# AvePoint, Inc. (AVPT) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from AvePoint, Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1777921/000143774923008808/avpt20221231_10k.htm
Accession: 0001437749-23-008808
Filing date: 2023-03-31
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/AVPT/
All MD&A years: /company/AVPT/mda/
Previous year: /company/AVPT/mda/fy2021/ (FY 2021)
Next year: /company/AVPT/mda/fy2023/ (FY 2023)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of our Company as of and for the periods presented below. The MD&A should be read in conjunction with the other sections of this Form 10-K, including our audited, consolidated financial statements and related notes contained in Item 8. Financial Statements and Supplementary Data, and the discussion of risk factors that may affect future results in Item 1.A. Risk Factors.

2022 Business Highlights

[[GREPCENT_TABLE]]
[["","\u25a0","Total ARR increased 27% year-over-year to $201.7 million as of December 31, 2022. On an FX adjusted basis, total ARR increased 32% year-over-year;"],["","\u25a0","Total revenue increased 21% year-over-year to $232.3 million for the year ended December 31, 2022. On a constant currency basis, total revenue increased 29% year-over-year;"],["","\u25a0","SaaS revenue increased 37% year-over-year to $117.2 million for the year ended December 31, 2022. On a constant currency basis, SaaS revenue increased 46% year-over-year;"],["","\u25a0","Completed the acquisition of four companies during 2022, further enhancing the Company's talent, product offerings, and distribution capabilities with a strong focus in the digital workplace and EdTech markets; and"],["","\u25a0","Announced a 100 million SGD international research and development hub in Singapore to support the growing demand for our SaaS solutions."]]
[[/GREPCENT_TABLE]]

Overview

AvePoint provides a cloud-native platform that organizations rely on to optimize IT operations, manage critical data and secure the digital workplace. As companies around the world embrace the new normal of hybrid work, they must build and deliver a new, seamless workplace experience for knowledge workers, centered around an extensive portfolio of SaaS solutions and productivity applications aimed at improving collaboration across the organization.

The adoption of this portfolio of solutions – what has been generally described as the “digital transformation” – is a substantial and ongoing challenge for most organizations, which for decades had previously relied upon only a small number of multi-purpose on-premises applications to drive business outcomes. However, to build and deliver an efficient digital workplace today, companies must address this abundance of applications and the associated explosive growth and sprawl of data with a platform offering that is well governed, fit for purpose, easy to use and built on automation.

AvePoint’s Confidence Platform empowers organizations – of all sizes, in all regions, and across all industries – to optimize and secure the solutions that most commonly establish and underpin the digital workplace. As our customers seek to rapidly reduce costs, improve productivity and make more informed business decisions, they depend on our platform for data-driven insights, critical business intelligence and ongoing operational value through automation.

The 2021 Business Combination

On November 23, 2020, Legacy AvePoint and the members of the Apex Group entered into the Business Combination Agreement, and following a series of subsequent mergers, on July 26, 2021, we became the successor to an SEC-registered and Nasdaq-listed company.

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Item 7

Key Business Metrics

Our management reviews the following key business metrics to measure our performance, identify trends affecting our business, formulate business plans, make strategic decisions, and effectively allocate resources. We disclose key business metrics within the MD&A and elsewhere in this Annual Report to enable investors to evaluate progress against our growth strategies, provide transparency into performance trends, and reflect the continued evolution of our products and services. Our key business metrics are fundamentally interconnected and indicative of how customers use our products and services. However, increases or decreases in our key business metrics may not correspond with increases or decreases in our revenue.

The chart below illustrates certain of our key business metrics, each described in more detail below, as of the end of or for the periods presented. Our key business metrics are further discussed in the section titled “Notes to Consolidated Financial Statements” (Part II, Item 8 of this Annual Report).

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2022","","","2021"],["Total ARR ($ in mil)","","$","201.7","","","$","159.2"],["Core TTM dollar-based net retention rate (1)","","","105","%","","","110","%"]]
[[/GREPCENT_TABLE]]

(1) On an FX adjusted basis, Core TTM dollar-based net retention rate was 108% and 109% for 2022 and 2021, respectively.

Annual Recurring Revenue

We calculate annual recurring revenue (“ARR”) at the end of a particular period as the annualized sum of contractually obligated Annual Contract Value (“ACV”) from SaaS, term license and support, and maintenance revenue sources, with the exception of migration products, from all active customers.

As of December 31, 2022, and December 31, 2021, total ARR was $201.7 million and $159.2 million, respectively, representing growth of 27%. Growth in ARR is driven by both new business and the expansion of existing business.

ARR should be viewed independently of revenue and deferred revenue and is not intended to be combined with, or to replace, either of those items. ARR is not a forecast and the active contracts at the end of a reporting period used in calculating ARR may or may not be extended or renewed by our customers.

Beginning in 2023, the Company will include migration products in the calculation of ARR. For 2022 and 2021, ARR from these products totaled $13.0 million and $8.0 million, respectively.

Core TTM Dollar-Based Net Retention Rate

We use a TTM dollar-based net retention rate to evaluate our ability to expand our revenue with our Core customer base, which are those with a contract duration exceeding three months.

“Core TTM Dollar-Based Net Retention Rate” as of a period end is calculated by starting with the ARR from the cohort of all Core customers as of 12 months prior to such period end (the “Prior Period ARR”). We then calculate the ARR from these same Core customers as of the current period end (the “Current Period ARR”). Current Period ARR includes any expansion and is net of contraction or attrition over the last 12 months but excludes ARR from new customers in the current period. We then divide the total Current Period ARR by the total Prior Period ARR to arrive at the Core TTM Dollar-Based Net Retention Rate.

Beginning in 2023, the Company plans to report this metric for its entire base of customers. For 2022 and 2021, this metric was 103% and 110%, respectively.

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Item 7

Components of Results of Operations

[[GREPCENT_TABLE]]
[["Revenue","We generate revenue from four primary sources: SaaS, term license and support, services, and maintenance. SaaS revenue sources are generated from our cloud-based solutions. Term license and support revenue sources are generated from the sales of on-premises or hybrid licenses which include a distinct support component. Both SaaS and term license and support revenue sources are primarily billed annually. SaaS and term license and support are generally sold per user license or based upon the amount of data protected. Services revenue includes revenue generated from implementation, training, consulting, migration, license customization and managed services. These revenues are recognized by applying a measure of progress, such as labor hours, to determine the percentage of completion of each contract. These offerings are not inherently recurring in nature and as such are subject to more period-to-period volatility than other elements of our business. Services revenue from managed services are recognized ratably or on a straight-line basis over the contract term. Maintenance revenue is a result of selling ongoing support for perpetual licenses. It also includes recurring professional services such as Technical Account Management. Maintenance revenue is recognized ratably over the term of the maintenance agreement, which is typically one year. We expect SaaS revenue will continue to increase as a percentage of total revenue, as our focus on increasing revenues from this offering remains a strategic priority."],["Cost of Revenue","Cost of SaaS and cost of term license and support consists of all direct costs to deliver and support our SaaS and term license and support products, including salaries, benefits and related expenses, allocated overhead, and third-party hosting fees related to our cloud services. We recognize these expenses as they are incurred. We expect that these costs will increase in absolute dollars but may fluctuate as a percentage of SaaS and term license and support revenue from period to period. Cost of maintenance consists of all direct costs to support our perpetual license products, including salaries, benefits, stock-based compensation and related expenses and allocated overhead. We recognize these expenses as they are incurred. We expect that cost of maintenance will decrease in absolute dollars as maintenance revenue declines but may fluctuate as a percentage of maintenance revenue. Cost of services consists of salaries, benefits, stock-based compensation and related expenses for our services organization, allocated overhead and IT necessary to provide services for our customers. We recognize these expenses as they are incurred."],["Gross Profit and Gross Margin","Gross profit is revenue less cost of revenue, and gross margin is gross profit as a percentage of revenue. Gross profit has been and will continue to be affected by various factors, including the mix of our revenue, the costs associated with third-party cloud-based hosting services for our cloud-based subscriptions, and the extent to which we expand our customer support and services organizations. We expect that our gross margin will fluctuate from period to period depending on the interplay of these various factors but should increase in the long term as SaaS revenue continues to increase as a percentage of total revenue."],["Sales and Marketing","Sales and marketing expenses consist primarily of personnel-related expenses for sales, marketing and customer success personnel, stock-based compensation expense, sales commissions, marketing programs, travel-related expenses, and allocated overhead costs. We focus our sales and marketing efforts on creating sales leads and establishing and promoting our brand. Incremental sales commissions for new customer contracts are deferred and amortized ratably over the estimated period of our relationship with such customers. We plan to continue our investment in sales and marketing by hiring additional sales and marketing personnel, executing our go-to-market strategy globally, and building our brand awareness."],["General and Administrative","General and administrative expenses consist primarily of personnel-related expenses for finance, legal and compliance, human resources, and IT personnel, as well as, stock-based compensation expense, external professional services, allocated overhead costs and other administrative functions. Our general and administrative expenses have increased as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, and increased expenses for insurance, investor relations, and professional services."],["Research and Development","Research and development expenses consist primarily of personnel-related expenses incurred for our engineering and product and design teams, as well as stock-based compensation expense and allocated overhead costs. We have a research and development presence in the United States, China, Singapore and Vietnam. This provides a strategic advantage, allowing us to invest efficiently in both new product development and increasing our existing product capabilities. We believe delivering expanding product functionality is critical to enhancing the success of existing customers while new product development further reinforces our breadth of software solutions."],["Other Income (Expense), net","Other income (expense), net consists primarily of fair value adjustments on earn-out and warrant liabilities and realized gain/loss for securities. Other income (expense), net also consists of foreign currency remeasurement gains/losses and interest income on corporate funds invested in money market instruments and highly liquid short-term investments."],["Income Taxes","We are subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. Tax laws, regulations, administrative practices, principles, and interpretations in various jurisdictions may be subject to significant change, with or without notice, due to economic, political, and other conditions. The foreign jurisdictions in which we operate have different statutory tax rates than those of the United States. Accordingly, our effective tax rate could be affected by the relative proportion of foreign to domestic income, use of foreign tax credits, changes in the valuation of our deferred tax assets and liabilities, applicability of any valuation allowances, and changes in tax laws in jurisdictions in which we operate."]]
[[/GREPCENT_TABLE]]

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Item 7

Results of Operations

The following table summarizes our historical consolidated statement of operations data for the periods indicated. The period-to-period comparison of operating results is not necessarily indicative of results for future periods.

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","","2021"],["","","(in thousands)"],["Total revenue","","$","232,339","","","$","191,909"],["Total cost of revenue(1)","","","65,123","","","","52,664"],["Gross profit","","","167,216","","","","139,245"],["Operating expenses:"],["Sales and marketing(1)","","","109,805","","","","100,512"],["General and administrative(1)","","","64,874","","","","59,221"],["Research and development(1)","","","30,519","","","","31,765"],["Depreciation and amortization","","","3,084","","","","1,238"],["Total operating expenses","","","208,282","","","","192,736"],["Loss from operations","","","(41,066",")","","","(53,491",")"],["Other income (expense), net","","","7,416","","","","20,703"],["Loss before income taxes","","","(33,650",")","","","(32,788",")"],["Income tax expense","","","5,038","","","","457"],["Net loss","","$","(38,688",")","","$","(33,245",")"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Stock-based compensation for the periods was included in the following line items:"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","","2021"],["","","(in thousands)"],["Cost of revenue","","$","2,640","","","$","3,477"],["Sales and marketing","","","11,393","","","","15,906"],["General and administrative","","","19,398","","","","24,063"],["Research and development","","","3,787","","","","16,062"],["Total stock-based compensation","","$","37,218","","","$","59,508"]]
[[/GREPCENT_TABLE]]

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PART II

Item 7

Comparison of the Years Ended December 31, 2022, and December 31, 2021

Revenue

The components of AvePoint's revenue during the years ended December 31, 2022 and 2021 were as follows:

[[GREPCENT_TABLE]]
[["","","Year Ended"],["","","December 31,","","","Change"],["","","2022","","","2021","","","Amount","","","%"],["","","(in thousands, except percentages)"],["Revenue:"],["SaaS","","$","117,180","","","$","85,580","","","$","31,600","","","","36.9","%"],["Term license and support","","","57,214","","","","50,970","","","","6,244","","","","12.3","%"],["Services","","","41,283","","","","31,919","","","","9,364","","","","29.3","%"],["Maintenance","","","15,868","","","","21,022","","","","(5,154",")","","","(24.5",")%"],["Perpetual license","","","794","","","","2,418","","","","(1,624",")","","","(67.2",")%"],["Total revenue","","$","232,339","","","$","191,909","","","$","40,430","","","","21.1","%"]]
[[/GREPCENT_TABLE]]

Total revenue increased 21.1% to $232.3 million for the year ended December 31, 2022, primarily as a result of an increase in SaaS revenue. SaaS revenue growth comprised approximately 78% of the net increase year over year. For the year ended December 31, 2022, SaaS revenue increased 36.9% to $117.2 million, as we continued to see strong customer demand for these and our term license and services offerings.

The increases were partially offset by a decrease in maintenance revenue, which decreased 24.5% to $15.9 million for the year ended December 31, 2022.

Our revenue from perpetual license and maintenance offerings is expected to continue declining as we shift away from the sale of perpetual licenses and towards SaaS licenses. Without material perpetual license sales, there will be limited opportunities to sell maintenance contracts to new customers. Existing maintenance customers have transitioned and will continue to transition to SaaS and term licenses, which will continue the decline in maintenance revenue.

For the year ended December 31, 2022, total revenue increased 29% year over year on a constant currency basis. Within total revenue, SaaS revenue increased 46% year over year on a constant currency basis.

Revenue by geographic area during the years ended December 31, 2022 and 2021 was as follows:

[[GREPCENT_TABLE]]
[["","","Year Ended"],["","","December 31,","","","Change"],["","","2022","","","2021","","","Amount","","","%"],["","","(in thousands, except percentages)"],["North America","","$","102,025","","","$","83,034","","","$","18,991","","","","22.9","%"],["EMEA","","","71,635","","","","58,285","","","","13,350","","","","22.9","%"],["APAC","","","58,679","","","","50,590","","","","8,089","","","","16.0","%"],["Total","","$","232,339","","","$","191,909","","","$","40,430","","","","21.1","%"]]
[[/GREPCENT_TABLE]]

From the year ended December 31, 2021 to the year ended December 31, 2022, North America revenues increased by $19.0 million, driven by a $21.1 million increase in SaaS, term license and support, and services revenues, partially offset by a $2.1 million decrease in maintenance and perpetual license revenue. EMEA revenues increased by $13.4 million, driven by an $15.6 million increase in SaaS, term license and support, and services revenue, partially offset by a $2.2 million decrease in maintenance and perpetual license revenue. APAC revenues increased by $8.1 million, driven by a $10.6 million increase in SaaS, term license and support, and services revenue, partially offset by a $2.5 million decrease in maintenance and perpetual license revenue.

For the year ended December 31, 2022, North America total revenue increased 23% on a constant currency basis, EMEA total revenue increased 38% on a constant currency basis, and APAC total revenue increased 28% on a constant currency basis. For the year ended December 31, 2022, North America SaaS revenue increased 39% on a constant currency basis, EMEA SaaS revenue increased 48% on a constant currency basis, and APAC SaaS revenue increased 57% on a constant currency basis.

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Item 7

Non-GAAP Financial Measures

In addition to our financial results determined in accordance with GAAP, we disclosed non-GAAP cost of revenue, non-GAAP sales and marketing expense, non-GAAP general and administrative expense, non-GAAP research and development expense, non-GAAP operating income and non-GAAP operating margin.

We believe these non-GAAP measures aid investors by providing additional insight into our operational performance and help clarify trends affecting our business. Management uses these non-GAAP financial measures to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, and to evaluate financial performance.

Non-GAAP financial measures should not be considered as an alternative to operating income, operating margin or any other performance measures derived in accordance with GAAP as measures of performance. Non-GAAP financial measures should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP.

Cost of Revenue, Gross Profit, and Gross Margin

Cost of revenue, gross profit, and gross margin during the years ended December 31, 2022 and 2021 were as follows:

[[GREPCENT_TABLE]]
[["","","Year Ended"],["","","December 31,","","","Change"],["","","2022","","","2021","","","Amount","","","%"],["","","(in thousands, except percentages)"],["Cost of revenue:"],["SaaS","","$","26,617","","","$","19,039","","","$","7,578","","","","39.8","%"],["Term license and support","","","1,969","","","","950","","","","1,019","","","","107.3","%"],["Services","","","35,629","","","","30,726","","","","4,903","","","","16.0","%"],["Maintenance","","","908","","","","1,949","","","","(1,041",")","","","(53.4",")%"],["Total cost of revenue","","$","65,123","","","$","52,664","","","$","12,459","","","","23.7","%"],["Gross profit","","","167,216","","","","139,245","","","","27,971","","","","20.1","%"],["Gross margin","","","72.0","%","","","72.6","%","","","\u2014","","","","\u2014"],["GAAP cost of revenue","","$","65,123","","","$","52,664","","","$","12,459","","","","23.7","%"],["Stock-based compensation expense","","","(2,640",")","","","(3,477",")","","","837","","","","(24.1",")%"],["Non-GAAP cost of revenue","","$","62,483","","","$","49,187","","","$","13,296","","","","27.0","%"],["Non-GAAP gross profit","","","169,856","","","","142,722","","","","27,134","","","","19.0","%"],["Non-GAAP gross margin","","","73.1","%","","","74.4","%","","","\u2014","","","","\u2014"]]
[[/GREPCENT_TABLE]]

Cost of revenue expenses increased 23.7% to $65.1 million for the year ended December 31, 2022, driven by an $8.8 million increase from higher aggregated hosting costs resulting from increased SaaS revenue and a $4.9 million increase in personnel costs primarily due to higher headcount. Within personnel costs, a one-time expense of $0.2 million was associated with the Company's reduction in workforce announced in December of 2022, primarily related to severance and compensation benefits.

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Operating Expenses

Sales and Marketing

Sales and marketing expenses during the years ended December 31, 2022 and 2021 were as follows:

[[GREPCENT_TABLE]]
[["","","Year Ended"],["","","December 31,","","","Change"],["","","2022","","","2021","","","Amount","","","%"],["","","(in thousands, except percentages)"],["Sales and marketing","","$","109,805","","","$","100,512","","","$","9,293","","","","9.2","%"],["Percentage of revenue","","","47.3","%","","","52.4","%","","","\u2014","","","","\u2014"],["GAAP sales and marketing","","$","109,805","","","$","100,512","","","$","9,293","","","","9.2","%"],["Stock-based compensation expense","","","(11,393",")","","","(15,906",")","","","4,513","","","","(28.4",")%"],["Non-GAAP sales and marketing","","$","98,412","","","$","84,606","","","$","13,806","","","","16.3","%"],["Non-GAAP percentage of revenue","","","42.4","%","","","44.1","%","","","\u2014","","","","\u2014"]]
[[/GREPCENT_TABLE]]

Sales and marketing expenses increased 9.2% to $109.8 million for the year ended December 31, 2022, primarily due to an increase of $10.0 million in personnel costs from higher headcount as well as increasing employee compensation which includes commissions, and also from a $1.2 million increase in travel costs, which have risen as business shifts to a more normalized pre-pandemic state. Within personnel costs, a one-time expense of $1.9 million was associated with the Company's reduction in workforce announced in December of 2022, primarily related to severance and compensation benefits.

General and Administrative

General and administrative expenses during the years ended December 31, 2022 and 2021 were as follows:

[[GREPCENT_TABLE]]
[["","","Year Ended"],["","","December 31,","","","Change"],["","","2022","","","2021","","","Amount","","","%"],["","","(in thousands, except percentages)"],["General and administrative","","$","64,874","","","$","59,221","","","$","5,653","","","","9.5","%"],["Percentage of revenue","","","27.9","%","","","30.9","%","","","\u2014","","","","\u2014"],["GAAP general and administrative","","$","64,874","","","$","59,221","","","$","5,653","","","","9.5","%"],["Stock-based compensation expense","","","(19,398",")","","","(24,063",")","","","4,665","","","","(19.4",")%"],["Non-GAAP general and administrative","","$","45,476","","","$","35,158","","","$","10,318","","","","29.3","%"],["Non-GAAP percentage of revenue","","","19.6","%","","","18.3","%","","","\u2014","","","","\u2014"]]
[[/GREPCENT_TABLE]]

General and administrative expenses increased 9.5% to $64.9 million for the year ended December 31, 2022.

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Item 7

The year over year increase was partially due to an increase of $4.8 million in personnel costs as a result of increased headcount and overall costs to support the growth in our business. Within personnel costs, a one-time expense of $0.5 million was associated with the Company's reduction in workforce announced in December of 2022, primarily related to severance and compensation benefits. Of the remaining increase, professional services increased $1.4 million primarily due to increased legal fees relating to acquisitions.

Research and Development

Research and development expenses during the years ended December 31, 2022 and 2021 were as follows:

[[GREPCENT_TABLE]]
[["","","Year Ended"],["","","December 31,","","","Change"],["","","2022","","","2021","","","Amount","","","%"],["","","(in thousands, except percentages)"],["Research and development","","$","30,519","","","$","31,765","","","$","(1,246",")","","","(3.9",")%"],["Percentage of revenue","","","13.1","%","","","16.6","%","","","\u2014","","","","\u2014"],["GAAP research and development","","$","30,519","","","$","31,765","","","$","(1,246",")","","","(3.9",")%"],["Stock-based compensation expense","","","(3,787",")","","","(16,062",")","","","12,275","","","","(76.4",")%"],["Non-GAAP research and development","","$","26,732","","","$","15,703","","","$","11,029","","","","70.2","%"],["Non-GAAP percentage of revenue","","","11.5","%","","","8.2","%","","","\u2014","","","","\u2014"]]
[[/GREPCENT_TABLE]]

Research and development expenses decreased 3.9% to $30.5 million for the year ended December 31, 2022. Stock-based compensation contributed a decrease of $12.3 million year over year, primarily as a result of a one-time compensation expense related to existing stock-based compensation awards to a group of AvePoint's international employees. The primary driver of the offsetting increase resulted from $8.9 million higher compensation costs for research and development personnel as the Company seeks to expand development of new offerings and improvements to existing offerings. Within personnel costs, a one-time expense of $0.5 million was associated with the Company's reduction in workforce announced in December of 2022, primarily related to severance and compensation benefits.

Income Tax Provision

Income tax provision during the years ended December 31, 2022 and 2021 was as follows:

[[GREPCENT_TABLE]]
[["","","Year Ended"],["","","December 31,","","","Change"],["","","2022","","","2021","","","Amount","","","%"],["","","(in thousands, except percentages)"],["Income tax expense","","$","5,038","","","$","457","","","$","4,581","","","","1,002.4","%"]]
[[/GREPCENT_TABLE]]

Our income tax expense for the year ended December 31, 2022 was $5.0 million as compared to $0.5 million for the year ended December 31, 2021. The effective tax rate, which equals the income tax provision divided by income from continuing operations, was (15.0)% for the year ended December 31, 2022, compared to (1.4)% for the year ended December 31, 2021. The change in effective tax rates for the year ended December 31, 2022, as compared to the year ended December 31, 2021, was primarily due to the mix of pre-tax income (loss) results by jurisdictions taxed at different rates than 21%, a permanent item recorded for the executive compensation limitation and changes in the valuation allowance in the U.S. and certain foreign jurisdictions.

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Item 7

Non-GAAP Operating Income and Non-GAAP Operating Margin

Non-GAAP operating income and non-GAAP operating margin are non-GAAP financial measures that our management uses to assess our overall performance. We define non-GAAP operating income as GAAP operating income plus stock-based compensation and the amortization of acquired intangible assets. We define non-GAAP operating margin as non-GAAP operating income divided by revenue. We believe non-GAAP operating income and non-GAAP operating margin provide our management and investors consistency and comparability with our past financial performance and facilitate period-to-period comparisons of operations, as these metrics eliminate the effects of stock-based compensation, which has had historical volatility from period to period due to marked-to-market securities, and of acquired intangible assets, which are unrelated to current operations and are neither comparable to the prior period nor predictive of future results. The elimination of the effect of variability caused by stock-based compensation expense and the amortization of acquired intangible assets, both of which are non-cash expenses, provides a better representation as to the overall operating performance of the company. We use non-GAAP financial measures (a) to evaluate our historical and prospective financial performance and trends as well as our performance relative to our peers, (b) to set and approve spending budgets, (c) to allocate resources, (d) to measure operational profitability and the accuracy of forecasting, and (e) to assess financial discipline over operational expenditures.

GAAP operating margin for the years ended December 31, 2022 and 2021 was (17.7)% and (27.9)% respectively. Non-GAAP operating margin for the years ended December 31, 2022 and 2021 was (1.2)% and 3.1%, respectively. The reduction in non-GAAP operating margin was primarily attributable to higher personnel costs across the organization, increased Azure costs to support the growth in SaaS revenue, returning to a more normalized post-COVID travel routine and the full-year inclusion of expenses related to becoming a publicly traded company. The following table presents a reconciliation of non-GAAP operating income from the most comparable GAAP measure, operating income, for the periods presented:

[[GREPCENT_TABLE]]
[["","","Year Ended"],["","","December 31,"],["","","2022","","","2021"],["","","(in thousands, except percentages)"],["GAAP operating loss","","$","(41,066",")","","$","(53,491",")"],["GAAP operating margin","","","(17.7",")%","","","(27.9",")%"],["Add:"],["Stock-based compensation","","","37,218","","","","59,508"],["Amortization of acquired intangible assets","","","955","","","","\u2014"],["Non-GAAP operating (loss) income","","$","(2,893",")","","$","6,017"],["Non-GAAP operating margin","","","(1.2",")%","","","3.1","%"]]
[[/GREPCENT_TABLE]]

Liquidity and Capital Resources

As of December 31, 2022, we had an accumulated deficit of $416.9 million, $227.2 million in cash and cash equivalents and $2.6 million in short-term investments.

Our short-term liquidity needs primarily include working capital for sales and marketing, research and development, and continued innovation. Our long-term capital requirements will depend on many factors, including our growth rate, levels of revenue, the expansion of sales and marketing activities, market acceptance of our platform, the results of business initiatives, and the timing of new product introductions. Refer to “Note 13 - Commitments and Contingencies” for more information regarding the purchase commitments.

We also maintain a loan and security agreement with HSBC Venture Bank USA, Inc. (“HSBC”) as lender for a revolving line of credit of up to $30.0 million, with an additional $20.0 million accordion feature for additional capital we may draw at our request. Borrowings under the line bear interest at a rate equal to LIBOR plus 3.5%. The line carries an annual unused fee of 0.5%. The line will mature on April 7, 2023. We are required to maintain a specified adjusted quick ratio and a minimum annual recurring revenue tested by HSBC each quarter. We pledged, assigned and granted the HSBC a security interest in all shares, future proceeds and assets (except for excluded assets, including material intellectual property) as a security for the performance of the loan and security agreement obligations. As of December 31, 2022, we are compliant with all covenants under the line and had no borrowings outstanding under the line of credit.

We believe that our existing cash and cash equivalents, our cash flows from operating activities, and our borrowing capacity under our credit facility with HSBC, described below, will be sufficient to meet our working capital and capital expenditure needs and debt service obligations for at least the next twelve months. In the future, we may attempt to raise additional capital through the sale of additional equity or debt financing. The sale of additional equity would be dilutive to our stockholders. Additional debt financing could result in increased debt service obligations and more restrictive financial and operational covenants.

Cash Flows

The following table sets forth a summary of our cash flows for the periods indicated.

[[GREPCENT_TABLE]]
[["","","Year Ended"],["","","December 31,"],["","","2022","","","2021"],["","","(in thousands)"],["Net cash (used in) provided by operating activities","","$","(774",")","","$","5,030"],["Net cash used in investing activities","","","(21,452",")","","","(3,377",")"],["Net cash (used in) provided by financing activities","","","(17,148",")","","","198,617"]]
[[/GREPCENT_TABLE]]

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PART II

Item 7

Operating Activities

Net cash
used in operating activities for the year ended
December 31, 2022, was
$0.8 million, reflecting our
net loss of
$38.7 million, adjusted for non-cash items of
$46.2 million and net cash
outflows of
$8.3 million from changes in our operating assets and liabilities. The main considerations for non-cash items were stock-based compensation, which reflects ongoing compensation charges for the entity’s equity- and pre-merger liability-classified awards, operating lease right-of-use asset expense and mark to market adjustments on earnout and warrant liabilities. The main considerations of changes in operating assets and liabilities that resulted in cash outflows related to an increase in deferred contract costs and operating lease liabilities. This was partially offset by cash inflows related to an increase in deferred revenue that is partially offset by an increase in accounts receivable as a result of the business growth, and an increase in accrued expenses primarily due to personnel related expenses.

Net cash provided by operating activities for the year ended
December 31, 2021, was 
$5.0 million, reflecting our
net loss of
$33.2 million, adjusted for non-cash items of
$39.9 million and net cash
outflows of
$1.6 million from changes in our operating assets and liabilities. The primary drivers for non-cash items were stock-based compensation, which reflects ongoing compensation charges for the entity’s equity- and pre-merger liability-classified awards, mark to market adjustments on earnout and warrant liabilities and changes in deferred tax assets as a result of timing differences in tax related to stock option awards. The primary drivers of changes in operating assets and liabilities related to an increase in accounts receivable due primarily to timing of payments from customers and an increase in prepaid expenses and other current assets primarily related to prepaid insurance in Q3 2021 and an estimated tax payment in Q2 2021, partially offset by an increase in accounts payable and accrued expenses primarily due to billings related to professional services and an increase in deferred revenue due to continued increases in sales of our SaaS offerings which result in increased up-front payments.

Investing Activities

Net cash 
used in investing activities for the year ended
December 31, 2022, was
$21.5 million, consisting of $18.6 million in acquisitions and $3.9 million of purchases of property and equipment, as well as $183.5 million in maturities of short-term investments and $180.9 million in the purchase of investments.

Net cash 
used in investing activities for the year ended
December 31, 2021, was
$3.4 mill
ion, consisting of $2.5 million of purchases of property and equipment and $1.4 million of purchases of short-term investments.

Financing Activities

Net cash
used in financing activities for the year ended
December 31, 2022, was
$17.1 million. The primary driver of cash flows from financing activities was due to $19.9 million in purchases of common stock, partially offset by $2.8 million of proceeds from the exercising of stock options.

Net cash
provided by financing activities for the year ended
December 31, 2021, was 
$198.6 million. The primary driver of cash flows from financing activities was a result of the Apex Business Combination, which resulted in a $441.6 million cash inflow, net of issuance costs paid immediately prior to the merger, partially offset by $130.9 million of cash outflows to Legacy AvePoint's preferred stockholders and $106.2 million of cash outflows to Legacy AvePoint's common stockholders. Other cash flows from financing activities included $7.5 million of cash outflows to holders of Legacy AvePoint options, $3.0 million of cash outflows for Apex Business Combination transaction costs paid directly by us, and $1.6 million of cash outflows related to Legacy AvePoint's purchase of pre-Apex Business Combination Apex shares, which are now recorded as treasury stock. These cash outflows were partially offset by $5.6 million of cash inflows from the proceeds collected upon exercise of stock options.

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PART II

Item 7

Indebtedness

Credit Facility

We maintain a line of credit under a Loan Agreement, as amended (the “Amended Loan Agreement”) with HSBC, as the lender. See “Note 10 – Line of Credit” in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report.

The Amended Loan Agreement provides for a revolving line of credit of up to $30.0 million, with an additional $20.0 million accordion feature for additional capital we may draw at our request. Borrowings under the line bear interest at a rate equal to LIBOR plus 3.5%. The line carries an unused fee of 0.5% per year. Any proceeds of borrowings under the Amended Loan Agreement will be used for general corporate purposes.

On a consolidated basis with our subsidiaries, we are required to maintain a specified adjusted quick ratio, tested by HSBC each quarter. Pursuant to the Amended Loan Agreement, we pledged, assigned, and granted HSBC a security interest in all shares of our subsidiaries, future proceeds, and certain assets as security for our obligations under the Amended Loan Agreement. Our line of credit under the Amended Loan Agreement will mature on April 7, 2023.

To date, we are in compliance with all covenants under the Amended Loan Agreement. We have not at any time, including as of and for the fiscal year ending as of December 31, 2022, borrowed under the Amended Loan Agreement. The description of the Amended Loan Agreement is qualified in its entirety by the full text of such agreement, a copy of which is attached as an exhibit to our Annual Report.

Leasing Obligations

We are obligated under various non-cancelable operating leases for office space. The initial terms of the leases expire on various dates through 2030. During the years ended December 31, 2022 and 2021, total rent expense for facilities amounted to $6.8 million and $6.4 million, respectively. As of December 31, 2022, letters of credit have been issued in the amount of $0.9 million as security for operating leases. The letters of credit are secured by certificates of deposit.

Operating Segment Information

We operate in one segment. Our products and services are sold throughout the world, through direct and indirect sales channels. Our chief operating decision maker (the “CODM”) is our Chief Executive Officer. The CODM makes operating performance assessment and resource allocation decisions on a global basis. The CODM does not receive discrete financial information about asset allocation, expense allocation, or profitability by product or geography. See “Note 18 – Segment Information” (Part II, Item 8 of this Annual Report) for more information.

Critical Accounting Policies and Estimates

Preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities. We also make estimates and assumptions on the reported revenue generated and reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that our management believes are reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

While our significant accounting policies are described in more detail in the section titled “Notes to Consolidated Financial Statements” (Part II, Item 8 of this Annual Report), we believe the following critical accounting policies are most important to understanding and evaluating our reported financial results.

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Item 7

Revenue Recognition

We derive revenue from four primary sources: SaaS, term license and support, services, and maintenance. Many of our contracts with customers include multiple performance obligations. Judgment is required in determining whether each performance obligation is distinct. Our products and services generally do not require a significant amount of integration or interdependency; therefore, our products and services are generally not combined. We allocate the transaction price for each contract to each performance obligation based on the relative standalone selling price (“SSP”) for each performance obligation within each contract.

We use judgment in determining the SSP for products and services. For substantially all performance obligations except term licenses, we are able to establish the SSP based on the observable prices of products or services sold separately in comparable circumstances to similar customers. We typically establish an SSP range for our products and services which is reassessed on a periodic basis or when facts and circumstances change. Term licenses are sold only as a bundled arrangement that includes the rights to a term license and support. In determining the SSP of license and support in a term license arrangement, we apply observable inputs using the value relationship between support and term license, the value relationship between support and perpetual licenses, the average economic life of our products, software renewals rates and the price of the bundled arrangement in relation to the perpetual licensing approach. Using a combination of the relative fair value method or the residual value method, the SSP of the performance obligations in an arrangement is allocated to each performance obligation within a sales arrangement.

Company Earn-Out Shares

In evaluation of the Company Earn-Out Shares and Company Earn-Out RSUs, management determined that the Company Earn-Out Shares represent derivatives to be marked to market at each reporting period, while the Company Earn-Out RSUs represent equity under ASC 718. Refer to
"Note 16 — Stock-Based Compensation" for more information regarding the Company Earn-Out RSUs.

In order to capture the market conditions associated with the Company Earn-Out Shares, the Company applied an approach that incorporated a Monte Carlo simulation, which involved random iterations that took different future price paths over the Sponsor Earn-Out Shares’ contractual life based on the appropriate probability distributions. The fair value was determined by taking the average of the fair values under each Monte Carlo simulation trial. The Monte Carlo model requires highly subjective assumptions including the expected volatility of the price of our common stock, and the expected term of the earn-out shares.

Economic Conditions, Challenges, and Risks

The markets for software and cloud-based services are dynamic and highly competitive. Our competitors are developing new software while also deploying competing cloud-based services for consumers and businesses. Customer preferences evolve rapidly, and choices in hardware, products, and devices can and do influence how users access services in the cloud, and in some cases, the user’s choice of which suite of cloud-based services to use. We must continue to evolve and adapt to keep pace with this changing environment. The investments we are making in infrastructure, research and development, marketing, and geographic expansion will continue to increase our operating costs and may decrease our operating margins.

Our success is highly dependent on our ability to attract and retain qualified employees. We hire a mix of university and industry talent worldwide. We compete for talented individuals globally by offering an exceptional working environment, broad customer reach, scale in resources, the ability to grow one’s career across many different products and businesses, and competitive compensation and benefits. Aggregate demand for our software, services, and devices is correlated to global macroeconomic and geopolitical factors, which remain dynamic. In 2022, Russia initiated significant military action against Ukraine. In response, the U.S. and certain other countries imposed significant sanctions and export controls against Russia, Belarus and certain individuals and entities connected to Russian or Belarusian political, business, and financial organizations, and the U.S. and certain other countries could impose further sanctions, trade restrictions, and other retaliatory actions should the conflict continue or worsen. It is not possible to predict the broader consequences of the conflict, including related geopolitical tensions, and the measures and retaliatory actions taken by the U.S. and other countries in respect thereof as well as any counter measures or retaliatory actions by Russia or Belarus in response, including, for example, potential cyberattacks or the disruption of energy exports, is likely to cause regional instability, geopolitical shifts, and could materially adversely affect global trade, currency exchange rates, regional economies and the global economy. The situation remains uncertain, and while it is difficult to predict the impact of any of the foregoing, the conflict and actions taken in response to the conflict could increase our costs, disrupt our supply chain, reduce our sales and earnings, impair our ability to raise additional capital when needed on acceptable terms, if at all, or otherwise adversely affect our business, financial condition, and results of operations.

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Item 7

Our international operations provide a significant portion of our total revenue and expenses. Many of these revenue and expenses are denominated in currencies other than the U.S. dollar. As a result, changes in foreign exchange rates may significantly affect revenue and expenses. Refer to the section titled “Risk Factors” (Part I, Item 1A of this Annual Report) for a discussion of these factors and other risks.

Seasonality

Our quarterly revenue fluctuates and does not necessarily grow sequentially when measuring any one fiscal quarter’s revenue with another (e.g. comparing the fourth fiscal quarter of fiscal year 2021 with the first fiscal quarter of fiscal year 2022). Historically, our third and fourth quarters have been our highest revenue quarters, however those results are not necessarily indicative of future quarterly revenue or full year results. Higher third and fourth quarter revenue is driven primarily by increased sales resulting from our customers’ fiscal year ends. Additionally, new product and service introductions (including the timing of those introductions) can significantly impact revenue. Revenue can also be affected when customers anticipate a product introduction. Our operating expenses have generally increased sequentially due to increases in personnel in connection with the expansion of our business.

Emerging Growth Company Accounting Election

Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable. We will be an emerging growth company at least until June 30, 2023. As a result, we have elected to avail ourselves of the extended transition period and will take advantage of the benefits of the extended transition period emerging growth company status permits. During the extended transition period, it may be difficult or impossible to compare our financial results with the financial results of another public company that complies with public company effective dates for accounting standard updates because of the potential differences in accounting standards used.

We will remain an emerging growth company under the JOBS Act until the earliest of (a) December 31, 2024, (b) the last date of our fiscal year in which we have total annual gross revenue of at least $1.07 billion, (c) the date on which we are deemed to be a “large accelerated filer” under the rules of the SEC with at least $700.0 million of outstanding securities held by non-affiliates, or (d) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the previous three years. The next determination date as to whether we have satisfied the criteria set forth in the foregoing (b), (c), and (d) is the last day of our second fiscal quarter in 2023.

Recently Issued and Adopted Accounting Pronouncements

For information about recent accounting pronouncements, see Note 2 to the Consolidated Financial Statements of this Annual Report.

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