Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission ( “ SEC ” ), including our Annual Report on Form 10-K for the year ended December 31, 2022, filed on February 28, 2023. In addition to historical information, this Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements generally relate to future events or our future financial or operating performance. 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. These forward-looking statements include, but are not limited to, statements concerning the following:
• our financial performance and our ability to achieve or sustain profitability or predict future results;
• our plans regarding future acquisitions and our ability to consummate and integrate acquisitions;
• our ability to expand our go to market operations, including our marketing and sales organization, and successfully increase sales of our products;
• our ability to obtain financing in the future on acceptable terms or at all;
• our expectations with respect to revenue, cost of revenue and operating expenses in future periods;
• our expectations with regard to revenue from perpetual licenses and professional services;
• our ability to adapt to macroeconomic factors impacting the global economy, including foreign currency exchange risk, inflation and supply chain constraints;
• our ability to attract and retain customers;
• our ability to successfully enter new markets and manage our international expansion;
• our ability to comply with privacy laws and regulations;
• our ability to deliver high-quality customer service;
• our plans regarding, and our ability to effectively manage, our growth;
• maintaining our senior management team and key personnel;
• the performance of our resellers;
• our ability to adapt to changing market conditions and competition;
• our ability to adapt to technological change and continue to innovate;
• global economic and financial market conditions and uncertainties;
• the growth of demand for cloud-based, digital transformation applications;
• our ability to integrate our applications with other software applications;
• maintaining and expanding our relationships with third parties;
• costs associated with defending intellectual property infringement and other claims;
• our ability to maintain, protect and enhance our brand and intellectual property;
• our expectations with regard to trends, such as seasonality, which affect our business;
• impairments to goodwill and other intangible assets;
• our beliefs regarding how our applications benefit customers and what our competitive strengths are;
• the operation, reliability and security of our third-party data centers;
• the risk that we did not consider another contingency included in this list;
• our expectations as to the payment of dividends; and
• other risk factors included under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 28, 2023, as updated by this Quarterly Report on Form 10-Q and periodically updated as necessary in our future quarterly reports on Form 10-Q and other filings that we make with the SEC.
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You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors, including those described in the section titled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 28, 2023. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.
Overview
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, retail, technology, manufacturing, legal, education, consumer goods, media, telecommunications, government, non-profit, food and beverage, healthcare and life sciences.
Through a series of acquisitions and integrations, we have established a library of diverse, cloud-based software applications that address specific digital transformation needs. Our revenue has grown from $149.9 million in the year ended December 31, 2018 to $317.3 million in the year ended December 31, 2022, representing a compound annual growth rate of 21%. During the three months ended March 31, 2023 foreign revenue as a percent of total revenue decreased to 29% compared to 32% during the three months ended March 31, 2022. See “ Note 12. Revenue Recognition ” in the notes to our unaudited condensed consolidated financial statements for more information regarding our revenue as it relates to domestic and foreign operations.
To support continued growth, we intend to pursue acquisitions of complementary technologies and businesses. This will expand our product library, customer base, and market access resulting in increased benefits of scale. Consistent with our growth strategy, we have made 31 acquisitions from February 2012 through March 31, 2023.
Recent Developments
On May 2, 2023, the Board of Directors (the “Board of Directors”) of the Company, authorized and declared a dividend of one preferred stock purchase right (a “Right”) for each outstanding share of Common Stock. The dividend is payable on May 12, 2023 (the “Record Date”), to the holders of record of shares of Common Stock as of 5:00 P.M., New York City time, on the Record Date. The description and terms of the Rights are set forth in a Tax Benefit Preservation Plan, dated as of May 2, 2023, as the same may be amended from time to time (the “Plan”), between the Company and Broadridge Corporate Issuer Solutions, LLC, as Rights Agent. See “ Note 14. Subsequent Events ” for further details.
Acquisitions
2022 Acquisitions
During the three months ended March 31, 2022, we completed the two acquisitions summarized below. As a result, the impact of these two acquisitions are fully reflected in our results of operations for the three months ended March 31, 2023 but are not fully reflected in our results of operations for the three months ended March 31, 2022.
• BA Insight - On February 22, 2022, the Company entered into an agreement to purchase the shares comprising the entire issued share capital of BA Insight Inc., a Delaware corporation.
• Objectif Lune - On January 7, 2022, the Company entered into an agreement to purchase the shares comprising the entire issued share capital of Objectif Lune Inc., a Quebec proprietary company.
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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.
Three Months Ended March 31,
2023 2022
Amount Percent of Revenue Amount Percent of Revenue
(dollars in thousands, except share and per share data)
Revenue:
Subscription and support $ 72,914 95 % $ 73,627 94 %
Perpetual license 1,571 2 % 1,778 2 %
Total product revenue 74,485 97 % 75,405 96 %
Professional services 2,571 3 % 3,311 4 %
Total revenue 77,056 100 % 78,716 100 %
Cost of revenue:
Subscription and support (1)(3)
23,485 30 % 22,069 28 %
Professional services and other (1)
2,051 3 % 2,686 3 %
Total cost of revenue 25,536 33 % 24,755 31 %
Gross profit 51,520 67 % 53,961 69 %
Operating expenses:
Sales and marketing (1)
14,289 19 % 15,593 20 %
Research and development (1)
12,530 16 % 12,067 15 %
General and administrative (1)(2)
17,189 22 % 19,614 25 %
Depreciation and amortization 15,094 20 % 11,051 14 %
Acquisition-related expenses 1,094 1 % 10,413 13 %
Impairment of goodwill 128,755 167 % — — %
Total operating expenses 188,951 245 % 68,738 87 %
Loss from operations (137,431) (178) % (14,777) (18) %
Other Expense:
Interest expense, net (5,461) (7) % (7,762) (10) %
Other income (expense), net 1,425 2 % (418) (1) %
Total other expense (4,036) (5) % (8,180) (11) %
Loss before provision for income taxes (141,467) (183) % (22,957) (29) %
Benefit from income taxes 1,422 1 % 126 — %
Net loss (140,045) (182) % (22,831) (29) %
Preferred stock dividends and accretion (1,315) (2) % — — %
Net loss attributable to common shareholders $ (141,360) (184) % $ (22,831) (29) %
Net loss per common share:
Net loss per common share, basic and diluted $ (4.38) $ (0.73)
Weighted-average common shares outstanding, basic and diluted 32,259,110 31,163,273
(1) Includes stock-based compensation detailed under Share-based Compensation in “ Item 1. Financial Statements—Note 11. Stockholders' Equity” .
(2) Includes General and administrative stock-based compensation of $4.9 million and $9.0 million for the three months March 31, 2023 and March 31, 2022, respectively. General and administrative expense excluding stock-based compensation as a percentage of total revenues was 16% and 13% for the three months ended March 31, 2023 and March 31, 2022.
(3) Includes depreciation and amortization of $3.4 million and $3.2 million for the three months ended March 31, 2023 and March 31, 2022, respectively.
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Comparison of the Three Months Ended March 31, 2023 and 2022
Revenue
Three Months Ended March 31,
2023 2022 % Change
(dollars in thousands)
Revenue:
Subscription and support $ 72,914 $ 73,627 (1) %
Perpetual license 1,571 1,778 (12) %
Total product revenue 74,485 75,405 (1) %
Professional services 2,571 3,311 (22) %
Total revenue $ 77,056 $ 78,716 (2) %
Percentage of revenue:
Subscription and support 95% 94%
Perpetual license 2% 2%
Total product revenue 97% 96%
Professional services 3% 4%
Total revenue 100% 100%
Total revenue was $77.1 million in the three months ended March 31, 2023, compared to $78.7 million in the three months ended March 31, 2022, a decrease of $1.6 million, or 2%. This decrease is attributable to a decline of $0.7 million in subscription and support revenue, a decline of $0.2 million in perpetual license revenue, and a decline of $0.7 million in professional services revenue.
The table below details the $0.7 million decrease in subscription and support revenue for the three months ended March 31, 2023, compared to the three months ended March 31, 2022.
Increase from acquisition not fully in the prior year comparative period (1)
$ 1,697
Decrease related to Sunset Assets (2)
(2,668)
Increase related to overage charges (3)
563
Remaining decrease related to core organic business (4)
(305)
Total decrease in Subscription and support revenue $ (713)
(1) Subscription and support revenue related to our acquisition not fully in the prior year comparative period was $2.4 million for the three months ended March 31, 2023, after the reduction of $0.1 million purchase accounting deferred revenue discount for the three months ended March 31, 2023.
(2) During the fourth quarter of 2022, in connection with the periodic review of its business, the Company decided to sunset certain non-strategic product offerings and customer contracts (collectively referred to as “Sunset Assets”). Subscription and support revenue related to these Sunset Assets was $8.9 million for the three months ended March 31, 2023. During future periodic reviews of our business we may determine to add additional non-strategic product offerings or customer contracts to Sunset Assets. Similarly, we may determine that a product offering or customer contract previously determined to be non-strategic in fact does have a strategic value to the Company and therefore we may remove that product offering or customer contract from the classification of Sunset Assets. In either case, we will adjust the revenues attributable to Sunset Assets for the then current period and properly reflect the year over year change for such addition or removal.
(3) Overage Charges are revenue earned in addition to contractual minimum customer commitments as a result of the usage volume of services including text and e-mail messaging and third party pass-through costs that exceed the levels stipulated in contracts with the Company. Subscription and support revenue related to Overage Charges was $2.4 million for the three months ended March 31, 2023.
(4) Subscription and support revenue for the three months ended March 31, 2022 excluding revenue from acquisitions not fully in the prior year comparative period, revenue from Sunset Assets and revenue from overage charges (all as disclosed in this table and footnotes) referred to here as subscription and support revenue from the core organic business declined by $0.3 million to $59.2 million for the three months ended March 31, 2023. However, using constant currency foreign exchange rates from the three months ended March 31, 2022, subscription and support revenue from the core organic business grew by $0.4 million to $59.9 million for the three months ended March 31, 2023.
The $0.2 million decrease in perpetual license revenue is normal quarterly variation as we do not expect an ongoing downtrend in perpetual license revenue.
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The $0.7 million decrease in professional services revenue is related to the typical decline of professional services revenue of acquired businesses where we de-emphasize low margin or negative margin professional service projects along with the decline of professional service revenue from Sunset Assets.
Three Months Ended March 31,
2023 2022 % Change
(dollars in thousands)
Cost of revenue:
Subscription and support (1)
$ 23,485 $ 22,069 6 %
Professional services and other 2,051 2,686 (24) %
Total cost of revenue 25,536 24,755 3 %
Gross profit $ 51,520 $ 53,961
Percentage of total revenue:
Subscription and support (1)
30% 28%
Professional services and other 3% 3%
Total cost of revenue 33% 31%
Gross profit 67% 69%
(1) Includes depreciation, amortization and stock compensation expense as follows:
Depreciation $ 2 $ 2
Amortization $ 3,404 $ 3,209
Stock Compensation $ 302 $ 402
Cost of subscription and support revenue was $23.5 million in the three months ended March 31, 2023, compared to $22.1 million in the three months ended March 31, 2022, an increase of $1.4 million, or 6%. The acquisitions not fully in the comparable period contributed $0.2 million to cost of subscription and support revenue, primarily related to costs associated with the delivery of the newly acquired products. Cost of subscription and support revenue related to our Sunset Assets decreased by $1.2 million as a result of decreased sales and marketing focus on those Sunset Assets. The remaining increase in cost of subscription and support revenue of $2.4 million is primarily related to an increase in personnel related costs, carrier pass-through costs, hosting costs and amortization partially offset by a decrease in stock compensation.
Cost of professional services and other revenue was $2.1 million in the three months ended March 31, 2023, compared to $2.7 million in the three months ended March 31, 2022, a decrease of $0.6 million, or 24%. Cost of professional services related to our Sunset Assets decreased by $0.4 million as a result of decreased sales and marketing focus on those Sunset Assets. The remaining decrease in cost of professional services of $0.2 million was related to a decrease in personnel related costs.
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Operating Expenses
Sales and Marketing Expense
Three Months Ended March 31,
2023 2022 % Change
(dollars in thousands)
Sales and marketing (1)
$ 14,289 $ 15,593 (8) %
Percentage of total revenue 19% 20%
(1) Includes stock compensation expense as follows:
Stock Compensation $ 576 $ 1,474
Sales and marketing expense was $14.3 million in the three months ended March 31, 2023, compared to $15.6 million in the three months ended March 31, 2022, a decrease of $1.3 million, or 8%. The acquisitions not fully in the comparable period contributed an increase of $0.2 million to sales and marketing expense, primarily consisting of personnel related costs. Sales and marketing expense related to our Sunset Assets decreased by $1.0 million as a result of decreased sales and marketing focus on those Sunset Assets. A decrease in sales and marketing expense of $0.9 million is attributable to a reduction in non-cash stock compensation expense. The remaining increase in sales and marketing expense of $0.4 million is primarily attributable to increased personnel related costs associated with our growth investments.
Research and Development Expense
Three Months Ended March 31,
2023 2022 % Change
(dollars in thousands)
Research and development (1)
$ 12,530 $ 12,067 4 %
Percentage of total revenue 16% 15%
(1) Includes stock compensation expense as follows:
Stock Compensation $ 655 $ 748
Research and development expense was $12.5 million in the three months ended March 31, 2023, compared to $12.1 million in the three months ended March 31, 2022, an increase of $0.4 million, or 4%. The acquisitions not fully in the comparable period contributed $0.1 million to the increase in research and development expense primarily consisting of personnel related costs. Research and development expense related to our Sunset Assets decreased by $0.9 million as a result of decreased engineering focus on those Sunset Assets. The remaining increase of $1.2 million in research and development expense is primarily related to personnel related costs associated with our growth investments.
General and Administrative Expense
Three Months Ended March 31,
2023 2022 % Change
(dollars in thousands)
General and administrative (1)
$ 17,189 $ 19,614 (12) %
Percentage of total revenue 22% 25%
(1) Includes stock compensation expense as follows:
Stock Compensation $ 4,929 $ 8,995
General and administrative expense was $17.2 million in the three months ended March 31, 2023, compared to $19.6 million in the three months ended March 31, 2022, a decrease of $2.4 million, or 12%. General and administrative expense decreased by $0.2 million due to lower personnel related expenses related to our Sunset Assets. In addition, general and administrative expense decreased by $4.1 million due to lower non-cash stock compensation expense, which was partially offset by a $1.9 million increase in personnel related expenses and outside professional expenses.
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Depreciation and Amortization Expense
Three Months Ended March 31,
2023 2022 % Change
(dollars in thousands)
Depreciation and amortization:
Depreciation $ 328 $ 435 (25) %
Amortization 14,766 10,616 39 %
Total depreciation and amortization $ 15,094 $ 11,051 37 %
Percentage of total revenue:
Depreciation 1% 1%
Amortization 19% 13%
Total depreciation and amortization 20% 14%
Depreciation and amortization expense was $15.1 million in the three months ended March 31, 2023, compared to $11.1 million in the three months ended March 31, 2022, an increase of $4.0 million, or 37%. The acquisitions not fully in the comparable period increased depreciation and amortization expense by $0.2 million, primarily related to acquired intangible assets such as customer relationships, developed technology and tradenames. Depreciation and amortization expense related to our Sunset Assets increased by $4.6 million. The remaining decrease in depreciation and amortization expense of $0.8 million resulted from assets becoming fully depreciated and amortized.
Acquisition-related Expenses
Three Months Ended March 31,
2023 2022 % Change
(dollars in thousands)
Acquisition-related expenses $ 1,094 $ 10,413 (89) %
Percentage of total revenue 1% 13%
Acquisition-related expenses are typically one-time expenses incurred for up to four quarters after each acquisition, with the majority of these costs being incurred within 6 to 9 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, vendor cancellations, and adjustments to the fair value of earnouts due to sellers. Generally, without new acquisition activity, acquisition related expenses decline in subsequent sequential quarters and may no longer be incurred after the first anniversary of the last closed acquisition.
Acquisition-related expense was $1.1 million in the three months ended March 31, 2023, compared to $10.4 million in the three months ended March 31, 2022, a decrease of $9.3 million, or 89%. During the three months ended March 31, 2023, transaction related expense was nil compared to $4.5 million for the three months ended March 31, 2022. Transformational expenses were $1.1 million and $5.9 million during the three months ended March 31, 2023 and 2022, respectively. The transformational expenses in both the current and year ago periods were primarily related to temporary transitional personnel related costs along with accelerated rent related expenses incurred in conjunction with the closures of offices of our acquired companies as we consolidate and integrate these acquisitions. We have had no new acquisitions since our two acquisitions during the three months ended March 31, 2022. Transformation expenses in the three months ended March 31, 2022 include expenses related to acquisitions closed in the three months ended March 31, 2022 as well the three acquisitions closed in 2021.
Impairment of goodwill
Three Months Ended March 31,
2023 2022 % Change
(dollars in thousands)
Impairment of goodwill $ 128,755 $ — NA
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Goodwill impairment is recognized on a non-recurring basis when the carrying value (or GAAP basis book value) of our Company (which is our only reporting unit) exceeds the estimated fair value of our Company as determined by reference to a number of factors and assumptions, including the spot closing price of our Common Stock as of a certain reporting or measurement date. We assess Goodwill for impairment annually on October 1st, or more frequently when an event occurs which could cause the carrying value of our Company to exceed the estimated fair value of our Company. As a result of the decline of our stock price during the three months ended March 31, 2023, we performed a Goodwill impairment evaluation, which resulted in a Goodwill impairment of $128.8 million. See “Note 5. Goodwill and Other Intangible Assets” in the notes to our condensed consolidated financial statements for more information regarding our first quarter 2023 Goodwill impairment. We will continue to evaluate Goodwill for impairment in 2023 and future impairments of Goodwill could occur if our stock price continues to decline.
Other Income (Expense)
Three Months Ended March 31,
2023 2022 % Change
(dollars in thousands)
Other expense:
Interest expense, net $ (5,461) $ (7,762) (30) %
Other income (expense), net 1,425 (418) (441) %
Total other expense $ (4,036) $ (8,180) (51) %
Percentage of total revenue:
Interest expense, net (7)% (10)%
Other income (expense), net 2% (1)%
Total other expense (5)% (11)%
Interest expense, net was $5.5 million in the three months ended March 31, 2023 compared to $7.8 million in the three months ended March 31, 2022 a decrease in interest expense of $2.3 million or 30%, due primarily to higher interest income on our interest-bearing cash balances as well as a decrease in interest expense due to scheduled principal payments lowering outstanding borrowings on our Credit Facility.
Other income was $1.4 million in the three months ended March 31, 2023, compared to other expense of $0.4 million in the three months ended March 31, 2022. Other income recognized during the three months ended March 31, 2023 was related primarily to foreign currency exchange gains.
Benefit from Income Taxes
Three Months Ended March 31,
2023 2022 % Change
(dollars in thousands)
Benefit from income taxes $ 1,422 $ 126 1,029 %
Percentage of total revenue 1% —%
Benefit from income taxes was $1.4 million in the three months ended March 31, 2023, compared to a benefit for income taxes of $0.1 million in the three months ended March 31, 2022, resulting in an increase in benefit from income taxes of $1.3 million. The benefit from income taxes for the three months ended March 31, 2023 related primarily related to the deferred tax impact of the goodwill impairment booked during the first quarter of 2023. This tax benefit is offset by the foreign income taxes associated with our combined non U.S. operations, changes in deferred tax liabilities associated with amortization of United States tax deductible goodwill, and U.S. state taxes in certain states in which the Company does not file on a consolidated basis or have net operating loss carryforwards. The benefit from income taxes for the three months ended March 31, 2022 related primarily to foreign income taxes associated with our combined non-U.S. operations. These tax benefits were offset by changes in deferred tax liabilities associated with amortization of United States tax deductible goodwill and state taxes in certain U.S. states in which the Company does not file on a consolidated basis or have net operating loss carryforwards and the impact, recorded as discrete, of the deferred tax provision attributable to the tax gain associated with the transfer of goodwill between foreign and domestic jurisdictions.
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Inflation
Inflation may further effect our business, financial condition or results of operations. If our costs were to continue to become subject to significant inflationary pressures, we may be further challenged in our ability to offset such higher costs through price increases. Our inability or failure to do so could further harm our business, financial condition and results of operations.
Non-GAAP Financial Measures
Key Metrics
In addition to the GAAP financial measures described in “Results of Operations,” 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.
Adjusted EBITDA
We monitor our 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 loss, calculated in accordance with GAAP, plus depreciation and amortization expense, interest expense, net, other expense (income), net, provision for (benefit from) income taxes, stock-based compensation expense, acquisition-related expenses, and purchase accounting adjustments for deferred revenue.
The following table represents a reconciliation of net loss from continuing operations, the most comparable GAAP measure, to Adjusted EBITDA for each of the periods indicated.
Three Months Ended March 31,
2023 2022
(dollars in thousands)
Reconciliation of net loss to Adjusted EBITDA:
Net loss $ (140,045) $ (22,831)
Add:
Depreciation and amortization expense 18,500 14,262
Interest expense, net 5,461 7,762
Other expense (income), net (1,425) 418
Benefit from income taxes (1,422) (126)
Stock-based compensation expense 6,462 11,619
Acquisition-related expense 1,086 10,413
Purchase accounting deferred revenue discount 228 1,929
Impairment of goodwill 128,755 —
Adjusted EBITDA $ 17,600 $ 23,446
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 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.
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:
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• Depreciation and amortization are non-cash charges, and the assets being depreciated or amortized 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.
Liquidity and Capital Resources
To date, we have financed our operations primarily through the raising of capital including sales of our common stock or our convertible preferred stock, cash from operating activities, and borrowings under our credit facility. We believe that current cash and cash equivalents, cash flows from operating activities, availability under our existing credit facility will be sufficient to fund our operations for at least the next twelve months. In addition, we may utilize the sources of capital available to us under our Credit Facility to support our continued growth via acquisitions.
As of March 31, 2023, we had cash and cash equivalents of $257.7 million, $60.0 million of available borrowings under our credit facility, as discussed below, and $521.1 million of borrowings outstanding under our credit facility. As of December 31, 2022, we had cash and cash equivalents of $248.7 million, $60.0 million of available borrowings under our Credit Facility, and $522.5 million of borrowings outstanding under our credit facility. The $9.1 million increase in cash and cash equivalents from December 31, 2022 to March 31, 2023 was due primarily to the seasonality of our customer cash receipts in the three months ended March 31, 2023 from our customer contract renewals in the three months ended December 31, 2022.
Our cash and cash equivalents held by our foreign subsidiaries was $53.5 million as of March 31, 2023 and $34.8 million as of December 31, 2022. If these funds held by our foreign subsidiaries are needed for our domestic operations, a repatriation of these funds may require us to accrue and pay dividend withholding taxes in the foreign jurisdictions where applicable and accrue and pay U.S. taxes to the extent such dividend income exceeds our ability to utilize our net operating loss carryforwards. 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 March 31, 2023 and December 31, 2022, we had a working capital surplus of $180.2 million and surplus of $170.1 million, respectively.
Series A Preferred Stock
The Series A Preferred Stock as discussed in “ Note 10. Series A Preferred Stock ” provided us an additional $115.0 million in liquidity during the three months ended March 31, 2023, which we intend to use for (a) for general corporate purposes and (b) for transaction-related fees and expenses. As of March 31, 2023, the Series A Preferred Stock Issuance Costs totaled $4.6 million.
The holders of Series A Convertible Preferred Stock are entitled to dividends (i) at the rate of 4.5% per annum until but excluding the seven year anniversary of the closing, and (ii) at the rate of 7.0% per annum on and after the seven year anniversary of the closing, and are also entitled to fully participate in any dividends or other distributions declared or paid on our common stock on an as-converted basis. Dividends will be payable quarterly in arrears, and may be paid, at our option, in cash or by paying dividends in kind . Our ability to pay cash dividends is subject to the restrictions under the Credit Facility (as defined below). The Series A Preferred Stock had accrued unpaid dividends of $3.2 million as of March 31, 2023.
The Series A Preferred Stock will rank senior to our common stock with respect to distribution rights and rights upon our liquidation, dissolution or winding up (“Liquidation”), on parity with any class or series of our capital stock expressly designated as ranking on parity with the Series A Preferred Stock with respect to distribution rights and rights upon Liquidation, junior to any class or series of our capital stock expressly designated as ranking senior to the Series A Preferred
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Stock with respect to distribution rights and rights upon Liquidation and junior in right of payment to our existing and future indebtedness, including the Credit Facility.
On October 21, 2022 we filed a resale registration statement on Form S-3 (File No. 333-267973), on behalf of Ulysses Aggregator, LP (the “Purchaser”) and pursuant to the Registration Rights Agreement between us and the Purchaser, which became effective on November 1, 2022 and covers (i) the issued Series A Preferred Stock and (ii) the number of shares of the Company’s common stock issuable upon conversion of such Series A Preferred Stock, which amount includes and assumes that dividends on the Series A Preferred Stock are paid by increasing the Liquidation Preference of the Series A Preferred Stock for a period of sixteen dividend payment periods from the initial issuance date. See “ Note—10. Series A Preferred Stock ” in the notes to our consolidated financial statements for more information regarding our Series A Preferred Stock.
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 March 31, 2023.
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 in an aggregate principal amount of $190 million (the “2019 Incremental Term Loan”) which is in addition to the existing $350 million term loans outstanding under the Credit Facility and the $60 million Revolver under the 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 March 31, 2023 we were in compliance with all covenants under the Credit Facility. See “ Note 7. Debt—Credit Facility ” for more information regarding our Credit Facility and outstanding debt as of March 31, 2023.
On August 6, 2019, the Company entered into an interest rate hedge instrument for the full 7 year term, effectively fixing our interest rate at 5.4% for the Term Loan. In addition, on November 26, 2019, the Company entered into interest rate swap agreements to hedge the interest rate risk associated with the Company’s floating rate obligations under the 2019 Incremental Term Loan. These interest rate swaps fix the Company's interest rate (including the hedge premium) at 5.4% for the term of the Credit Facility. The interest rate associated with our $60 million, 5 year, Revolver remains floating.
The interest rate swap has been designated as a cash flow hedge and is valued using a market approach, which is a Level 2 valuation technique. At March 31, 2023, the fair value of the interest rate swap was a $33.0 million asset. The decrease in the fair value of the interest rate swap assets during the three months ended March 31, 2023 is the result of the change in the yield curve for our interest rate swaps compared to December 31, 2022.
The following table summarizes our cash flows for the periods indicated:
Three Months Ended March 31,
2023 2022
(dollars in thousands)
Consolidated Statements of Cash Flow Data:
Net cash provided by operating activities $ 15,825 $ 8,222
Net cash used in investing activities (215) (62,509)
Net cash used in financing activities (6,781) (4,211)
Effect of exchange rate fluctuations on cash 238 (217)
Change in cash and cash equivalents 9,067 (58,715)
Cash and cash equivalents, beginning of period 248,653 189,158
Cash and cash equivalents, end of period $ 257,720 $ 130,443
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
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acquisition related expenses incurred after each acquisition to transact and transform the acquired business into the Company's unified operating platform. Additionally, operating cash flows includes the impact of earn-outs 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 on those bookings and renewals, 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 $15.8 million for the three months ended March 31, 2023 compared to cash provided by operating activities of $8.2 million for the three months ended March 31, 2022, an increase of $7.6 million. Working capital sources of cash for the three months ended March 31, 2023 included a $7.0 million decrease in accounts receivable related to the timing of collections. Working capital uses of cash for the three months ended March 31, 2023 included a $4.8 million increase in prepaid expenses and other current assets, partially offset by amortization of previously deferred costs of $3.4 million. In addition, working capital uses of cash for the three months ended March 31, 2023 included a $0.9 million decrease in accrued expenses and a $0.2 million decrease in accounts payable.
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 condensed consolidated balance sheets as a liability. Deferred revenue consists of the unearned portion of booked fees for our software subscriptions and support, 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 and businesses. As our business grows, we expect our primary investing activities to continue to expand our product library, customer base, and market access.
For the three months ended March 31, 2023, cash used in investing activities consisted of purchases of property and equipment of $0.2 million. Cash used in investing activities decreased $62.3 million for the three months ended March 31, 2023 compared to the same period in 2022 primarily as a result of no acquisitions closed during the period compared to the two acquisitions 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 employee payroll tax payment activity.
Cash used in financing activities increased $2.6 million for the three months ended March 31, 2023 compared to the same period in 2022 due to a $2.6 million increase in additional consideration paid to sellers (i.e. acquisition holdbacks).
Critical Accounting Policies and the Use of Estimates
We prepare our condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of our condensed 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. 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.
The following critical accounting policies reflect significant judgments and estimates used in the preparation of our condensed consolidated financial statements:
• revenue recognition and deferred revenue;
• income taxes;
• deferred sales commissions and sales commission expense;
• business combinations;
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• goodwill and other intangibles; and
• stock-based compensation.
We are not aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities as of May 9, 2023, the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.
Other Key Accounting Policies
Our unaudited interim financial statements and other financial information for the three months ended March 31, 2023, as presented herein and in “ Item 1. Financial Statements ” to this Quarterly Report on Form 10-Q, reflect no material changes in our critical accounting policies and estimates as set forth in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 28, 2023 (the “Annual Report”). Please refer to our Annual Report for a detailed description of our critical accounting policies that involve significant management judgment.
We evaluate our estimates, judgments and assumptions on an ongoing basis, and while we believe that our estimates, judgments and assumptions are reasonable, they are based upon information available at the time. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.
Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements and the impact of these pronouncements on our condensed consolidated financial statements, refer to “Note 2. Basis of Presentation and Summary of Significant Accounting Policies—Recent Accounting Pronouncements” to our condensed consolidated financial statements.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.