Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes theret o included elsewhere 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 “Item 1A. Risk Factors.”
This section and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties. Forward-looking statements may be identified by the use of forward-looking words such as “anticipate,” “believe,” “may,” “will,” “continue,” “seek,” “estimate,” “intend,” “hope,” “predict,” “could,” “should,” “would,” “project,” “plan,” “expect” or the negative or plural of these words or similar expressions, although not all forward-looking statements contain these words. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled “Item 1A. Risk Factors” above, which are incorporated herein by reference. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. All information presented herein is based on our fiscal calendar. Unless otherwise stated, references in this report to particular years or quarters refer to our fiscal years ended December 31 and the associated quarters of those fiscal years. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.
Overview
We provide cloud-based enterprise work management software. We define enterprise work management software as software applications that enable organizations to plan, manage and execute projects and work. Our family of applications enables users to manage their projects, professional workforce and IT investments, automate document-intensive business processes, and effectively engage with their customers, prospects, and community via the web and mobile technologies.
The continued growth of an information-based economy has given rise to a large and growing group of knowledge workers who operate in dynamic work environments as part of geographically dispersed and virtual teams. We believe that manual processes and legacy on- premise enterprise systems are insufficient to address the needs of the modern work environment. In order for knowledge workers to be successful, they need to interact with intuitive enterprise work systems in a collaborative way, including real-time access. Today, legacy processes and systems are being disrupted and replaced by cloud-based enterprise work management software that improves visibility, collaboration and productivity.
In response to these changes, we are providing organizations and their knowledge workers with software applications that better align resources with business objectives and increase visibility, governance, collaboration, quality of customer experience, and responsiveness to changes in the business environment. This results in increased work capacity, higher productivity, better execution, and greater levels of customer engagement. Our applications are easy-to-use, scalable, and offer real-time collaboration for knowledge workers distributed on a local or global scale. Our software applications address diverse enterprise work challenges and our customers currently use our applications in the following functional areas:
• Marketing . Digital marketing, e-commerce and customer service teams use our applications to interact with consumers across multiple channels to acquire new customers, drive product and service utilization, resolve issues, and build brand loyalty. Our applications deliver value to CXM-focused organizations across a variety of use cases including mobile messaging, mobile application marketing, VoC, email marketing, knowledge management and call center productivity. We also offer customer data platform, or CDP, solutions that provide organizations the ability to unify customer data stored across diverse systems to drive more personalized omnichannel campaigns.
• Sales . Sales teams employ our applications to drive growth through deeper customer engagement, reduced sales cycle times, and overall improved collaboration between sales, marketing, and other customer-facing functions. We offer applications that help organizations optimize their sales opportunity and account management processes, coordinate proposal and reference activities, collaborate on the creation and publication of digital content and gain increased control over key sales and marketing workflows, activities and budgets.
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• Contact Center . Customer service and support environments use our applications to enable agents to resolve issues and engage customers. We offer applications that improve customer experience and reduce call volume and cycle times through customer self-service products and VoC technology that captures customer sentiment in real-time. Upland also offers products that improve call center agent productivity by providing more direct access to knowledge and to customer sentiment thereby improving both inbound call outcomes and proactive outbound success. We also provide products that deliver knowledge-based, guided workflows for customer service environments supporting complex products in strict regulatory requirements. Additional solutions help call center leadership to manage agent performance and measure real-time performance relative to call resolution and customer sentiment, improve performance through gamification, and gather agent feedback to keep employee engagement high.
• Project Management. Business leaders and PMOs use our applications to optimize project portfolios, balance capacity against demand, improve financial-based decision making, align execution of projects to strategy across large organizations, and manage the entire project delivery lifecycle. Our applications deliver value to project management across a variety of use cases including continuous improvement, enterprise IT, new product development, and services departments along with industry depth in higher education, public sector and healthcare IT.
• Information Technology . IT departments use our applications to manage a variety of IT activities and resources across the enterprise. Our applications help information technology departments ensure they are delivering against the objectives of the business by helping them select and prioritize the right investments, gain greater control of resource demand and allocation, and track and report benefit realization. Our applications enable executives to gain better insight into IT spending to help prevent cost overruns and understand the nature of consumption.
• Business Operations . Multiple functional departments use our applications to streamline operations and accelerate business performance across their value chains. Upland solutions in this area range from supply chain collaboration and factory management, back office document and vendor management, to applications that improve sales responsiveness. In addition, our products help operations team compose, automate and exchange documents based on content from existing back-office systems to produce interactive business communications, while maintaining compliance and reducing production costs.
• Human Resources and Legal . HR, legal departments, and law firms use our applications to improve collaboration and operational control and streamline routine processes. We offer applications that automate document management and workflow including, contracts, records, and other documentation that require enhanced security and compliance requirements. Other applications support HR-specific workflows including onboarding, employee management, termination, HR support and time and expense management.
We sell our software applications primarily through a direct sales organization comprised of inside sales and field sales personnel. In addition to our direct sales organization, we have an indirect sales organization, which sells to distributors and value-added resellers. We employ a land-and-expand go-to-market strategy. After we demonstrate the value of an initial application to a customer, our sales and account management teams work to expand the adoption of that initial application across the customer, as well as cross-sell additional applications to address other enterprise work management needs of the customer. Our customer success organization supports our direct sales efforts by managing the post-sale customer lifecycle.
Our subscription agreements are typically sold either on a per-seat basis or on a minimum contracted volume basis with overage fees billed in arrears, depending on the application being sold. We service customers ranging from large global corporations and government agencies to small- and medium-sized businesses. We have more than 10,000 customers with over 1,000,000 users across a broad range of industries, including financial services, consulting services, technology, manufacturing, media, telecommunications, government, political, non-profit, healthcare, life sciences, retail and hospitality.
Through a series of acquisitions and integrations, we have established a diverse family of software applications under the Upland brand and in the product solution categories listed above, each of which addresses a specific enterprise work management need. Our revenue has grown from $98.0 million in 2017 to $302.0 million in 2021, representing a cumulative annual growth rate of 33%. During the year ended December 31, 2021 domestic revenue as a percent of total revenue decreased to 71% compared to 74% during the year ended December 31, 2020. See “Note 13 Revenue Recognition” in the notes to the consolidated financial statements for more information regarding our revenue as it relates to domestic and foreign operations.
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Our operating results in a given period can fluctuate based on the mix of subscription and support, perpetual license and professional services revenue. For the years ended December 31, 2021, 2020 and 2019, our subscription and support revenue represented 95% , 95% and 92%, respectively of our total revenue. Historically, we have sold certain of our applications under perpetual licenses, which also are paid in advance. For the years ended December 31, 2021, 2020 and 2019, our perpetual license revenue accounted for 1% , 1% and 3% of our total revenue, respectively. The support agreements related to our perpetual licenses are one-year in duration and entitle the customer to support and unspecified upgrades. The revenue related to such support agreements is included as part of our subscription and support revenue. Professional services revenue consists of fees related to implementation, data extraction, integration and configuration and training on our applications. For the years ended December 31, 2021, 2020 and 2019, our professional services revenue accounted for 4% , 4% and 5%, respectively.
To support continued growth, we intend to pursue acquisitions of complementary technologies, products and businesses. This will expand our product families, customer base and market access, resulting in increased benefits of scale. We will prioritize acquisitions within our current enterprise solution categories as described in “Item 1. Business” herein. Consistent with our growth strategy, we have completed a total of 29 acquisitions in the 10 years ending December 31, 2021.
Acquisitions completed during the years ended December 31, 2021, 2020 and 2019 include the following:
2021 Acquisitions
• Panviva - On June 24, 2021, the Company entered into an agreement to purchase the shares comprising the entire issued share capital of Panviva Pty Ltd, an Australian proprietary company (“Panviva”), a cloud-based enterprise knowledge management solution. Revenue recorded since the acquisition date through December 31, 2021 were approximately $3.9 million.
• BlueVenn - On February 28, 2021 the Company entered into an agreement to purchase the shares comprising the entire issued share capital of BlueVenn Group Limited, a company limited by shares organized and existing under the laws of England and Wales (“BlueVenn”), a cloud-based customer data platform. Revenue recorded since the acquisition date through December 31, 2021 were approximately $12.6 million.
• Second Street - On January 19, 2021, the Company entered into an agreement to purchase the shares comprising the entire issued share capital of Second Street Media, Inc., a Missouri corporation (“Second Street”), an audience engagement platform. Revenue recorded since the acquisition date through December 31, 2021 were approximately $10.2 million.
2020 Acquisitions
• Localytics - On February 6, 2020, the Company entered into an agreement to purchase the shares comprising the entire issued share capital of Char Software, Inc (dba Localytics), a Delaware corporation (“Localytics”), a provider of mobile app personalization and analytics solutions.
2019 Acquisitions
• Postup - On April 18, 2019, the Company completed its purchase of the shares comprising the entire issued share capital of Postup Holdings, LLC, a Texas limited liability company (“Postup Holdings”), and Postup Digital, LLC, a Texas limited liability company (“Postup Digital”), an Austin-based company providing email and audience development solutions for publishing & media brands.
• Kapost - On May 24, 2019, the Company completed of its purchase of the shares comprising the entire issued share capital of Daily Inches, Inc., d/b/a Kapost, a Delaware corporation (“Kapost”), a content operations platform provider for sales and marketing.
• Cimpl - On August 21, 2019, the Company completed its purchase of the shares comprising the entire issued share capital of Cimpl, Inc., a Canadian corporation (“Cimpl”), a cloud-based telecom expense management platform.
• InGenius - On October 1, 2019, the Company completed its purchase of the shares comprising the entire issued share capital of InGenius Software Inc., a Canadian corporation (“InGenius”), a Computer Telephony Integration (CTI) solution for enterprise contact centers.
• Altify - On October 4, 2019, the Company’s wholly owned subsidiary, PowerSteering Software Limited, a limited company incorporated under the laws of England and Wales (“PowerSteering UK”), entered into an agreement to purchase the shares comprising the entire issued share capital of Altify Ireland Limited, a private company limited by shares organized and existing under the laws of Ireland (“Altify”), a customer revenue optimization (CRO) cloud solution for sales and the extended revenue teams.
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COVID-19 Impact
In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, which has created significant economic uncertainty across the globe and has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. As a result, beginning in the second quarter of 2020, we paused our acquisition activity in order to gauge the overall economic impact of the pandemic and focus on evaluating our pipeline of opportunities. This resulted in a steady decrease in acquisition related expenses during 2020.
The ongoing spread of COVID-19 remains a global pandemic, compounded with the discovery of new COVID-19 variants (such as the Delta and Omicron). However, with the gradual easing of COVID-19 lockdown restrictions globally and progress made in the development and distribution of vaccines and boosters, stability in the markets have continued to improve. As such, the Company gradually picked up acquisition activity in 2021, with the acquisitions of Second Street, BlueVenn and Panviva. In addition, acquisition-related expenses picked up again starting in the first quarter of 2021. These acquisition related expenses will vary quarter to quarter in proportion to the size, timing and complexity of current and future acquisitions.
While we generally have limited exposure to the industry verticals that have been hardest hit by the pandemic (including the travel, transportation, entertainment and retail industries), we have seen continued impact to new bookings and churn in 2021, which we attribute to COVID-19. The persistence of COVID-19 and the preventative measures implemented to help limit the spread of the illness, have impacted, and will continue to impact, our ability to operate our business and may materially and adversely impact our business, financial condition, and results of operations.
We support the health and well-being of our employees, customers, partners and communities. As such, we are continuing our remote working arrangements and limiting non-essential business travel for our employees. We are currently evaluating our plans to reopen our facilities and resume business travel for our employees. We expect that current cash and cash equivalent balances and cash flows generated from operations will be sufficient to meet our domestic and international working capital needs for at least the next 12 months.
Key Metrics
In addition to the GAAP financial measures described in “—Components of Operating Results” below, we regularly review the following key metrics to evaluate and identify trends in our business, measure our performance, prepare financial projections and make strategic decisions (in thousands, except %):
Year Ended December 31,
2021 2020 2019
Other Financial Data:
Annualized recurring revenue value at year-end (1)
$ 257,056 $ 220,535 $ 209,700
Annual net dollar retention rate (2)
94 % 94 % 97 %
Adjusted EBITDA (3)
$ 96,657 $ 99,903 $ 82,520
(1) Annualized recurring revenue value at year-end . We define annualized recurring revenue value (“ARR”) as the value as of December 31 that equals the monthly value of our recurring revenue contracts measured as of December 31 multiplied by 12. This measure excludes the revenue value of uncontracted overage fees, on-demand service fees and certain divested and/or sunseted minor non-strategic customer contracts and related website management and analytics assets (collectively referred to as the “Sunset Assets”). Refer to “Note 3 Acquisitions” and “Note 5 Goodwill and Other Intangible Assets” in the notes to the consolidated financial statements for further discussion.
(2) Annual net dollar retention rate . We define annual net dollar retention rate as of December 31 as the aggregate ARR at December 31 from those customers that were also customers as of December 31 of the prior fiscal year, divided by the aggregate ARR value from all customers as of December 31 of the prior fiscal year. This measure excludes the revenue value of uncontracted overage fees, on-demand service fees and our Sunset Assets.
(3) Adjusted EBITDA . We monitor Adjusted EBITDA to help us evaluate the effectiveness and efficiency of our operations. Adjusted EBITDA is a non-GAAP financial measure. We define Adjusted EBITDA as net income (loss), calculated in accordance with GAAP, plus depreciation and amortization expense, interest expense, net, loss on debt extinguishment, other expense, net, benefit from income taxes, stock-based compensation expense, acquisition-related expense and purchase accounting deferred revenue discount.
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Non-GAAP Financial Measures
Adjusted EBITDA
The following table presents a reconciliation of GAAP Net loss from continuing operations to Adjusted EBITDA for each of the periods indicated (in thousands).
Year Ended December 31,
2021 2020 2019
Net loss $ (58,212) $ (51,219) $ (45,371)
Depreciation and amortization expense 52,928 47,164 34,621
Interest expense, net 31,626 31,529 22,313
Loss on debt extinguishment — — 2,317
Other expense, net 253 111 3,240
Benefit from income taxes (8,344) (4,234) (6,805)
Stock-based compensation expense 53,873 41,692 25,754
Acquisition-related expense 21,234 27,075 39,657
Purchase accounting deferred revenue discount 3,299 7,785 6,794
Adjusted EBITDA $ 96,657 $ 99,903 $ 82,520
We believe that Adjusted EBITDA provides useful information to management, investors and others in understanding and evaluating our operating results for the following reasons:
• Adjusted EBITDA is widely used by our investors and securities analysts to measure a company’s operating performance without regard to items that can vary substantially from company to company depending upon their financing, capital structures and the method by which assets were acquired;
• Our management uses Adjusted EBITDA in conjunction with GAAP financial measures for planning purposes, in the preparation of our annual operating budget, as a measure of our operating performance, to assess the effectiveness of our business strategies and to communicate with our board of directors concerning our financial performance because Adjusted EBITDA eliminates the impact of items that we do not consider indicative of our core operating performance;
• Adjusted EBITDA provides more consistency and comparability with our past financial performance, facilitates period-to-period comparisons of our operations and also facilitates comparisons with other companies, many of which use similar non-GAAP financial measures to supplement their GAAP results; and
• Adjusted EBITDA should not be considered as an alternative to net loss or any other measure of financial performance calculated and presented in accordance with GAAP.
The use of Adjusted EBITDA as an analytical tool has limitations such as:
• depreciation and amortization are non-cash charges, and the assets being depreciated or amortized, which contribute to the generation of revenue, will often have to be replaced in the future and Adjusted EBITDA does not reflect cash requirements for such replacements; however, much of the depreciation and amortization currently reflected relates to amortization of acquired intangible assets as a result of business combination purchase accounting adjustments, which will not need to be replaced in the future;
• Adjusted EBITDA may not reflect changes in, or cash requirements for, our working capital needs or contractual commitments;
• Adjusted EBITDA does not reflect the potentially dilutive impact of stock-based compensation;
• Adjusted EBITDA does not reflect interest or tax payments that could reduce cash available for use; and,
• other companies, including companies in our industry, might calculate Adjusted EBITDA or similarly titled measures differently, which reduces their usefulness as comparative measures.
Because of these limitations, you should consider Adjusted EBITDA together with other financial performance measures, including various cash flow metrics, net loss and our other GAAP results.
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Components of Operating Results
Revenue
Subscription and support revenue . We derive our subscription revenue from fees paid to us by our customers for use of our cloud-based applications. We recognize the revenue associated with subscription agreements ratably over the term of the agreement as the customer receives and consumes the benefits of the cloud services through the contract period. Our subscription agreements are typically one to three years.
Our support revenue consists of maintenance fees associated with our perpetual licenses and hosting fees paid to us by our customers. Typically, when purchasing a perpetual license, a customer also purchases maintenance for which we charge a fee, priced as a percentage of the perpetual license fee. Maintenance agreements include the right to support and unspecified upgrades. We recognize the revenue associated with maintenance ratably over the term of the contract. In limited instances, at the customer’s option, we may host the software purchased by a customer under a perpetual license on systems at our third-party data centers.
Perpetual license revenue . Perpetual license revenue reflects the revenue recognized from sales of perpetual licenses to new customers and additional perpetual licenses to existing customers. We generally recognize the license fee portion of the arrangement up-front at a point in time when the software is made available to the customer.
Professional services revenue . Professional services revenue consists of fees related to implementation, data extraction, integration and configuration and training on our applications. We generally recognize the revenue associated with these professional services over time as services are performed. Revenues for fixed price services are generally recognized over time applying input methods to estimate progress to completion. Revenues for consumption-based services are generally recognized as the services are performed.
Cost of Revenue
Cost of product revenue . Cost of product revenue consists primarily of hosting costs, personnel and related costs of our customer success and cloud operations teams, including salaries, benefits, bonuses, payroll taxes, stock-based compensation, and allocated overhead, as well as software license fees, internet connectivity, depreciation expenses and pass-through costs directly related to delivering our applications. We expect that cost of revenues may increase in the future depending on the growth rate of our new customers and billings and our need to support the implementation, hosting and support of those new customers. We intend to continue to invest additional resources in expanding the delivery capability of our applications. As we add hosting infrastructure capacity and support personnel in advance of anticipated growth, our cost of product revenue will increase, and if such anticipated revenue growth does not occur, our product gross profit will be adversely affected both in terms of absolute dollars and as a percentage of total revenues in any particular quarterly or annual period. Our cost of product revenue is generally expensed as the costs are incurred.
Cost of professional services revenue . Cost of professional services revenue consists primarily of personnel and related costs, including salaries, benefits, bonuses, payroll taxes, stock-based compensation and allocated overhead, as well as the costs of contracted third-party vendors and reimbursable expenses. As most of our personnel are employed on a full-time basis, our cost of professional services revenue is largely fixed in the short-term, while our professional services revenue may fluctuate, leading to fluctuations in professional services gross profit. We expect that cost of professional services as a percentage of total revenues could fluctuate from period to period depending on the growth of our professional services business, the timing of sales of applications, and any associated costs relating to the delivery of services. Our cost of professional services revenue is generally expensed as costs are incurred.
Operating Expenses
Our operating expenses are classified into five categories: sales and marketing, research and development, general and administrative, depreciation and amortization and acquisition-related expenses. For each category, other than depreciation and amortization, the largest expense component is primarily personnel and related costs, which includes salaries, employee benefit costs, bonuses, commissions, stock-based compensation, and payroll taxes. Operating expenses also include allocated overhead costs for facilities, which are allocated to each department based on relative department headcount. Operating expenses are generally recognized as incurred.
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Sales and marketing . Sales and marketing expenses primarily consist of personnel and related costs for our sales and marketing staff, including salaries, benefits, deferred commission amortization, bonuses, payroll taxes, stock-based compensation and allocated overhead, as well as costs of promotional events, corporate communications, online marketing, product marketing and other brand-building activities. Sales commissions earned by our sales force, and related payroll taxes, are considered incremental and recoverable costs of obtaining a contract with a customer. Deferred commissions and other costs for a particular customer agreement for initial contracts are amortized over the expected life of the customer relationships while deferred commissions related to contract renewals are amortized over average renewal term. Sales commissions, and related payroll taxes, are earned when the initial customer contract is signed and upon any renewal as our obligation to pay a sales commission arises at these times. Sales and marketing expenses may fluctuate as a percentage of total revenues for a variety of reasons including due to the timing of such expenses, in any particular quarterly or annual period.
Research and development . Research and development expenses primarily consist of personnel and related costs of our research and development staff, including salaries, benefits, bonuses, payroll taxes, stock-based compensation, allocated overhead and costs of certain third-party contractors. Research and development costs related to the development of our software applications are generally recognized as incurred. For example, we are parties to a technology services agreement pursuant to which we generally recognize expenses for services as they are received. See “Note 16 Related Party Transactions”, in the notes to the consolidated financial statements for more information regarding how expenses under such agreement are recognized. We have devoted our product development efforts primarily to enhancing the functionality, and expanding the capabilities, of our applications. Investment tax credits are included as a reduction of research and development costs. Inves tment tax credits are recorded in the year in which the research and development costs of the capital expenditures are incurred, provided that we are reasonably certain that the credits will be received. The investment tax credit must be examined and approved by the tax authorities, and it is possible that the amounts granted will differ fro m the amounts recorded.
General and administrative . General and administrative expenses primarily consist of personnel and related costs for our executive, administrative, finance, information technology, legal, accounting and human resource staff, including salaries, benefits, bonuses, payroll taxes, stock-based compensation, allocated overhead, professional fees and other corporate expenses. We have recently incurred, and expect to continue to incur, additional expenses as we grow our operations, including potentially higher legal, corporate insurance, accounting and auditing expenses and the additional costs of enhancing and maintaining our internal control environment. General and administrative expenses may fluctuate as a percentage of revenue, and overtime we expect that general and administrative expenses will decrease as a percent of revenue due to operational efficiencies.
Depreciation and amortization . Depreciation and amortization expenses primarily consist of depreciation and amortization of acquired intangible assets as a result of business combination purchase accounting adjustments. The valuation of identifiable intangible assets reflects management’s estimates based on, among other factors, use of established valuation methods. Customer relationships are valued using an income approach, which estimates fair value based on the earnings and cash flow capacity of the subject asset and are amortized over a seven to ten-year period. The value of the trade name intangibles are determined using a relief from royalty method, which estimates fair value based on the value the owner of the asset receives from not having to pay a royalty to use the asset and are amortized over mostly a three-year period. Developed technology is valued using a cost-to-recreate approach and is amortized over a four- to nine-year period.
Acquisition-related expenses . Acquisition-related expenses are typically incurred for up to four quarters after each acquisition, with the majority of these costs being incurred within six to nine months, to transform the acquired business into the Company's unified operating platform. These expenses can vary based on the size, timing and location of each acquisition. These acquisition-related expenses include transaction related expenses such as banker fees, legal and professional fees, insurance costs and deal bonuses. These acquisition-related expenses also include transformational expenses such as severance, compensation for transitional personnel, office lease terminations and vendor cancellations. Generally, if the Company ceased acquisition activity today, within a year, these acquisition-related expenses should no longer be incurred.
Total Other Expense
Total other expense consists primarily of amortization of debt issuance costs over the term of the related term loan, revaluation of contingent consideration, and interest expense on outstanding debt, including amortization of debt issuance costs. We participate in interest rate swap agreements for the purpose of reducing variability in interest rate payments the Company’s term loans. These interest rate swaps fix the Company's interest rate (including the hedge premium) at 5.4% for the term of the Credit Facility (as hereinafter defined in “—Liquidity and Capital Resources—Credit Facility”). In addition,
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gains/losses on divested assets that meet the definition of a business under ASC 805-10, Business Combination—Overall , are included in Total other expense.
Income Taxes
Because we have not generated domestic net income in any period to date, we have recorded a full valuation allowance against our domestic net deferred tax assets, exclusive of tax deductible goodwill. We have historically not recorded any material provision for federal or state income taxes, other than deferred taxes related to tax deductible goodwill and current taxes in certain separate company filing states. The balance of the tax benefit for the years ended December 31, 2021, 2020 and 2019, outside of tax deductible goodwill and current taxes in separate filing states, is related to foreign income taxes, primarily operations of our Australian, Canadian, Ireland, and United Kingdom subsidiaries, and to the release of valuation allowances associated with acquisitions of domestic entities with deferred tax liabilities. Realization of any of our domestic deferred tax assets depends u pon future earnings, the timing and amount of which are uncertain. Based on analysis of acquired net operating losses, utilization of our net operating losses will be subject to annual limitations due to the ownership change rules under the Internal Revenue Code of 1986, as amended, or the Code, and similar state provisions. In the event we have subsequent changes in ownership, the availability of net operating losses and research and development credit carryovers could be further limited.
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Results of Operations
Consolidated Statements of Operations Data
The following tables set forth our results of operations for the specified periods, as well as our results of operations for the specified periods as a percentage of revenue. The period-to-period comparisons of results of operations are not necessarily indicative of results for future periods (dollars in thousands, except share and per share data).
Year Ended December 31,
2021 2020 2019
Amount Percent of Revenue Amount Percent of Revenue Amount Percent of Revenue
Revenue:
Subscription and support $ 287,621 95% $ 277,504 95% $ 203,866 92%
Perpetual license 2,150 1% 1,884 1% 5,738 3%
Total product revenue 289,771 96% 279,388 96% 209,604 95%
Professional services 12,245 4% 12,390 4% 13,033 5%
Total revenue 302,016 100% 291,778 100% 222,637 100%
Cost of revenue:
Subscription and support (1)(2) 92,168 31% 89,880 31% 61,465 28%
Professional services and other 7,285 2% 8,566 3% 7,652 3%
Total cost of revenue 99,453 33% 98,446 34% 69,117 31%
Gross profit 202,563 67% 193,332 66% 153,520 69%
Operating expenses:
Sales and marketing (1) 55,097 18% 46,077 16% 35,170 16%
Research and development (1) 42,693 14% 39,002 13% 29,037 13%
General and administrative (1) 76,901 25% 68,072 23% 48,077 22%
Depreciation and amortization 41,315 14% 36,919 13% 25,885 12%
Acquisition-related expenses 21,234 8% 27,075 9% 39,657 17%
Total operating expenses 237,240 79% 217,145 74% 177,826 80%
Loss from operations (34,677) (12)% (23,813) (8)% (24,306) (11)%
Other Expense:
Interest expense, net (31,626) (10)% (31,529) (11)% (22,313) (10)%
Loss on debt extinguishment — —% — —% (2,317) (1)%
Other expense, net (253) (1)% (111) —% (3,240) (2)%
Total other expense (31,879) (11)% (31,640) (11)% (27,870) (13)%
Loss before benefit from income taxes (66,556) (23)% (55,453) (19)% (52,176) (24)%
Benefit from income taxes 8,344 4% 4,234 1% 6,805 4%
Net loss (58,212) (19)% (51,219) (18)% (45,371) (20)%
Net loss per common share:
Loss from continuing operations per common share, basic and diluted (3) $ (1.92) $ (1.92) $ (1.96)
Weighted-average common shares outstanding, basic and diluted (3) 30,295,769 26,632,116 23,099,549
(1) Includes stock-based compensation. See table below for stock-based compensation by operating expense line item.
(2) Includes depreciation and amortization of $11.6 million, $10.2 million and $8.7 million in 2021, 2020 and 2019, respectively.
(3) See “Note 8 Net Loss Per Share”, in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a discu ssion and a reconciliation of historical net loss attributable to common stockholders and weighted average shares outstanding for historical basic and diluted net loss per share calculations.
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Stock-based compensation
The following tables present stock-based compensation included in the respective line items on our Consolidated Statement of Operations:
Year Ended December 31,
2021 2020 2019
(dollars in thousands)
Stock-based compensation:
Cost of revenue $ 2,088 $ 1,951 $ 1,000
Research and development 3,085 3,391 2,310
Sales and marketing 5,957 3,450 1,543
General and administrative 42,743 32,900 20,901
Total $ 53,873 $ 41,692 $ 25,754
Comparison of Years Ended December 31, 2021 and December 31, 2020
Revenue
Year Ended December 31,
2021 2020 Change
Amount Percent of Revenue Amount Percent of Revenue Amount % Change
(dollars in thousands)
Revenue:
Subscription and support $ 287,621 95% $ 277,504 95% $ 10,117 4%
Perpetual license 2,150 1% 1,884 1% 266 14%
Total product revenue 289,771 96% 279,388 96% 10,383 4%
Professional services 12,245 4% 12,390 4% (145) (1)%
Total revenue $ 302,016 100% $ 291,778 100% $ 10,238 4%
Total revenue was $302.0 million in 2021, compared to $291.8 million in 2020, an increase of $10.2 million, or 4%. The acquisitions not fully in the comparative period contributed $27.7 million to the increase after the reduction of $3.3 million purchase accounting deferred revenue discount in 2021. Total Revenue related to Sunset Assets decreased by $1.3 million as a result of decreased sales and marketing focus on those Sunset Assets. Our organic business excludes acquisitions closed during or subsequent to the prior year comparable period and business operations related to Sunset Assets (the “Organic Business”). Therefore, total revenue for the Organic Business decreased by $16.2 million. The year ended December 31, 2020 included $18.2 million of CXM usage revenue from US election-year presidential campaigns in 2020 which did not repeat in 2021.
Subscription and support revenue was $287.6 million in 2021, compared to $277.5 million in 2020, an increase of $10.1 million, or 4%. The acquisitions not fully in the comparative period contributed $26.1 million to the increase in subscription and support revenue after the reduction of $3.3 million purchase accounting deferred revenue discount in 2021. Subscription and support revenue related to our Sunset Assets decreased $1.3 million as a result of decreased sales and marketing focus on those Sunset Assets. Subscription and support revenue for our Organic Business decreased to $243.9 million from a basis of $258.6 million for the year ended December 31, 2020. The year ended December 31, 2020 included $18.2 million of CXM usage revenue from US election-year presidential campaigns in 2020 which did not repeat in 2021.
Perpetual license revenue was $2.2 million in 2021, compared to $1.9 million in 2020, an increase of $0.3 million.
Professional services revenue was $12.2 million in 2021, compared to $12.4 million in 2020, a decrease of $0.2 million, or 1%. The acquisitions not fully in the comparative period contributed to a $1.7 million increase in professional services revenue in 2021. Therefore, professional services revenue from our Organic Business decreased by $1.9 million due primarily to COVID-19 related travel impacts and a higher proportion of expansion bookings versus new bookings which tend to have more professional services associated with them.
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Cost of Revenue and Gross Profit Margin
Year Ended December 31,
2021 2020 Change
Amount Percent of Revenue Amount Percent of Revenue Amount % Change
(dollars in thousands)
Cost of revenue:
Subscription and support (1) $ 92,168 31% $ 89,880 31% $ 2,288 3%
Professional services 7,285 2% 8,566 3% (1,281) (15)%
Total cost of revenue 99,453 33% 98,446 34% 1,007 1%
Gross profit $ 202,563 67% $ 193,332 66% $ 9,231 5%
(1) Includes depreciation and amortization expense as follows:
Depreciation $ 30 —% $ 170 —% $ (140) (82)%
Amortization $ 11,583 4% $ 10,075 3% $ 1,508 15%
Cost of subscription and support revenue was $92.2 million in 2021, compared to $89.9 million in 2020, an increase of $2.3 million, or 3%. The acquisitions not fully in the comparative period contributed $8.7 million to the increase to cost of subscription and support revenue, primarily related to costs associated with the delivery of the Localytics, Second Street, BlueVenn and Panviva products. Cost of subscription and support revenue related to our Sunset Assets decreased $0.8 million, primarily related to hosting and infrastructure costs. Therefore, cost of subscription and support revenue for our Organic Business decreased by $5.6 million, primarily related to a year over year reduction in pass-through telecom messaging costs associated with the CXM usage revenue from US election-year presidential campaigns in 2020 which did not repeat in 2021, partially offset by an increase in infrastructure and hosting costs.
Cost of professional services revenue was $7.3 million in 2021, compared to $8.6 million in 2020, a decrease of $1.3 million, or 15%. The acquisitions not fully in the comparative period contributed $0.9 million to the increase to cost of professional services revenue, primarily related to an increase in personnel and related costs. Therefore, cost of professional services revenue for our Organic Business decreased by $2.2 million which corresponds with the reduction in professional services revenue as a result of COVID-19 related travel impacts.
Operating Expenses
Sales and Marketing Expense
Year Ended December 31,
2021 2020 Change
Amount Percent of Revenue Amount Percent of Revenue Amount % Change
(dollars in thousands)
Sales and marketing $ 55,097 18% $ 46,077 16% $ 9,020 20%
Sales and marketing expense was $55.1 million in 2021, compared to $46.1 million in 2020, an increase of $9.0 million, or 20%. Sales and marketing expense for our Organic Business increased by $5.4 million, primarily as a result of increased commission costs which were partially offset by decreased travel and discretionary marketing expenses. In addition, the acquisitions not fully in the comparative period contributed $3.6 million to the increase in sales and marketing expense, primarily consisting of personnel and related costs in 2021.
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Research and Development Expense
Year Ended December 31,
2021 2020 Change
Amount Percent of Revenue Amount Percent of Revenue Amount % Change
(dollars in thousands)
Research and development $ 42,693 14% $ 39,002 13% $ 3,691 9%
Research and development expense was $42.7 million in 2021, compared to $39.0 million in 2020, an increase of $3.7 million, or 9%. The acquisitions not fully in the comparative period contributed $3.6 million to the increase in research and development expense primarily consisting of personnel and related costs. Research and development expense related to our Sunset Assets decreased by $0.2 million primarily due to reductions in personnel costs. Therefore, research and development costs for our Organic Business increased by $0.3 million primarily related to an increase in non-cash stock compensation expense and outsourced technology services costs.
General and Administrative Expense
Year Ended December 31,
2021 2020 Change
Amount Percent of Revenue Amount Percent of Revenue Amount % Change
(dollars in thousands)
General and administrative $ 76,901 25% $ 68,072 23% $ 8,829 13%
General and administrative expense was $76.9 million in 2021, compared to $68.1 million in 2020, an increase of $8.8 million, or 13%. General and administrative expense for our Organic Business increased by $6.2 million, which was driven primarily by increased non-cash stock compensation expense largely due to the issuance of restricted stock units in 2021 and a one-time increase in non-cash stock compensation expense related to the departure of our former co-President and Chief Operating Officer in March 2021. In addition, an increase in general administrative expense of $2.6 million was due to the acquisitions not fully in the comparative period, which consisted primarily of personnel and related costs and administrative expenses.
Depreciation and Amortization Expense
Year Ended December 31,
2021 2020 Change
Amount Percent of Revenue Amount Percent of Revenue Amount % Change
(dollars in thousands)
Depreciation and amortization:
Depreciation $ 1,968 1% $ 2,057 1% $ (89) (4)%
Amortization 39,347 13% 34,862 12% 4,485 13%
Total depreciation and amortization $ 41,315 14% $ 36,919 13% $ 4,396 12%
Depreciation and amortization expense was $41.3 million in 2021, compared to $36.9 million in 2020, an increase of $4.4 million, or 12%. The acquisitions not fully in the comparative period increased depreciation and amortization expense by $5.8 million, primarily related to acquired intangible assets such as customer relationships, developed technology and tradenames. Therefore, depreciation and amortization expense for our Organic Business decreased by $1.4 million in the comparative periods due to assets becoming fully depreciated or amortized during the period.
Acquisition-related Expense
Year Ended December 31,
2021 2020 Change
Amount Percent of Revenue Amount Percent of Revenue Amount % Change
(dollars in thousands)
Acquisition-related expense $ 21,234 8% $ 27,075 9% $ (5,841) (22)%
Acquisition-related expenses are one-time expenses typically incurred for up to four quarters after each acquisition, with the majority of these costs being incurred within six to nine months, to transform the acquired business into the Company's unified operating platform. These expenses can vary based on the size, timing and location of each acquisition. These acquisition-related expenses include transaction related expenses such as banker fees, legal and professional fees, insurance costs, and deal bonuses. These acquisition-related expenses also include transformational expenses such as severance, compensation for transitional personnel, office lease terminations, and vendor cancellations. Absent new acquisition activity, acquisition-related expenses decline in subsequent, sequential quarters and are generally no longer incurred after the first anniversary of the last closed acquisition.
Acquisition-related expense was $21.2 million in 2021, compared to $27.1 million for 2020, a decrease of $5.9 million, or 22%. The decrease was primarily attributable to a $4.5 million gain recognized in 2021 related to a decrease in the fair value of earnout liabilities due to sellers related to our 2021 acquisitions and a reduction in holdback liabilities subsequent to the closing of purchase accounting. In addition, we completed one acquisition in 2020 and incurred the majority of its transformational expense in 2021. This is in contrast to the five acquisitions completed in 2019 for which the majority of transformational expenses were incurred in 2020.
Other Expense, net
Year Ended December 31,
2021 2020 Change
Amount Percent of Revenue Amount Percent of Revenue Amount % Change
(dollars in thousands)
Other Expense:
Interest expense, net $ (31,626) (10)% $ (31,529) (11)% $ (97) —%
Other expense, net (253) (1)% (111) —% (142) 128%
Total other expense $ (31,879) (11)% $ (31,640) (11)% $ (239) 1%
Interest expense, net was $31.6 million in 2021, compared to $31.5 million for 2020, an increase of $0.1 million, or 0%. The marginal increase in interest expense was primarily attributable to the average borrowing on our Credit Facility being largely unchanged.
Other expense, net was $0.3 million in 2021, compared to other expense of $0.1 million in 2020, an increase of $0.2 million, or 128%. The difference in other expense is primarily due to an increase in foreign currency exchange losses compared to 2020.
Benefit from Income Taxes
Year Ended December 31,
2021 2020 Change
Amount Percent of Revenue Amount Percent of Revenue Amount % Change
(dollars in thousands)
Loss before provision for income taxes (66,556) (23)% (55,453) (19)% (11,103) (20)%
Benefit from (provision for) income taxes $ 8,344 4% $ 4,234 1% $ 4,110 97%
Effective income tax rate (12.5) % (7.6) %
Benefit from income taxes was $8.3 million in 2021, compared to a benefit for income taxes of $4.2 million in 2020, an increase in the benefit from income taxes of $4.1 million, or 97%. This increase was due primarily to increased benefits recognized during the year attributable to the release of valuation allowances associated with acquisitions of domestic entities with deferred tax liabilities that, upon acquisition, allow us to recognize certain deferred tax assets that had previously been offset by a valuation allowances.
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Because we have not generated domestic net income in any period to date, we have recorded a full valuation allowance against our domestic net deferred tax assets, exclusive of any remaining tax deductible goodwill after application of indefinite life deferred tax assets. Realization of any of our domestic deferred tax assets depends upon future earnings, the timing and amount of which are uncertain. Based on analysis of acquired net operating losses, utilization of our net operating losses will be subject to annual limitations due to the ownership change rules under the Code and similar state provisions. Refer to “Note 6. Income Taxes”, in the notes to the consolidated financial statements for more information regarding our income taxes as they relate to foreign and domestic operations.
Comparison of Years Ended December 31, 2020 and December 31, 2019
For a comparison of years ended December 31, 2020 and 2019 refer to “Item 7. Management’s Discussion and Analysis” in the Company’s Annual Report on Form 10-K for the years ended December 31, 2020 filed with the SEC on February 25 , 2021 (the “2020 Annual Report”).
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Liquidity and Capital Resources
To date, we have financed our operations primarily through the raising of capital including sales of our common stock, cash from operating activities, borrowings under our Credit Facility, and the issuance of notes to sellers in some of our acquisitions. We believe that current cash and cash equivalents, cash flows from operating activities, availability under our Credit Facility (as hereinafter defined), and the ability to offer and sell securities pursuant to our registration statement, as discussed under “—Registration Statement” below, will be sufficient to fund our operations for at least the next twelve months. In addition, we intend to utilize the sources of capital available to us under our Credit Facility and registration statement to support our continued growth via acquisitions within our core enterprise solution suites of complementary technologies and businesses.
The following table summarizes our liquidity for the periods indicated:
Year Ended December 31,
2021 2020
(dollars in thousands)
Cash and cash equivalents $ 189,158 $ 250,029
Available borrowings from our Credit Facility 60,000 60,000
Total Liquidity $ 249,158 $ 310,029
The $60.9 million decrease in cash and cash equivalents from December 31, 2020 to December 31, 2021 includes $97.7 million in cash paid for our three acquisitions completed during 2021, net of $1.2 million in cash acquired, which was partially offset by a $5.2 million settlement in total consideration for Localytics related to a representation and warranty insurance settlement. Non-cash acquisition date consideration to be paid in future periods related to these acquisitions includes $10.9 million in holdback payments and $4.2 million in earnout payments that are due within 12 to 18 months of the closing dates of the underlying acquisitions. The earnouts are subject to attainment of future performance-based conditions.
Our cash and cash equivalents held by our foreign subsidiaries was $24.8 million as of December 31, 2021. If these funds held by our foreign subsidiaries are needed for our domestic operations, we would be required to accrue and pay U.S. taxes to repatriate these funds to the U.S. However, our intent is to permanently reinvest these funds outside the U.S. and our current plans do not demonstrate a need to repatriate them to fund our domestic operations. We do not provide for federal income taxes on the undistributed earnings of our foreign subsidiaries.
As of December 31, 2021 and 2020, we had a working capital surplus of $106.5 million and $196.1 million, respectively.
Credit Facility
Our facility is comprised of $540.0 million in original principal term loans and a $60.0 million revolving credit facility.
On August 6, 2019, we entered into a credit agreement (the “Credit Facility”) which provides for (i) a fully-drawn $350 million, 7 year, senior secured term loan B facility (the “Term Loan”) and (ii) a $60 million, 5 year, revolving credit facility (the “Revolver”) that was fully available as of December 31, 2021. The Credit Facility replaced our previous credit facility. All outstanding balances under our previous credit facility were paid off using proceeds from our Credit Facility.
On November 26, 2019, the Company entered into a First Incremental Assumption Agreement (the “Incremental Assumption Agreement”) which provides for a term loan facility to be established under the Credit Facility i n an aggregate principal amount of $190 million (the “2019 Incremental Term Loan”) which is in addition to the existing $350 million Term Loan outstanding und er the Credit Facility and the $60 million Revolver under t he Credit Facility.
The Credit Facility has no financial covenants as long as less than 35% of the Revolver is drawn as of the last day of any fiscal quarter. The Credit Facility is secured by a security interest in substantially all of our assets and requires us to maintain certain financial covenants. The Credit Facility contains certain non-financial restrictive covenants that limit our ability to transfer or dispose of assets, merge with other companies or consummate certain changes of control, acquire other companies, pay dividends, incur additional indebtedness and liens, effect changes in management and enter into new businesses. As of December 31, 2021, we were in compliance with all covenants under the Credit Facility. See “Note 7. Debt” in the notes to the consolidated financial statements for more information regarding our Credit Facility and outstanding debt as of December 31, 2021.
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Registration Statement
On August 10, 2020, the Company filed a registration statement on Form S-3 (File No. 333-243728) (the “2020 S-3”), which became effective automatically upon its filing and covers an unlimited amount of securities. The 2020 S-3 will remain effective through August 2023. On August 14, 2020, we completed a registered underwritten public offering pursuant to the 2020 S-3 of 3,500,000 shares of the Company's $0.0001 par value common stock for an offering price to the public of $34.00 per share. In addition, on August 27, 2020 we closed the sale of an additional 525,000 shares issuable pursuant to a fully exercised option to purchase additional shares granted to the underwriters of the offering. The total net proceeds of the offering, including shares issued pursuant to the fully exercised option, of $130.1 million, net of issuance costs of $6.8 million, will be used for general business purposes, including the funding of future acquisitions. There are no open outstanding security offerings at this time.
The following table summarizes our cash flows for the periods indicated:
Year Ended December 31,
2021 2020 2019
(dollars in thousands)
Consolidated Statements of Cash Flow Data:
Net cash provided by operating activities $ 41,738 $ 35,620 $ 12,076
Net cash used in investing activities (93,532) (68,970) (217,761)
Net cash provided by (used in) financing activities (8,180) 107,899 363,768
Effect of exchange rate fluctuations on cash (897) 456 203
Change in cash and cash equivalents (60,871) 75,005 158,286
Cash and cash equivalents, beginning of period 250,029 175,024 16,738
Cash and cash equivalents, end of period $ 189,158 $ 250,029 $ 175,024
Cash Flows from Operating Activities
Cash provided by operating activities is significantly influenced by the amount of cash we invest in personnel and infrastructure to support the anticipated growth of our business. Included in net cash provided by operations are one-time acquisition related expenses incurred for up to four quarters after each acquisition to transact and transform the acquired business into the Company's unified operating platform. Additionally, operating cash flows includes the impact o f earnout payments in excess of original purchase accounting estimates. Our working capital consists primarily of cash, receivables from customers, prepaid assets, unbilled professional services, deferred commissions, accounts payable, accrued compensation and other accrued expenses, acquisition related earnout and holdback liabilities, lease liabilities and deferred revenues. The volume of professional services rendered, the volume and timing of customer bookings and contract renewals, and the related timing of collections and renewals on those bookings, as well as the timing of spending commitments and payments of our accounts payable, accrued expenses, accrued payroll and related benefits, all affect these account balances.
Cash provided by operating activities was $41.7 million for 2021 compared to $35.6 million for 2020, an increase of $6.1 million. This increase in operating cash flow is generally attributable to the Company’s increased size and scale. Working capital sources of cash for 2021 included an increase of $10.9 million in accounts payable related to timing of payments, and an increase of $5.6 million in deferred revenue. Working capital uses of cash for the twelve months ended December 31, 2021 included a $1.7 million increase in accounts receivable related to the timing of collections, a $7.5 million increase in prepaids and other related primarily to an increase in deferred sales commissions, and a $9.7 million decrease in accrued expenses.
A substantial source of cash is invoicing for subscriptions and support fees in advance, which is recorded as deferred revenue, and is included on our consolidated balance sheet as a liability. Deferred revenue consists of the unearned portion of booked fees for our software subscriptions and support and for professional services, which is amortized into revenue in accordance with our revenue recognition policy. We assess our liquidity, in part, through an analysis of new subscriptions invoiced, expected cash receipts on new and existing subscriptions, and our ongoing operating expense requirements.
Cash Flows from Investing Activities
Our primary investing activities have consisted of acquisitions of complementary technologies, products and businesses. As our business grows, we expect our primary investing activities to continue to further expand our family of software applications and infrastructure and support additional personnel.
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For 2021, cash used in investing activities consisted of $97.7 million associated with the Company’s 2021 acquisitions, and the purchases of property and equipment of $1.1 million, partially offset by a $5.2 million settlement in total consideration for Localytics related to a representation and warranty insurance settlement. Cash used in investing activities increased $24.6 million in 2021 compared to 2020 primarily as a result of closing three acquisitions during the period compared to one acquisition in the comparable prior year period.
Cash Flows from Financing Activities
Our primary financing activities have consisted of capital raised to fund our acquisitions, proceeds from debt obligations incurred to finance our acquisitions, repayments of our debt obligations, and share based tax payment activity.
Cash provided by financing activities decreased $116.1 million in 2021 compared to 2020. The decrease relates primarily to a decrease in cash generated from issuance of our common stock as the Company received net proceeds of $130.1 million related to a secondary stock offering completed in August 2020. This decrease in cash provided by financing activities was partially offset by a $12.8 million decrease in additional consideration paid to sellers (i.e. holdbacks and earnouts) compared to 2020. In addition, net share employee payroll tax settlement payments decreased $1.2 million during 2021 compared to 2020 as a result of the payroll tax election in mid-2020 to sell shares to cover employee payroll taxes on stock compensation vestings.
Contractual Payment Obligations
The following table summarizes our future contractual obligations as of December 31, 2021 (in thousands):
Next 12 Months Beyond 12 Months Total
Debt Obligations (1)
$ 5,400 $ 522,450 $ 527,850
Interest on Debt Obligations (2)
28,628 100,979 129,607
Operating Lease Obligations (3)
4,060 7,963 12,023
Purchase Commitments (4)
22,771 30,329 53,100
Total $ 60,859 $ 661,721 $ 722,580
(1) Consists of contractual principal payments on our Credit Facility. See “—Liquidity and Capital Resources” above for further discussion regarding our Credit Facility.
(2) Future interest on debt obligations is calculated using the interest rate effective as of December 31, 2021. We have entered into floating-to-fixed interest rate swap agreements to limit exposure to interest rate risk related to our debt. These interest rate swaps effectively converted the entire balance of the Company's $540 million original principal term loans from variable interest payments to fixed interest rate payments, based on an annualized fixed rate of 5.4%, for the 7 year term of the debt. In conjunction with our new $350 million, 7 year, Credit Facility and our $190 million 2019 Incremental Term Loan, we entered into interest rate hedge instruments for the full 7 year term, effectively fixing our interest rate at 5.4%. However, the interest rate associated with our $60 million, 5 year, undrawn Revolver remains floating. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk— Interest Rate Risk ” for further discussion.
(3) We lease office space under operating leases that expire between 2022 and 2027. Operating lease obligations above do not include the impact of future rental income related to agreements we have entered into to sublet excess office space as a result of our transformation activities.
(4) We define a purchase commitment as an agreement that is enforceable and legally binding and that specifies all significant terms, including: fixed or minimum services to be used; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Obligations under contracts that we can cancel without a significant penalty are not included. In addition, Purchase orders are not included as they represent authorizations to purchase rather than binding agreements.
The Company has purchase commitments related to hosting services, third-party technology used in the Company's solutions and for other services the Company purchases as part of normal operations. In certain cases these arrangements require a minimum annual purchase commitment.
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Includes an outstanding purchase commitment in 2022 for software development services from DevFactory FZ-LLC (“DevFactory”) pursuant to a technology services agreement in the amount of $10.0 million. The agreement provides for annual renewal by either party to the contract. See “Note 16. Related Party Transactions” in the notes to consolidated financial statements for more information regarding this purchase commitment.
Critical Accounting Policies and the Use of Estimates
We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.
While our significant accounting policies are more fully described in “Note 2. Summary of Significant Accounting Policies” in the notes to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K , we believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services over the term of the agreement. We recognize revenues based on the five-step model in accordance with ASC 606, Revenue from Contracts with Customers . We derive our revenues primarily from subscription and support revenues. Other revenue-generating activities include perpetual licenses and professional services revenues.
Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. In addition, significant judgments are made when determining the standalone selling price (“SSP”) in situations where we have a contract that have multiple performance obligations. We determine the SSP based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, historical standalone sales, customer demographics, geographic locations, and the number and types of users within our contracts.
For revenue generated from arrangements that involve vendor reseller agreements and messaging-related subscription agreements, there is significant judgment in evaluating whether we are the principal (i.e., report revenues on a gross basis) or agent (i.e., report revenues on a net basis). In this assessment, we consider if we obtain control of the specified goods or services before they are transferred to the customer. In reaching conclusions on gross versus net revenue recognition, we place the most weight on the analysis of whether or not it is the primary obligor in the arrangement. Generally, we report revenue from vendor reseller agreements on a gross basis, meaning the amounts billed to customers are recorded as revenue, and expenses incurred are recorded as cost of revenue.
See “Note 13. Revenue Recognition” in the notes to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K for a detailed description of our revenue recognition policy.
Deferred Commissions
Sales commissions for new customer contracts are capitalized upon contract signing and amortized over the expected life of the customer relationships, which has been determined to be approximately 6 years, consistent with prior year. Sales commissions paid on renewal contracts are deferred and amortized over the average renewal term, which was determined to be approximately 18 months, consistent with prior year. Determining the period of expected life of customer relationships and average renewal term requires judgment for which we take into consideration our customer contracts, our technology life cycle and other factors.
See “Note 13. Revenue Recognition—Deferred Commissions” in the notes to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K for a detailed description of our deferred commission.
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Income Taxes
We are subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in evaluating and estimating our provision for these taxes. There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. The Tax Act has provisions that require additional guidance on specific interpretations of the tax law changes. Our provision for income taxes could be adversely affected by our earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, losses incurred in jurisdictions for which we are not able to realize the related tax benefit, changes in foreign currency exchange rates, entry into new businesses and geographies and changes to our existing businesses, acquisitions and investments, changes in our deferred tax assets and liabilities including changes in our assessment of valuation allowances, changes in the relevant tax laws or interpretations of these tax laws, and developments in current and future tax examinations.
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. 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 of a change in tax rates on deferred tax assets and liabilities will be recognized in the period that includes the enactment date. We make significant estimates in determining the value of our deferred tax assets. These estimates included, but are not limited to, the expected reversal periods of deferred tax assets and liabilities, the availability of net operating losses and other carryovers and consideration of the future ability to generate taxable income. These estimates are inherently uncertain and unpredictable, and if different estimates were used, it would impact the value of our deferred tax assets and the income tax benefit recognized in fiscal 2021 and in future periods when the deferred taxes are realized.
A valuation allowance is established against our deferred tax assets to reduce their carrying value to an amount that is more likely than not to be realized. As of December 31, 2021 we recorded a valuation allowance of $28.6 million against our deferred tax assets. If, in the future, we evaluate that our deferred tax assets are not more likely than not to be realized, an increase in the related valuation allowance could result in a material income tax expense in the period such determination is made.
The Company has adopted an indefinite reinvestment position whereby foreign earnings for foreign subsidiaries are expected to be reinvested and future earnings are not expected to be repatriated. As a result of this policy, no deferred tax liability has been accrued in anticipation of future dividends from foreign subsidiaries.
The Company accounts for the uncertainty of income taxes based on a “more likely than not” threshold for the recognition and derecognition of tax positions. The Company’s policy is to account for interest and penalties as a component of income tax expense.
Business Combinations
The allocation of the purchase price in a business combination requires management to make significant estimates in determining the fair value of acquired assets and assumed liabilities, especially with respect to intangible assets. The excess of the purchase price over these estimated fair values is recorded to goodwill. Significant estimates and assumptions, including fair value estimates, are used to determine the fair value of assets acquired, liabilities assumed, and contingent consideration transferred as well as the useful lives of long-lived assets acquired.
The valuation of identifiable intangible assets reflects management’s estimates based on, among other factors, use of established valuation methods, including, but not limited to, the multi-period excess earnings method income approach method and the relief-from-royalty method. The purchase price transferred in our acquisitions often contain purchase price holdback and contingent consideration provisions, such as earnout payments. The Company utilizes a third-party valuation specialist to estimate the acquisition date fair value of potential earnout payments. Subsequent remeasurements of potential earnout payments require significant judgements and estimates including, but not limited to, (and if applicable in the circumstances) customer renewals, new customers, ARR growth, forecasted bookings, forecasted churn and other factors.
See “Note 2. Summary of Significant Accounting Policies—Business Combinations” in the notes to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K for a detailed description of business combinations.
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Stock-Based Compensation
We measure all share-based payments, including grants of options to purchase common stock and the issuance of restricted stock or restricted stock units to employees, service providers and board members, using the fair-value at grant date. We record forfeitures as they occur. The cost of services received from employees and non-employees in exchange for awards of equity instruments is recognized on our consolidated statement of operations based on the estimated fair value of those awards on the grant date and amortized on a straight-line basis over the requisite service period. We value restricted stock and restricted stock units at the closing price of our common stock on the grant date. We value stock option awards using the Black-Scholes option-pricing model. For the years ended December 31, 2021, 2020, and 2019 stock-based compensation awards consisted primarily of restricted stock and restricted stock units.
From time to time, we grant restricted stock units that also include performance or market-based conditions (“PRSUs”). For PRSUs granted with a market condition, we use a Monte Carlo simulation analysis to value the award. Compensation expense for awards with marked-based conditions is recognized over the required service period of the grant based on the grant date fair value of the award and is not subject to fluctuation due to achievement of the underlying market-based condition.
Goodwill and Other Intangibles
Goodwill
Goodwill is evaluated for impairment annually in October or more frequently when a triggering event occurs or circumstances change that indicate the carrying value may not be recoverable. We assess goodwill for impairment by comparing the estimated fair value of the Company to the its carrying value. If the fair value of the reporting unit is less than its carrying amount, we recognize an impairment loss equal to that excess amount.
We apply both qualitative and quantitative assessments to determine whether it is more likely than not that the fair value of our single reporting unit is less than its carrying value. Although several fair value methodologies are allowed, we use the fair-value-based approach based on market capitalization, which generates the best evidence of fair value since the approach uses quoted market prices (a Level 1 fair-value hierarchy).
Identifiable intangible assets
Identifiable intangible assets consist of customer relationships, marketing-related intangible assets and developed technology. Intangible assets with definite lives are amortized over their estimated useful lives on a straight-line basis. The straight-line method of amortization represents our best estimate of the distribution of the economic value of the identifiable intangible assets. The Company periodically reviews the estimated useful lives of its identifiable intangible assets, taking into consideration any events or circumstances that might result in either a diminished fair value or revised useful life.
Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, refer to “Note 2. Summary of Significant Accounting Policies” in the notes to the consolidated financial statements included in “Part II—Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.