TASKUS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in Part II, Item 8 of this Annual Report. In addition to historical data, the following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in our forward-looking statements as a result of various factors, including but not limited to those discussed under "Cautionary Note Regarding Forward-Looking Statements" and disclosed or referenced in Part I, Item 1A "Risk Factors" in this Annual Report. The following discussion and analysis also includes a discussion of certain non-GAAP financial measures. For a description and reconciliation of the non-GAAP measures discussed in this section, see "-Non-GAAP Financial Measures" below. This Annual Report includes certain historical consolidated financial and other data forTaskUs, Inc. ("we," "us," "our" or the "Company"). The following discussion provides a narrative of our financial condition and results of operations for the fiscal year endedDecember 31, 2021 compared to the fiscal year endedDecember 31, 2020 . A discussion regarding our financial condition and results of operations for the fiscal year endedDecember 31, 2020 compared to the fiscal year endedDecember 31, 2019 can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our prospectus datedOctober 20, 2021 as filed with theSEC onOctober 22, 2021 , which is incorporated herein by reference.
Overview
We provide digital outsourced services, focused on serving high-growth
technology companies to represent, protect and grow their brands. As of
Our global, omni-channel delivery model is focused on providing our clients
three key services - Digital Customer Experience ("Digital CX"), Content
Security and Artificial Intelligence ("AI") Operations. 95% of our revenue for
the year ended December 31, 2021 was delivered from non-voice, digital channels
or omni-channel services. Non-voice channels allow us to utilize resources
efficiently, thereby driving higher profitability.
We have designed our platform to enable us to rapidly scale and benefit from our clients' growth. We believe our ability to deliver "ridiculously good" outsourcing will enable us to continue to grow our client base.
AtTaskUs , culture is at the heart of everything we do. Many of the companies operating in the Digital Economy are well-known for their obsession with creating a world-class employee experience. We believe clients chooseTaskUs in part because they view our company culture as aligned with their own, which enables us to act as a natural extension of their brands and gives us an advantage in the recruitment of highly engaged frontline teammates who produce better results. Business Highlights We nearly doubled our 2020 revenue growth rate during the year endedDecember 31, 2021 , as we transitioned to operating as a public company in a primarily virtual environment. We added 41 new clients in 2021, achieving a 49% new client win rate, and 69 current clients signed new statements of work with us. Recent Financial Highlights
For the year ended
For the year endedDecember 31, 2021 , we recorded a net loss of$(58.7) million , or a (270.0)% decrease from net income of$34.5 million for the year endedDecember 31, 2020 . This decrease included expenses related to the one-time phantom shares bonuses and non-recurring teammate bonuses associated with the initial public offering ("IPO") of$133.7 million and non-cash stock-based compensation expense which we began recognizing upon our IPO. Adjusted Net Income for the year endedDecember 31, 2021 increased 86.5% to$129.4 million from$69.4 million for the year endedDecember 31, 2020 . Adjusted EBITDA for the year endedDecember 31, 2021 increased 75.8% to$187.9 million from$106.9 million for the year endedDecember 31, 2020 .
The operating results in any period are not necessarily indicative of the results that may be expected for any future period.
2021 Developments
Initial Public Offering
OnJune 11, 2021 , our Class A common stock began trading on the Nasdaq. Upon closing the IPO onJune 15, 2021 , we issued and sold 5,553,154 shares of Class A common stock (the "primary" offering) and certain selling stockholders sold 55
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9,626,846 outstanding shares (the "secondary" offering), including shares sold by the selling stockholders pursuant to the underwriters' full exercise of their option to purchase additional shares, at a public offering price of$23 per share. We received net proceeds of$120.7 million after deducting underwriting discounts and commissions, but before deducting offering expenses. We used the proceeds from the issuance, together with cash on hand, to satisfy payments of approximately$127.5 million in respect of vested phantom shares. As a result of becoming a public company, we incur additional costs related to audit, legal, and tax-related services associated with maintaining compliance with exchange listing andSEC requirements, director and officer insurance premiums and investor relations costs associated with being a public company.
Amendment and Restatement of Certificate of Incorporation
Prior to the completion of the IPO, we amended and restated our certificate of incorporation to effect a ten-for-one forward stock split of our outstanding common stock and authorized three classes of ownership interests: (i) 250,000,000 shares of preferred stock, par value$0.01 per share; (ii) 2,500,000,000 shares of Class A common stock, par value$0.01 per share; and (iii) 250,000,000 shares of Class B common stock, par value$0.01 per share. After giving effect to the ten-for-one stock split, all then outstanding shares of common stock were reclassified into an equal number of shares of Class B common stock.
Equity Incentive Plans
At the IPO date, we concluded that our IPO represented a qualifying liquidity
event that would cause the performance conditions of stock options issued under
our 2019 Stock Incentive Plan to be probable of occurring. As such, we started
to recognize stock-based compensation expense in relation to the stock options
issued under the 2019 Stock Incentive Plan.
In connection with the IPO, we adopted the 2021 Omnibus Incentive Plan, which
became effective on the date our registration statement was declared effective.
Under the 2021 Omnibus Incentive Plan, we granted time-based restricted stock
units ("RSUs"), performance-based restricted stock units ("PSUs"), and
time-based stock options, in each case relating to shares of our Class A common
stock.
For additional information, see Note 9, "Employee Compensation" in the Notes to Consolidated Financial Statements of this Annual Report.
Trends and Factors Affecting our Performance
There are a number of key factors and trends affecting our results of operations.
Growing with our current clients
As ofDecember 31, 2021 , we served over 100 of the world's leading technology companies. In addition, over 99% of our revenues in 2021 were from recurring revenue contracts. As our clients grow in size and the complexity of their outsourcing needs increases, we believe we have an opportunity to increase the addressable spend available toTaskUs through enhanced penetration of current services as well as cross-selling new services. In 2021, 69 current clients signed new statements of work with us.
New client wins
We are well positioned within multi-billion dollar commercial markets with substantial addressable spend opportunities where we focus on culturally aligned, agile companies that plan to scale rapidly. Our world-class sales team is organized around new-economy industry verticals such as Entertainment + Gaming, FinTech, HealthTech, HiTech,On Demand Travel + Transportation, Retail + e-Commerce and Social Media. We identify emerging industry and funding trends to engage early and work with future market leaders and enterprise-class clients. We added 41 new clients in 2021, and we achieved a 49% new client win rate for every dollar of new client opportunities we pursued.
Expanded service offerings
We closely watch trends in the start-up and venture capital space, working with founders and investors to develop custom service offerings. This approach has earned us the opportunity to support some of the fastest growing companies in history, often before anyone else. In Content Security we responded to the rise of NFTs by rolling out a service focused on securing the marketplaces or games where these digital assets are bought and sold. This leverages our existing capabilities and brings an adjacent offering to the market.
Expanding geographically
Global presence and multilingual capabilities are of increasing importance to our multinational clients and potential clients. New geographies mean new languages and/or capabilities to offer to our clients and increasing opportunities to win new business. We have expanded our presence from 18 sites in eight countries as ofDecember 31, 2020 to 23 sites in ten countries as ofDecember 31, 2021 , including two countries where operations are expected to start in 2022. InOctober 2019 , we entered 56
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theIndia market with our first site inIndore , where we had approximately 6,000 employees as ofDecember 31, 2021 . We plan to continue expanding our geographic footprint to drive growth with both existing and new clients, which may result in one-time costs that may impact profitability. Additionally, as we enter new geographies and make new capabilities available, clients may elect to move current work withTaskUs in one geography to another geography to optimize cost or to provide additional business continuity to their operations. These changes in geographic mix may result in fluctuations in revenue and cost of service which are driven by the geography in which the work is being performed. These fluctuations are in line with our business model, which aims to deliver service out of the optimal geography for our clients. This allows us to serve our clients better in the long-term in most cases and deepens our relationship as we tend to grow and operate over multiple geographies contemporaneously with our larger clients over time as they grow. These fluctuations might be especially noticeable in a particular service line or geography on a period over period basis.
Hiring and retention of employees
In order to efficiently and effectively provide services to our clients, we must be able to quickly hire, train and retain employees. We offer our employees competitive wages with annual increases and also invest in their well-being. Our employee benefits and employee engagement costs may vary from period to period based on employee participation. We seek to retain sufficient employees to serve our clients' increasing business needs and position ourselves for growth. We believe our focus on employee culture leads to lower employee attrition levels. Apart from driving our high client satisfaction and retention metrics, lower employee attrition leads to lower hiring and training costs and higher employee productivity. The voluntary attrition rate for employees who were employed byTaskUs for more than 180 days was 15.3% for the year endedDecember 31, 2021 .
Foreign currency fluctuations
We are subject to foreign currency exposure, primarily related to costs from the international locations in which we have operations. In order to mitigate this exposure, we enter into foreign currency exchange rate forward contracts for the larger geographies in which we operate to reduce the volatility of forecasted cash flows denominated in foreign currencies.
COVID-19
The COVID-19 pandemic has evolved from its emergence in early 2020, and so has its global impact. Many countries have reacted by instituting or re-instituting quarantines and restrictions on travel, closing financial markets and/or restricting trading, and limiting operations of non-essential businesses. Such actions created disruption in global supply chains, increased rates of unemployment and adversely impacted many industries. The outbreak could have a continued adverse impact on economic and market conditions, and the full extent of the impact and effects of the COVID-19 pandemic will depend on future developments, including, among other factors, the duration and spread of the outbreak, including new strains and variants of the virus, and the success and impact of vaccination programs and mandates, along with related travel advisories, quarantines and restrictions, the recovery time of the disrupted supply chains and industries, the impact of labor market interruptions and wage increases, the impact of government interventions, and uncertainty with respect to longer term global macro-economic effects. We continue to closely monitor the outbreak and the impact on our operations and liquidity. As events continue to evolve and additional information becomes available, our estimates may change materially in the future. Operational Enablement In earlyMarch 2020 , in response to the COVID-19 pandemic, we implemented a virtual operating model, enabling over 90% of our frontline employees to work virtually soon after the commencement of lockdowns to protect the health and safety of our employees, and ensure continued service for our clients. As part of our swift transition to a virtual operating model during the outbreak, we continued to pay employees who were unable to work due to logistical and technical hurdles or due to illness in order to maintain the health and financial well-being of our employees. We also made certain payments to employees as incentive to quickly adapt to the virtual model, which allowed us to maintain employee productivity. In total, we incurred costs of$0.5 million related to leave payments for the year endedDecember 31, 2021 and$2.0 million related to incentive and leave payments for the year endedDecember 31, 2020 . Similarly, as part of the transition to working virtually, we made additional investments in our employees in the form of internet and Wi-Fi connectivity to their homes as well as hotel and shuttle costs for employees who were displaced by the pandemic. We incurred approximately$4.8 million of operational enablement related investments during the year endedDecember 31, 2020 . InSeptember 2021 , we announced the continuation of our company-wide work from home policy through the first quarter of 2022. However, where there have been specific client requirements to return to our facilities and, where it has been safe to do so, we have begun transitioning some of our employees back to the office. We continued to incur approximately$5.6 million of operational enablement costs during the year endedDecember 31, 2021 . As ofDecember 31, 2021 , approximately 90% of our frontline employees have continued to work virtually. 57
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Revenue and Sales Generation
While we initially saw a reduction in spend from some clients, our strong market position within our industry verticals as well as our operational agility enabled us to act as a key partner. As a result, we ultimately delivered strong sales performance across new and existing clients, with revenue of$760.7 million for the year endedDecember 31, 2021 , which was an increase of 59.1% compared to our revenue of$478.0 million for the year endedDecember 31, 2020 .
Cash and Cost Management
OnMarch 27, 2020 , inthe United States , the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating loss ("NOL") carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021 and the deferral of employer taxes. We chose to avail ourselves of these CARES Act provisions for NOL carryovers and carrybacks and the deferral of employer taxes. We have carried back net operating losses resulting in an expected benefit of approximately$5.2 million . During the year endedDecember 31, 2020 , we deferred$5.3 million of employer taxes. InMarch 2020 , we also drew$39.9 million in our revolving line of credit as a liquidity precaution due to the uncertainty to our business and our clients' businesses as a result of the COVID-19 pandemic. However, we were able to meet our liquidity needs with cash generated from operations and the funds that were drawn from the revolving credit line were not needed. We believe these actions have appropriately prepared us to respond to continued uncertainty, and we do not have significant liquidity or operational concerns. As ofDecember 31, 2021 , we had$63.6 million of cash and$50.1 million of borrowing availability under the revolving line of credit. We continue to closely monitor the outbreak and the impact on our operations and liquidity. In addition, we conducted a comprehensive review of our cost structure in order to build efficiencies across functions and implemented robust working capital controls to maintain cash conversion and compliance with covenants. Throughout the year endedDecember 31, 2020 we incurred certain costs as a result of our cash and cost management decisions. We terminated leases for two of ourU.S. sites during the second half of 2020, for which we incurred$1.8 million of termination costs. Certain cost optimizing measures to consolidate and transition some support functions in lower-cost geographies resulted in$2.6 million of severance costs for the year. We believe our active cash and cost management decisions will have long-term benefits to the goal of enabling our future growth and profitability. As a result of the unpredictable and evolving impact of the pandemic and measures being taken around the world to combat its spread, the timing and trajectory of the recovery remain unclear at this time, and the adverse impact of the pandemic on our operations could be material. See Part I, Item IA "Risk Factors-Risks Related to Our Business and Industry-The ongoing COVID-19 pandemic, including the resulting global economic uncertainty and measures taken in response to the pandemic, has adversely impacted our business, financial condition and results of operations."
Key Components of Our Results of Operations
Service Revenue
We derive revenues from the following three service offerings:
•Digital Customer Experience: Principally consists of omni-channel customer care services primarily delivered through digital (non-voice) channels. Other solutions include customer care services for new product or market launches, trust & safety solutions and customer acquisition solutions. •Content Security: Principally consists of review and disposition of user and advertiser generated content for purposes which include removal or labeling of policy violating, offensive or misleading content. We are developing and enforcing Content Security policies in several areas including intellectual property, job and commerce postings, objectionable material, political advertising, as well as services related to the rise of NFTs, digital marketplaces and gaming platforms.
•AI Operations: Principally consists of data labeling, annotation and transcription services performed for the purpose of training and tuning AI algorithms through the process of machine learning.
As these services are delivered, we bill our clients on
either time-and-materials, cost-plus, unit-priced, fixed-price, or outcome
oriented basis. Service revenue from time-and-materials or cost-plus contracts
is recognized as the services are performed. Service revenue from unit-priced
contracts is recognized monthly as transactions are processed based on objective
measures of output. Service revenue from fixed-price contracts is recognized
monthly as service revenue is earned and obligations are fulfilled. Service
revenue from outcome oriented contracts is recognized when it is reasonably
certain that the desired outcome has been achieved.
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Table of Contents Operating Expenses Cost of Services Cost of services consists primarily of costs related to delivery of services, and consists primarily of personnel costs like salaries and wages, employee welfare, employee engagement, recruiting, professional development and stock-based compensation expense. Additionally, cost of services includes expenses related to sites and technology costs that can be directly attributed to the delivery of services.
Selling, General, and Administrative
Selling expenses consist of personnel costs, travel expenses, and other expenses for our client services, sales and marketing teams. Additionally, it includes costs of marketing and promotional events, corporate communications, and other brand-building activities.
General and administrative expenses consist of personnel costs and related expenses for technology, human resources, legal, finance, global shared services, and executives including, professional fees; insurance premiums, cloud-based capabilities and other corporate expenses.
Depreciation
Depreciation is computed on the straight-line basis over the estimated useful life of our property and equipment assets, generally three to five years or, for leasehold improvements, over the term of the lease, whichever is shorter.
Amortization of Intangible Assets
Amortization of intangible assets relates to our client relationship and trade name intangibles, which are amortized over their useful lives using the straight-line method, which reflects the pattern of benefit, and assumes no residual value.
Other Expense (Income)
Other expense (income) primarily consists of gains and losses resulting from changes in the fair value of the foreign currency exchange rate forward contracts that we are party to. Our forward contracts are not designated as hedging instruments. Other income also includes gains and losses resulting from the remeasurement ofU.S. -denominated accounts to foreign currency and interest income. Financing Expenses Financing expenses primarily consist of interest expenses related to our term loan and revolving credit facility in addition to commitment fees related to the undrawn delayed draw loan and revolver borrowings.
Provision for (Benefit From) Income Taxes
Provision for (benefit from) income taxes consists primarily of income taxes
related to
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Results of Operations
Comparison of the Years Ended
The following table sets forth our consolidated statement of income information
for the years ended
Year ended December 31, Period over Period Change
(in thousands) 2021 2020 ($) (%)
Service revenue $ 760,703 $ 478,046 $ 282,657 59.1 %
Operating expenses:
Cost of services 431,736 270,510 161,226 59.6 %
Selling, general, and administrative
expense 335,312 113,519 221,793 195.4 %
Depreciation 29,038 20,155 8,883 44.1 %
Amortization of intangible assets 18,847 18,847 - - %
Loss on disposal of assets 52 1,116 (1,064) (95.3) %
Contingent consideration - 3,570 (3,570) (100.0) %
Total operating expenses 814,985 427,717 387,268 90.5 %
Operating income (loss) (54,282) 50,329 (104,611) (207.9) %
Other expense (income) 177 (1,572) 1,749 (111.3) %
Financing expenses 6,504 7,482 (978) (13.1) %
Income (loss) before income taxes (60,963) 44,419 (105,382) (237.2) %
Provision for (benefit from) income taxes (2,265) 9,886 (12,151) (122.9) %
Net income (loss) $ (58,698) $ 34,533 $ (93,231) (270.0) %
Service revenue
Service revenue for the years ended December 31, 2021 and 2020 was $760.7
million and $478.0 million , respectively. Service revenue for the year ended
December 31, 2021 increased by $282.7 million or 59.1% when compared to the year
ended December 31, 2020 .
Service revenues by service offering
The following table presents the breakdown of our service revenue by service
offering for each period:
Year ended December 31, Period over Period Change
(in thousands) 2021 2020 ($) (%)
Digital Customer Experience $ 486,679 $ 300,424 $ 186,255 62.0 %
Content Security 169,080 127,657 41,423 32.4 %
AI Operations 104,944 49,965 54,979 110.0 %
Service revenue $ 760,703 $ 478,046 $ 282,657 59.1 %
The year over year growth in Digital Customer Experience, AI Operations and
Content Security contributed 38.9%, 11.5% and 8.7%, respectively, of the total
increase of 59.1% for the year ended December 31, 2021 . The 62.0% growth in
Digital Customer Experience was primarily driven by an increase in volume of
services to our existing customers and new customer wins. The 32.4% growth in
Content Security was primarily driven by an increase in volume of services to
our existing customers. The 110.0% growth in AI Operations was driven by an
increase in volume of services to our existing customers and new customer wins.
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Service revenues by delivery geography
The majority of our service revenues are derived from contracts with clients who are either located inthe United States , or with clients who are located outside ofthe United States but whereby the contract specifies payment inUnited States Dollars. However, we deliver our services from multiple locations around the world.
The following table presents the breakdown of our service revenue by geographical location, based on where the services are provided:
Year ended December 31, Period over Period Change
(in thousands) 2021 2020 ($) (%)
Philippines $ 402,340 $ 267,687 $ 134,653 50.3%
United States 246,642 171,476 75,166 43.8%
Rest of World 111,721 38,883 72,838 187.3%
Service revenue $ 760,703 $ 478,046 $ 282,657 59.1%
Revenue generated from services provided from our delivery sites in
Revenue generated from services provided from our delivery sites inthe United States grew from expansion in two of our service offerings, Digital Customer Experience and AI Operations, which contributed 36.7% and 12.7% of the total increase of 43.8% inthe United States , respectively, partially offset by a 5.6% decrease contributed by Content Security due to the shift in revenues tothe Philippines and Rest of World. Revenues generated from services provided from our delivery sites in the Rest of World grew primarily from expansion in all three of our service offerings inIndia andMexico . Operating Expenses Cost of Services Cost of services for the years endedDecember 31, 2021 and 2020 was$431.7 million and$270.5 million , respectively. Cost of services for the year endedDecember 31, 2021 increased by$161.2 million , or 59.6%, when compared to the year endedDecember 31, 2020 . The increase was primarily driven by higher personnel costs of$143.7 million related to an increase in headcount to meet the demand in services from our customers. The remaining increase included site expansions to support revenue growth, operational enablement costs incurred in response to the COVID pandemic and costs associated with our gradual return to office.
Selling, general, and administrative expense
Selling, general, and administrative expense for the years endedDecember 31, 2021 and 2020 was$335.3 million and$113.5 million , respectively. Selling, general, and administrative expense for the year endedDecember 31, 2021 increased by$221.8 million , or 195.4%, when compared to the year endedDecember 31, 2020 . The increase was primarily driven by higher personnel costs of$207.6 million due primarily to expenses related to the one-time phantom shares bonuses and non-recurring teammate bonuses associated with the IPO of$133.7 million , as well as stock-based compensation expense for equity-classified awards of$44.9 million , and increased costs across functions in support of our growth in revenue and public company requirements. The remaining increase included professional fees of$10.5 million due primarily to third parties who were engaged to assist with public offerings and public company requirements, investment in digital initiatives and higher insurance expense, partially offset by lease termination charges and severance incurred during the year endedDecember 31, 2020 . We expect our stock-based compensation expense for equity-classified awards to increase in future periods as we recognize expense for the full periods, as well as any future grants.
Depreciation
Depreciation for the years endedDecember 31, 2021 and 2020 was$29.0 million and$20.2 million , respectively. The increase in depreciation is a result of capital expenditures for additional technology and computers in support of our company-wide work-from-home policy, as well as leasehold improvements associated with site expansions to support revenue growth.
Amortization of intangible assets
Amortization of intangible assets for the years endedDecember 31, 2021 and 2020 was$18.8 million . Amortization can be attributed to the recognition of client relationship and trade name intangible assets recognized in connection with the October 61
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2018 transaction in which we were formed by affiliates of
Loss on disposal of assets We recognized losses from disposal of assets during the years endedDecember 31, 2021 and 2020 of$0.1 million and$1.1 million , respectively. The loss recognized for the year endedDecember 31, 2020 related primarily to the closing of our Santa Monica Headquarters andSan Antonio office locations.
Contingent consideration
We recognized expense related to the increase in the value of a contingent consideration liability of$3.6 million for cash payments due to the sellers in the Blackstone Acquisition as a result of tax benefits that became receivable by the Company during the year endedDecember 31, 2020 . See Note 13, "Related Party " in the Notes to Consolidated Financial Statements included in this Annual Report for additional information.
Other expense (income)
Other expense (income) for the years endedDecember 31, 2021 and 2020 was$0.2 million and$(1.6) million , respectively. Changes in other expense (income) are primarily driven by our exposure to foreign currency exchange risk resulting from our operations in foreign geographies, primarilythe Philippines , offset by economic hedges using foreign currency exchange rate forward contracts.
Financing expense
Financing expense for the years endedDecember 31, 2021 and 2020 was$6.5 million and$7.5 million , respectively. The decrease in financing expense is primarily driven by the decrease in the rate of LIBOR used to calculate the interest rate of the term loan. See "-Liquidity and Capital Resources-Indebtedness-2019 Credit Agreement" for additional discussion on term loan.
Provision for (benefit from) income taxes
Provision for (benefit from) income taxes for the years endedDecember 31, 2021 and 2020 was$(2.3) million and$9.9 million , respectively. Our effective tax rate for the years endedDecember 31, 2021 and 2020 was 3.7% and 22.3%, respectively. There are certain items included within the provision for (benefit from) income taxes calculation which are directly related to the IPO and not expected to recur in future periods, including certain phantom shares bonuses and equity awards made to officers which are not deductible under Section 162(m) of the Internal Revenue Code. Additionally, there are costs related to the issuance of stock-based compensation included within the provision for (benefit from) income taxes calculation. If those costs directly related to the IPO and stock-based compensation expense are removed, the provision for income taxes would have been$23.0 million and the effective tax rate would have been 20.0% for the year endedDecember 31, 2021 .
Revenue by Top Clients
The table below sets forth the percentage of our total service revenues derived
from our largest clients for the years ended
Year ended December 31,
2021 2020
Top ten clients 62 % 68 %
Top twenty clients 76 % 81 %
Our clients are part of the rapidly growing Digital Economy and they rely on our
suite of digital solutions to drive their continued success. For our existing
clients, we benefit from our ability to grow as they grow and to cross sell new
solutions, further deepening our entrenchment.
For the years ended
We continue to identify and target high growth industry verticals and clients.
Our strategy is to acquire new clients and further grow with our existing ones
in order to achieve meaningful client and revenue diversification over time.
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Foreign Currency
As a global company, we face exposure to movements in foreign currency exchange rates. Fluctuations in foreign currencies impact the amount of total assets, liabilities, revenue, operating expenses and cash flows that we report for our foreign subsidiaries upon the translation of these amounts intoU.S. Dollars. See Item 7A., "Quantitative and Qualitative Disclosures About Market Risk" for additional information on how foreign currency impacts our financial results.
Key Operational Metrics
We regularly monitor the below operating metrics in order to measure our current performance and estimate our future performance:
Year ended December 31,
2021 2020
Headcount (approx. at period end)(1) 40,100 23,600
Net revenue retention rate(2) 141 % 117 %
(1)"Headcount" refers to TaskUs employees as of the end of a given measurement
period.
(2)"Net revenue retention rate" is an important metric we calculate annually to
measure the retention and growth in the use of our services by our existing
clients. Our net revenue retention rate as of a given fiscal year is calculated
using a measurement period consisting of the two consecutive fiscal years ending
with and including the most recent applicable fiscal year. Next, we define our
"base cohort" as the population of clients that were using our services during
the entire 12-month period of the first year of the measurement period. Net
revenue retention rate is calculated as the quotient obtained by dividing (a)
the revenue generated by the base cohort in the second year of measurement by
(b) the revenue generated by the base cohort in the first year of measurement.
Net revenue retention rate for the year ended December 31, 2020 was impacted by
the COVID-19 pandemic which resulted in a reduction in volumes for certain
clients in the ride sharing and self-driving autonomous vehicle markets who
experienced a decline in their end customer volumes, which were significantly
impacted by the lockdown restrictions globally. Normalizing for the decline in
volume from the ride sharing and self-driving autonomous vehicle markets, net
revenue retention rate in 2020 would have been approximately 126%. We expect the
uncertainty related to these markets to continue throughout the duration of the
COVID-19 pandemic.
Non-GAAP Financial Measures
We use Adjusted Net Income, Adjusted Earnings Per Share ("EPS"), EBITDA and
Adjusted EBITDA as key profitability measures to assess the performance of our
business. We believe these measures help illustrate underlying trends in TaskUs'
business and use the measures to establish budgets and operational goals,
communicate internally and externally, for managing TaskUs' business and
evaluating its performance. We also believe these measures help investors
compare TaskUs' operating performance with its results in prior periods.
Each of the profitability measures described below are not recognized under GAAP
and do not purport to be an alternative to net income as a measure of our
performance. Such measures have limitations as analytical tools, and you should
not consider any of such measures in isolation or as substitutes for our results
as reported under GAAP. Adjusted Net Income, Adjusted EPS, EBITDA, and Adjusted
EBITDA exclude items that can have a significant effect on our profit or loss
and should, therefore, be used in conjunction with profit or loss for the
period. Our management compensates for the limitations of
using non-GAAP financial measures by using them to supplement GAAP results to
provide a more complete understanding of the factors and trends affecting the
business than GAAP results alone. Because not all companies use identical
calculations, these measures may not be comparable to other similarly titled
measures of other companies.
Adjusted Net Income
Adjusted Net Income is a non-GAAP profitability measure that represents net
income or loss for the period before the impact of amortization of intangible
assets and certain items that are considered to hinder comparison of the
performance of our businesses on a period-over-period basis or with other
businesses. During the periods presented, we exclude from Adjusted Net Income
amortization of intangible assets, offering costs, the effect of foreign
currency gains and losses, losses on disposals of assets, COVID-19 related
expenses, severance costs, lease termination costs, natural disaster costs,
contingent consideration, one-time payments associated with the IPO, stock-based
compensation expense and employer payroll tax associated with equity-classified
awards and the related effect on income taxes of certain pre-tax adjustments,
which include costs that are required to be expensed in accordance with GAAP.
Our management believes that the inclusion of supplementary adjustments to net
income (loss) applied in presenting Adjusted Net Income are appropriate to
provide additional information to investors about certain
material non-cash items and about unusual items that we do not expect to
continue at the same level in the future.
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The following table reconciles net income, the most directly comparable GAAP
measure, to Adjusted Net Income for the years ended
Year ended December 31, Period over Period Change
(in thousands, except %) 2021 2020 ($) (%)
Net income $ (58,698) $ 34,533 $ (93,231) (270.0) %
Amortization of intangible assets 18,847 18,847 - - %
Offering costs(1) 6,969 896 6,073 677.8 %
Foreign currency losses (gains)(2) 809 (1,511) 2,320 (153.5) %
Loss on disposal of assets 52 1,116 (1,064) (95.3) %
COVID-19 related expenses(3) 6,105 7,541 (1,436) (19.0) %
Severance costs(4) - 2,557 (2,557) (100.0) %
Lease termination costs(5) - 1,815 (1,815) (100.0) %
Natural disaster costs(6) 442 - 442 100.0 %
Contingent consideration - 3,570 (3,570) (100.0) %
Phantom shares bonus(7) 129,362 - 129,362 100.0 %
Teammate IPO bonus(8) 4,361 - 4,361 100.0 %
Stock-based compensation expense(9) 46,384 - 46,384 100.0 %
Tax impacts of adjustments(10) (25,244) - (25,244) (100.0) %
Adjusted Net Income $ 129,389 $ 69,364 $ 60,025 86.5 %
Net Income Margin(11) (7.7) % 7.2 %
Adjusted Net Income Margin(11) 17.0 % 14.5 %
(1) Represents non-recurring professional service fees related to the preparation for public
offerings that have been expensed during the period. (2) Realized and unrealized foreign currency losses (gains) include the effect of fair market
value changes of forward contracts and remeasurement of
to foreign currency. (3) Represents incremental expenses incurred related to the transition to a virtual operating
model and incentive and leave pay granted to employees that are directly attributable to
the COVID-19 pandemic. (4) Represents severance payments as a result of certain cost optimization measures we
undertook during the period. (5) Represents one-time costs associated with the termination of lease agreements for certain
bonuses for our employees in connection with the natural disaster related to the severe
winter storm in
phantom shareholders in connection with the completion of the IPO, as well as associated
payroll tax and 401(k) contributions. (8) Represents expense for non-recurring bonus payments to certain employees in connection
with the completion of the IPO. (9) Represents stock-based compensation expense associated with equity-classified awards, as
well as associated payroll tax. (10) Represents tax impacts of adjustments to net income (loss) which resulted in a tax benefit
during the period. These adjustments include phantom shares bonus related to the IPO and
stock-based compensation expense after the IPO. (11) Net Income (Loss) Margin represents net income (loss) divided by service revenue and
Adjusted Net Income Margin represents Adjusted Net Income divided by service revenue.
Adjusted EPS
Adjusted EPS is a non-GAAP profitability measure that represents earnings
available to shareholders excluding the impact of certain items that are
considered to hinder comparison of the performance of our business on a
period-over-period basis or with other businesses. Adjusted EPS is calculated as
Adjusted Net Income divided by our diluted weighted-average number of shares
outstanding, including the impact of any potentially dilutive common stock
equivalents that are anti-dilutive to GAAP net income (loss) per share - diluted
("GAAP diluted EPS") but dilutive to Adjusted EPS. Our management believes that
the inclusion of supplementary adjustments to earnings per share applied in
presenting Adjusted EPS are appropriate to provide additional information to
investors about certain material non-cash items and about unusual items that we
do not expect to continue at the same level in the future.
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The following table reconciles GAAP diluted EPS, the most directly comparable GAAP measure, to Adjusted EPS for the years endedDecember 31, 2021 and 2020: Year ended December 31, 2021 2020 GAAP diluted EPS$ (0.62) $ 0.38 Per share adjustments to net income (loss)(1) 1.98 0.38 Per share adjustments for GAAP anti-dilutive shares(2) (0.10) - Adjusted EPS $
1.26
Weighted-average common stock outstanding - diluted 94,832,137 91,737,020 GAAP anti-dilutive shares(2) 7,476,384 - Adjusted weighted-average shares outstanding 102,308,521 91,737,020
(1) Reflects the aggregate adjustments made to reconcile net income (loss) to Adjusted Net
Income, as noted in the above table, divided by the GAAP diluted weighted-average number
of shares outstanding for the relevant period. (2) Reflects the impact of awards that were anti-dilutive to GAAP diluted EPS since we were
in a net loss position, and therefore not included in the calculation, but would be
dilutive to Adjusted EPS and are therefore included in the calculation.
EBITDA and Adjusted EBITDA
EBITDA is a non-GAAP profitability measure that represents net income or loss
for the period before the impact of the benefit from or provision for income
taxes, financing expenses, depreciation, and amortization of intangible assets.
EBITDA eliminates potential differences in performance caused by variations in
capital structures (affecting financing expenses), tax positions (such as the
availability of net operating losses against which to relieve taxable profits),
the cost and age of tangible assets (affecting relative depreciation expense)
and the extent to which intangible assets are identifiable (affecting relative
amortization expense).
Adjusted EBITDA is a non-GAAP profitability measure that represents EBITDA
before certain items that are considered to hinder comparison of the performance
of our businesses on a period-over-period basis or with other businesses. During
the periods presented, we exclude from Adjusted EBITDA offering costs, the
effect of foreign currency gains and losses, losses on disposals of assets,
COVID-19 related expenses, severance costs, lease termination costs, natural
disaster costs, contingent consideration, one-time payments associated with the
IPO and stock-based compensation expense and employer payroll tax associated
with equity-classified awards, which include costs that are required to be
expensed in accordance with GAAP. Our management believes that the inclusion of
supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA are
appropriate to provide additional information to investors about certain
material non-cash items and about unusual items that we do not expect to
continue at the same level in the future.
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The following table reconciles net income, the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA for the years endedDecember 31, 2021 and 2020: Year ended December 31, Period over Period Change (in thousands, except %) 2021 2020 ($) (%) Net income$ (58,698) $ 34,533 (93,231) (270.0) % Provision for (benefit from) income taxes (2,265) 9,886 (12,151) (122.9) % Financing expenses 6,504 7,482 (978) (13.1) % Depreciation 29,038 20,155 8,883 44.1 % Amortization of intangible assets 18,847 18,847 - - % EBITDA (6,574) 90,903 (97,477) (107.2) % Offering costs(1) 6,969 896 6,073 677.8 % Foreign currency losses (gains)(2) 809 (1,511) 2,320 (153.5) % Loss on disposals of assets 52 1,116 (1,064) (95.3) % COVID-19 related expenses(3) 6,105 7,541 (1,436) (19.0) % Severance costs(4) - 2,557 (2,557) (100.0) % Lease termination costs(5) - 1,815 (1,815) (100.0) % Natural disaster costs(6) 442 - 442 100.0 % Contingent consideration - 3,570 (3,570) (100.0) % Phantom shares bonus(7) 129,362 - 129,362 100.0 % Teammate IPO bonus(8) 4,361 - 4,361 100.0 % Stock-based compensation expense(9) 46,384 - 46,384 100.0 % Adjusted EBITDA$ 187,910 $ 106,887 $ 81,023 75.8 % Net Income Margin(10) (7.7) % 7.2 % Adjusted EBITDA Margin(10) 24.7 % 22.4 %
(1) Represents non-recurring professional service fees related to the preparation for public
offerings that have been expensed during the period. (2) Realized and unrealized foreign currency losses (gains) include the effect of fair
market value changes of forward contracts and remeasurement of
accounts to foreign currency. (3) Represents incremental expenses incurred related to the transition to a virtual
operating model and incentive and leave pay granted to employees that are directly
attributable to the COVID-19 pandemic. (4) Represents severance payments as a result of certain cost optimization measures we
undertook during the period. (5) Represents one-time costs associated with the termination of lease agreements for
certain
bonuses for our employees in connection with the natural disaster related to the severe
winter storm in
phantom shareholders in connection with the completion of the IPO, as well as associated
payroll tax and 401(k) contributions. (8) Represents expense for non-recurring bonus payments to certain employees in connection
with the completion of the IPO. (9) Represents stock-based compensation expense associated with equity-classified awards, as
well as associated payroll tax. (10) Net Income (Loss) Margin represents net income (loss) divided by service revenue and
Adjusted EBITDA Margin represents Adjusted EBITDA divided by service revenue.
Liquidity and Capital Resources
As ofDecember 31, 2021 , our principal sources of liquidity were cash and cash equivalents totaling$63.6 million , which were held for working capital purposes, as well as the available balance of our 2019 Credit Facilities, described further below. Historically, we have made investments in supporting the growth of our business, which were enabled in part by our positive cash flows from operations. We expect to continue to make similar investments in the future. We have financed our operations primarily through cash received from operations. We believe our existing cash and cash equivalents and our 2019 Credit Facilities will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Our future capital requirements will depend on several factors, including but not limited to our obligation to repay any amounts outstanding under our 2019 Credit Facilities, our revenue growth rate, timing of client billing and collections, the timing of expansion into new geographies, variability in the cost of delivering services in our geographies, the timing and extent of spending on technology innovation, the extent of our sales and marketing activities, and the introduction of new and enhanced service offerings and the continuing market adoption of our platform. 66
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To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds; however, such financing may not be available on favorable terms, or at all. If we are unable to raise additional funds when desired, our business, financial condition and results of operations could be adversely affected. Although we are not currently a party to any material definitive agreement regarding potential investments in, or acquisitions of, complementary businesses, applications or technologies, we may enter into these types of arrangements, which could reduce our cash and cash equivalents, require us to seek additional equity or debt financing or repatriate cash generated by our international operations that could cause us to incur withholding taxes on any distributions. Additional funds from financing arrangements may not be available on terms favorable to us or at all. As market conditions warrant, we and certain of our equity holders, includingBlackstone and their respective affiliates, may from time to time seek to purchase our outstanding debt securities or loans, including the notes and borrowings under our 2019 Credit Facilities, in privately negotiated or open market transactions, by tender offer or otherwise. Subject to any applicable limitations contained in the agreements governing our indebtedness, any purchases made by us may be funded by the use of cash on our balance sheet or the incurrence of new secured or unsecured debt, including borrowings under our credit facilities. The amounts involved in any such purchase transactions, individually or in the aggregate, may be material. Any such purchases may be with respect to a substantial amount of a particular class or series of debt, with the attendant reduction in the trading liquidity of such class or series. In addition, any such purchases made at prices below the "adjusted issue price" (as defined forU.S. federal income tax purposes) may result in taxable cancellation of indebtedness income to us, which amounts may be material, and in related adverse tax consequences to us.
Indebtedness
As of
2019 Credit Agreement
OnSeptember 25, 2019 , we entered into a credit agreement (the "2019 Credit Agreement") that included a$210 million term loan (the "Term Loan Facility") and a$40 million revolving credit facility (the "Revolving Credit Facility" and, together with the Term Loan Facility, the "2019 Credit Facilities"). OnApril 30, 2021 , we entered into Amendment No. 1 to the 2019 Credit Agreement with the existing lenders providing for$50.0 million incremental revolving credit commitments on the same terms as our existing revolving credit facility. The Revolving Credit Facility includes a letter of credit sub-facility of up to$15.0 million , and the 2019 Credit Facilities include an uncommitted incremental facility, which, subject to certain conditions, would provide for additional term loan facilities, an increase in commitments under the Term Loan Facility and/or an increase in commitments under the Revolving Credit Facility, in an aggregate amount of up to$75.0 million (which may increase based on consolidated EBITDA (as defined in the 2019 Credit Agreement)) plus additional amounts based on achievement of a certain consolidated total net leverage ratio. Our borrowings under the 2019 Credit Facilities bear interest, at our option, at a rate of either (a) a Eurocurrency Rate, defined as LIBOR, subject to a 0.00% floor, plus 2.25% per annum or (b) a Base Rate, defined as the greatest of (i) the prime rate, (ii) the federal funds rate plus one half of 1.00% and (iii) the sum of one-month LIBOR plus 1.00%, subject to a floor of 1.00%, plus 1.25% per annum, and in each case subject to certain adjustments and exceptions. We have elected to pay interest on our borrowings under the 2019 Credit Facilities based on the Eurocurrency Rate, except that any borrowings under the swing line provided for in the 2019 Credit Agreement will be subject to the Base Rate. The Term Loan Facility matures onSeptember 25, 2024 and requires quarterly principal payments of 0.25% of the original principal amount per quarter throughSeptember 30, 2020 , 0.625% of the original principal amount throughSeptember 30, 2021 , 1.25% of the original principal amount throughSeptember 30, 2022 , 1.875% of the original principal amount throughSeptember 30, 2023 and 2.50% of the original principal amount thereafter, with any remaining principal due in a lump sum at the maturity date. Borrowings under the Revolving Credit Facility are subject to the same interest rate as the Term Loan Facility, with the exception of the swing line borrowings which are always subject to the Base Rate. As ofDecember 31, 2021 ,$200.0 million was outstanding under the Term Loan Facility. The interest rate in effect for the Term Loan Facility was 2.35% as ofDecember 31, 2021 . The Revolving Credit Facility matures onSeptember 25, 2024 and requires a commitment fee of 0.4% of undrawn commitments also to be paid quarterly in arrears. As ofDecember 31, 2021 , the interest rate in effect was 2.35% on$39.9 million of outstanding borrowings under the Revolving Credit Facility. As ofDecember 31, 2021 , we had$50.1 million of borrowing availability under the Revolving Credit Facility. 67
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The 2019 Credit Agreement contains certain affirmative and negative covenants applicable to us and our restricted subsidiaries, including, among other things, limitations on our Consolidated Total Net Leverage Ratio (as defined in the 2019 Credit Agreement) and restrictions on changes in the nature of our business, acquisitions and other investments, indebtedness, liens, fundamental changes, dispositions, prepayment of other indebtedness, repurchases of stock, cash dividends, and other distributions. The 2019 Credit Facilities are guaranteed by our material domestic subsidiaries and are secured by substantially all of our tangible and intangible assets, including our intellectual property, and the equity interests of our subsidiaries, subject to certain exceptions.
See Note 7, "Long-Term Debt" in the Notes to Consolidated Financial Statements included in this Annual Report for additional information regarding our debt.
Cash Flows
The following table presents a summary of our consolidated cash flows from operating, investing and financing activities for the periods indicated:
Year ended December 31 ,
(in thousands) 2021 2020
Net cash provided by (used in) operating activities
$ 58,873 Net cash used in investing activities (59,363)
(28,883)
Net cash provided by financing activities 54,390 36,990 Operating Activities Net cash used in operating activities for the year endedDecember 31, 2021 was$32.7 million compared to net cash provided by operating activities of$58.9 million for the year endedDecember 31, 2020 . Net cash used in operating activities for the year endedDecember 31, 2021 reflects the net loss of$58.7 million , which includes the one-time phantom shares bonuses, as well as changes in operating assets and liabilities of$62.8 million , primarily driven by an increase in accounts receivable of$76.2 million . These changes were partially offset by the add back for non-cash charges totaling$88.8 million , primarily driven by$46.2 million in stock-based compensation expense,$29.0 million of depreciation and$18.8 million of amortization of intangible assets, partially offset by deferred taxes of$11.5 million . Net cash provided by operating activities for the year endedDecember 31, 2020 reflects net income of$34.5 million and the add back for non-cash charges totaling$36.4 million , primarily driven by$20.1 million of depreciation and$18.8 million of amortization of intangible assets. These changes were partially offset by changes in operating assets and liabilities of$12.0 million , primarily driven by an increase in accounts receivable of$32.0 million .
Investing Activities
Net cash used in investing activities for the year endedDecember 31, 2021 was$59.4 million compared to net cash used in investing activities of$28.9 million for the year endedDecember 31, 2020 . The increase in net cash used from investing activities was primarily driven by investments in technology and computers as well as build-out costs associated with site expansions to support revenue growth. Financing Activities Net cash provided by financing activities for the year endedDecember 31, 2021 was$54.4 million compared to net cash provided by financing activities of$37.0 million for the year endedDecember 31, 2020 . Net cash provided by financing activities for the year endedDecember 31, 2021 consisted of proceeds from the IPO, net of underwriters' fees, partially offset by distribution of dividends, payments on long-term debt, payments for offering costs and payments for taxes related to net share settlement. Net cash provided by financing activities for the year endedDecember 31, 2020 consisted of cash proceeds from our Revolving Credit Facility of$39.9 million . 68
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Contractual Obligations
Our principal commitments consist of obligations for outstanding debt and leases for our office space. The following table summarizes our contractual obligations as ofDecember 31, 2021 : Payments Due by Period (in thousands) Total Current Noncurrent
Long-term debt obligations
4,129
Total $ 303,140 $ 71,910 $ 231,230 Technology solution obligations relate mainly to third-party cloud infrastructure agreements and subscription arrangements used to facilitate our operations at the enterprise level. If we fail to meet the minimum user or license commitment during any year, we are required to pay the difference.
In addition, in the ordinary course of business, we enter into agreements of varying scope and terms pursuant to which we agree to indemnify clients, vendors and other business partners with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements, services to be provided by us or from intellectual property infringement claims made by third parties. We have not included any such indemnification provisions in the contractual obligations table above. Historically, we have not experienced significant losses on these types of indemnification obligations.
JOBS Act Accounting Election
We qualify as an emerging growth company pursuant to the provisions of the JOBS Act. The JOBS Act permits an emerging growth company like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to use the extended transition period until we are no longer an emerging growth company or until we choose to affirmatively and irrevocably opt out of the extended transition period. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements applicable to public companies.
Critical Accounting Policies and Estimates
Our consolidated financial statements and the related notes included elsewhere in this Annual Report are prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, provision for income taxes, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Changes in accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected. We believe that the following critical accounting policies involve a greater degree of judgment or complexity than our other accounting policies. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
Revenue Recognition
We recognize revenue as services are performed and amounts are earned. Determining the method and amount of revenue to recognize requires us, at times, to make judgments and estimates. Specifically, we apply judgments in determining whether performance obligations are satisfied over-time and the method to measure progress towards completion. Additionally, the nature of our contracts gives rise to several types of variable consideration, including estimates on collectability, discounts, and client credits. Some contracts may include incentives or penalties related to costs incurred, benefits produced or adherence to schedules that may increase the variability in service revenues and margins earned on such contracts. Our estimates are monitored over the lives of our contracts and are based on an assessment of our anticipated performance, historical experience and other information available at the time.
Goodwill Impairment
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We review goodwill for impairment annually onOctober 1 , or more frequently when events or circumstances indicate goodwill may be impaired. We initially assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the estimated fair value of a reporting unit is less than its carrying amount ("Step 0"). If determined that it is more-likely-than-not the estimated fair value of a reporting unit is less than its carrying amount, a quantitative assessment is performed ("Step 1"). We have determined that we have a single reporting unit. Historically, the fair value of our reporting unit was estimated using a combination of the income approach, using a discounted cash flow methodology, and a market approach; the determination of discounted cash flows was based on our strategic plans and market conditions. Upon completion of the IPO, a public trading market for our common stock was established and, as a result, we consider our market capitalization (calculated as total common shares outstanding multiplied by the common equity price per share, as adjusted for a control premium factor, as necessary) to represent fair value. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered to be impaired. If the carrying amount of the reporting unit exceeds its fair value, an impairment charge is recorded in an amount equal to that excess, but not more than the carrying value of goodwill. Under FASB Topic ASC 350 Intangibles-Goodwill and Other, entities have an unconditional option to bypass the qualitative assessment described in the preceding sentences for any reporting unit in any period and proceed directly to performing the quantitative goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. As ofOctober 1, 2021 and 2020, we opted to bypass the qualitative assessment under Step 0 and proceeded directly to performing a quantitative goodwill impairment test under Step 1. As a result of the quantitative assessment, we determined that the carrying value of the reporting unit did not exceed its fair value. Stock-based Compensation We account for our stock-based awards in accordance with provisions of ASC 718, Compensation-Stock Compensation ("ASC 718"). For equity awards, total compensation cost is based on the grant date fair value. For liability awards, total compensation cost is based on the fair value of the award on the date the award is granted and its remeasured value at each reporting date until its settlement. Awards granted to employees contain service, performance and market conditions that affect vesting. We use the Black-Scholes model to determine the fair value of stock options with either solely service conditions or with a combination of service and performance conditions. The assumptions used in the Black-Scholes model, other than the fair value of our common stock, are estimated as follows:
•Expected term: Estimated based on the simplified method as we do not have adequate historical data.
•Risk-free interest rate: Based on the
•Expected volatility: Based on the historical stock price volatility of comparable publicly-traded companies in our peer group and the implied volatility of our assets and current leverage.
•Expected dividend yield: Zero percent, as we do not anticipate paying dividends on our common stock.
Prior to the IPO, we valued our options using a combination of Monte Carlo simulation and Black-Scholes model. A Monte Carlo simulation was first used to determine the number of options eligible for vesting, then a Black-Scholes model was used to estimate the value for the vested options given the simulated scenario, with the assumption that vested options will be exercised at the mid-point from the vesting date to its maturity date. Key assumptions in performing the option valuation include the expected time to liquidity event, total equity value, value per common share, the discount for lack of marketability to be applied to the common shares, and volatility of the common shares. For unvested awards with performance conditions, we assess the probability of attaining the performance conditions at each reporting period which requires judgment. Awards that are deemed probable of attainment are recognized in expense over the requisite service period of the grant using a graded vesting model. Prior to the IPO, independent valuations were performed to assist management in determining the fair value of the common stock. Given the absence of an active market for our common stock prior to the IPO, the board of directors was required to estimate the fair value of our common stock at the time of each option grant based on several factors, including consideration of input from management and third-party valuations. Management considered numerous factors to determine the best estimate of the fair value of our common stock, including:
•our operating and financial performance - both historical and projected;
•current business conditions and projections;
•the likelihood of achieving a liquidity event such as an initial public offering or sale of our company;
•the lack of marketability of our shares;
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•the market performance of comparable publicly traded companies and guideline transactions; and
•the overall macroeconomic environment.
The value of the common shares was then used as an input to the option valuation. Upon completion of the IPO, a public trading market for our common stock was established, and as a result, it is no longer necessary for our board of directors or management to estimate the fair value of our common stock in connection with our accounting for stock-based awards, as the fair value of our common stock will be determined based on its trading price on Nasdaq.
See Note 9, "Employee Compensation" in the Notes to Consolidated Financial Statements, for additional information.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
Recent Accounting Pronouncements
For additional information regarding recent accounting pronouncements adopted and under evaluation, refer to Note 2, "Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements.
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