Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read together with our audited consolidated financial statements and related notes and other financial information included in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in the section titled “Risk Factors.” Our historical results are not necessarily indicative of the results that may be expected for any period in the future. Unless otherwise noted, any reference to a year preceded by the word “fiscal” refers to the fiscal year ended June 30 of that year.
Overview
Intapp is a leading provider of industry-specific, cloud-based software solutions for the professional and financial services industry globally. We empower the world’s premier private capital, investment banking, legal, accounting, and consulting firms with the technology they need to meet rapidly changing client, investor, and regulatory requirements, deliver the right insights to the right professionals, and operate more competitively.
Our Intapp Platform is purpose-built to modernize these firms. The platform facilitates greater team collaboration, digitizes complex workflows to optimize deal and engagement execution, and leverages proprietary AI to help nurture relationships and originate new business. By better connecting their most important assets—people, processes, and data—our platform helps firms increase client fees and investment returns, operate more efficiently, and better manage risk and compliance.
How We Generate Revenue
We generate revenues primarily from software subscriptions, typically with one-year or multi-year contract terms. We sell our software through a direct enterprise sales model, which targets clients based on end market, geography, firm size, and business need. Historically, most of our clients hosted our software on-premises. However, as we saw the potential for the cloud to impact the professional and financial services industry, we invested in developing a multi-tenant cloud version of our platform and launched our initial software-as-a-service (“SaaS”) solutions in 2017. We recognize revenues from SaaS subscriptions ratably over the term of the contract, while we recognize revenues from the license component of on-premises subscriptions upfront and the support component of such subscriptions ratably over the support term. We generally price our subscriptions based on the modules deployed as well as the number of users adopting our solution.
We expect substantially all of our new ARR growth in the future to be from the sale of SaaS subscriptions.
We generate a majority of our non-recurring revenues from professional services. Our clients utilize these services to configure and implement one or more modules of the Intapp Platform, integrate those modules with the existing platform and with other core systems in their IT environment, upgrade their existing deployment, and provide training for their employees. Other professional services include strategic consulting and advisory work, which are generally provided on a standalone basis.
Our total revenues for fiscal years 2021, 2020 and 2019 were $214.6 million, $186.9 million and $143.2 million, respectively. Net losses attributable to us for fiscal years 2021, 2020 and 2019 were $46.8 million, $45.9 million and $17.1 million, respectively.
Recent Developments
On July 2, 2021, immediately prior to the closing of the IPO, our amended and restated Certificate of Incorporation became effective, pursuant to which our authorized capital stock was increased to 700 million shares of common stock and 50 million shares of preferred stock.
On July 2, 2021, we completed our IPO and sold 10,500,000 shares of our common stock at a public offering price of $26.00 per share. The net proceeds to us were $245.2 million, after deducting the underwriters’ discounts and offering expenses payable by us.
On July 2, 2021, upon the closing of the IPO, all outstanding shares of Series A and Series A-1 convertible preferred stock were automatically converted into 19,034,437 shares of our common stock on a one-for-one basis.
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On July 8, 2021, the underwriters of our IPO exercised in full the ir right to purchase an additional 1,575,000 shares of our common stock at the public offering price of $26.00 per share. The net proceeds to us were $38.2 million, after deducting the underwriters’ discounts.
On July 12, 2021, we repaid the outstanding $273.0 million borrowing under the term loan and $5.0 million borrowing under the revolving credit facility from the proceeds of the IPO. As a result, we will recognize a loss on extinguishment of debt of $2.4 million on this date for the unamortized financing costs related to the term loan.
Factors affecting our performance
Market adoption of our cloud platform. Our future growth depends on our ability to win new professional and financial services clients and expand within our existing client base, primarily through the continued acceptance of our cloud business. Our cloud business has historically grown faster than our overall business, and represents an increasing proportion of our ARR. We must demonstrate to new and existing clients the benefits of selecting our cloud platform, and support those deployments once live with reliable and secure service. From a sales perspective, our ability to add new clients and expand within existing accounts depends upon a number of factors, including the quality and effectiveness of our sales personnel and marketing efforts, and our ability to convince key decision makers within professional and financial services firms to embrace the Intapp Platform over point solutions, internally developed solutions, and horizontal solutions.
Long-term ARR expansion. A key element of our growth strategy is expanding within our existing client base. We typically land new clients by selling an application suite or capability to address a desired business outcome. From there, we seek to grow with the client, encouraging them to adopt our end-to-end platform capabilities across more of their organization until they reach full adoption of our platform.
We believe the historical ARR expansion within our existing client base illustrates our success in executing our land and expand strategy over the long term. To measure ARR expansion, we categorize clients by the year in which they first contracted for any of our platform modules, which we call an annual cohort. For each annual cohort, we measure the cohort’s aggregate ARR for our most recently completed fiscal year and divide it by the cohort’s aggregate ARR at the end of the previously completed fiscal year. We refer to the resulting quotient as ARR expansion.
We measure our ability to grow and retain ARR from existing clients using a metric we refer to as net revenue retention. We calculate this by starting with the ARR from the cohort of all clients as of the twelve months prior to the applicable fiscal period, or prior period ARR. We then calculate the ARR from these same clients as of the current fiscal period, or current period ARR. We then divide the current period ARR by the prior period ARR to calculate the net revenue retention.
This metric accounts for changes in our recurring revenue base from capability increases or decreases, seat increases or decreases, price increases or decreases, and client attrition. We have averaged a net revenue retention rate of over 110% for fiscal years 2021 and 2020 due to a steady increase in client adoption of our platform’s capabilities and a low level of client attrition. However, if our clients do not continue to see the ability of our platform to generate return on investment relative to other software alternatives, net revenue retention could suffer and our operating results may be adversely affected.
Continued investment in innovation and growth. We have made substantial investments in research and development and sales and marketing to achieve a leadership position in our market and grow our revenues and client base. We intend to continue to invest in research and development to build new capabilities and maintain the core technology underpinning our differentiated platform. In addition, we expect to increase investment in sales and marketing to broaden our reach with new clients in the United States and abroad and deepen our penetration with existing clients. We are in the process of increasing our general and administrative spending to support our growing operations and prepare for operating as a public company. With our revenue growth objectives, we expect to continue to make such investments for the foreseeable future.
To complement our organic growth engine, we continue to evaluate acquisition opportunities that will help us extend our platform, broaden and deepen our market leadership, and add new clients, and we have a track record of successfully identifying and integrating complementary businesses within the professional and financial services industry.
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COVID-19 effects on demand for our platform. In light of the onset of COVID-19 in the third quarter of fiscal year 2020, we experienced lower demand and longer sales cycles from some of our clients than we would have anticipated going into the second half of fiscal year 2020. Over recent months, we have seen demand for our platform solutions begin to recover. However, given the ongoing nature of the COVID-19 pandemic and the risks it poses for business operations and demand for services across all sectors, there is no guarantee with respect to the timing or magnitude of demand recovery in the economy, or in the industry sectors that we serve, which may adversely impact our operating results.
Key business metrics
We review a number of operating and financial metrics, including the following key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.
Annual recurring revenues (“ARR”)
ARR represents the annualized recurring value of all active SaaS and on-premises subscription contracts at the end of a reporting period. Contracts with a term other than one year are annualized by taking the committed contract value for the current period divided by number of days in that period then multiplying by 365. As a metric, ARR mitigates fluctuations in revenue recognition due to certain factors, including contract term and the sales mix of SaaS contracts and subscription licenses. ARR does not have any standardized meaning and may not be comparable to similarly titled measures presented by other companies. ARR should be viewed independently of revenues and deferred revenues and is not intended to be combined with or to replace either of those elements of our financial statements. ARR is not a forecast and the active contracts at the end of a reporting period used in calculating ARR may or may not be extended or renewed by our clients.
ARR was $212.3 million and $172.6 million as of June 30, 2021 and 2020, respectively, an increase of 23%.
Cloud ARR
Cloud ARR is the portion of our ARR which represents the annualized recurring value of our active SaaS contracts. We believe Cloud ARR provides important information about our ability to sell new SaaS subscriptions to existing clients and to acquire new SaaS clients.
Cloud ARR was $109.7 million and $74.1 million as of June 30, 2021 and 2020, an increase of 48%, and represented 52% and 43% of ARR for fiscal years 2021 and 2020, respectively.
Number of clients
We believe our ability to increase the number of clients on our platform is a key indicator of the growth of our business and our future business opportunities. We define a client at the end of any reporting period as an entity with at least one active subscription as of the measurement date. As of June 30, 2021, we had over 1,900 clients.
Our client base includes some of the largest and most reputable professional and financial services firms globally. These clients have the financial and operating resources needed to purchase, deploy, and successfully use the full capabilities of our software platform, and as such, we believe the number of our clients with contracts greater than $100,000 of ARR is an important metric for highlighting our progress on the path to full adoption of our platform by our professional and financial services clients. As of June 30, 2021 and 2020, we had 420 and 356 clients, respectively, with contracts greater than $100,000 of ARR, of which 31 and 17 clients, respectively, with contracts greater than $1.0 million of ARR.
Components of our results of operations
Revenues
We generate recurring revenues from the sale of our SaaS solutions, subscriptions to our term software applications, and from providing support for those applications. We generate non-recurring revenues primarily by delivering professional services for the configuration, implementation and upgrade of our solutions. Our recurring revenues accounted for 89%, 87% and 86% of our total revenues during fiscal years 2021, 2020 and 2019, respectively.
42
SaaS and support
We recognize revenues from our SaaS solutions ratably over the term of the contract beginning once the SaaS environment is provisioned and made available to clients. The initial term of our SaaS contracts is generally one to three years in duration.
Support revenues consist of non-cancelable support which is included with our subscription licenses and entitles clients to receive technical support and software updates, on a when and if available basis. We recognize revenues for support ratably over the term of the support contract which corresponds to the underlying subscription license agreement. We expect to continue to generate a relatively consistent stream of revenues from support services we provide to our existing subscription license clients. However, over time as we focus on new sales of our SaaS solutions and encourage existing subscription license clients to migrate to SaaS solutions, we expect revenues from support to decrease as a percentage of total revenues.
Subscription license
Our subscription licenses provide the client with the right to functional intellectual property and are distinct performance obligations as the client can benefit from the subscription licenses on their own. The transaction price allocated to subscription license arrangements is recognized as revenues at a point in time when control is transferred to the client, which generally occurs at the time of delivery for a new contract or commencement of the renewal term for renewals. Subscription license fees are generally payable in advance on an annual basis over the term of the license arrangement, which is typically noncancelable.
Professional services
Our professional services primarily consist of implementation, configuration and upgrade services provided to clients. The majority of professional services engagements are billed to clients on a time and materials basis and revenues are recognized as invoiced. We expect the demand for our professional services to increase due to client growth and the need for implementation, upgrade, and migration services for new and existing clients. This demand will be affected by the mix of professional services that are provided by us versus provided by our third-party implementation partners. Our professional services are currently loss making (after allocated overhead for facilities and IT) and accounted for 11%, 13% and 14% of our total revenues during fiscal years 2021, 2020 and 2019, respectively.
Cost of revenues
Our cost of revenues consists primarily of expenses related to providing SaaS subscription, support and professional services to our clients, including personnel costs (salaries, bonuses, benefits, and stock-based compensation) and related expenses for client support and services personnel, as well as cloud infrastructure costs, third-party expenses, depreciation of fixed assets, amortization of capitalized internal-use software costs and acquired intangible assets, and allocated overhead. We do not have any cost of revenues related to our subscription licenses. We recognized expenses in fiscal year 2020 related to our April 2020 restructuring plan for the organizational integration of the DealCloud acquisition and some COVID-19-related headcount reductions that impacted our cost of revenues. We expect our cost of revenues to increase in absolute dollars as we expand our SaaS client base over time as this will result in increased cloud infrastructure costs and increased costs for additional personnel to provide technical support services to our growing client base.
Cost of SaaS and support
Our cost of SaaS and support revenues comprises the direct costs to deliver and support our products, including salaries, bonus, benefits, stock-based compensation, as well as allocated overhead for facilities and IT, third-party hosting fees related to cloud services, amortization of capitalized internal-use software development costs and amortization of acquired intangible assets.
Cost of professional services
Our cost of professional services revenues comprises the personnel-related expenses for our professional services employees and contractors responsible for delivering implementation, upgrade and migration services to our clients. This includes salaries, benefits, stock-based compensation, and allocated overhead for facilities and IT. We expect the cost of professional services revenues to increase in absolute dollars as we continue to hire personnel to provide implementation, upgrade and migration services to our growing client base.
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Operating expenses
Research and development expense
Our research and development expenses comprise costs associated with the development of our software products for sale. The major components of research and development costs include salaries and employee benefits, costs of third-party services, and allocations of various overhead and occupancy costs. We expect our research and development expenses to continue to increase in absolute dollars for the foreseeable future as we continue to dedicate substantial internal resources to develop, improve and expand the functionality of our solutions.
Sales and marketing expense
Our sales and marketing expenses consist primarily of costs incurred for personnel-related expenses for our sales and marketing employees as well as commission payments to our sales employees, costs of marketing events and online advertising, allocations of various overhead and occupancy costs and travel and entertainment expenses. We capitalize client acquisition costs (principally commissions paid to sales personnel) and subsequently amortize these costs over the expected period of benefit. We expect in the long-term we will see an increase of our sales and marketing expense as we continue to expand our direct sales force to capitalize on opportunities for growth and resume in-person conferences and attendance at trade shows once the COVID-19 pandemic has been brought under control.
General and administrative expense
Our general and administrative expenses consist primarily of personnel-related expenses as well as professional services and facilities costs related to our executive, finance, human resources, information technology and legal functions. Being a new public company, we expect to incur significant additional accounting and legal costs related to compliance with rules and regulations enacted by the SEC, including the additional costs of achieving and maintaining compliance with the Sarbanes-Oxley Act, as well as additional insurance, investor relations and other costs associated with being a public company.
Restructuring
Restructuring expenses relate to our April 2020 restructuring plan for the organizational integration of the DealCloud acquisition and some COVID-19-related headcount reductions across all functions. These charges have been classified in cost of revenues or operating expenses according to the nature of the expenses.
Interest expense
Interest expense, net primarily consists of the interest on our debt, which was paid in full in July 2021.
Other income (expense), net
Other income (expense), net consists primarily of realized and unrealized foreign exchange gains and losses resulting from fluctuations in foreign exchange rates on monetary assets and liabilities denominated in currencies other than the U.S. dollar.
Income tax benefit (expense)
Our income tax provision consists of an estimate of federal, state, and foreign income taxes based on enacted federal, state, and foreign tax rates, as adjusted for allowable credits, deductions, uncertain tax positions, changes in the valuation of our deferred tax assets and liabilities, and changes in tax laws. We maintain a full valuation allowance on our federal and state deferred tax assets as we have concluded that it is not more likely than not that the deferred tax assets will be realized.
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Results of O perations
The following tables set forth our results of operations for the periods presented, expressed in total dollar terms and as a percentage of total revenues (percentages may not add up due to rounding):
Year ended June 30,
2021
2020
As adjusted*
2019
As adjusted*
(in thousands, except for percentages)
Revenues:
SaaS and support
$
144,075
67
%
$
114,125
61
%
$
73,997
52
%
Subscription license
45,963
21
48,427
26
48,939
34
Total recurring revenues
190,038
89
162,552
87
122,936
86
Professional services
24,595
11
24,300
13
20,287
14
Total revenues
214,633
100
186,852
100
143,223
100
Cost of revenues:
SaaS and support
40,644
19
37,677
20
23,170
16
Total cost of recurring revenues
40,644
19
37,677
20
23,170
16
Professional services
33,730
16
32,847
18
21,723
15
Restructuring
—
—
765
—
—
—
Total cost of revenues
74,374
35
71,289
38
44,893
31
Gross profit
140,259
65
115,563
62
98,330
69
Operating expenses:
Research and development
50,853
24
42,090
23
28,826
20
Sales and marketing
69,948
33
58,898
32
44,889
31
General and administrative (1)
42,418
20
28,491
15
28,718
20
Restructuring
—
—
2,894
2
—
—
Total operating expenses
163,219
76
132,373
71
102,433
72
Operating loss
(22,960
)
(11
)
(16,810
)
(9
)
(4,103
)
(3
)
Interest expense
(24,608
)
(11
)
(27,856
)
(15
)
(19,944
)
(14
)
Other income (expense), net
1,276
1
(896
)
—
(898
)
(1
)
Net loss before income taxes
(46,292
)
(22
)
(45,562
)
(24
)
(24,945
)
(17
)
Income tax benefit (expense)
(472
)
—
(353
)
—
7,806
5
Net loss
$
(46,764
)
(22
)
%
$
(45,915
)
(25
)
%
$
(17,139
)
(12
)
%
*
As adjusted to reflect the impact of the full retrospective adoption of ASC 606. See Note 2 to our consolidated financial statements for a summary of adjustments.
(1)
Includes acquisition-related transaction costs of $1.6 million and $3.4 million for fiscal years 2021 and 2019, respectively.
Comparison of the Fiscal Years Ended June 30, 2021 and 2020
Revenues
Year ended June 30,
Change
2021
2020
$
%
(in thousands, except for percentages)
Revenues:
SaaS and support
$
144,075
$
114,125
$
29,950
26
%
Subscription license
45,963
48,427
(2,464
)
(5
)
%
Total recurring revenues
190,038
162,552
27,486
17
%
Professional services
24,595
24,300
295
1
%
Total revenues
$
214,633
$
186,852
$
27,781
15
%
45
Recurring revenues
Recurring revenues from the sale of our SaaS solutions, from subscriptions to our term software solutions, and from providing support for these solutions increased by $27.5 million, or 17%, compared to the prior year.
Our SaaS and support revenues grew $30.0 million, or 26%, in fiscal year 2021 compared to fiscal year 2020, principally due to increased sales to new clients and additional orders and renewals by existing clients.
Subscription license revenues decreased $2.5 million, or 5%, in fiscal year 2021 compared to the prior year, primarily due to fewer multi-year deals originating or renewing in fiscal year 2021 compared to the prior year and our trend to migrate subscription clients to cloud. We anticipate subscription license revenues as a percentage of our total revenues may vary quarter to quarter and will continue to decrease as we continue to emphasize the sale of SaaS solutions to our clients and cloud migration .
Professional services
Professional services revenues increased by $0.3 million, or 1%, for fiscal year 2021 compared to fiscal year 2020. In the early part of fiscal year 2021, we saw a slowdown in new sales and related demand for implementation services as well as reduced demand for upgrade services due to COVID-19. We saw a recovery in demand for implementation, upgrade and migration services in the second half of the fiscal year which helped offset the impact of the COVID-19 slowdown experienced earlier.
Cost of revenues and gross profit
Year ended June 30,
Change
2021
2020
$
%
(in thousands, except for percentages)
Cost of revenues:
SaaS and support
$
40,644
$
37,677
$
2,967
8
%
Total cost of recurring revenues
40,644
37,677
2,967
8
%
Professional services
33,730
32,847
883
3
%
Restructuring
—
765
(765
)
n/a
Total cost of revenues
74,374
71,289
3,085
4
%
Gross profit
SaaS and support
103,431
76,448
26,983
35
%
Subscription license
45,963
48,427
(2,464
)
(5
)
%
Total gross profit - recurring revenues
149,394
124,875
24,519
20
%
Professional services (including restructuring of $0 and $765)
(9,135
)
(9,312
)
177
(2
)
%
Gross profit
$
140,259
$
115,563
$
24,696
21
%
Cost of SaaS and support
Cost of SaaS and support revenues increased by $3.0 million, or 8%, for fiscal year 2021 compared to fiscal year 2020. The increase can be attributed primarily to an increase in cost of hosting services as we expanded our cloud offerings and royalty expenses associated with third-party products in our software offerings.
Cost of professional services
Cost of professional services revenues increased by $0.9 million, or 3%, for fiscal year 2021 compared to fiscal year 2020, primarily due to an increase in headcount-related costs due to new hires and an increase in the annual bonus, partially offset by a decrease in travel related costs due to the impact of COVID-19.
Gross profit
Gross profit increased by $24.7 million, or 21%, driven by the growth in SaaS and support revenues together with cost savings due to reduced travel related costs as a result of the COVID-19 pandemic, which was offset by a reduction in subscription license revenues and an increase in royalty expenses and professional services costs.
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Operating expenses
Year ended June 30,
Change
2021
2020
$
%
(in thousands, except for percentages)
Operating expenses:
Research and development
$
50,853
$
42,090
$
8,763
21
%
Sales and marketing
69,948
58,898
11,050
19
%
General and administrative
42,418
28,491
13,927
49
%
Restructuring
—
2,894
(2,894
)
n/a
Total operating expenses
$
163,219
$
132,373
$
30,846
23
%
Research and development expense
Research and development expense increased by $8.8 million, or 21%, for fiscal year 2021 compared to fiscal year 2020, primarily due to headcount-related costs as we continued to invest in the development of our future product offerings. Of this amount, $5.9 million was attributable to a combination of increased headcount, the impact of annual pay raises and an increase in accrued bonus, and $1.0 million was attributable to contract labor costs. Stock-based compensation expense increased by $2.9 million due to an increase in option grants made in fiscal year 2021 combined with an increase in the fair value of the common stock underlying such grants. These increases were partially offset by a decrease in travel related costs of $0.9 million due to COVID-19 related restrictions.
Sales and marketing expense
Sales and marketing expenses increased by $11.1 million, or 19%, for fiscal year 2021 compared to fiscal year 2020, primarily driven by increased headcount-related costs, partially offset by reduced travel and marketing expenses. Personnel costs increased by $9.4 million due to an increase in headcount, the impact of annual pay raises and higher commission expense due to new sales growth. Stock-based compensation expense increased by $5.8 million due to an increase in option grants made in fiscal year 2021 combined with an increase in the fair value of the common stock underlying such grants. These increases were partially offset by a decrease of $4.8 million in travel related costs and marketing expenses resulting from the curtailment of business travel and in-person corporate marketing events caused by COVID-19.
General and administrative expense
General and administrative expense increased by $13.9 million, or 49%, for fiscal year 2021 compared to fiscal year 2020. The increase was primarily driven by personnel expenses and costs associated with our preparations to go public. Stock-based compensation expense increased by $5.3 million due to an increase in option grants made in fiscal year 2021 combined with an increase in the fair value of the common stock underlying such grants. Personnel expenses increased by $2.8 million, primarily due to an increased bonus accrual in fiscal year 2021. We also incurred increased expenditures for consultants and professional services of $6.1 million. These increases were partially offset by a $1.4 million decrease in travel and entertainment and company event related expenses resulting from the suspension of business travel and in-person company events due to COVID-19.
Restructuring
Restructuring expense decreased by $2.9 million in fiscal year 2021 compared to fiscal year 2020. The decrease was as a result of a re-organization and restructuring plan undertaken by management in April 2020 and consists of severance and employee benefit costs. There were no such activities in fiscal year 2021.
Interest expense
Year ended June 30,
Change
2021
2020
$
%
(in thousands, except for percentages)
Interest expense
$
(24,608
)
$
(27,856
)
$
3,248
(12
)
%
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Interest expense decreased by $3.2 million in fiscal year 2021 compared to fiscal year 2020. The reduction was primarily driven by a decrease in the variable interest rate on our debt.
Other income (expense), net
Year ended June 30,
Change
2021
2020
$
%
(in thousands, except for percentages)
Other income (expense), net
$
1,276
$
(896
)
$
2,172
(242
)
%
The increase in other income (expense), net for fiscal year 2021 compared to fiscal year 2020 was primarily attributable to unrealized and realized foreign exchange gains arising on our cash and accounts receivable balances denominated in British Pound as a result of the British Pound strengthening against the U.S. Dollar during fiscal year 2021. Our cash and accounts receivable balances denominated in other currencies were immaterial.
Income tax expense
Year ended June 30,
Change
2021
2020
$
%
(in thousands, except for percentages)
Income tax expense
$
(472
)
$
(353
)
$
(119
)
34
%
Income tax expense was $0.5 million for fiscal year 2021 compared to an income tax expense of $0.4 million recorded during fiscal year 2020. The income tax expense for fiscal years 2021 and 2020 are primarily attributable to taxes in foreign jurisdictions.
Comparison of the Fiscal Years Ended June 30, 2020 and 2019
Revenues
Year ended June 30,
Change
2020
2019
$
%
(in thousands, except for percentages)
Revenues:
SaaS and support
$
114,125
$
73,997
$
40,128
54
%
Subscription license
48,427
48,939
(512
)
(1
)
%
Total recurring revenues
162,552
122,936
39,616
32
%
Professional services
24,300
20,287
4,013
20
%
Total revenues
$
186,852
$
143,223
$
43,629
30
%
Recurring revenues
Recurring revenues from the sale of our SaaS solutions, from subscriptions to our term software solutions, and from providing support for these solutions increased by $39.6 million, or 32%, compared to the prior year.
Our SaaS and support revenues grew $40.1 million, or 54%, in fiscal year 2020 compared to fiscal year 2019. This increase was principally due to the full year of revenues recognized from initial SaaS subscription and support services sold to new and existing clients in fiscal year 2019 and from renewals of such services in fiscal year 2020, the full year of revenues from the three fiscal year 2019 acquisitions, DealCloud, gwabbit and OnePlace, and revenues from initial sales to new and existing clients in fiscal year 2020.
Subscription license revenues decreased $0.5 million, or 1%, in fiscal year 2020 compared to the prior year, as we emphasized new sales of SaaS solutions to our clients. We anticipate that the percentage of subscription license revenues as a percentage of our total revenues will continue to decrease.
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Professional services
Professional services revenues increased by $4.0 million, or 20%, for fiscal year 2020 compared to fiscal year 2019. The increase was primarily driven by an increase in implementation agreements as we performed implementation, upgrade and migration services to on-board new clients and expanded our offerings to our existing clients.
Cost of revenues and gross profit
Year ended June 30,
Change
2020
2019
$
%
(in thousands, except for percentages)
Cost of revenues:
SaaS and support
$
37,677
$
23,170
$
14,507
63
%
Total cost of recurring revenues
37,677
23,170
14,507
63
%
Professional services
32,847
21,723
11,124
51
%
Restructuring
765
—
765
n/a
Total cost of revenues
$
71,289
$
44,893
$
26,396
59
%
Gross profit
SaaS and support
$
76,448
$
50,827
$
25,621
50
%
Subscription license
48,427
48,939
(512
)
(1
)
%
Total gross profit - recurring revenues
$
124,875
$
99,766
25,109
25
%
Professional services (including restructuring of $765 and $0)
(9,312
)
(1,436
)
(7,876
)
548
%
Gross profit
$
115,563
$
98,330
$
17,233
18
%
Cost of SaaS and support
Cost of SaaS and support revenues increased by $14.5 million, or 63%, for fiscal year 2020 compared to fiscal year 2019. The increase can be attributed primarily to increases in headcount, hosting and facilities costs to support our growth as we scale our business. Specifically, our payroll-related costs increased by $5.1 million, our facility and technology costs increased by $4.8 million, and amortization of acquired technology and capitalized software increased by $2.7 million.
Cost of professional services
Cost of professional services revenues increased by $11.1 million, or 51%, for fiscal year 2020 compared to fiscal year 2019. The increase was primarily driven by an increase of $9.6 million in our personnel-related expenses for our professional services employees and consultants as we expanded our teams to provide implementation services to our growing client base.
Restructuring
Restructuring expense, which was primarily related to professional services, was $0.8 million in fiscal year 2020 as a result of a re-organization and restructuring plan undertaken by management in April 2020 and consists of severance and employee benefit costs.
Gross profit
Our gross profit increased by $17.2 million, primarily due to growth in our recurring revenues, which was partially offset by an increase in professional services costs as we invested in implementation, upgrade and migration services to on-board new clients and to expand our subscription revenues within our existing client base, and additional SaaS and support costs due to increased investment in our cloud operations.
49
Operating expenses
Year ended June 30,
Change
2020
2019
$
%
(in thousands, except for percentages)
Operating expenses:
Research and development
$
42,090
$
28,826
$
13,264
46
%
Sales and marketing
58,898
44,889
14,009
31
%
General and administrative
28,491
28,718
(227
)
(1
)
%
Restructuring
2,894
—
2,894
n/a
Total operating expenses
$
132,373
$
102,433
$
29,940
29
%
Research and development expense
Research and development expense increased by $13.3 million, or 46%, for fiscal year 2020 compared to fiscal year 2019. The increase was driven in part by an additional $6.1 million in payroll and related costs, including $0.6 million of stock-based compensation, as a result of increased headcount, along with an increase of $4.3 million in costs for consultants and contractors in order to support the development of our products and an increase of $2.2 million in the allocation of various overhead and occupancy costs to support our increased headcount.
Sales and marketing expense
Sales and marketing expense increased by $14.0 million, or 31%, for fiscal year 2020 compared to fiscal year 2019. The increase was primarily driven by an additional $12.3 million in payroll and related costs, including $0.4 million of stock-based compensation, and an increase of $2.9 million in the allocation of various overhead and occupancy costs to support our increased headcount. Additionally, there was an increase of $0.8 million in amortization for our tradename and client relationships that we acquired as part of our acquisitions in fiscal year 2019. These increases were partially offset by a decrease of $2.5 million in marketing and sales expenses as we canceled all in-person marketing and sales events in early 2020 in response to the COVID-19 pandemic.
General and administrative expense
General and administrative expense decreased by $0.2 million, or 1%, for fiscal year 2020 compared to fiscal year 2019. While we had an increase in certain expenses to support the growth of our business, such as an increase of $3.9 million in payroll and related costs due to increased headcount, the increase was offset by a decrease in transaction costs of $3.1 million, and a decrease of $0.6 million in recruiting costs, a decrease of $0.3 million in travel and entertainment expenses and a decrease of $0.3 million in costs related to conferences and events which were related to cost reduction measures taken in response to the COVID-19 pandemic.
Restructuring
Restructuring expense was $2.9 million in fiscal year 2020 as a result of a re-organization and restructuring plan undertaken by management in April 2020 and consists of severance and employee benefit costs.
Interest expense
Year ended June 30,
Change
2020
2019
$
%
(in thousands, except for percentages)
Interest expense
$
(27,856
)
$
(19,944
)
$
(7,912
)
40
%
Interest expense increased by $7.9 million for fiscal year 2020 compared to fiscal year 2019. The change was primarily driven by an increase in our term loan in May 2019, resulting in interest being paid on a higher balance for the entire fiscal year 2020 compared to only a partial period during fiscal year 2019. Additionally, we increased our borrowings on the credit facility during the twelve months ended June 30, 2020.
50
Income tax benefit (expense)
Year ended June 30,
Change
2020
2019
$
%
(in thousands, except for percentages)
Income tax benefit (expense)
$
(353
)
$
7,806
$
(8,159
)
(105
)
%
Income tax expense was $0.4 million for fiscal year 2020 compared to an income tax benefit of $7.8 million recorded during fiscal year 2019. Our income tax benefit during fiscal year 2019 was primarily attributable to a partial release of the valuation allowance against our deferred tax assets in the U.S. due to acquisitions that were completed during the year. The valuation allowance release was the result of net deferred tax liabilities originating from the acquisitions that were an available source of income to realize a portion of our deferred tax assets.
Quarterly results of operations
The following tables set forth our unaudited quarterly consolidated statements of operations data for each of the eight quarters ended June 30, 2021, as well as the percentage that each line item represents of total revenues. The information for each of these quarters has been prepared on the same basis as the audited annual consolidated financial statements included elsewhere in this Annual Report on Form 10-K, and, in the opinion of management, reflects all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of this data. These historical quarterly operating results are not necessarily indicative of the results to be expected for a full year or any future period.
Three months ended
September 30,
December 31,
March 31,
June 30,
September 30,
December 31,
March 31,
June 30,
2019
2019
2020
2020
2020
2020
2021
2021
(in thousands)
Revenues
SaaS and support
$
25,209
$
28,160
$
29,511
$
31,245
$
33,105
$
34,651
$
36,888
$
39,431
Subscription license
12,614
11,655
12,987
11,171
9,996
9,750
11,784
14,433
Total recurring revenues
37,823
39,815
42,498
42,416
43,101
44,401
48,672
53,864
Professional services
6,637
6,336
6,195
5,132
5,042
5,184
6,976
7,393
Total revenues
44,460
46,151
48,693
47,548
48,143
49,585
55,648
61,257
Cost of revenues
SaaS and support
8,754
9,013
10,157
9,753
9,279
9,876
10,826
10,663
Total cost of recurring revenues
8,754
9,013
10,157
9,753
9,279
9,876
10,826
10,663
Professional services
7,669
8,978
8,795
7,405
7,704
7,551
8,795
9,680
Restructuring
—
—
—
765
—
—
—
—
Total cost of revenues
16,423
17,991
18,952
17,923
16,983
17,427
19,621
20,343
Gross profit
28,037
28,160
29,741
29,625
31,160
32,158
36,027
40,914
Operating expenses:
Research and development
9,926
10,931
11,786
9,447
11,954
12,146
13,036
13,717
Sales and marketing
14,504
15,592
15,827
12,975
15,338
15,472
16,407
22,731
General and administrative
7,396
7,757
7,888
5,450
8,144
9,437
10,729
14,108
Restructuring
—
—
—
2,894
—
—
—
—
Total operating expenses
31,826
34,280
35,501
30,766
35,436
37,055
40,172
50,556
Operating loss
(3,789
)
(6,120
)
(5,760
)
(1,141
)
(4,276
)
(4,897
)
(4,145
)
(9,642
)
Interest expense
(6,917
)
(6,925
)
(7,008
)
(7,006
)
(6,279
)
(6,395
)
(5,850
)
(6,084
)
Other income (expense), net
(599
)
604
(832
)
(69
)
268
1,107
(58
)
(41
)
Net loss before income taxes
(11,305
)
(12,441
)
(13,600
)
(8,216
)
(10,287
)
(10,185
)
(10,053
)
(15,767
)
Income tax expense
(3
)
(112
)
(172
)
(66
)
(120
)
(145
)
(64
)
(143
)
Net loss
$
(11,308
)
$
(12,553
)
$
(13,772
)
$
(8,282
)
$
(10,407
)
$
(10,330
)
$
(10,117
)
$
(15,910
)
51
Quarterly trends as a percentage of total revenues (percentages may not add up due to rounding):
Three months ended
September 30,
December 31,
March 31,
June 30,
September 30,
December 31,
March 31,
June 30,
2019
2019
2020
2020
2020
2020
2021
2021
(as a percentage of total revenues)
Revenues
SaaS and support
57
%
61
%
61
%
66
%
69
%
70
%
66
%
64
%
Subscription license
28
25
27
23
21
20
21
24
Total recurring revenues
85
86
87
89
90
90
87
88
Professional services
15
14
13
11
10
10
13
12
Total revenues
100
100
100
100
100
100
100
100
Cost of revenues
SaaS and support
20
20
21
21
19
20
19
17
Total cost of recurring revenues
20
20
21
21
19
20
19
17
Professional services
17
19
18
16
16
15
16
16
Restructuring
—
—
—
2
—
—
—
—
Total cost of revenues
37
39
39
38
35
35
35
33
Gross profit
63
61
61
62
65
65
65
67
Operating expenses:
Research and development
22
24
24
20
25
24
23
22
Sales and marketing
33
34
33
27
32
31
29
37
General and administrative
17
17
16
11
17
19
19
23
Restructuring
—
—
—
6
—
—
—
—
Total operating expenses
72
74
73
65
74
75
72
83
Operating loss
(9
)
(13
)
(12
)
(2
)
(9
)
(10
)
(7
)
(16
)
Interest expense
(16
)
(15
)
(14
)
(15
)
(13
)
(13
)
(11
)
(10
)
Other income (expense), net
(1
)
1
(2
)
—
1
2
—
—
Net loss before income taxes
(25
)
(27
)
(28
)
(17
)
(21
)
(21
)
(18
)
(26
)
Income tax expense
—
—
—
—
—
—
—
—
Net loss
(25
)
%
(27
)
%
(28
)
%
(17
)
%
(22
)
%
(21
)
%
(18
)
%
(26
)
%
Quarterly trends in revenues
Our quarterly SaaS and support revenues increased sequentially for each period presented, primarily due to sales to new clients and additional orders and renewals placed by existing clients. We cannot assure you that this pattern of sequential growth in SaaS and support revenues will continue.
Sales of our subscription licenses are recognized at a point-in-time, generally upon delivery of the license or commencement of the renewal term, rather than over the license term, which causes our quarterly subscription license revenues to fluctuate depending on the timing of new sales and renewals of existing contracts. As we have emphasized sales of SaaS solutions to our clients, our quarterly subscription license revenues have generally decreased each quarter, except the third and fourth quarters of fiscal year 2021 and the third quarter of fiscal year 2020, when there was an increase caused largely by the number of subscription license deals contracted in those quarters. We anticipate that subscription license revenues will generally continue to decrease as we focus on sales of our SaaS solutions but may fluctuate quarter to quarter depending on the pattern of existing annual and multi-year contract renewals.
Our professional services revenues declined over the periods presented except the third and fourth quarters of fiscal year 2021 as a result of a few large implementation projects, upgrade, and migration services by our new and existing clients in those quarters.
The proportion of our total revenues derived from SaaS and support increased over the first six quarters presented as we continued to focus on new sales of our SaaS solutions and encouraged existing subscription license clients to migrate to SaaS solutions. Although revenues from SaaS and support increased in absolute dollars during the third and fourth quarters of fiscal year 2021, they decreased as a proportion of our total revenues due to an increase in subscription license and professional services revenues. Gross profit as a percentage of total revenues increased sequentially for each period presented since the second quarter of fiscal year 2020, as we experienced increased economies of scale as we grew.
52
Quarterly trends in cost of revenues
Our quarterly total cost of revenues increased sequentially from the first to the third quarter of fiscal year 2020, primarily due to an increase in cost of SaaS and support as we invested in supporting our growing client base and product offerings. We completed a re-organization and restructuring plan in the fourth quarter of fiscal year 2020 as well as some COVID-19-related headcount reductions which resulted in a restructuring charge of $0.8 million for severance and employee benefits. We also implemented cost reduction measures in response to the COVID-19 pandemic, including ceasing all travel and in-person events. The reduction in headcount as a result of the restructuring combined with the cost reduction measures resulted in decreased cost of revenues starting in the fourth quarter of fiscal year 2020. Our cost of revenues started to increase again starting in the second quarter of fiscal year 2021 as we eased the cost reduction measures and hired additional personnel to provide technical support services to our growing client base.
Quarterly trends in operating expenses
Our quarterly total operating expenses, as well as quarterly research and development, sales and marketing and general and administrative expenses, increased sequentially during the first three quarters of fiscal year 2020, primarily due to increases in employee compensation-related costs driven by increase in headcount in each of these functions. In the fourth quarter of fiscal year 2020, we completed a restructuring plan for the organizational integration of the DealCloud acquisition and some COVID-19-related headcount reductions across all functions, and we cancelled all in-person meetings and events in response to the COVID-19 pandemic, resulting in a restructuring charge of $2.9 million and a decline in operating expense across all functions.
During fiscal year 2021, our quarterly total operating expenses increased across all functions primarily as a result of stock-based compensation expense associated with a new grant of performance-based equity awards and an increase in salary costs due to annual salary raises and new hires. In addition, our general and administrative costs increased during each quarter in fiscal year 2021 as we increased expenditures on consultants and incurred higher professional services fees in preparation for becoming a public company.
Liquidity and capital resources
Sources of liquidity
As of June 30, 2021, we had cash, cash equivalents, and restricted cash of $41.5 million and had financed our operations primarily through collections from clients, borrowings under our credit facility and the issuance of convertible preferred and common stock. We generally bill and collect from our clients annually in advance. Our billings are subject to seasonality, with billings in the second and fourth quarters substantially higher than in the first and third quarters.
We expect that operating losses and negative cash flows from operations could continue in the future as we continue to invest in the growth of our business. We believe our existing cash and cash equivalents and restricted cash as of June 30, 2021 will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months.
In July 2021, we received net proceeds of $283.4 million upon the completion of our IPO. We used $278.0 million of the net proceeds from the offering to fully repay the $273.0 million outstanding under our term loan and the $5.0 million outstanding under our revolving credit facility.
Our future capital requirements will depend on many factors, including, but not limited to, our ability to grow our revenues and the timing and extent of investment across our organization necessary to support growth in our business. In addition, we may in the future enter into arrangements to acquire or invest in complementary businesses or technologies. We may need to seek additional equity or debt financing in order to meet these future capital requirements. If we are unable to raise additional capital when desired, or on terms that are acceptable to us, our business, financial condition and results of operations could be adversely affected.
We continue to assess the effect of the COVID-19 pandemic on our operations. The extent to which the COVID-19 pandemic will impact our business and operations will depend on future developments that are highly uncertain and cannot be predicted with confidence, such as the continuing spread of the infection, the duration of the pandemic, and the effectiveness of actions taken in the United States and other countries to contain and treat the disease.
53
Cash flows
The following table summarizes our cash flows from operating, investing, and financing activities for the periods indicated (in thousands):
Year ended June 30,
2021
2020
2019
Cash flow data:
Net cash used in operating activities (1)
$
(9,749
)
$
(1,410
)
$
(5,064
)
Net cash used in investing activities
(25,604
)
(5,134
)
(194,605
)
Net cash provided by financing activities
32,404
27,246
204,276
Effect of foreign exchange rates on cash and cash equivalents
1,253
(161
)
(187
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
$
(1,696
)
$
20,541
$
4,420
(1)
Includes debt-related cash interest payments of $24.1 million, $22.1 million and $17.7 million during fiscal years 2021, 2020 and 2019, respectively.
Operating activities
During fiscal year 2021, net cash used in operating activities was $9.7 million, primarily resulting from our operating loss of $46.8 million, which was offset by $37.1 million of adjustments. These adjustments consisted of $32.6 million of non-cash charges (principally comprising depreciation and amortization and stock-based compensation expense), and net cash inflow of $4.5 million from net changes in operating assets and liabilities. The net cash inflow from changes in operating assets and liabilities was primarily driven by an increase in accounts payable and other accrued liabilities of $10.7 million due to an increase in accrued bonuses and timing of payments, and an increase in deferred revenues of $28.8 million consistent with our revenue growth. These changes were partially offset by an increase in accounts and other receivable of $26.0 million due to the timing of billing and collections on our outstanding receivables, an increase in prepaid expenses of $4.7 million and an increase in deferred commissions of $3.9 million consistent with our revenue growth.
During fiscal year 2020, net cash used in operating activities was $1.4 million, primarily resulting from our operating loss of $45.9 million, which was offset by $44.5 million of adjustments. These adjustments consisted of $18.1 million of non-cash charges (principally comprising depreciation and amortization and stock-based compensation expense), and net cash inflow of $26.4 million from net changes in operating assets and liabilities. The net cash inflow from changes in operating assets and liabilities was primarily driven by a decrease in accounts and other receivable of $7.7 million as we increased collections on our outstanding receivables, an increase in deferred revenues of $18.0 million consistent with our revenue growth and an increase in other liabilities of $9.0 million which primarily related to accrued interest on our debt and deferred rent. These changes were partially offset by an increase in unbilled revenues of $3.8 million and deferred commissions of $3.4 million consistent with our revenue growth and a decrease in accounts payable and other accrued liabilities of $1.3 million due to timing of payments.
During fiscal year 2019, net cash used in operating activities was $5.1 million, primarily resulting from our operating loss of $17.1 million, which was offset by $12.0 million of adjustments. These adjustments consisted of non-cash charges of $5.8 million and net cash inflow of $6.2 million from net changes in operating assets and liabilities, net of business combinations. The net cash inflow from changes in operating assets and liabilities was primarily driven by an increase in deferred revenues of $18.9 million due to our revenue growth and an increase in accounts payable and accrued liabilities of $10.0 million due to timing of payments. These changes were partially offset by an increase in unbilled revenues of $3.8 million and deferred commissions of $3.8 million consistent with our revenue growth and an increase in accounts and other receivables of $14.0 million due to the timing of collections from our clients.
54
Investing activities
Net cash used in investing activities consists of business acquisitions, purchases of property and equipment, leasehold improvements, and capitalization of internal-use software costs.
During fiscal year 2021, net cash used in investing activities was $25.6 million, consisting of $20.6 million of cash consideration (net of cash acquired) paid for our acquisition of Repstor, Limited (“Repstor”), capitalized internal-use software costs of $2.5 million and capital expenditures of $2.5 million on property and equipment consisting largely of leasehold improvements to our facilities in Charlotte.
During fiscal year 2020, net cash used in investing activities was $5.1 million, consisting of capitalized internal-use software costs of $2.5 million and capital expenditures of $2.6 million on property and equipment.
During fiscal year 2019, net cash used in investing activities was $194.6 million, consisting of $190.3 million of cash consideration (net of cash acquired) paid for our acquisitions of DealCloud, gwabbit and OnePlace, capital expenditures of $2.4 million on property and equipment including $1.8 million in leasehold improvements, and $1.9 million of capitalized internal-use software.
Financing activities
During fiscal year 2021, net cash provided by financing activities was $32.4 million, primarily comprised of $29.0 million from the issuance of common stock and $15.7 million proceeds from option exercises, partially offset by $5.4 million of payments related to deferred offering costs in connection with our IPO, $5.0 million for the repayment of borrowings on our revolving line of credit and $1.9 million of payments for the repurchase of common stock.
During fiscal year 2020, net cash provided by financing activities was $27.2 million, primarily resulting from $16.5 million net proceeds for the issuance of convertible preferred stock, $3.6 million proceeds from option exercises and shareholder contribution and $10.0 million of net proceeds from borrowings on our revolving line of credit, offset by payments of $2.8 million to repurchase shares and options in the tender offer in October 2019.
During fiscal year 2019, net cash provided by financing activities was $204.3 million, primarily resulting from $281.0 million of proceeds from borrowings, $5.9 million from stock option exercises and the issuance of common stock, partially offset by payments on borrowings of $78.0 million and $4.6 million of debt financing costs.
Other non-cash items
As of June 30, 2021, in connection with the acquisition of Repstor, we are obligated to make certain earn-out payments for an amount up to $28.4 million if certain performance measures are achieved. The earn-out payments are expected to be paid in the next two fiscal years. We also are obligated to make a cash holdback payment of $2.1 million in the second quarter of fiscal year 2024. See Note 5 for a discussion of the liabilities recorded.
55
Non-GAAP financial measures
We report our financial results in accordance with accounting principles generally accepted in the United States (“GAAP”); however, management believes evaluating the Company’s ongoing operating results may be enhanced if investors have additional non-GAAP financial measures. Specifically, management reviews non-GAAP gross profit, non-GAAP recurring gross profit, and non-GAAP operating profit each of which is a non-GAAP financial measure, to manage our business, make planning decisions, evaluate our performance and allocate resources and, for the reasons described below, considers them to be effective indicators, for both management and investors, of our financial performance over time.
Non-GAAP gross profit
We define non-GAAP gross profit as GAAP gross profit before the portion related to cost of revenues of stock-based compensation expense, amortization of intangible assets, and certain restructuring costs. We believe non-GAAP gross profit provides investors and other users of our financial information consistency and comparability with our past financial performance and facilitates period-to-period comparisons of gross profit.
The following table provides a reconciliation of gross profit to non-GAAP gross profit (in thousands):
Year ended June 30,
2021
2020*
2019*
Gross profit*
$
140,259
$
115,563
$
98,330
Adjusted to exclude the following (as related to cost of revenues):
Stock-based compensation
1,128
642
193
Amortization of intangible assets
6,783
7,371
5,282
Restructuring costs
—
765
—
Non-GAAP gross profit
$
148,170
$
124,341
$
103,805
*
As adjusted to reflect the impact of the full retrospective adoption of ASC 606. See Note 2 to our consolidated financial statements for a summary of adjustments.
Non-GAAP recurring gross profit
We define non-GAAP recurring gross profit as GAAP total recurring revenues less GAAP total cost of recurring revenues adjusted for the portion of cost related to stock-based compensation expense and amortization of intangible assets. We believe non-GAAP recurring gross profit provides investors and other users of our financial information consistency and comparability with our past financial performance and facilitates period-to-period comparisons of recurring gross profit as management is focused on increasing sales associated with our recurring revenue stream.
The following table provides a reconciliation of recurring gross profit to non-GAAP recurring gross profit (in thousands):
Year ended June 30,
2021
2020*
2019*
Total recurring revenues*
$
190,038
$
162,552
$
122,936
Total cost of recurring revenues
40,644
37,677
23,170
Recurring gross profit*
149,394
124,875
99,766
Adjusted to exclude the following (as related to recurring cost of revenues)
Stock-based compensation
250
203
76
Amortization of intangible assets
6,783
7,371
5,282
Non-GAAP recurring gross profit
$
156,427
$
132,449
$
105,124
*
As adjusted to reflect the impact of the full retrospective adoption of ASC 606. See Note 2 to our consolidated financial statements for a summary of adjustments.
56
Non-GAAP operating profit
We define non-GAAP operating profit as GAAP operating loss excluding stock-based compensation expense, amortization of intangible assets, certain acquisition-related transaction costs and restructuring costs. We believe non-GAAP operating profit provides investors and other users of our financial information consistency and comparability with our past financial performance and facilitates period-to-period comparisons of GAAP operating loss.
The following table provides a reconciliation of GAAP operating loss to non-GAAP operating profit (in thousands):
Year ended June 30,
2021
2020*
2019*
Operating loss*
$
(22,960
)
$
(16,810
)
$
(4,103
)
Adjusted to exclude the following (including the portion related to cost of revenues):
Stock-based compensation
18,566
4,139
2,921
Amortization of intangible assets
10,870
11,339
8,383
Acquisition-related transaction costs
1,557
—
3,395
Restructuring costs
—
3,659
—
Non-GAAP operating profit
$
8,033
$
2,327
$
10,596
*
As adjusted to reflect the impact of the full retrospective adoption of ASC 606. See Note 2 to our consolidated financial statements for a summary of adjustments.
Contractual obligations and commitments
The following table summarizes our contractual obligations as of June 30, 2021 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):
Payments due by period
Less than
More than
Total
1 year
1-3 years
3-5 years
5 years
Operating lease obligations
$
31,458
$
8,784
$
10,036
$
3,890
$
8,748
Term loan*
273,000
—
273,000
—
—
Credit facility
5,000
—
5,000
—
—
Software and other
9,768
4,946
4,669
153
—
Total
$
319,226
$
13,730
$
292,705
$
4,043
$
8,748
*
Excludes interest payments on the term loan which are based on a variable interest rate as discussed below under “Indebtedness.”
In connection with the acquisition of Repstor in June 2021, we entered into a contingent consideration arrangement, consisting of earn-out payments to the former shareholders of Repstor of up to $28.4 million. The earn-out payments are expected to be paid in cash of up to $11.1 million in the third quarter of fiscal year 2022 and up to $17.3 million in the first quarter of fiscal year 2023, if the performance measures are achieved. We have not included these potential contingent payment obligations in the table above as the likelihood and amount of the payments is uncertain. See Note 4 to our consolidated financial statements for additional information.
On July 12, 2021, we repaid the full $273.0 million borrowing under our term loan and $5.0 million borrowing under our credit facility. Unamortized financing costs of $2.4 million will be recognized as a loss on extinguishment of debt on that date.
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Indebtedness
In September 2013, we obtained a revolving and term credit facility (as amended in 2018 and 2019, the “credit facility”) from a lender, which provides for a total borrowing capacity of $283.0 million, consisting of a $273.0 million term loan and a $10.0 million revolving line of credit.
Amounts drawn under the revolving line of credit may be repaid and reborrowed at any time during the term of the agreement. The outstanding principal amount of the draws, together with any accrued and unpaid interest are due and payable on the maturity date or, if earlier, on the date on which they are declared due and payable pursuant to the credit facility. We may prepay the term loans at any time with an applicable prepayment premium. Any principal amount of the term loans that is repaid or prepaid may not be reborrowed.
The credit facility and term loans bear a floating rate of interest, which we select at the beginning of a period between (i) a LIBOR loan, for which the interest rate is calculated as the then-current LIBOR rate, with a floor of 1.00%, plus 7.25%, and (ii) an index loan, for which the interest rate is calculated as the then-current Wall Street Journal Prime rate, with a floor of 2.00%, plus 6.25%. The credit facility is collateralized by substantially all of our assets. The maturity date of the credit facility is August 2023.
The credit facility contains certain restrictive covenants which, among other things, requires us to meet a defined financial ratio as well as maintain a specified minimum liquidity amount. We were in compliance with all of the covenants as of June 30, 2021. Failure to be in compliance with these covenants could adversely affect our business, including requiring all or a portion of our outstanding obligations to become due and payable.
As of June 30, 2021, we had an outstanding balance of $273.0 million under the term loan and $5.0 million under the credit facility. On July 12, 2021, we repaid the outstanding $273.0 million borrowing under the term loan and $5.0 million borrowing under the revolving credit facility from the proceeds of the IPO.
We incurred $4.6 million of costs directly related to obtaining the credit facility which have been recorded as deferred financing fees and are being amortized to interest expense, using the effective interest method, over the term of the facility.
Critical accounting policies and estimates
The process of preparing our consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. These estimates and judgments are based on historical experience, future expectations and other factors and assumptions we believe to be reasonable under the circumstances. The most significant estimates and judgments are reviewed on an ongoing basis and are revised when necessary. Actual amounts may differ from these estimates and judgments. A summary of our significant accounting policies is contained in Note 2 of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Revenue recognition
Revenue recognition requires judgment and the use of estimates, especially in identifying and evaluating the various non-standard terms and conditions in our contracts with clients and their effect on reported revenues.
We derive our revenues primarily from the following four sources, which represent our performance obligations:
i .
Sales of our SaaS solutions ;
ii.
Sales of subscriptions to license our on-premises software ;
iii.
Provision of support activities ; and
iv.
Provision of professional services .
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The estimates and assumptions requiring significant judgment under our revenue recognition policy in accordance with ASC 606 are as follows:
Determination of the transaction price
We determine the transaction price based on the consideration to which we expect to be entitled in exchange for transferring our services and products to the client. We estimate variable consideration included in the transaction price if, in our judgment, it is probable that no significant future reversal of cumulative revenues under the contract will occur.
In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined that contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide clients with simplified and predictable ways of purchasing our products and services, not to receive financing from clients or to provide clients with financing.
Allocation of the transaction price to the performance obligations in the contract
If the contract contains a single performance obligation, we allocate the entire transaction price to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on its relative standalone selling price (“SSP”). The determination of SSP involves judgment and is generally based on the contractually stated, observable prices of the promised goods and services charged when sold separately to client. The majority of our contracts contain multiple performance obligations (such as when subscription licenses are sold with support and implementation services) and are typically capable of being distinct and accounted for as separate performance obligations. In a contract with multiple performance obligations, we allocate revenues to each performance obligation at the inception of the contract. Some of our performance obligations have observable inputs that are used to determine the SSP of those distinct performance obligations. Where SSP is not directly observable, we determine the SSP using information that may include market conditions and other observable inputs.
Stock-based compensation
We calculate compensation expense related to stock option awards made to employees, consultants and directors based on the fair value of stock-based awards on the date of grant. We determine the grant date fair value of our stock option awards using the Black-Scholes option pricing model and for awards without performance condition the related stock-based compensation is recognized on a straight-line basis, over the period in which a participant is required to provide service in exchange for the stock-based award, which is generally four years. We recognize stock-based compensation expense in the consolidated statements of operations based on awards ultimately expected to vest, and we recognize forfeitures of stock-based awards as they occur.
Determining the fair value of stock-based awards at the grant date requires significant judgement. The determination of the grant date fair value of stock-based awards using the Black-Scholes option-pricing model is affected by our estimated common stock fair value as well as other subjective assumptions including the expected term of the awards, the expected volatility over the expected term of the awards, expected dividend yield and risk-free interest rates. The assumptions used in our option-pricing model represent management’s best estimates and are as follows:
•
Fair Value of Common Stock. Prior to our initial public offering, we were privately held and thus we have historically estimated the fair value of common stock based on contemporaneous valuations and other factors deemed relevant by management. For valuations after the completion of our initial public offering, we determined the fair value of each share of underlying common stock based on the closing price of our common stock on the date of grant.
•
Expected Term. The expected term of employee stock options reflects the period for which we believe the option will remain outstanding based on historical experience and future expectations.
•
Expected Volatility. As we do not have trading history for our common stock, the selected volatility used is representative of expected future volatility. We base expected future volatility on the historical and implied volatility of comparable publicly traded companies over a similar expected term. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our stock price becomes available.
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•
Expected Dividend Yield. We have never declared or paid any cash dividends and do not presently intend to pay cash dividends in the foreseeable future. As a result, we used an expected dividend yield of zero.
•
Risk-Free Interest Rates. We base the risk-free interest rate on the applicable rate for a U.S. Treasury issue with a term that closely approximates the expected life of the option grant at the date nearest the option grant date.
We have issued performance-based stock options that vest based upon continued service through the vesting term and achievement of certain annual contract value targets established by the Board of Directors for a predetermined period. We measure stock-based compensation expense for performance-based stock options based on the estimated grant date fair value determined using the Black-Scholes valuation model, and we recognize compensation expense for such awards in the period in which it becomes probable that the performance target will be achieved.
On December 30, 2020, we entered into a director service agreement with Mr. Charles Moran, where he was engaged as a special advisor to us for a 12-month term for financial advice and advice in connection with our initial public offering. As consideration for Mr. Moran’s services, we granted him an option to purchase up to 300,000 shares of our common stock, one-half of which vested upon the pricing of the IPO on June 29, 2021 and the remaining one-half will vest on the first anniversary of that date. The aggregate fair value on the grant date of this stock option award to Mr. Moran was $1.8 million, and we recognized $1.2 million during fiscal year 2021. The unrecognized compensation cost of $0.6 million will be recognized over the remaining service period.
Goodwill
Goodwill represents the excess purchase price over fair value of net tangible and identifiable intangible assets acquired in our business combinations. We test goodwill for impairment on an annual basis during the fourth quarter or whenever events or changes in circumstances indicate the carrying amount may not be recoverable. We have determined that we have one reporting unit for purposes of our annual impairment evaluation. As part of the annual goodwill impairment test, we first perform a qualitative assessment to determine whether further impairment testing is necessary. If, as a result of this qualitative assessment, it is more-likely-than-not that the fair value of our reporting unit is less than its carrying amounts, the quantitative impairment test will be required.
Income taxes
We account for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are recorded based on the estimated future tax effects of differences between the financial statement and income tax basis of existing assets and liabilities. These differences are measured using the enacted statutory tax rates that are expected to apply to taxable income for the years in which differences are expected to reverse. We recognize the effect on deferred income taxes of a change in tax rates in the period that includes the enactment date. We record a valuation allowance to reduce its deferred tax assets to the net amount that it believes is more-likely-than-not to be realized. Management considers all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing tax planning strategies in assessing the need for a valuation allowance.
Recent accounting pronouncements
See Note 2 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information regarding recent accounting pronouncements and our assessment of their impact.
JOBS Act
In April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. We have elected to use this extended transition period to enable us to comply with certain new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
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We also intend to rely on certain other exemptions and reduced reporting requirements under the JOBS Act, including: not having to (1) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act or (2) comply with any requirement that may be adopted by Public Company Accounting Oversight Board (“PCAOB”) regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis.
We will remain an emerging growth company until the earlier of (1) the last day of fiscal year in which we have more than $1.07 billion in annual revenues; (2) the date we qualify as a “large accelerated filer,” which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of the most recently completed second fiscal quarter, and we have been required to file annual, quarterly and current reports under the Exchange Act for at least twelve months, and we have filed at least one annual report pursuant to the Exchange Act; (3) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; and (4) the last day of fiscal year ending after the fifth anniversary of our initial public offering.