) benefit                                     (0.5) %         -  %

Net income (loss)                                                 4.1  %      (3.5) %

Comparison of the Three Months Ended March 31, 2021 and 2020

                                       33
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Revenues
                         Three Months Ended March 31,                    Change
                              2021                    2020           $             %
                                          (dollars in thousands)
Revenues, net     $        53,550                  $ 39,178      $ 14,372        36.7  %


Revenues increased by $14.4 million, or 36.7%, for the three months ended March
31, 2021, compared to the three months ended March 31, 2020. Due to the nature
of our subscription-based business model, the majority of our revenue in a given
period results from the recognition of revenue deferred in prior periods. As
such, $12.4 million of the increase is related to the recognition of deferred
revenue from the accumulation of contracts entered into during prior periods.
The remaining increase is attributable to revenue from new customers combined
with revenue from cross-selling additional products into our existing customer
base.
Cost of Revenues and Gross Margin
                            Three Months Ended March 31,                   Change
                           2021                        2020            $             %
                                            (dollars in thousands)
Cost of revenues     $       7,343                  $  6,043       $  1,300        21.5  %
Gross profit         $      46,207                  $ 33,135       $ 13,072        39.5  %
Gross margin                  86.3   %                  84.6  %


Cost of revenue increased by $1.3 million, or 21.5%, for the three months ended
March 31, 2021, compared to the three months ended March 31, 2020. The overall
increase in cost of revenue is in line with our increase in revenue, while
maintaining our margin position. The increase in cost of revenue is primarily
driven by additional personnel costs related to increased headcount to support
our overall business growth. Gross margins were slightly higher compared to the
prior year period driven primarily by reductions in amortization expense for our
platform and content assets.

Operating Expenses
Sales and Marketing.
                                        Three Months Ended March 31,                   Change
                                       2021                        2020            $            %
                                                        (dollars in thousands)
Sales and marketing              $      23,071                  $ 19,627       $ 3,444        17.5  %
Percentage of total revenues              43.1   %                  50.1  %


Sales and marketing expenses increased by $3.4 million, or 17.5%, for the three
months ended March 31, 2021, compared to the three months ended March 31, 2020.
The increase in sales and marketing expenses primarily relates to increased
personnel costs of $2.7 million, including salaries and commissions. These
increased personnel costs are driven by headcount increases within our sales
organization, which is consistent with our overall business growth.

                                       34
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Technology and Development.
                                      Three Months Ended March 31,                   Change
                                     2021                          2020          $           %
                                                     (dollars in thousands)
Technology and development     $       5,742                    $ 4,906       $ 836        17.0  %
Percentage of total revenues            10.7   %                   12.5  %


Technology and development expenses increased by $0.8 million, or 17.0%, for the
three months ended March 31, 2021, compared to the three months ended March 31,
2020. The increase in technology and development costs is driven by $0.7 million
of additional personnel costs as we increase developer headcount to support our
growth initiatives. The remaining increases related to higher overhead
allocations driven by overall growth in our business.

General and Administrative
                                      Three Months Ended March 31,                   Change
                                     2021                        2020            $            %
                                                      (dollars in thousands)
General and administrative     $      14,629                  $ 10,120       $ 4,509        44.6  %
Percentage of total revenues            27.3   %                  25.8  %


General and administrative expenses increased by $4.5 million, or 44.6%, for the
three months ended March 31, 2021, compared to the three months ended March 31,
2020. This increase relates to $2.8 million of additional personnel costs driven
by headcount increases within our administrative functions in preparation for
becoming a public company along with increased consulting and professional fees
of $1.2 million. The increase in consulting and professional fees primarily
relates to costs incurred to support the completion of our initial public
offering ("IPO") and costs associated with the acquisition of MediaPro Holdings,
LLC.
Liquidity and Capital Resources
At March 31, 2021, our principal sources of liquidity were cash and cash
equivalents totaling $94.6 million and accounts receivable of $37.3 million. Our
cash and cash equivalents are comprised of time deposits with financial
institutions. To date, we have financed our operations primarily through
payments received from customers using our platform supplemented by private
placements of our equity securities. Our positive cash flows from operations on
an annual basis enable us to make continued investments in the growth of our
business. We expect that our operating cash flows, in addition to our cash and
cash equivalents, will enable us to continue to make such investments in the
future. We expect our operating cash flows to further improve as we increase our
operational efficiency and experience economies of scale.
We typically invoice our subscription customers annually in advance. Therefore,
a substantial source of our cash is from customer prepayments, which are
included on our consolidated balance sheets as deferred revenue. Deferred
revenue consists of invoiced fees for our subscription services, prior to
satisfying the criteria for revenue recognition, which are subsequently
recognized as revenue in accordance with our revenue recognition policy. As of
March 31, 2021, we had deferred revenue of $204.1 million, of which $127.0
million was recorded as a current liability and is expected to be recorded as
revenue in the next 12 months, provided all other revenue recognition criteria
are met.
Our remaining performance obligation represents contracted revenue that has not
yet been recognized and includes deferred revenue, which has been invoiced and
is recorded on the consolidated balance sheet, and unbilled amounts that are not
yet recorded on the balance sheet, that will be recognized as revenue in future
periods. As of March 31, 2021, our remaining performance obligation was $246.4
million.

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On March 12, 2021, we entered into a three-year $100.0 million revolving credit
facility with Bank of America (the "Revolving Credit Facility"). Interest on any
borrowings under the revolving credit facility bear interest, at our option, at
(i) a base rate equal to the highest of (a) the federal funds rate plus 0.50%,
(b) the rate of interest in effect for such date as publicly announced from time
to time by Bank of America as its "prime rate", or (c) the eurodollar rate plus
1.0%, provided that such rate will not be less than 0.5%. We are obligated to
pay other customary fees for a credit facility of this size and type, including
letter of credit fees, an upfront fee, and an unused commitment fee. The terms
of our Revolving Credit Facility include a number of covenants that limit our
ability and our subsidiaries' ability to, among other things, incur additional
indebtedness, grant liens, merge or consolidate with other companies or sell
substantially all of our assets, pay dividends, make redemptions and repurchases
of stock, make investments, loans and acquisitions, or engage in transactions
with affiliates. We expect to use the revolving credit facility for general
corporate purposes, including potential future acquisitions and expansions. As
of March 31, 2021, we were in compliance with all covenants and there were no
amounts outstanding under this facility.
On April 26, 2021, we completed an IPO of our Class A common stock, in which we
issued and sold 10,425,000 shares of Class A common stock, including 1,425,000
shares resulting from the exercise in full of the underwriters' option to
purchase additional shares, at an IPO price of $16.00 per share. We received net
proceeds of $156.0 million after deducting underwriting discounts and
commissions but before estimated offering costs of $3.0 million. The shares and
proceeds from our IPO are not reflected in the consolidated financial statements
as of and for the three months ended March 31, 2021.
We believe our existing cash and cash equivalents, cash provided by operating
activities, available borrowings under our revolving line of credit and unbilled
amounts related to contracted non-cancelable subscription agreements, which are
not reflected on the balance sheet, will be sufficient to meet our working
capital and capital expenditure needs over the next 12 months. In the future, we
may enter into arrangements to acquire or invest in complementary businesses,
products and technologies, and intellectual property rights, though we currently
have no agreements or commitments to do so. To facilitate these acquisitions or
investments, we may seek additional equity or debt financing, which may not be
available on terms favorable to us or at all, impacting our ability to complete
subsequent acquisitions or investments.
Cash Flows
The following table presents a summary of our consolidated cash flows from
operating, investing and financing activities.
                                                    Three Months Ended March 31,
                                                         2021                    2020
                                                           (in thousands)
Net cash provided by operating activities    $         21,852                 $ 13,929
Net cash used in investing activities        $        (12,186)                $ (3,537)
Net cash used in financing activities        $           (834)              

$ (1)



Operating Activities
Our largest source of cash flows from operations is cash collections from our
customers for subscription services while our primary use of cash for operating
activities is for employee-related expenses, including salaries, commissions and
monthly performance bonuses. We have historically generated positive cash flows
from operations as a result of our efficient sales model and period-over-period
growth in subscription services.
Net cash provided by operating activities during the three months ended March
31, 2021 was $21.9 million, which consisted of net income of $2.2 million,
adjusted for non-cash charges of $7.7 million and net cash inflows of $12.0
million provided by changes in our operating assets and liabilities. Non-cash
charges primarily consisted of $4.1 million of amortization of deferred
commissions, $3.2 million of depreciation and amortization of our capital assets
and $1.7 million of stock-based compensation expense. Cash outflows from changes
in operating assets and liabilities primarily resulted from a $1.7 million
increase in the total deferred commissions balance and a $3.3 million increase
in the prepaid and other assets balance. The increase in deferred commissions
balances is due to the
                                       36
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addition of new customers and renewal of existing contracts during the period.
The increase in prepaid and other assets is due to the deferral of initial
public offering costs and the advanced funding of various international
operations. Cash inflows from changes in operating assets and liabilities
primarily relate to a $18.4 million increase in the total deferred revenue
balance resulting from the sale of additional subscription services under our
standard advanced invoicing practices, a $1.4 million decrease in the accounts
receivable balance and a $6.2 million increase in the accounts payable balance
due primarily to overall growth in the business.
Net cash provided by operating activities during the three months ended March
31, 2020 was $13.9 million, which consisted of a net loss of $1.4 million,
adjusted for non-cash charges of $5.8 million and net cash inflows of $9.4
million provided by changes in our operating assets and liabilities. Non-cash
charges primarily consisted of $3.4 million of amortization of deferred
commissions, $2.7 million of depreciation and amortization of our capital assets
and $0.7 million of stock-based compensation expense. Cash outflows from changes
in operating assets and liabilities primarily resulted from a $1.7 million
increase in the total deferred commissions due to the addition of new customers
and renewal of existing contracts during the period. Cash inflows from changes
in operating assets and liabilities primarily relate to a $12.6 million increase
in the total deferred revenue balance resulting from the sale of additional
subscription services under our standard advanced invoicing practices.
Investing Activities
Net cash used in investing activities during the three months ended March 31,
2021 primarily related to the $11.3 million of net cash paid for the acquisition
of MediaPro, completed March 1, 2021, combined with $0.4 million and $0.5
million of capital expenditures for internal-use software and the purchase of
property and equipment, respectively. Net cash used in investing activities
during the three months ended March 31, 2020 related to $0.9 million and $2.7
million of capital expenditures for internal-use software and the purchase of
property and equipment, respectively.
Financing Activities
Net cash used in financing activities during the three months ended March 31,
2021 primarily related to $1.2 million paid for the repurchase of common stock
offset by $0.3 million of cash received upon the issuance of common stock from
the exercise of stock options. Net cash used in financing activities during the
three months ended March 31, 2020 primarily related to $0.3 million paid for the
repurchase of common stock offset by $0.1 million of cash received upon the
issuance of common stock from the exercise of stock options.
Commitments and Contractual Obligations
There were no material changes to our commitments and contractual obligations
during the three months ended March 31, 2021 from the commitments and
contractual obligations disclosed in the Prospectus. Refer to Note 15
"Commitments and Contingencies" to the consolidated financial statements
contained within this Quarterly Report on Form 10-Q for further details.
Indemnification Agreements
Our subscription agreements generally contain standard indemnification
obligations. Pursuant to these agreements, we will indemnify, defend and hold
the other party harmless with respect to a claim, suit, or proceeding brought
against the other party by a third party alleging that our intellectual property
infringes upon the intellectual property of the third party, or results from a
breach of our representations and warranties or covenants, or that results from
any acts of negligence or willful misconduct. The term of these indemnification
agreements is generally perpetual any time after the execution of the agreement.
Typically, these indemnification provisions do not provide for a maximum
potential amount of future payments we could be required to make. However, in
the past we have not been obligated to make significant payments for these
obligations and no liabilities have been recorded for these obligations on our
consolidated balance sheet as of March 31, 2021 or December 31, 2020.
We also indemnify our officers and directors for certain events or occurrences,
subject to certain limits, while the officer is or was serving at our request in
such capacity. The maximum amount of potential future indemnification is
unlimited. However, our director and officer insurance policy limits our
exposure and enables us
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to recover a portion of any future amounts paid. Historically, we have not been
obligated to make any payments for these obligations and no liabilities have
been recorded for these obligations on our consolidated balance sheet as of
March 31, 2021 or December 31, 2020.
Off-Balance Sheet Arrangements
As of March 31, 2021, we did not have any relationships with unconsolidated
organizations or financial partnerships, such as structured finance or special
purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or for other contractually narrow or
limited purposes.
Quantitative and Qualitative Disclosures About Market Risk
We have operations in the United States and internationally and we are exposed
to market risk in the ordinary course of business.
Inflation Rate Risk
We do not believe that inflation has had a material effect on our business,
financial condition or results of operations. Nonetheless, if our costs were to
become subject to significant inflationary pressures, we may not be able to
fully offset such higher costs through price increases. Our inability or failure
to do so could harm our business, financial condition and results of operations.
Interest Rate Risk
Our cash and cash equivalents primarily consist of cash on hand and highly
liquid investments in money market funds, including overnight investments. As of
March 31, 2021, we had cash and cash equivalents of $94.6 million. The carrying
amount of our cash equivalents reasonably approximates fair value, due to the
short maturities of these instruments. The primary objectives of our investment
activities are the preservation of capital, the fulfillment of liquidity needs
and the fiduciary control of cash and investments. We do not enter into
investments for trading or speculative purposes. Our investments are exposed to
market risk due to fluctuations in interest rates, which may affect our interest
income and the fair market value of our investments. However, due to the
short-term nature of our investment portfolio, we do not believe an immediate
10% increase or decrease in interest rates would have a material effect on the
fair market value of our portfolio. We therefore do not expect our operating
results or cash flows to be materially affected by a sudden change in market
interest rates.
Foreign Currency Risk
The vast majority of our sales contracts are denominated in U.S. dollars, with a
small number of contracts denominated in foreign currencies. A portion of our
operating expenses are incurred outside the United States, denominated in
foreign currencies and subject to fluctuations due to changes in foreign
currency exchange rates, particularly changes in the British Pound, Brazilian
Real and South African Rand. Additionally, fluctuations in foreign currency
exchange rates may cause us to recognize transaction gains and losses in our
consolidated statements of operations. During the three months ended March 31,
2021 and 2020, a hypothetical 10% change in foreign currency exchange rates
applicable to our business would not have had a material impact on our
consolidated financial statements. As the impact of foreign currency exchange
rates has not been material to our historical operating results, we have not
entered into derivative or hedging transactions, but we may do so in the future
if our exposure to foreign currency becomes more significant.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements and notes to our
financial statements, which were prepared in accordance with GAAP. The
preparation of these consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets and
liabilities and related disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenue and
expenses during the reporting periods. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable,
the
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results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
The accounting estimates we use in the preparation of our financial statements
will change as new events occur, more experience is acquired, additional
information is obtained and our operating environment changes. Changes in
estimates are made when circumstances warrant. Such changes in estimates and
refinements in estimation methodologies are reflected in our reported results of
operations and, if material, the effects of changes in estimates are disclosed
in the notes to our financial statements. By their nature, these estimates and
judgments are subject to an inherent degree of uncertainty and actual results
could differ materially from the amounts reported based on these estimates.
While our significant accounting policies are more fully described in Note 2 of
our consolidated financial statements "Summary of Significant Accounting
Policies" included elsewhere in this Quarterly Report on Form 10-Q, the
following accounting policies involve a greater degree of judgment and
complexity. Accordingly, the following summary identifies the policies we
believe are the most critical to aid in fully understanding and evaluating our
consolidated financial condition and results of our operations:
•the allocation of transaction price to separate performance obligations on a
relative stand-along selling price, or SSP, basis;
•the determination of the period of benefit related to commissions paid for the
acquisition of an initial subscription contract;
•the calculation of the fair value of stock option awards using the
Black-Scholes option-pricing model, including certain assumptions made when
determining the inputs to the model; and
•the determination of the fair value of our common stock prior to our IPO.
Recent Accounting Pronouncements
See Note 2 "Summary of Significant Accounting Policies" to our consolidated
financial statements contained within this Quarterly Report on Form 10-Q for
more information.
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