EngageSmart, Inc. - Quarter Report: 2022 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2022
OR
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________________ to _________________
Commission File Number: 001-40835
EngageSmart, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware |
83-2785225 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer |
30 Braintree Hill Office Park, Suite 101 Braintree, Massachusetts |
02184 |
(Address of principal executive offices) |
(Zip Code) |
(781) 848-3733
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
|
Trading Symbol(s) |
|
Name of each exchange on which registered |
Common stock, $0.001 par value per share |
|
ESMT |
|
The New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
|
☐ |
|
Accelerated filer |
|
☐ |
Non-accelerated filer |
|
☒ |
|
Smaller reporting company |
|
☐ |
|
|
|
|
Emerging growth company |
|
☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
As of April 30, 2022, the registrant had 162,614,038 shares of common stock, $0.001 par value per share, outstanding.
Table of Contents
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Page |
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PART I. |
1 |
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Item 1. |
1 |
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1 |
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Condensed Consolidated Statements of Operations and Comprehensive Income |
2 |
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3 |
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4 |
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5 |
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7 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
21 |
Item 3. |
31 |
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Item 4. |
31 |
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PART II. |
33 |
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Item 1. |
33 |
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Item 1A. |
33 |
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Item 2. |
34 |
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Item 3. |
34 |
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Item 4. |
34 |
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Item 5. |
34 |
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Item 6. |
35 |
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36 |
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i
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q may be forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “forecasts,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to statements regarding our future results of operations and financial position, industry and business trends, equity compensation, business strategy, plans, market growth and our objectives for future operations.
The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including, but not limited to: our rapid growth may not be sustainable or indicative of our future growth; our business could be harmed if we fail to manage our infrastructure to support future growth; our risk management efforts may not be effective to prevent fraudulent activities, which could expose us to material financial losses and liability; risks related to our ability to attract new customers or convert trial customers into paying customers; risks related to our ability to introduce new features or services successfully and to make enhancements to our solutions; risks related to our customers renewing their contracts for our solutions with us and expanding their use of our solutions; risks related to any decline in our customer renewals or failure to convince our customers to broaden their use of solutions and related services would harm our business, results of operations, and financial condition; We have incurred net losses on an annual basis since we were founded, anticipate increasing our operating expenses in the future, and may not achieve or sustain profitability; if we fail to adapt and respond effectively to rapidly changing technology, evolving industry standards and regulations, and changing business needs, requirements, or preferences, our products may become less competitive and our growth rate could decline; real or perceived errors, failures, or bugs in our solutions could adversely affect our business, results of operations, financial condition, and growth prospects; we may face intense competition, which could limit our ability to maintain or expand market share within our industry, and if we do not maintain or expand our market share, our business, financial condition, and operating results will be harmed; if we are unsuccessful in establishing, growing or maintaining strategic partnerships, our ability to compete could be impaired, and our operating results may suffer; as well as the other important factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “2021 Form 10-K”), filed on March 3, 2022 with the Securities and Exchange Commission (the “SEC”). The forward-looking statements in this Quarterly Report on Form 10-Q are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
You should read this Quarterly Report on Form 10-Q and the documents that we reference and have filed as exhibits to this Quarterly Report on Form 10-Q with the understanding that our actual future results, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this Quarterly Report on Form 10-Q, whether as a result of any new information, future events or otherwise.
ii
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
EngageSmart, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
||
Assets |
|
(unaudited) |
|
|
|
|
||
Current assets: |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
256,190 |
|
|
$ |
254,294 |
|
Accounts receivable, net of allowance for credit losses of $176 and $203 as of March 31, 2022 and December 31, 2021, respectively |
|
|
9,854 |
|
|
|
10,266 |
|
Unbilled receivables |
|
|
5,098 |
|
|
|
3,441 |
|
Prepaid expenses and other current assets |
|
|
9,331 |
|
|
|
7,617 |
|
Total current assets |
|
|
280,473 |
|
|
|
275,618 |
|
Operating lease right-of-use assets |
|
|
30,257 |
|
|
|
— |
|
Property and equipment, net |
|
|
11,659 |
|
|
|
10,968 |
|
Goodwill |
|
|
425,677 |
|
|
|
425,677 |
|
Acquired intangible assets, net |
|
|
84,019 |
|
|
|
87,920 |
|
Other assets |
|
|
4,163 |
|
|
|
3,811 |
|
Total assets |
|
$ |
836,248 |
|
|
$ |
803,994 |
|
Liabilities and stockholders’ equity |
|
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
|
||
Accounts payable |
|
$ |
595 |
|
|
$ |
2,090 |
|
Accrued expenses and other current liabilities |
|
|
23,198 |
|
|
|
25,229 |
|
Contingent consideration liability |
|
|
— |
|
|
|
2,800 |
|
Deferred revenue |
|
|
7,637 |
|
|
|
6,792 |
|
Operating lease liabilities |
|
|
4,464 |
|
|
|
— |
|
Total current liabilities |
|
|
35,894 |
|
|
|
36,911 |
|
Long-term operating lease liabilities |
|
|
30,979 |
|
|
|
— |
|
Deferred income taxes |
|
|
5,044 |
|
|
|
4,224 |
|
Deferred revenue, net of current portion |
|
|
233 |
|
|
|
232 |
|
Other long-term liabilities |
|
|
188 |
|
|
|
5,528 |
|
Total liabilities |
|
|
72,338 |
|
|
|
46,895 |
|
|
|
|
|
|
|
|||
Stockholders' equity: |
|
|
|
|
|
|
||
Preferred stock, par value $0.001 per share, 10,000,000 shares authorized and no shares issued and outstanding as of March 31, 2022 and December 31, 2021 |
|
|
|
|
|
|
||
Common stock, par value $0.001 per share, 650,000,000 shares authorized and 162,434,392 and 161,860,980 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively |
|
|
162 |
|
|
|
162 |
|
Additional paid-in capital |
|
|
791,795 |
|
|
|
787,043 |
|
Accumulated stockholders' deficit |
|
|
(28,047 |
) |
|
|
(30,106 |
) |
Total stockholders’ equity |
|
|
763,910 |
|
|
|
757,099 |
|
Total liabilities and stockholders’ equity |
|
$ |
836,248 |
|
|
$ |
803,994 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
EngageSmart, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income
(in thousands, except share and per share amounts)
(Unaudited)
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Revenue |
|
$ |
67,362 |
|
|
$ |
47,424 |
|
Cost of revenue |
|
|
16,039 |
|
|
|
12,220 |
|
Gross profit |
|
|
51,323 |
|
|
|
35,204 |
|
Operating expenses: |
|
|
|
|
|
|
||
General and administrative |
|
|
13,287 |
|
|
|
7,655 |
|
Selling and marketing |
|
|
22,664 |
|
|
|
15,045 |
|
Research and development |
|
|
10,040 |
|
|
|
6,993 |
|
Contingent consideration expense |
|
|
— |
|
|
|
202 |
|
Amortization of intangible assets |
|
|
2,362 |
|
|
|
2,362 |
|
Total operating expenses |
|
|
48,353 |
|
|
|
32,257 |
|
Income from operations |
|
|
2,970 |
|
|
|
2,947 |
|
Other income (expense), net: |
|
|
|
|
|
|
||
Interest expense, including related party interest (Note 15) |
|
|
(119 |
) |
|
|
(2,305 |
) |
Other income (expense), net |
|
|
28 |
|
|
|
(42 |
) |
Total other income (expense), net |
|
|
(91 |
) |
|
|
(2,347 |
) |
Income before income taxes |
|
|
2,879 |
|
|
|
600 |
|
Provision for income taxes |
|
|
820 |
|
|
|
115 |
|
Net income and comprehensive income |
|
$ |
2,059 |
|
|
$ |
485 |
|
Net income per share: |
|
|
|
|
|
|
||
Basic |
|
$ |
0.01 |
|
|
$ |
0.00 |
|
Diluted |
|
$ |
0.01 |
|
|
$ |
0.00 |
|
Weighted-average number of common shares outstanding: |
|
|
|
|
|
|
||
Basic |
|
|
162,143,171 |
|
|
|
147,698,362 |
|
Diluted |
|
|
169,016,112 |
|
|
|
149,631,870 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
EngageSmart, Inc.
Condensed Consolidated Statements of Members’ Equity
(in thousands, except share amounts)
(Unaudited)
|
|
Class A-1 |
|
|
Class A-2 |
|
|
Class A-3 |
|
|
Accumulated |
|
|
Total |
|
|||||||||||||||||
|
|
Common Shares |
|
|
Common Shares |
|
|
Common Shares |
|
|
Members’ |
|
|
Members’ |
|
|||||||||||||||||
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Deficit |
|
|
Equity |
|
||||||||
Balances as of December 31, 2020 |
|
|
97,209,436 |
|
|
$ |
293,286 |
|
|
|
45,262,340 |
|
|
$ |
136,559 |
|
|
|
5,010,888 |
|
|
$ |
19,956 |
|
|
$ |
(21,141 |
) |
|
$ |
428,660 |
|
Exercise of equity-based options |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
306,762 |
|
|
|
552 |
|
|
|
— |
|
|
|
552 |
|
Equity-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
222 |
|
|
|
— |
|
|
|
222 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
485 |
|
|
|
485 |
|
Balances as of March 31, 2021 |
|
|
97,209,436 |
|
|
$ |
293,286 |
|
|
|
45,262,340 |
|
|
$ |
136,559 |
|
|
|
5,317,650 |
|
|
$ |
20,730 |
|
|
$ |
(20,656 |
) |
|
$ |
429,919 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
EngageSmart, Inc.
Condensed Consolidated Statements of Stockholders' Equity
(in thousands, except share amounts)
(Unaudited)
|
|
|
|
|
Additional |
|
|
Accumulated |
|
|
Total |
|
||||||||
|
|
Common Stock |
|
|
Paid-in |
|
|
Stockholders' |
|
|
Stockholders' |
|
||||||||
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Equity |
|
|||||
Balances as of December 31, 2021 |
|
|
161,860,980 |
|
|
$ |
162 |
|
|
$ |
787,043 |
|
|
$ |
(30,106 |
) |
|
$ |
757,099 |
|
Issuance of common stock upon exercise of stock options |
|
|
561,581 |
|
|
|
— |
|
|
|
1,897 |
|
|
|
— |
|
|
|
1,897 |
|
Vesting of restricted stock units |
|
|
17,302 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Shares withheld for employee taxes |
|
|
(5,471 |
) |
|
|
— |
|
|
|
(132 |
) |
|
|
— |
|
|
|
(132 |
) |
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
2,987 |
|
|
|
— |
|
|
|
2,987 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,059 |
|
|
|
2,059 |
|
Balances as of March 31, 2022 |
|
|
162,434,392 |
|
|
$ |
162 |
|
|
$ |
791,795 |
|
|
$ |
(28,047 |
) |
|
$ |
763,910 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
EngageSmart, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
||
Net income |
|
$ |
2,059 |
|
|
$ |
485 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
||
Depreciation and amortization expense |
|
|
4,641 |
|
|
|
4,349 |
|
Stock/equity-based compensation expense |
|
|
2,987 |
|
|
|
222 |
|
Contingent consideration expense |
|
|
— |
|
|
|
202 |
|
Non-cash operating lease expense |
|
|
1,135 |
|
|
|
— |
|
Deferred income taxes |
|
|
820 |
|
|
|
115 |
|
Non-cash interest expense |
|
|
58 |
|
|
|
1,059 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
||
Prepaid expenses and other current assets |
|
|
(1,714 |
) |
|
|
(1,277 |
) |
Accounts receivable, net |
|
|
412 |
|
|
|
531 |
|
Unbilled receivables |
|
|
(1,657 |
) |
|
|
(984 |
) |
Other assets |
|
|
(410 |
) |
|
|
(104 |
) |
Accounts payable |
|
|
(1,415 |
) |
|
|
(259 |
) |
Accrued expenses and other current liabilities |
|
|
(3,385 |
) |
|
|
(15 |
) |
Deferred revenue |
|
|
846 |
|
|
|
642 |
|
Operating lease liabilities |
|
|
(1,662 |
) |
|
|
— |
|
Other long-term liabilities |
|
|
26 |
|
|
|
12 |
|
Net cash provided by operating activities |
|
|
2,741 |
|
|
|
4,978 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
||
Purchases of property and equipment, including costs capitalized for development of internal-use software |
|
|
(1,509 |
) |
|
|
(1,313 |
) |
Net cash used in investing activities |
|
|
(1,509 |
) |
|
|
(1,313 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
||
Payment of debt issuance costs |
|
|
(23 |
) |
|
|
— |
|
Payments of related party notes |
|
|
— |
|
|
|
(5,900 |
) |
Payments of contingent consideration |
|
|
(1,066 |
) |
|
|
— |
|
Proceeds from exercise of stock/equity-based options |
|
|
1,897 |
|
|
|
552 |
|
Payments of taxes related to net share settlement of equity awards |
|
|
(132 |
) |
|
|
— |
|
Payment of initial public offering costs |
|
|
(12 |
) |
|
|
— |
|
Net cash provided by (used in) financing activities |
|
|
664 |
|
|
|
(5,348 |
) |
Net increase (decrease) in cash, cash equivalents and restricted cash |
|
|
1,896 |
|
|
|
(1,683 |
) |
Cash, cash equivalents and restricted cash at beginning of period |
|
|
254,594 |
|
|
|
29,650 |
|
Cash, cash equivalents and restricted cash at end of period |
|
$ |
256,490 |
|
|
$ |
27,967 |
|
|
|
|
|
|
|
|||
Cash and cash equivalents |
|
$ |
256,190 |
|
|
$ |
27,667 |
|
Restricted cash within other assets |
|
|
300 |
|
|
|
300 |
|
Total cash, cash equivalents, and restricted cash |
|
$ |
256,490 |
|
|
$ |
27,967 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
EngageSmart, Inc.
Condensed Consolidated Statements of Cash Flows (Continued)
(in thousands)
(Unaudited)
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Supplemental cash flow information: |
|
|
|
|
|
|
||
Cash paid for interest |
|
$ |
57 |
|
|
$ |
1,433 |
|
Cash paid for taxes |
|
$ |
1 |
|
|
$ |
— |
|
Supplemental disclosure of non-cash investing and financing activities: |
|
|
|
|
|
|
||
Additions to property and equipment included in accounts payable and accrued expenses |
|
$ |
100 |
|
|
$ |
30 |
|
Deferred initial public offering costs included in accrued expenses |
|
$ |
274 |
|
|
$ |
140 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
EngageSmart, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Nature of Business and Basis of Presentation
EngageSmart, Inc. and its subsidiaries (together referred to herein as the “Company” or “EngageSmart”) is a leading provider of vertically tailored customer engagement software and integrated payments solutions. EngageSmart offers single instance, multi-tenant, true Software-as-a-Service (“SaaS”) vertical solutions, including SimplePractice, InvoiceCloud, HealthPay24 and DonorDrive, that are designed to simplify our customers' engagement with their clients by driving digital adoption and self-service. The Company serves customers across several core verticals: Health & Wellness, Government, Utilities, Financial Services, Healthcare and Giving. EngageSmart's solutions are purpose-built for each of our verticals and they simplify and automate mission-critical workflows such as scheduling, client onboarding, client communication, paperless billing, and electronic payment processing. EngageSmart is headquartered in Braintree, Massachusetts with additional locations throughout the United States.
Initial Public Offering
On September 27, 2021, the Company completed its initial public offering ("IPO"), in which the Company issued and sold 13,620,054 shares of common stock at a public offering price of $26.00 per share, including 620,054 shares issued upon the exercise of the underwriters' option to purchase additional shares. The Company raised net proceeds of $326.4 million, after deducting the underwriting discount of $22.1 million and offering expenses of $5.6 million. Additionally, certain existing shareholders sold an aggregate of 3,112,446 shares in the IPO at the same price, resulting in net proceeds to the selling stockholders of $75.9 million. On September 27, 2021, the Company used a portion of the net proceeds from its IPO to repay in full the outstanding borrowings of $114.2 million under its Credit Facilities, as defined below under Note 9 - Debt.
Prior to the IPO, deferred offering costs, which consist of legal, accounting, consulting and other third-party fees that were directly associated with the IPO, were capitalized within other assets on the Company's consolidated balance sheets. Upon the completion of the IPO, these costs were offset against the proceeds from the IPO and recorded as a reduction to additional paid-in capital.
Following the Company's IPO, General Atlantic (IC), L.P. ("General Atlantic") controls more than 50% of the combined voting power of the Company's outstanding common stock, and the Company is considered a "controlled company" within the meaning of the corporate governance standards of the New York Stock Exchange ("NYSE").
Corporate Conversion
Immediately prior to effectiveness of the Company's IPO registration statement on Form S-1, EngageSmart, LLC, a Delaware limited liability company, converted into a Delaware corporation pursuant to a statutory conversion, which changed the Company's name to EngageSmart, Inc. ("Corporate Conversion"). Refer to Note 10 - Stockholders' Equity for further discussion.
Stock Split
On September 10, 2021, the Company effected a 1-for- forward stock split of its common shares. In connection with the forward stock split, each issued and outstanding common share, automatically and without action on the part of the holders, became three common shares. All share, per share and related information presented in the consolidated financial statements and accompanying notes have been retroactively adjusted, where applicable, to reflect the impact of the forward stock split.
Basis of Presentation
EngageSmart, Inc., formerly EngageSmart, LLC prior to the Corporate Conversion, was formed on December 7, 2018 as Hancock Parent, LLC. On December 11, 2018, EngageSmart, LLC entered a series of arrangements to indirectly acquire, through its wholly owned subsidiary Hancock Midco, LLC, 100% of the equity interest in Invoice Cloud, Inc. (the “InvoiceCloud Acquisition”). On February 11, 2019, Hancock Merger Sub, Inc., a transitory merger company of Hancock Midco, LLC, merged into InvoiceCloud, with InvoiceCloud continuing as the surviving corporation and a wholly owned subsidiary of Hancock Midco, LLC. For all the periods reported in these condensed consolidated financial statements, the Company has not and does not have any material revenue-generating operations on a standalone basis, and all the material revenue-generating operations of the Company are carried out by its subsidiaries.
7
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions between the Company and its subsidiaries have been eliminated in consolidation.
Certain information and note disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Therefore, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2021, included in the Company's 2021 Form 10-K. In the opinion of management, the interim condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position for the periods presented. The results for the interim periods presented are not necessarily indicative of future results.
Impact of the COVID-19 Pandemic
The Company is subject to risks and uncertainties relating to the ongoing outbreak of the novel strain of coronavirus (“COVID-19”), which the World Health Organization declared a pandemic in March 2020. The COVID-19 pandemic has continued to spread throughout the United States and the world 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. Work-from-home and other measures have introduced additional operational risks, including cybersecurity risks, and may adversely affect the way the Company and its customers and insurance providers conduct business.
In response to the COVID-19 pandemic, the Company limited corporate travel and reduced certain professional services. In addition, the Company implemented remote working capabilities and measures that focused on the safety of its employees. The Company continues to monitor the rapidly evolving conditions and circumstances as well as guidance from international and domestic authorities, including public health authorities. The Company does not currently foresee the need to take additional actions, however it continues to evaluate the ongoing impact of COVID-19 as facts and circumstances change. For the three months ended March 31, 2022, the COVID-19 pandemic has not had a material effect on the Company’s revenues and financial results, although the magnitude and duration of the ultimate effects as a result of the COVID-19 pandemic are not possible to predict at this time.
2. Summary of Significant Accounting Policies
The Company’s significant accounting policies are discussed in Note 2 - Summary of Significant Accounting Policies within the notes to consolidated financial statements for the year ended December 31, 2021, included in the Company's 2021 Form 10-K. There have been no significant changes to these policies during the three months ended March 31, 2022, except as noted below.
Risk of Concentrations of Credit and Significant Customers
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents, and accounts receivable. At times, the Company may maintain cash balances in excess of federally insured limits. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
Significant customers are those that accounted for 10% or more of the Company’s total revenue or accounts receivable during any period presented herein. During the three months ended March 31, 2022 and 2021, no customer accounted for 10% or more of revenue. As of March 31, 2022 and December 31, 2021, no customer accounted for 10% or more of accounts receivable.
8
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 requires lessees to recognize assets and liabilities on their balance sheet for the rights and obligations created by leases and to continue to recognize related expenses on their income statements over the lease term. It also requires disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. The Company adopted this standard effective January 1, 2022 using the modified retrospective transition method. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company elected the package of transition practical expedients for existing contracts. Adoption of the new standard resulted in the recording of operating lease right-of-use assets of $31.4 million and operating lease liabilities of $37.1 million, as of January 1, 2022. The difference between the operating lease right-of-use assets and operating lease liabilities relates to deferred rent balances, lease incentives, and liabilities recognized under Accounting Standards Codification ("ASC") 420, Exit or Disposal Cost Obligations, the net impact of which reduced the right-of-use assets. The adoption of the standard did not impact the Company's consolidated net earnings and had no impact on cash flows. Refer to Note 5 - Leases for additional information related to the Company’s lease obligations.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. This replaces the existing incurred loss model with an expected loss model and requires the use of forward-looking information to calculate credit loss estimates. Effective January 1, 2022, the Company adopted ASU 2016-13 on a modified retrospective basis. The adoption of ASU 2016-13 did not have a material impact of the Company's condensed consolidated balance sheets, statements of operations and comprehensive income, or cash flows.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles as well as clarifying and amending existing guidance to improve consistent application. Effective January 1, 2022, the Company adopted ASU 2019-12 on a modified retrospective basis. The adoption of ASU 2019-12 did not have a material impact of the Company's condensed consolidated balance sheets, statements of operations and comprehensive income, or cash flows.
Recently Issued Accounting Pronouncements
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers ("ASU 2021-08"), which requires the recognition and measurement of contract assets and liabilities acquired in a business combination in accordance with ASC 606, Revenue from Contracts with Customers ("ASC 606"). ASU 2021-08 is effective for fiscal years beginning after December 15, 2022 and, if adopted early, requires the retrospective method of transition applied to transactions occurring on or after the beginning of the fiscal year of adoption. The Company is currently evaluating the timing of adoption of ASU 2021-08. The Company does not believe the adoption of ASU 2021-08 will have a material impact on its consolidated financial statements.
3. Revenue
Revenue Disaggregated
The Company disaggregates revenue from contracts with customers by reportable segment and revenue type, as the Company believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors and is consistent with the manner in which the Company operates the business. The Company generates a significant majority of its revenue in the Enterprise Solutions segment from transaction and usage-based revenue and a significant majority of its revenue in the SMB Solutions segment from subscription revenue.
9
The following table depicts disaggregated revenue by segment and revenue type (in thousands):
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Enterprise Solutions |
|
|
|
|
|
|
||
Transaction and usage-based |
|
$ |
28,319 |
|
|
$ |
21,611 |
|
Subscription |
|
|
2,081 |
|
|
|
1,827 |
|
Other |
|
|
460 |
|
|
|
641 |
|
Total Enterprise Solutions revenue |
|
|
30,860 |
|
|
|
24,079 |
|
SMB Solutions |
|
|
|
|
|
|
||
Transaction and usage-based |
|
|
11,027 |
|
|
|
7,140 |
|
Subscription |
|
|
25,052 |
|
|
|
16,010 |
|
Other |
|
|
423 |
|
|
|
195 |
|
Total SMB Solutions revenue |
|
|
36,502 |
|
|
|
23,345 |
|
Total revenue |
|
$ |
67,362 |
|
|
$ |
47,424 |
|
Contract Assets and Liabilities
Contract assets are rights to consideration in exchange for goods or services that the entity has transferred to a customer when that right is conditional on something other than the passage of time. Contract assets are transferred to accounts receivable once the rights become unconditional. The Company did not have contract assets as of March 31, 2022 or December 31, 2021.
Contract liabilities (deferred revenue) primarily consist of billings and payments received in advance of revenue recognition. The Company primarily bills and collects payments from customers for its services in advance on a monthly, quarterly or annual basis. Contract liabilities are recognized as revenue when services are performed and all other revenue recognition criteria have been met. Amounts expected to be recognized as revenue within 12 months of the balance sheet date are classified as current deferred revenue and amounts expected to be recognized as revenue beyond 12 months of the balance sheet date are classified as non-current deferred revenue. The Company had current deferred revenue of $7.6 million and $6.8 million as of March 31, 2022 and December 31, 2021, respectively. Non-current deferred revenue was $0.2 million as of March 31, 2022 and December 31, 2021. During the three months ended March 31, 2022, the Company recognized revenue of $5.0 million from the deferred revenue balance as of December 31, 2021. During the three months ended March 31, 2021, the Company recognized revenue of $3.6 million from the deferred revenue balance as of December 31, 2020.
Remaining Performance Obligations
ASC 606 requires disclosure of the aggregate amount of the transaction price allocated to unsatisfied performance obligations. As permitted by ASC 606, the Company has elected to exclude from this disclosure any contracts with an original duration of one year or less and any variable consideration that meets specified criteria. For contracts greater than one year in length, the Company's most significant performance obligations consist of variable consideration. Such variable consideration meets the specified criteria for the disclosure exclusion; therefore, the majority of the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied is variable consideration that is not required for this disclosure.
10
4. Net Income Per Share
Basic net income per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is calculated by dividing net income by the sum of the weighted average number of common shares and potentially dilutive securities outstanding during the period using the treasury stock method. For the periods in which the Company incurs a net loss, the effect of the Company’s outstanding common stock equivalents is not included in the calculation of diluted net loss per share as the effect would be anti-dilutive. The following table sets forth the computation of basic and diluted net income per share:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
(in thousands, except share and per share amounts) |
|
|||||
Numerator: |
|
|
|
|
|
|
||
Net income |
|
$ |
2,059 |
|
|
$ |
485 |
|
Denominator: |
|
|
|
|
|
|
||
Weighted average common shares outstanding, basic |
|
|
162,143,171 |
|
|
|
147,698,362 |
|
Effect of potential dilutive common shares |
|
|
6,872,941 |
|
|
|
1,933,508 |
|
Weighted average common shares outstanding, diluted |
|
|
169,016,112 |
|
|
|
149,631,870 |
|
Net income per share, basic |
|
$ |
0.01 |
|
|
$ |
0.00 |
|
Net income per share, diluted |
|
$ |
0.01 |
|
|
$ |
0.00 |
|
The Company excluded the following potential common shares, presented based on amounts outstanding at each period end, from the computation of diluted net income per share for the periods indicated because including them would have had an anti-dilutive effect:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Options to purchase common shares |
|
|
580,711 |
|
|
|
6,456,900 |
|
Unvested restricted stock units |
|
|
477,344 |
|
|
|
— |
|
Total |
|
|
1,058,055 |
|
|
|
6,456,900 |
|
5. Leases
On January 1, 2022, the Company adopted ASU 2016-02, Leases, using the modified retrospective transition method. The Company has elected to adopt the package of practical expedients which apply to leases that commenced before the adoption date. By electing the package of practical expedients, the Company did not reassess: whether any expired or existing contracts are or contain leases, the lease classification for any expired or existing leases, and the initial direct costs for any existing leases. The Company has also elected to combine lease and non-lease components when calculating minimum lease payments on new leases for all asset classes.
The Company has elected an accounting policy to forgo the recognition of lease assets or liabilities for short-term leases. Short-term leases are defined, in accordance with the standard, as those with terms of one year or less and do not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
The Company determines if an arrangement is or contains a lease at contract inception. The Company accounts for a contract as a lease when it has the right to direct the use of the asset for a period of time while obtaining substantially all of the asset’s economic benefits. The Company determines the initial classification and measurement of right-of-use ("ROU") assets and lease liabilities at the lease commencement date and thereafter at the modification date, if modified.
ROU assets represent the Company's right to control the underlying assets under lease, and the lease liability is the Company's obligation to make the lease payments related to the underlying assets under lease, over the contractual term. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of future minimum fixed lease payments to be made over the lease term. The Company uses the non-cancellable lease term unless it is reasonably certain that a renewal or termination option will be exercised. When available, the Company will use the rate implicit in the lease to discount lease payments to present value. As most leases do not provide an implicit rate, the Company will estimate the incremental borrowing rate to discount the lease payments. The Company estimates the incremental borrowing rate based on the rates of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis, over a similar term, and in a similar economic environment. The ROU asset also includes any lease prepayments and initial direct costs, offset by lease incentives.
11
Certain lease agreements contain variable lease payments which are not included in the measurement of the lease liability. Variable lease payments relate to taxes, insurance, utilities, and common area maintenance ("CAM"). These variable lease payments are recognized in the condensed consolidated statements of operations and comprehensive income in the period in which the obligation for those payments is incurred.
The Company has operating leases for office space to support business operations. The Company's office leases expire at varying dates from 2022 through 2030. The Company's leases do not contain any material residual value guarantees or restrictive covenants. Operating leases are recognized on the condensed consolidated balance sheets as operating lease right-of-use assets, operating lease liabilities and long-term operating lease liabilities. Operating lease expense is recognized on a straight-line basis over the lease term within the Company’s condensed consolidated statements of operations and comprehensive income.
Lease Costs and Other Information
The following table summarizes the components of operating lease expense (in thousands):
|
|
Three Months Ended |
|
|
|
|
March 31, 2022 |
|
|
Operating lease cost |
|
$ |
1,181 |
|
Variable lease cost |
|
|
91 |
|
Total |
|
$ |
1,272 |
|
The weighted average remaining lease term and discount rate were as follows:
|
|
Three Months Ended |
|
|
|
|
March 31, 2022 |
|
|
Weighted-average remaining lease term |
|
7.4 years |
|
|
Weighted-average discount rate |
|
|
2.26 |
% |
Supplemental Cash Flow Information
The following table presents supplemental information relating to cash flows arising from lease transactions. Cash payments made for variable lease cost and short-term leases are not included in the measurement of operating lease liabilities, and, as such, are excluded from the amounts below (in thousands):
|
|
Three Months Ended |
|
|
|
|
March 31, 2022 |
|
|
Cash paid for amounts included in the measurement of operating lease liabilities |
|
$ |
1,404 |
|
Right of use assets obtained in exchange for new operating lease liabilities |
|
$ |
31,392 |
|
Maturity of Lease Liabilities
The following table presents the future minimum lease payments under the Company's operating leases liabilities as of March 31, 2022 (in thousands):
Remainder of 2022 |
|
$ |
3,801 |
|
2023 |
|
|
5,723 |
|
2024 |
|
|
5,750 |
|
2025 |
|
|
4,489 |
|
2026 |
|
|
4,079 |
|
Thereafter |
|
|
14,810 |
|
Total lease payments |
|
$ |
38,652 |
|
Less: imputed interest |
|
|
(3,209 |
) |
Lease liabilities |
|
$ |
35,443 |
|
The Company has subleased certain office space for which incoming sublease amounts will offset the future lease payments in the table above. Under the executed sublease agreement, the Company expects to receive future sublease payments of $0.4 million over the remainder of 2022 and $1.5 million thereafter.
12
ASC 840 Disclosures
Under the previous lease accounting standard, ASC 840, Leases, (“ASC 840”), as previously disclosed in the 2021 Form 10-K for the year ended December 31, 2021, the total future minimum payments under non-cancellable operating leases as of December 31, 2021 was as follows (in thousands):
2022 |
|
$ |
5,674 |
|
2023 |
|
|
5,716 |
|
2024 |
|
|
5,743 |
|
2025 |
|
|
4,481 |
|
2026 |
|
|
4,071 |
|
Thereafter |
|
|
14,766 |
|
Total |
|
$ |
40,451 |
|
Rent expense was $1.1 million for the three months ended March 31, 2021. As of December 31, 2021, the Company had total deferred rent of $4.5 million, which was included in accrued expenses and other current liabilities and other long-term liabilities on the Company’s condensed consolidated balance sheets.
6. Fair Value Measurements
The following tables present the Company’s fair value hierarchy for its assets and liabilities that were measured at fair value on a recurring basis (in thousands):
|
|
March 31, 2022 |
|
|||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash equivalents - money market funds |
|
$ |
202,022 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
202,022 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Contingent consideration liability |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
December 31, 2021 |
|
|||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash equivalents - money market funds |
|
$ |
205,010 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
205,010 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Contingent consideration liability |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,800 |
|
|
$ |
2,800 |
|
Money market funds held as of March 31, 2022 and December 31, 2021 were valued by the Company based on quoted market prices, which represent a Level 1 measurement within the fair value hierarchy. The carrying values of the Company’s accounts receivable, unbilled receivables, accounts payable, and accrued expenses approximate their fair values due to the short-term nature of these assets and liabilities. There were no transfers into or out of Level 3 during the periods presented.
The Company’s recurring fair value measurements using Level 3 inputs relate to the Company’s contingent consideration liability, as the significant inputs to the valuation are not observable in the market. The Company determines the fair value of the contingent consideration liability using a Monte Carlo simulation model, and the significant assumptions and estimates utilized in the model include forecasted net recurring revenue, net recurring revenue volatility, and discount rate. Changes in the fair value of the Company’s contingent consideration liability were as follows (in thousands):
Balance as of December 31, 2021 |
|
$ |
2,800 |
|
Payment of contingent consideration |
|
|
(2,800 |
) |
Change in fair value |
|
|
— |
|
Balance as of March 31, 2022 |
|
$ |
— |
|
13
7. Goodwill and Acquired Intangible Assets
The carrying amount of goodwill was $425.7 million as of March 31, 2022 and December 31, 2021, related to goodwill from the Company’s acquisitions. Changes in the carrying amount of goodwill by reportable segment through March 31, 2022 are as follows (in thousands):
|
|
Enterprise Solutions |
|
|
SMB Solutions |
|
|
Total |
|
|||
Balance as of December 31, 2021 |
|
$ |
218,658 |
|
|
$ |
207,019 |
|
|
$ |
425,677 |
|
Goodwill acquired |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Balance as of March 31, 2022 |
|
$ |
218,658 |
|
|
$ |
207,019 |
|
|
$ |
425,677 |
|
Acquired intangible assets of the Company consisted of the following (in thousands):
|
|
|
|
|
March 31, 2022 |
|
||||||||||
|
|
Weighted Average |
|
|
Gross Carrying Value |
|
|
Accumulated Amortization |
|
|
Net Carrying Value |
|
||||
|
|
(in years) |
|
|
|
|
|
|
|
|
|
|
||||
Customer relationships |
|
|
10.0 |
|
|
$ |
82,841 |
|
|
$ |
(25,131 |
) |
|
$ |
57,710 |
|
Developed technology |
|
|
7.0 |
|
|
|
42,913 |
|
|
|
(18,849 |
) |
|
|
24,064 |
|
Tradenames |
|
|
5.0 |
|
|
|
5,824 |
|
|
|
(3,579 |
) |
|
|
2,245 |
|
Total |
|
|
|
|
$ |
131,578 |
|
|
$ |
(47,559 |
) |
|
$ |
84,019 |
|
|
|
|
|
|
|
December 31, 2021 |
|
||||||||||
|
|
Weighted Average |
|
|
Gross Carrying Value |
|
|
Accumulated Amortization |
|
|
Net Carrying Value |
|
||||
|
|
(in years) |
|
|
|
|
|
|
|
|
|
|
||||
Customer relationships |
|
|
10.0 |
|
|
$ |
82,841 |
|
|
$ |
(23,059 |
) |
|
$ |
59,782 |
|
Developed technology |
|
|
7.0 |
|
|
|
42,913 |
|
|
|
(17,311 |
) |
|
|
25,602 |
|
Tradenames |
|
|
5.0 |
|
|
|
5,824 |
|
|
|
(3,288 |
) |
|
|
2,536 |
|
Total |
|
|
|
|
$ |
131,578 |
|
|
$ |
(43,658 |
) |
|
$ |
87,920 |
|
|
The Company recorded amortization expense of $3.9 million for both the three months ended March 31, 2022 and 2021. Amortization of developed technology is recorded within cost of revenue, while amortization of customer relationships and tradenames is recorded within amortization of intangible assets within the Company’s condensed consolidated statements of operations and comprehensive income. Future estimated amortization expense of the Company’s intangible assets as of March 31, 2022 is expected to be as follows (in thousands):
Remainder of 2022 |
|
$ |
11,700 |
|
2023 |
|
|
15,601 |
|
2024 |
|
|
14,640 |
|
2025 |
|
|
14,383 |
|
2026 |
|
|
9,335 |
|
Thereafter |
|
|
18,360 |
|
Total |
|
$ |
84,019 |
|
14
8. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
||
Accrued employee compensation and benefits |
|
$ |
7,850 |
|
|
$ |
12,437 |
|
Accrued consulting and professional fees |
|
|
2,694 |
|
|
|
2,619 |
|
Accrued processing fees |
|
|
2,152 |
|
|
|
1,626 |
|
Accrued channel partner fees |
|
|
2,368 |
|
|
|
2,081 |
|
Accrued license fees |
|
|
1,724 |
|
|
|
1,154 |
|
Accrued sales tax |
|
|
674 |
|
|
|
615 |
|
Accrued restructuring |
|
|
— |
|
|
|
387 |
|
Other |
|
|
5,736 |
|
|
|
4,310 |
|
Total |
|
$ |
23,198 |
|
|
$ |
25,229 |
|
9. Debt
As of March 31, 2022 and December 31, 2021, the Company had no long-term debt outstanding.
2021 Revolving Credit Facility
On September 27, 2021, the Company entered into a revolving credit agreement (“2021 Revolving Credit Facility”) with JPMorgan Chase Bank, N.A. as administrative agent and certain other lenders. The 2021 Revolving Credit Facility allows the Company to borrow up to $75.0 million, $7.5 million of which may be comprised of a letter of credit facility. The 2021 Revolving Credit Facility will mature on September 27, 2026 and proceeds of the borrowings under the 2021 Revolving Credit Facility will be used for general corporate purposes. In conjunction with the 2021 Revolving Credit Facility, the Company incurred debt issuance costs in the amount of $1.2 million, which were recorded within other assets on the condensed consolidated balance sheets and are being amortized into interest expense over the life of the 2021 Revolving Credit Facility. The 2021 Revolving Credit Facility requires the Company to pay a commitment fee in respect to unused revolving credit facility commitments of 0.25% per annum. The commitment fee is recorded as a component of interest expense on the Company's condensed consolidated statements of operations and comprehensive income. As of March 31, 2022, the Company has not yet drawn upon the 2021 Revolving Credit Facility, although $2.1 million has been utilized against the 2021 Revolving Credit Facility in the form of a line of credit, reducing the Company's borrowing capacity to $72.9 million.
The 2021 Revolving Credit Facility contains certain financial maintenance covenants, which require the Company to not exceed certain specified total net leverage ratios at the end of each fiscal quarter.
Credit Facilities
On February 11, 2019, in connection with the InvoiceCloud Acquisition, the Company entered into a credit agreement (“Credit Agreement”) with Ares Capital Corporation as administrative agent and collateral agent, and certain other lenders, which provided for a $75.0 million aggregate principal amount senior secured term loan facility (“Initial Term Loan Facility”), a $35.0 million senior secured delayed draw term loan facility (“Delayed Draw Term Loan Facility”), and a $7.5 million senior secured revolving credit facility (“2019 Revolving Credit Facility"). The Company collectively refers to the Initial Term Loan Facility, the Delayed Draw Term Loan Facility, and the 2019 Revolving Credit Facility as the Credit Facilities. On September 27, 2021, the Company used a portion of the net proceeds from its IPO to repay in full the outstanding borrowings of $114.2 million under the Credit Facilities. In connection with this repayment, the Company incurred a loss on debt extinguishment of $1.2 million. The loss on debt extinguishment primarily consists of a write-off of unamortized debt issuance costs associated with the Credit Facilities.
In September 2019, a letter of credit was issued related to one of the Company’s leases in the amount of $2.1 million, which reduced the amount of borrowings available under the 2019 Revolving Credit Facility. As of September 27, 2021, the Credit Agreement, which included the 2019 Revolving Credit Facility, was terminated and the outstanding letter of credit was cash collateralized. In December 2021, the cash collateral was returned along with the cancellation of the prior letter of credit, and a new letter of credit for $2.1 million was issued under the 2021 Revolving Credit Facility.
15
10. Stockholders' Equity
Initial Public Offering
On September 27, 2021, the Company completed its IPO, in which the Company issued and sold 13,620,054 shares of common stock at a public offering price of $26.00 per share, including 620,054 shares issued upon the exercise of the underwriters' option to purchase additional shares. The Company raised net proceeds of $326.4 million after deducting the underwriting discounts of $22.1 million and offering expenses of $5.6 million.
Corporate Conversion
Immediately prior to effectiveness of the Company’s IPO registration statement on Form S-1, EngageSmart, LLC, a Delaware limited liability company, converted into a Delaware corporation pursuant to a statutory conversion, which changed the Company’s name to EngageSmart, Inc. As part of the Corporate Conversion, each Class A-1 share, Class A-2 share, and Class A-3 share, in each case, of EngageSmart, LLC was converted on a 1:1 basis into Class A-1 common stock, Class A-2 common stock and Class A-3 common stock, in each case, of the Company, respectively, with the same rights and obligations that existed under the limited liability company agreement of EngageSmart, LLC (the “LLC Agreement”).
Under the LLC Agreement, Class A-2 holders, were entitled to certain cash distributions that General Atlantic would have otherwise been entitled to receive if General Atlantic had received a pre-established dollar threshold in connection with and/or following certain exit events (“CVR Obligation”). Following the Corporate Conversion, each share of (i) Class A-1 common stock was reclassified into 0.9398 shares of common stock, (ii) Class A-2 common stock was reclassified into 1.1102 shares of common stock, and (iii) Class A-3 common stock was reclassified into 1 share of common stock (collectively, the “Common Stock Reclassifications”). The conversion ratio for each Common Stock Reclassification reflected the difference in value of the shares as a result of the CVR Obligation. Pursuant to the Company’s amended and restated certificate of incorporation, no fractional shares resulting from the conversion of Class A-2 common stock to common stock were to be issued and, in lieu of the fractional shares, each holder of Class A-2 common stock who would otherwise be entitled to fractional shares were entitled to an amount in cash (the “Fractional Share Payout”).
Following the Common Stock Reclassifications, General Atlantic, the sole former holder of Class A-1 common stock (which were formerly Class A-1 shares of EngageSmart, LLC) subscribed for 1,662,917 additional shares of common stock in the Company, with the value of each share based on the public offering price of the shares of common stock sold by the Company in the IPO. As consideration for the additional shares of common stock, General Atlantic contributed capital to the Company in an amount equal to $43.2 million in order for the Company to satisfy its obligation in full for the Fractional Share Payout. The Fractional Share Payout settled the former CVR Obligation of the Company under the LLC Agreement.
Additionally, certain of the Company's executive officers and other employees, among others, currently hold CVR Unit Awards ("CVR Units"), under the CVR Bonus Award Plan (the "CVR Plan"). The CVR Plan was amended to reflect the Corporate Conversion and the CVR Units will otherwise remain subject to the same terms and conditions applicable to the CVR Units immediately prior to the Company’s IPO. Following the Common Stock Reclassifications, General Atlantic subscribed for 288,344 additional shares of common stock in the Company, with the value of each share based on the public offering price of the shares of common stock sold by the Company in the IPO. As consideration for the additional shares of common stock, General Atlantic entered into a promissory note with the Company which requires General Atlantic to make a capital contribution to the Company equal to the amount of any payments made by the Company to holders of CVR Units pursuant to the CVR Plan, which such payments would be triggered by the same exit events specified under the LLC Agreement.
Stock Split
On September 10, 2021, the Company effected a 1-for- forward stock split of its common shares. In connection with the forward stock split, each issued and outstanding common share, automatically became three common shares.
Preferred Stock
In connection with the Company's IPO in September 2021, the Company's amended and restated certificate of incorporation and amended and restated bylaws became effective, which authorized the issuance of 10,000,000 shares of preferred stock with a par value of $0.001 with rights and preferences, including voting rights, designated from time to time by the Board of Directors. As of March 31, 2022, no shares of preferred stock were issued or outstanding.
16
Common Stock
In connection with the Company's IPO in September 2021, the Company's amended and restated certificate of incorporation and amended and restated bylaws became effective, with authorized the issuance of 650,000,000 shares of common stock with a par value of $0.001. As of March 31, 2022, there were 162,434,392 shares of common stock issued and outstanding.
11. Stock-based Compensation
2021 Incentive Award Plan
In September 2021, the Company’s Board of Directors adopted, and its stockholders approved, the 2021 Incentive Award Plan (“2021 Plan”), which became effective in connection with the IPO. The 2021 Plan provides for granting stock options, including incentive stock options ("ISOs") and nonqualified stock options ("NSOs"), restricted stock, dividend equivalents, restricted stock units ("RSUs"), other stock-based awards, and cash awards to eligible employees, consultants and directors. A total of 14,798,186 shares of the Company’s common stock have been reserved for issuance under the 2021 Plan. The number of shares initially available for issuance will be increased annually on January 1 of each calendar year beginning in 2022 and ending in 2031 by an amount equal to the lesser of (i) 5% of the shares of the Company's common stock outstanding on the final day of the immediately preceding calendar year or (ii) a smaller number of shares as determined by the Company's Board of Directors. As of March 31, 2022, there were 13,861,534 remaining shares available for the Company to grant under the 2021 Plan.
The Company’s Amended and Restated 2015 Stock Option Plan ("2015 Plan”) provided for the granting of ISOs and NSOs to the Company's employees, consultants, and nonemployee directors. In conjunction with the effectiveness of the 2021 Plan, the Company’s Board of Directors voted that no further awards would be granted under the 2015 Plan but any awards under the 2015 Plan that were outstanding as of the date of the IPO shall remain outstanding and continue to be subject to the terms and conditions of the 2015 Plan.
Stock-based awards granted to employees generally vest over a four-year period, and, in the case of stock options, expire ten years from the date of grant.
2021 Employee Stock Purchase Plan
In September 2021, the Company’s Board of Directors adopted, and its stockholders approved, the 2021 Employee Stock Purchase Plan (“2021 ESPP”), which became effective in connection with the IPO. The 2021 ESPP authorizes the issuance of shares of common stock pursuant to purchase rights granted to employees. A total of 2,219,728 shares of the Company’s common stock have been reserved for future issuance under the 2021 ESPP. The number of shares available for issuance under the 2021 ESPP will be annually increased on January 1 of each calendar year beginning in 2022 and ending in 2031, by an amount equal to the lesser of: (i) 1% of the aggregate number of shares of the Company's common stock outstanding on the final day of the immediately preceding calendar year or (ii) such smaller number of shares as is determined by the Company's Board of Directors.
The 2021 ESPP permits eligible participants to purchase common stock through payroll deductions of up to 15% of their eligible compensation during the offering period. The purchase price of the shares will be 85% of the lesser of the fair market value of our common stock on the first day of the offering period or the fair market value on the last day of the offering period. The Company's first offering period commenced on February 1, 2022 and ends May 31, 2022. Following the completion of the first offering period, the 2021 ESPP will typically be administered through consecutive six-month offering periods. As of March 31, 2022, the Company has not issued any shares under the 2021 ESPP.
Stock-based Compensation Expense
Stock-based compensation expense is reflected in the condensed consolidated statements of operations and comprehensive income as follows (in thousands):
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Cost of revenue |
|
$ |
108 |
|
|
$ |
4 |
|
General and administrative |
|
|
2,319 |
|
|
|
184 |
|
Selling and marketing |
|
|
403 |
|
|
|
23 |
|
Research and development |
|
|
157 |
|
|
|
11 |
|
Total |
|
$ |
2,987 |
|
|
$ |
222 |
|
17
12. Income Taxes
The Company's effective income tax rates were 28.5% and 19.2% for the three months ended March 31, 2022 and 2021, respectively. The effective tax rate for the three months ended March 31, 2022 was higher than the statutory rate of 21.0% primarily due to stock-based compensation adjustments and the impact of state taxes, partially offset by excess benefits from stock-based compensation. The effective tax rate for the three months ended March 31, 2021 was lower than the statutory rate of 21.0% due to the impact of state income taxes, as well as permanent adjustments and excess benefits from stock-based compensation.
13. Commitments and Contingencies
Non-Cancellable Commitments
As of March 31, 2022, the Company had non-cancellable commitments to vendors primarily consisting of subscriptions to third party software products. Obligations under contracts that are cancellable or with a remaining term of 12 months or less are not included. As of March 31, 2022, future minimum payments under other non-cancellable agreements were $3.8 million, of which $1.9 million, $1.5 million and $0.4 million are expected to be paid by December 31, 2022, 2023 and 2024, respectively.
Contingent Value Payments
In connection with the InvoiceCloud Acquisition, the CVR Plan was established for the benefit of option holders as of February 11, 2019 in the event that holders of the Company’s Class A-1 common shares receive cash distributions in connection with certain exit events specified under the LLC Agreement of at least $889.1 million (the “Performance Threshold”). Subject to the achievement of the Performance Threshold, CVR Units entitle the holder, subject generally to the holder’s continued employment through the date of payment, to a pro-rata portion of a bonus pool (based on a participant’s share of CVR Units held). The maximum amount of this bonus pool was capped at $9.5 million, of which, $7.3 million remains outstanding as of March 31, 2022. No compensation expense has been recognized in relation to the CVR Plan as the Company has determined that certain exit events specified under the LLC Agreement are not probable as of March 31, 2022.
In connection with the Company’s IPO, the CVR Plan was amended to reflect the Corporate Conversion (refer to Note 10 - Stockholders' Equity) and the CVR Units will remain subject to the same terms and conditions applicable immediately prior to the Company’s IPO. Following the Common Stock Reclassifications, General Atlantic subscribed and received 288,344 additional shares of common stock in the Company, with the value of each share based on the public offering price of the shares of common stock sold by the Company in the IPO. As consideration for the additional shares of common stock, General Atlantic entered into a promissory note with the Company, which requires General Atlantic to make a capital contribution to the Company equal to the amount of any future payments to be made by the Company to holders of CVR Units pursuant to the CVR Plan, which such payments would be triggered by the same exit events specified under the LLC Agreement. In the event the CVR Units are forfeited or the Performance Threshold is not met, General Atlantic will not be required to make any payments under the promissory note and will keep the shares issued.
Indemnification Agreements
In the normal course of business, the Company may provide indemnification of varying scope and terms to third parties and may enter into commitments and guarantees (“Agreements”) under which it may be required to make payments. The duration of these Agreements varies, and in certain cases, may be indefinite with no limit to the Company’s maximum potential payment exposure. In addition, the Company has obligations with certain members of its board of directors and certain executive officers that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. To date, the Company has not incurred any material costs as a result of such indemnifications. The Company does not believe that the outcome of any claims under indemnification arrangements will have a material effect on its financial position, results of operations or cash flows, and it has not accrued any liabilities related to such obligations in its condensed consolidated financial statements as of March 31, 2022 and December 31, 2021.
18
Legal Proceedings
The Company is from time to time subject to various other legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. The Company routinely assesses its current litigation and/or threatened litigation as to the probability of ultimately incurring a liability and records its best estimate of the ultimate loss if reasonably possible to estimate, in situations where the Company assesses the likelihood of loss as probable. While the outcome of these claims cannot be predicted with certainty, the Company believes that these pending or threatened legal proceeding or claims could not have a material impact on the Company’s condensed consolidated financial statements.
14. Restructuring
In 2020, the Company relocated certain of its operations and abandoned office space in Los Angeles, California resulting in a restructuring charge of $2.4 million. In 2021, the Company revised sublease assumptions and executed a sublease agreement for this office space and recorded a reversal in restructuring expense of $0.2 million.
As of December 31, 2021, the remaining restructuring liability was $1.2 million, of which $0.4 million was included within accrued expenses and other current liabilities and $0.8 million was included within other long-term liabilities within the Company’s condensed consolidated balance sheets. Upon adoption of ASU 2016-12 on January 1, 2022, the outstanding restructuring liability was reclassified as a reduction to the Company's operating lease right-of use asset. As of March 31, 2022, the Company had no restructuring liability balance outstanding.
15. Related Parties
In 2019, the Company assumed unsecured notes payable in the aggregate amount of $3.0 million (the “GC Notes”) and $2.9 million (“IVR Note”), respectively, with two individuals that are former shareholders, one of which is a former employee and the other is a current employee of Global Cloud, Ltd. (“GC”) and individuals that are former shareholders and former employees of IVR Technologies Group, LLC (“IVR”), respectively. The GC Notes and IVR Note bore interest at a rate of 7% and 8% per annum, respectively, and required interest-only payments with the outstanding principal amount and any accrued but unpaid interest due on the maturity date of March 12, 2021 and January 16, 2021, respectively. During the three months ended March 31, 2021, the Company repaid in full the outstanding principal balance of the GC Notes and IVR Note, which totaled $5.9 million. These amounts are disclosed within cash flows from financing activities within the condensed consolidated statements of cash flows.
Within its condensed consolidated statements of operations and comprehensive income, the Company recognized interest expense related to the GC Notes and IVR Note of less than $0.1 million during the three months ended March 31, 2021. The Company made cash interest payments related to the GC Notes and IVR Note of $0.2 million during the three months ended March 31, 2021.
16. Segment and Geographic Information
Segment Information
The Company has determined that its chief executive officer is its chief operating decision maker (“CODM”) and the Company is organized into two reportable segments: Enterprise Solutions and SMB Solutions. The reportable segments were determined based on how the CODM reviews business performance and makes decisions about resources to be allocated.
The Enterprise Solutions segment is primarily engaged in providing SaaS solutions that simplify customer-client engagement primarily through electronic billing and digital payments. Enterprise solutions are built to address the unique needs of specific verticals: Government, Utilities, Financial Services, Healthcare and Giving. For the Enterprise Solutions segment, the Company integrates directly with its customers’ core software systems and utilizes a partner-assisted direct sales model for purposes of its go-to-market strategy. The Company generates a significant majority of its revenue in this segment from transaction and usage-based revenue. For the three months ended March 31, 2022, this segment generated 46% of total revenue.
The SMB Solutions segment is primarily engaged in providing end-to-end practice management solutions geared toward the Health & Wellness industry. For the Company's SMB Solutions segment, the Company primarily relies on a free trial to paid customer sales model. The Company generates interest for its offerings in the Company's SMB Solutions segment through a combination of search engine optimization, word-of-mouth, paid customer referrals, and search engine marketing. The Company generates a majority of its revenue in this segment from subscription revenue. For the three months ended March 31, 2022, this segment generated 54% of total revenue.
19
The CODM evaluates segment operating performance using revenue and Adjusted EBITDA, as defined below, from reportable segments to make resource allocation decisions and to evaluate segment performance. Adjusted EBITDA assists management in comparing the Company’s performance on a consistent basis for purposes of business decision-making. The Company defines Adjusted EBITDA as net income excluding interest expense, net; provision for income taxes; depreciation; and amortization of intangible assets, as further adjusted for transaction-related expenses, fair value adjustment of acquired deferred revenue, and stock/equity-based compensation. Adjusted EBITDA from reportable segments excludes unallocated corporate costs which are primarily comprised of costs for accounting, finance, legal, human resources and costs for certain executives supporting overall business strategy and execution.
The following table sets forth the revenue and Adjusted EBITDA results attributable to each reportable segment and includes a reconciliation of the totals reported for the reportable segments to the applicable line items in the Company’s accompanying condensed consolidated statements of operations and comprehensive income (in thousands):
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Revenue |
|
|
|
|
|
|
||
Enterprise Solutions |
|
$ |
30,860 |
|
|
$ |
24,079 |
|
SMB Solutions |
|
|
36,502 |
|
|
|
23,345 |
|
Total revenue |
|
|
67,362 |
|
|
|
47,424 |
|
Adjusted EBITDA |
|
|
|
|
|
|
||
Enterprise Solutions |
|
|
4,476 |
|
|
|
3,288 |
|
SMB Solutions |
|
|
13,018 |
|
|
|
8,127 |
|
Total Adjusted EBITDA from reportable segments |
|
|
17,494 |
|
|
|
11,415 |
|
Unallocated corporate expenses |
|
|
(6,937 |
) |
|
|
(3,496 |
) |
Total Adjusted EBITDA |
|
|
10,557 |
|
|
|
7,919 |
|
Reconciling items: |
|
|
|
|
|
|
||
Interest expense, net |
|
|
(88 |
) |
|
|
(2,305 |
) |
Amortization of intangible assets |
|
|
(3,901 |
) |
|
|
(3,900 |
) |
Depreciation |
|
|
(740 |
) |
|
|
(449 |
) |
Transaction-related expenses |
|
|
38 |
|
|
|
(384 |
) |
Fair value adjustment of acquired deferred revenue |
|
|
— |
|
|
|
(59 |
) |
Stock/equity-based compensation |
|
|
(2,987 |
) |
|
|
(222 |
) |
Income before income taxes |
|
|
2,879 |
|
|
|
600 |
|
Provision for income taxes |
|
|
820 |
|
|
|
115 |
|
Net income |
|
$ |
2,059 |
|
|
$ |
485 |
|
The Company’s CODM does not separately evaluate assets by segment, and therefore assets by segment are not presented.
Geographic Information
For the three months ended March 31, 2022 and 2021, revenues by geographic region are not disclosed as revenue outside the United States does not exceed 10% of total revenue.
The Company does not disclose geographic information for long-lived assets as long-lived assets located outside the United States do not exceed 10% of total assets.
20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q, as well as our consolidated financial statements and related notes included in our 2021 Form 10-K. This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans, and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading “Special Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q. You should review the disclosure in Part I, Item 1A. "Risk Factors" in our 2021 Form 10-K for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.
Overview
We are a leading provider of vertically tailored customer engagement software and integrated payments solutions. At EngageSmart, our mission is to simplify customer and client engagement to allow our customers to focus resources on initiatives that improve their businesses and better serve their communities. We offer single instance, multi-tenant, true Software-as-a-Service ("SaaS") vertical solutions that are designed to simplify our customers’ engagement with their clients by driving digital adoption and self-service. As of March 31, 2022, we serve more than 84,000 customers in the SMB Solutions segment and more than 3,100 customers in the Enterprise Solutions segment across several core verticals: Health & Wellness, Government, Utilities, Financial Services, Healthcare and Giving. Our SaaS solutions are purpose-built for each of our verticals and they simplify and automate mission-critical workflows such as scheduling, client onboarding, client communication, paperless billing, and electronic payment processing. Our solutions transform our customers’ digital engagement and empower them to manage, improve, and grow their businesses.
Our vertically tailored solutions include software and payment tools that automate mission-critical business workflows for customers across our verticals. Our value proposition is focused on transforming our customers’ digital engagement through four core SaaS solutions, including:
Our Business Segments
We organize our solutions into two reportable segments, Enterprise Solutions and SMB Solutions. The chief operating decision maker (“CODM”), which is our chief executive officer, evaluates segment operating performance using revenue and Adjusted EBITDA from reportable segments to make resource allocation decisions and to evaluate segment performance.
21
Our Revenue Model
We primarily generate two types of revenue: (i) subscription revenue and (ii) transaction and usage-based revenue.
Impact of COVID-19 on Our Business
The COVID-19 pandemic that began in early 2020 continues to affect global economic activity and create macroeconomic uncertainty, and has impacted our customers and partners, which may ultimately affect our business operations and results. As described in our 2021 Form 10-K, during the second half of 2021, the impact of the COVID-19 pandemic on our solutions began to decrease and our operating results began to normalize. For the three months ended March 31, 2022, the COVID-19 pandemic did not have a material adverse effect on our results of operations.
The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations, cash flows, and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted. Given the evolving nature of COVID-19, we will continue to closely monitor the pandemic’s impact on both the verticals we serve and our business specifically. We will continue to prioritize the safety of our employees, customers, their clients and communities in which we operate. Refer to Part I, Item 1A, “Risk Factors – Risks related to our business and industry – The COVID-19 pandemic could have a material adverse impact on our employees, customers, partners, clients and other key stakeholders, which could materially and adversely impact our business, operating results and financial condition" in our 2021 Form 10-K.
Key Business Metrics and Non-GAAP Financial Measures
We review the following key business metrics and non-GAAP financial measures to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions. Accordingly, we believe our key business metrics and non-GAAP financial measures provide useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management team. Our key business metrics and non-GAAP financial measures are presented for supplemental informational purposes only, should not be considered a substitute for financial information presented in accordance with accounting principles generally accepted in the United States ("GAAP") and may be calculated differently than similarly titled metrics or measures presented by other companies.
Number of Customers
We serve a wide variety of customers across our verticals. The majority of our customers are based in the United States. For the purposes of measuring our key business metrics, we define customers as individuals or entities with whom we directly contract to use our solutions. The number of customers in the table below represents the total number of customers for each of our segments for the periods presented.
|
|
March 31, 2022 |
|
|
March 31, 2021 |
|
||
Customers in the SMB Solutions segment |
|
|
84,600 |
|
|
|
63,600 |
|
Customers in the Enterprise Solutions segment |
|
|
3,200 |
|
|
|
3,000 |
|
Total |
|
|
87,800 |
|
|
|
66,600 |
|
22
Transactions Processed
We define Transactions Processed as the number of accepted payment transactions, such as credit card and debit card transactions, ACH payments, emerging electronic payments, other communication, text messaging and interactive voice response transactions, and other payment transaction types, which are facilitated through our solutions during a given period. We believe Transactions Processed is a useful key business metric for investors because it directly correlates with transaction and usage-based revenue. We use Transactions Processed to evaluate changes in transaction and usage-based revenue over time.
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
(in millions) |
|
|||||
Transactions Processed |
|
|
34.3 |
|
|
|
24.9 |
|
Adjusted EBITDA and Adjusted EBITDA Margin
We define Adjusted EBITDA as net income excluding interest expense, net, provision for income taxes, depreciation, and amortization of intangible assets, as further adjusted for transaction-related expenses, the fair value adjustment of acquired deferred revenue, and stock/equity-based compensation. We define Adjusted EBITDA Margin as Adjusted EBITDA divided by revenue plus the fair value adjustment of acquired deferred revenue. We believe that Adjusted EBITDA and Adjusted EBITDA Margin, when taken collectively with our GAAP results, may be helpful to investors because they provide consistency and comparability with past financial performance and assist in comparisons with other companies, some of which use similar non-GAAP financial measures to supplement their GAAP results.
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
(in thousands, except percentages) |
|
|||||
Net income |
|
$ |
2,059 |
|
|
$ |
485 |
|
Net income margin |
|
|
3.1 |
% |
|
|
1.0 |
% |
Adjusted EBITDA |
|
$ |
10,557 |
|
|
$ |
7,919 |
|
Adjusted EBITDA Margin |
|
|
15.7 |
% |
|
|
16.7 |
% |
Adjusted Gross Profit and Adjusted Gross Margin
We define Adjusted Gross Profit as gross profit as adjusted for the fair value adjustment of acquired deferred revenue, amortization of intangible assets, stock/equity-based compensation, and transaction-related expenses. We define Adjusted Gross Margin as Adjusted Gross Profit divided by revenue plus the fair value adjustment of acquired deferred revenue. We believe that Adjusted Gross Profit and Adjusted Gross Margin, when taken collectively with our GAAP results, may be helpful to investors because they provide consistency and comparability with past financial performance and assist in comparisons with other companies, some of which use similar non-GAAP financial measures to supplement their GAAP results.
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
(in thousands, except percentages) |
|
|||||
Gross profit |
|
$ |
51,323 |
|
|
$ |
35,204 |
|
Gross profit margin |
|
|
76.2 |
% |
|
|
74.2 |
% |
Adjusted Gross Profit |
|
$ |
52,970 |
|
|
$ |
36,832 |
|
Adjusted Gross Margin |
|
|
78.6 |
% |
|
|
77.6 |
% |
Management uses Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Gross Profit, and Adjusted Gross Margin:
By providing these non-GAAP financial measures, together with a reconciliation to the most directly comparable GAAP measure, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives. Adjusted EBITDA, Adjusted EBITDA
23
Margin, Adjusted Gross Profit, and Adjusted Gross Margin have limitations as analytical tools, and should not be considered in isolation, or as an alternative to, or a substitute for net income, gross profit, or other financial statement data presented in our consolidated financial statements as indicators of financial performance. Some of the limitations are:
Reconciliations of Non-GAAP Financial Measures
The following tables present the reconciliations for each non-GAAP financial measure to the most directly comparable financial measure calculated and presented in accordance with GAAP.
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
(in thousands, except percentages) |
|
|||||
Net income |
|
$ |
2,059 |
|
|
$ |
485 |
|
Net income margin |
|
|
3.1 |
% |
|
|
1.0 |
% |
Adjustments: |
|
|
|
|
|
|
||
Provision for income taxes |
|
|
820 |
|
|
|
115 |
|
Interest expense, net |
|
|
88 |
|
|
|
2,305 |
|
Amortization of intangible assets |
|
|
3,901 |
|
|
|
3,900 |
|
Depreciation |
|
|
740 |
|
|
|
449 |
|
Fair value adjustment of acquired deferred revenue |
|
|
— |
|
|
|
59 |
|
Stock/equity-based compensation |
|
|
2,987 |
|
|
|
222 |
|
Transaction-related expense |
|
|
(38 |
) |
|
|
384 |
|
Adjusted EBITDA |
|
$ |
10,557 |
|
|
$ |
7,919 |
|
Adjusted EBITDA Margin |
|
|
15.7 |
% |
|
|
16.7 |
% |
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
(in thousands, except percentages) |
|
|||||
Gross profit |
|
$ |
51,323 |
|
|
$ |
35,204 |
|
Gross margin |
|
|
76.2 |
% |
|
|
74.2 |
% |
Adjustments: |
|
|
|
|
|
|
||
Fair value adjustment of acquired deferred revenue |
|
|
— |
|
|
|
59 |
|
Amortization of intangible assets |
|
|
1,539 |
|
|
|
1,538 |
|
Stock/equity-based compensation |
|
|
108 |
|
|
|
4 |
|
Transaction-related expense |
|
|
— |
|
|
|
27 |
|
Adjusted Gross Profit |
|
$ |
52,970 |
|
|
$ |
36,832 |
|
Adjusted Gross Margin |
|
|
78.6 |
% |
|
|
77.6 |
% |
Components of Results of Operations
Revenue
We generate revenue primarily from providing access to our SaaS solutions via subscription and transaction and usage-based fees for services provided through such solutions. To a lesser extent, we also generate revenue from the sale of implementation services, sale of on-demand learning courses and the sale of hardware.
Cost of Revenue
Cost of revenue primarily consists of personnel-related expenses for our customer support and operations teams, certain variable transaction and licensing costs, amortization of intangible assets related to acquired developed technology, and hosting and data storage costs associated with our infrastructure and platform environments. We expect that cost of
24
revenue will increase in absolute dollars, but it may fluctuate as a percentage of revenue from period to period as we continue to invest in growing our business across our segments.
Operating Expenses
General and Administrative
General and administrative expenses consist primarily of personnel-related expenses, professional and consulting-related expenses, software costs and non-income tax-related expenses. We expect to incur additional general and administrative expenses as a result of operating as a public company and to support the anticipated growth of our business. We expect that general and administrative expenses will increase, but they may fluctuate as a percentage of revenue from period to period. Over the longer term, we expect general and administrative expenses to decrease as a percentage of revenue as we leverage the scale of our business.
Selling and Marketing
Selling and marketing expenses consist primarily of personnel-related expenses, inclusive of sales commission expense, fees paid to third-party partners, and costs to market and promote our solutions through advertisements and marketing events. We expect our selling and marketing expense to increase in absolute dollars as we continue to invest in new customer acquisition and retention efforts, but they may fluctuate as a percentage of revenue from period to period.
Research and Development
Research and development expenses consist primarily of personnel-related expenses, third-party consulting costs, and costs for software tools for product management and software development. Costs associated with developing new products and features that qualify as internal use software are capitalized and amortized. We expect our research and development expenses to increase in absolute dollars, but they may fluctuate as a percentage of revenue from period to period as we expand our research and development team to develop new products and enhance existing products.
Contingent Consideration Expense
Contingent consideration expense consists of increases or decreases in the fair value of our contingent consideration liabilities. We remeasure the fair value of potential future payments based upon the achievement levels of remaining targets at each subsequent reporting period until the contingent liabilities are settled or have expired.
Amortization of Intangible Assets
Amortization of intangible assets, within operating expenses, consists primarily of amortization of customer relationship and tradename assets acquired as part of business combinations. We amortize acquired intangible assets over their estimated useful lives based on the pattern of consumption of the economic benefits or, if that pattern cannot be readily determined, on a straight-line basis.
Other Expense
Interest Expense
Interest expense consists of interest expense on our long-term and related party debt, costs incurred to extinguish debt, amortization of debt issuance costs and fees associated with unused revolving credit facility commitments.
Results of Operations
The following table sets forth, for the periods presented, each line item from our condensed consolidated statements of operations on a percentage of revenue basis. The period-to-period comparison of financial results is not necessarily indicative of future results. The information contained in the table below should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.
25
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
% |
|
|
% |
|
||
|
(% of total revenue) |
|
||||||
Revenue |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of revenue |
|
|
23.8 |
% |
|
|
25.8 |
% |
Gross profit |
|
|
76.2 |
% |
|
|
74.2 |
% |
Operating expenses: |
|
|
|
|
|
|
||
General and administrative |
|
|
19.7 |
% |
|
|
16.1 |
% |
Selling and marketing |
|
|
33.6 |
% |
|
|
31.7 |
% |
Research and development |
|
|
14.9 |
% |
|
|
14.7 |
% |
Contingent consideration expense |
|
|
— |
% |
|
|
0.4 |
% |
Amortization of intangible assets |
|
|
3.5 |
% |
|
|
5.0 |
% |
Total operating expenses |
|
|
71.8 |
% |
|
|
68.0 |
% |
Income from operations |
|
|
4.4 |
% |
|
|
6.2 |
% |
Other income (expense), net: |
|
|
|
|
|
|
||
Interest expense, including related party interest |
|
|
(0.2 |
)% |
|
|
(4.9 |
)% |
Other income (expense), net |
|
|
0.0 |
% |
|
|
(0.1 |
)% |
Total other income (expense), net |
|
|
(0.1 |
)% |
|
|
(4.9 |
)% |
Income before income taxes |
|
|
4.3 |
% |
|
|
1.3 |
% |
Provision for income taxes |
|
|
1.2 |
% |
|
|
0.2 |
% |
Net income and comprehensive income |
|
|
3.1 |
% |
|
|
1.0 |
% |
Comparison of the Three Months Ended March 31, 2022 and 2021
The following tables set forth our results of operations for the periods presented:
|
Three Months Ended March 31, |
|
|||||||||||||
|
2022 |
|
|
2021 |
|
|
Change |
|
|||||||
|
Amount |
|
|
Amount |
|
|
Amount |
|
|
% |
|
||||
|
(in thousands, except percentages) |
|
|||||||||||||
Revenue |
$ |
67,362 |
|
|
$ |
47,424 |
|
|
$ |
19,938 |
|
|
|
42.0 |
% |
Cost of revenue |
|
16,039 |
|
|
|
12,220 |
|
|
|
3,819 |
|
|
|
31.3 |
% |
Gross profit |
|
51,323 |
|
|
|
35,204 |
|
|
|
16,119 |
|
|
|
45.8 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
||||
General and administrative |
|
13,287 |
|
|
|
7,655 |
|
|
|
5,632 |
|
|
|
73.6 |
% |
Selling and marketing |
|
22,664 |
|
|
|
15,045 |
|
|
|
7,619 |
|
|
|
50.6 |
% |
Research and development |
|
10,040 |
|
|
|
6,993 |
|
|
|
3,047 |
|
|
|
43.6 |
% |
Contingent consideration expense |
|
— |
|
|
|
202 |
|
|
|
(202 |
) |
|
|
(100.0 |
)% |
Amortization of intangible assets |
|
2,362 |
|
|
|
2,362 |
|
|
|
— |
|
|
|
— |
% |
Total operating expenses |
|
48,353 |
|
|
|
32,257 |
|
|
|
16,096 |
|
|
|
49.9 |
% |
Income from operations |
|
2,970 |
|
|
|
2,947 |
|
|
|
23 |
|
|
|
0.8 |
% |
Other income (expense), net: |
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense, including related party interest |
|
(119 |
) |
|
|
(2,305 |
) |
|
|
2,186 |
|
|
|
(94.8 |
)% |
Other income (expense), net |
|
28 |
|
|
|
(42 |
) |
|
|
70 |
|
|
|
(166.7 |
)% |
Total other income (expense), net |
|
(91 |
) |
|
|
(2,347 |
) |
|
|
2,256 |
|
|
|
(96.1 |
)% |
Income before income taxes |
|
2,879 |
|
|
|
600 |
|
|
|
2,279 |
|
|
|
379.8 |
% |
Provision for income taxes |
|
820 |
|
|
|
115 |
|
|
|
705 |
|
|
|
613.0 |
% |
Net income and comprehensive income |
$ |
2,059 |
|
|
$ |
485 |
|
|
$ |
1,574 |
|
|
|
324.5 |
% |
Revenue
Revenue increased $19.9 million for the three month period ended March 31, 2022, as compared to the corresponding period in 2021, primarily due to an increase of $10.6 million in transaction and usage-based revenue, driven by an increase in the number of Transactions Processed, and an increase of $9.3 million in subscription revenue, driven by an increase in the number of customers utilizing our solutions as well as expansion with existing customers.
26
Cost of revenue
Cost of revenue increased $3.8 million for the three month period ended March 31, 2022, as compared to the corresponding period in 2021, primarily related to an increase of $1.9 million in certain variable transaction, licensing and hosting costs due to higher usage of our solutions, and a $1.5 million increase in personnel-related costs, driven by headcount growth within our customer support departments needed to sustain the increased demand for our solutions.
General and administrative expenses
General and administrative expenses increased $5.6 million for the three month period ended March 31, 2022, as compared to the corresponding period in 2021, primarily due to an increase of $4.0 million in personnel-related costs, driven by an increase of $2.1 million in stock-based compensation expense as well as increased headcount to support overall growth and public company operations. In addition, professional and consulting-related expenses, including legal, audit and insurance, increased $1.8 million related to increased costs required to support operating as a public company.
Selling and marketing expenses
Selling and marketing expenses increased $7.6 million for the three month period ended March 31, 2022, as compared to the corresponding period in 2021, primarily due to an increase of $2.5 million in personnel-related costs associated with headcount growth, an increase of $2.2 million in advertising and other marketing-related spend utilized to drive new customer additions, and an increase of $1.5 million in fees paid to third-party channel partners.
Research and development expenses
Research and development expenses increased $3.0 million for the three month period ended March 31, 2022, as compared to the corresponding period in 2021, primarily due to an increase of $2.7 million in personnel-related costs associated with headcount growth needed to enhance the functionality and ease of use of our solutions.
Contingent consideration expense
There was no contingent consideration expense recorded for the three month period ended March 31, 2022, as the contingent consideration liability was fully settled during the period. Contingent consideration expense was $0.2 million for the three months ended March 31, 2021, and relates to the change in fair value of the contingent consideration liability.
Amortization of intangible assets
Amortization of intangible assets, within operating expenses, remained consistent for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021.
Interest expense
Interest expense decreased $2.2 million for the three month period ended March 31, 2022, as compared to the corresponding period in 2021, primarily due to interest expense recognized during the three months ended March 31, 2021 related to our prior credit facility which was extinguished on September 27, 2021.
Provision for income taxes
The provision for income taxes was $0.8 million during the three months ended March 31, 2022, as compared to $0.1 million for the three months ended March 31, 2021, an increase of $0.7 million. Our effective income tax rate was 28.5% for the three months ended March 31, 2022, compared to 19.2% for the three months ended March 31, 2021. The effective tax rate for the three months ended March 31, 2022 was higher than the statutory rate of 21.0% primarily due to stock-based compensation adjustments and the impact of state taxes, partially offset by excess benefits from stock-based compensation. The effective tax rate for the three months ended March 31, 2021 was lower than the statutory rate of 21.0% due to the impact of state income taxes, as well as permanent adjustments and excess benefits from stock-based compensation.
Segment Information
Our reportable segments have been determined in accordance with Accounting Standards Codification ("ASC"), ASC 280, Segment Reporting. Currently, we have two reportable segments: Enterprise Solutions and SMB Solutions. The CODM, which is our chief executive officer, evaluates segment operating performance using revenue and Adjusted EBITDA from reportable segments to make resource allocation decisions and to evaluate segment performance. We define Adjusted EBITDA as net income excluding interest expense, net; provision for income taxes; depreciation; and amortization of intangible assets, as further adjusted for transaction-related expenses, the fair value adjustment of acquired deferred revenue, and stock/equity-based compensation. Adjusted EBITDA from reportable segments excludes unallocated corporate costs which are primarily comprised of costs for accounting, finance, legal, human resources and costs for certain executives supporting overall business strategy and execution.
27
Adjusted EBITDA from reportable segments is a non-GAAP measure. Refer to “Key Business Metrics and Non-GAAP Financial Measures” for a reconciliation of Adjusted EBITDA, a non-GAAP measure, to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP.
Comparison of the Three Months Ended March 31, 2022 and 2021
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
(in thousands, except percentages) |
|
||||||
Revenue |
|
|
|
|
|
|
||
Enterprise Solutions |
|
$ |
30,860 |
|
|
$ |
24,079 |
|
SMB Solutions |
|
|
36,502 |
|
|
|
23,345 |
|
Total revenue |
|
|
67,362 |
|
|
|
47,424 |
|
Adjusted EBITDA |
|
|
|
|
|
|
||
Enterprise Solutions |
|
|
4,476 |
|
|
|
3,288 |
|
SMB Solutions |
|
|
13,018 |
|
|
|
8,127 |
|
Total Adjusted EBITDA from reportable segments |
|
|
17,494 |
|
|
|
11,415 |
|
Unallocated corporate expenses |
|
|
(6,937 |
) |
|
|
(3,496 |
) |
Total Adjusted EBITDA |
|
|
10,557 |
|
|
|
7,919 |
|
Reconciling items: |
|
|
|
|
|
|
||
Interest expense, net |
|
|
(88 |
) |
|
|
(2,305 |
) |
Amortization of intangible assets |
|
|
(3,901 |
) |
|
|
(3,900 |
) |
Depreciation |
|
|
(740 |
) |
|
|
(449 |
) |
Transaction-related expenses |
|
|
38 |
|
|
|
(384 |
) |
Fair value adjustment of acquired deferred revenue |
|
|
— |
|
|
|
(59 |
) |
Stock/equity-based compensation |
|
|
(2,987 |
) |
|
|
(222 |
) |
Income before income taxes |
|
|
2,879 |
|
|
|
600 |
|
Provision for income taxes |
|
|
820 |
|
|
|
115 |
|
Net income |
|
$ |
2,059 |
|
|
$ |
485 |
|
Net income margin |
|
|
3.1 |
% |
|
|
1.0 |
% |
Adjusted EBITDA Margin - Enterprise Solutions |
|
|
14.5 |
% |
|
|
13.7 |
% |
Adjusted EBITDA Margin - SMB Solutions |
|
|
35.7 |
% |
|
|
34.7 |
% |
Revenue
Revenue for the Enterprise Solutions segment increased $6.8 million for the three month period ended March 31, 2022, as compared to the corresponding period in 2021, primarily attributable to an increase of $6.7 million in transaction and usage-based revenue driven by an increase in Transactions Processed.
Revenue for the SMB Solutions segment increased $13.2 million for the three month period ended March 31, 2022, as compared to the corresponding period in 2021, primarily attributable to an increase of $9.0 million in subscription revenue driven by an increase in the number of customers utilizing our solutions as well as expansion with existing customers and a $3.9 million increase in transaction and usage-based revenue driven by an increase in Transactions Processed.
Adjusted EBITDA
Adjusted EBITDA margin for the Enterprise Solutions segment increased to 14.5% for the three month period ended March 31, 2022, as compared to 13.7% in the corresponding period in 2021. The increase in Adjusted EBITDA margin was primarily driven by efficiencies in supporting, hosting and implementing our solutions, partially offset by investments in sales and marketing infrastructure to support new customer acquisition and deliver increased adoption with existing customers.
Adjusted EBITDA margin for the SMB Solutions segment increased to 35.7% for the three month period ended March 31, 2022, as compared to 34.7% in the corresponding period in 2021. The increase in Adjusted EBITDA margin was primarily driven by efficiencies in certain back-office functions as well as a reduction in non-income based taxes, partially offset by an increase in marketing spend to drive higher trial volumes.
Liquidity and Capital Resources
As of March 31, 2022 and December 31, 2021, we had cash and cash equivalents of $256.2 million and $254.3 million, respectively, which were primarily held for working capital purposes. Our primary source of funds has been, and we expect it to continue to be, cash generated from our net revenues, supplemented through debt financing and sale of our equity securities. We believe our existing cash and cash equivalents, cash provided by operations and access to our 2021
28
Revolving Credit Facility, as defined below, will be sufficient to meet our working capital and capital expenditures needs for at least the next 12 months.
On September 27, 2021, we completed our initial public offering ("IPO"), in which we issued and sold 13,620,054 shares of common stock at a price of $26.00 per share. We raised net proceeds of $326.4 million from the IPO after deducting the underwriting discounts of $22.1 million and offering expenses of $5.6 million. On September 27, 2021, we used a portion of the net proceeds from our IPO to repay in full the outstanding borrowings of $114.2 million under our prior credit facility.
On September 27, 2021, we entered into a revolving credit agreement ("2021 Revolving Credit Facility") which allows us to borrow up to $75.0 million, $7.5 million of which may be comprised of a letter of credit facility. The 2021 Revolving Credit Facility matures on September 27, 2026 and proceeds of any borrowings under the 2021 Revolving Credit Facility will be used for general corporate purposes. As of March 31, 2022, we have not drawn upon the 2021 Revolving Credit Facility, although $2.1 million has been utilized against the 2021 Revolving Credit Facility in the form of a line of credit, reducing our borrowing capacity to $72.9 million. The 2021 Revolving Credit Facility contains certain financial maintenance covenants, which require us to not exceed certain specified total net leverage ratios at the end of each fiscal quarter. As of March 31, 2022, we were in compliance with all financial covenants under the 2021 Revolving Credit Facility.
To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. The sale of additional equity would result in additional dilution to our stockholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. There can be no assurances that we will be able to raise additional capital. In the event that additional financing is required from outside sources, we may not be able to negotiate terms acceptable to us or at all. If we are unable to raise additional capital when required, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, results of operations, financial condition, and cash flows would be adversely affected.
Cash Flows
The following table summarizes our cash flows for the periods presented:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
(in thousands) |
|
|||||
Net cash provided by operating activities |
|
$ |
2,741 |
|
|
$ |
4,978 |
|
Net cash used in investing activities |
|
|
(1,509 |
) |
|
|
(1,313 |
) |
Net cash provided by (used in) financing activities |
|
|
664 |
|
|
|
(5,348 |
) |
Cash Flows from Operating Activities
Our primary source of operating cash is revenue generated from subscription and transaction and usage-based fees associated with our SaaS solutions. Our primary uses of operating cash are personnel-related costs and payments to our vendors. Our cash flows from operating activities are impacted by the amount of our net income, revenue and customer growth, volume of transactions, changes in working capital accounts, the timing of payments to vendors and add-backs of non-cash expense items such as depreciation and amortization, stock/equity-based compensation expense, deferred income taxes, non-cash operating lease expense and non-cash interest expense.
Net cash provided by operating activities decreased $2.2 million for three month period ended March 31, 2022, as compared to the corresponding period in 2021, primarily due to a decrease of $7.5 million in cash generated from the change in operating asset and liability accounts, offset by $5.3 million increase in net income adjusted for non-cash expense items.
Cash Flows from Investing Activities
Investing activities primarily consist of payments made related capital expenditures.
Net cash used in investing activities increased $0.2 million for the three month period ended March 31, 2022, as compared to the corresponding period in 2021, driven by a $0.2 million increase in capital expenditures.
29
Cash Flows from Financing Activities
Financing activities primarily consist of proceeds from the exercise of stock/equity-based options, repayments on related party debt, contingent consideration payments, payments of taxes related to net share settlement of equity awards, and payments of offering costs.
Net cash provided by financing activities increased $6.0 million for the three month period ended March 31, 2022, as compared to the corresponding period in 2021.
During the three months ended March 31, 2022, cash provided by financing activities was $0.7 million, which was primarily driven by $1.9 million of proceeds from issuance of stock options, offset by contingent consideration payments of $1.1 million and tax payments related to net share settlement of equity awards of $0.1 million.
During the three months ended March 31, 2021, cash used in financing activities was $5.3 million, which was primarily driven by $5.9 million used to repay related party notes, offset by $0.6 million of proceeds from issuance of equity-based options.
Contractual Obligations and Commitments
As of March 31, 2022, there were no material changes in our contractual obligations and commitments from those disclosed in our 2021 Form 10-K.
For additional discussion on our operating leases and other non-cancellable commitments, refer to Note 5 - Leases and Note 13 - Commitment and Contingencies to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, which have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods, as well as related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities and the amount of revenue and expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and any such differences may be material.
There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates as described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our 2021 Form 10-K, except as noted in Note 2 - Summary of Significant Accounting Policies and Note 5 - Leases to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Recent Accounting Pronouncements
Refer to Note 2 - Summary of Significant Accounting Policies to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a description of recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted.
JOBS Act
We currently qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Accordingly, we have the option to adopt new or revised accounting guidance either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies. We have elected to delay the adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Our utilization of these transition periods may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the transition periods afforded under the JOBS Act.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in our market risk exposure as described under the heading "Item 7A. Quantitative and Qualitative Disclosures about Market Risk" in our 2021 Form 10-K.
Item 4. Controls and Procedures.
Inherent Limitations on Effectiveness of Controls
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, and as a result of the material weakness described below, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2022, our disclosure controls and procedures were not effective at the reasonable assurance level. However, after giving full consideration to this material weakness, and the additional analyses and other procedures that we performed to ensure that our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q were prepared in accordance with GAAP, our management has concluded that our consolidated financial statements present fairly, in all material respects, our financial position, results of operations and cash flows for the periods disclosed in conformity with GAAP.
Material Weaknesses
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual and interim financial statements will not be detected or prevented on a timely basis.
In connection with the preparation of our consolidated financial statements for the years ended December 31, 2021 and 2020, as previously reported in our 2021 Form 10-K, we identified deficiencies related to a lack of certain defined processes and controls over information technology, in the areas of access management, segregation of duties, change management, data governance and program development, and a lack of certain defined processes and controls over the financial statement close process. These deficiencies, when aggregated, are a material weakness and could result in a material misstatement to our financial statements that may not be able to be prevented or detected.
Remediation Measures
We are compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404(a) of Sarbanes-Oxley Act and we are taking steps to remediate the material weakness. The finalization of our remediation measures is ongoing and includes the following:
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While we believe these efforts will remediate the material weaknesses, these material weaknesses cannot be considered fully remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Changes in Internal Control over Financial Reporting
We are taking actions to remediate the material weakness relating to our internal control over financial reporting. Other than the changes to our internal control over financial reporting described in “Remediation Measures” above, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
We are subject to legal and regulatory proceedings in the ordinary course of business. We believe that there is no pending or threatened legal proceeding that has arisen from these matters that individually is likely to have a material impact on our business, financial condition, results of operations or cash flows. However, management’s views and estimates related to these matters may change in the future, as new events and circumstances arise and the matters continue to develop. Moreover, results of litigation and claims are inherently unpredictable, and legal proceedings related to such accidents or incidents could, in the aggregate, have a material impact on our business, financial condition, results of operations, and cash flows.
Item 1A. Risk Factors.
Our operations and financial results are subject to various risks and uncertainties that could adversely affect our business, financial condition, liquidity and results of operations. There have been no material changes to the risks and uncertainties previously identified in Part I, Item 1A. “Risk Factors", in our 2021 Form 10-K.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) Sale of Unregistered Securities; Purchases of Equity Securities by the Issuer or Affiliated Purchaser
Not Applicable.
(b) Use of Proceeds
On September 27, 2021 we completed our IPO, in which we issued and sold 13,620,054 shares of our common stock. All shares sold were registered pursuant to a registration statement on Form S-1 (File No. 333-259101), as amended, declared effective by the SEC on September 22, 2021. There has been no material change in the expected use of the net proceeds from our initial public offering as described in our final prospectus dated September 22, 2021, filed with the SEC in accordance with Rule 424(b) of the Securities Act on September 24, 2021 (the “Prospectus”).
(c) Issuer Purchases of Equity Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
Not Applicable.
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Item 6. Exhibits.
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Incorporated by Reference |
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Exhibit Number |
Exhibit Description |
Form |
File No. |
Exhibit |
Filing Date |
Filed / Furnished Herewith |
2.1 |
10-Q |
001-40835 |
2.1 |
11/10/2021 |
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|
2.2 |
10-Q |
001-40835 |
2.2 |
11/10/2021 |
|
|
2.3 |
10-Q |
001-40835 |
2.3 |
11/10/2021 |
|
|
3.1 |
Amended and Restated Certificate of Incorporation of EngageSmart, Inc. |
10-Q |
001-40835 |
3.1 |
11/10/2021 |
|
3.2 |
10-Q |
001-40835 |
3.2 |
11/10/2021 |
|
|
4.1 |
Specimen Common Stock Certificate Evidencing the Shares of Common Stock. |
S-1/A |
333-259101 |
4.3 |
9/13/2021 |
|
10.1 |
Employment Agreement dated March 1, 2022, by and between EngageSmart, Inc. and Scott Semel. |
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|
|
* |
10.2 |
Employment Agreement dated February 1, 2022, by and between EngageSmart, Inc. and Kevin O'Brien. |
10-K |
001-40835 |
10.20 |
3/3/2022 |
|
10.3 |
General Release dated February 15, 2022, by and between EngageSmart, Inc. and Charles Kallenbach. |
10-K |
001-40835 |
10.22 |
3/3/2022 |
|
31.1 |
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). |
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|
|
* |
31.2 |
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a). |
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|
|
* |
32.1 |
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350. |
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** |
32.2 |
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350. |
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|
|
** |
101.INS |
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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|
* |
101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
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|
|
* |
101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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|
|
|
* |
101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
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|
|
|
* |
101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
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|
|
|
* |
101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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|
|
|
* |
104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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|
* |
|
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|
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|
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|
* |
Filed herewith. |
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|
** |
Furnished herewith. |
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|
|
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35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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EngageSmart, Inc. |
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Date: May 5, 2022 |
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By: |
/s/ Robert P. Bennett |
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Robert P. Bennett |
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Chief Executive Officer |
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Date: May 5, 2022 |
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By: |
/s/ Cassandra Hudson |
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Cassandra Hudson |
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Chief Financial Officer |
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36