EverCommerce Inc. (EVCM) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Unless the context requires otherwise, references in this report to "EverCommerce Inc.," the “Company,” “we,” “us” and “our” refer to EverCommerce Inc. and its consolidated subsidiaries. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. Additionally, our historical results are not necessarily indicative of the results that may be expected for any period in the future. An analysis of our results of operations and cash flows for the year ended December 31, 2020, including a discussion of the year ended December 31, 2021 as compared to the year ended December 31, 2020, has been reported previously in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (“SEC”) on March 15, 2022, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Overview
EverCommerce is a leading provider of integrated, vertically-tailored software-as-a-service (“SaaS”) solutions for service-based small- and medium-sized businesses (“service SMBs”). Our platform spans across the full lifecycle of interactions between consumers and service professionals with vertical-specific applications. Today, we serve more than 685,000 customers across three core verticals: Home Services; Health Services; and Fitness & Wellness Services. Within our core verticals, our customers operate within numerous micro-verticals, ranging from home service professionals, such as home improvement contractors and home maintenance technicians, to physician practices and therapists within Health Services, to personal trainers and salon owners within Fitness & Wellness. Our platform provides vertically-tailored SaaS solutions that address service SMBs’ increasingly specialized demands, as well as highly complementary solutions that complete end-to-end offerings, allowing service SMBs and EverCommerce to succeed in the market, and provide end consumers more convenient service experiences.
We offer several vertically-tailored suites of solutions, each of which follows a similar and repeatable go-to-market playbook: offer a “system of action” Business Management Software that streamlines daily business workflows, integrate highly complementary, value-add adjacent solutions and complete gaps in the value chain to create end-to-end solutions. These solutions focus on addressing how service SMBs market their services, streamline operations and retain and engage their customers.
•Business Management Software: Our vertically-tailored Business Management Software is the system of action at the center of a service business’s operation, and is typically the point-of-entry and first solution adopted by a customer. Our software, designed to meet the day-to-day workflow needs of businesses in specific vertical end markets, streamlines front and back-office processes and provides polished customer-facing experiences. Using these offerings, service SMBs can focus on growing their customers, improving their services and driving more efficient operations.
•Billing & Payment Solutions: Our Billing & Payment Solutions provide integrated payments, billing and invoicing automation and business intelligence and analytics. Our omni-channel payments capabilities include point-of-sale, eCommerce, online bill payments, recurring billing, electronic invoicing and mobile payments. Supported payment types include credit card, debit card and Automated Clearing House (“ACH”) processing. Our payments platform also provides a full suite of service commerce features, including customer management as well as cash flow reporting and analytics. These value-add features help small- and medium-sized businesses (“SMBs”) to ensure more timely billing and payments collection and provide improved cash flow visibility.
•Customer Experience Solutions: Our Customer Experience Solutions modernize how businesses engage and interact with customers by leveraging innovative, bespoke customer listening and communication solutions to improve the customer experience and increase retention. Our software provides customer listening capabilities with real-time customer surveying and analysis to allow standalone businesses and multi-location brands to receive voice of the customer (“VoC”) insights and manage the customer experience lifecycle. These applications include: customer health scoring, customer support systems, real-time alerts, NPS-based
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customer feedback collection, review generation and automation, reputation management, customer satisfaction surveying and a digital communication suite, among others. These tools help our customers gain actionable insights, increase customer loyalty and repeat purchases and improve customer experiences.
•Marketing Technology Solutions: Our Marketing Technology Solutions work with our Customer Experience Solutions to help customers build their businesses by invigorating marketing operations and improving return on investment across the customer lifecycle. These solutions help businesses to manage campaigns, generate quality leads, increase conversion and repeat sales, improve customer loyalty and provide a polished brand experience. Our solutions include: custom website design, development and hosting, responsive web design, marketing campaign design and management, search engine optimization (“SEO”), paid search and display advertising, social media and blog automation, call tracking, review monitoring and marketplace lead generation, among others.
We go to market with suites of solutions that are aligned to our three core verticals: (i) the EverPro suite of solutions in Home Services; (ii) the EverHealth suite of solutions within Health Services; and (iii) the EverWell suite of solutions in Fitness & Wellness Services. Within each suite, our Business Management Software – the system of action at the center of a service business’ operation – is typically the first solution adopted by a customer. This vertically-tailored point-of-entry provides us with an opportunity to cross-sell adjacent products, previously offered as fragmented and disjointed point solutions by other software providers. This “land and expand” strategy allows us to acquire customers with key foundational solutions and expand into offerings via product development and acquisitions that cover all workflows and power the full scope of our customers’ businesses. This results in a self-reinforcing flywheel effect, enabling us to drive value for our customers and, in turn, improve customer stickiness, increase our market share and fuel our growth.
We generate three types of revenue: (i) Subscription and Transaction Fees, which are primarily recurring revenue streams, (ii) Marketing Technology Solutions, which includes both recurring and re-occurring revenue streams and (iii) Other revenue which consists primarily of one-time revenue streams. Our recurring revenue generally consists of monthly, quarterly and annual software and maintenance subscriptions, transaction revenue associated with integrated payments and billing solutions and monthly contracts for Marketing Technology Solutions. Additionally, our re-occurring revenue includes revenue related to the sale of marketing campaigns and lead generation under contractual arrangements with customers.
•Subscription and Transaction Fees revenue includes: (i) recurring monthly, quarterly and annual SaaS subscriptions and software license and maintenance fees from the sale of our Business Management, Customer Engagement and Billing and Payment solutions; (ii) payment processing fees based on the transaction volumes processed through our integrated payment solutions and processing fees based on transaction volumes for our revenue cycle management, chronic care management and health insurance clearinghouse solutions; and (iii) membership subscriptions and our share of rebates from suppliers generated though group purchasing programs.
•Marketing Technology Solutions revenue includes: (i) recurring revenues for managing digital advertising programs on behalf of our customers including website hosting, search engine management and optimization, social media management and blog automation; and (ii) re-occurring fees paid by service professionals for consumer leads generated by our various platforms.
•Other revenue includes: (i) consulting, implementation, training and other professional services; (ii) website development; (iii) revenue from various business development partnerships; (iv) event income; and (v) hardware sales related to our business management or payment software solutions.
Our business benefits from attractive unit economics. Approximately 95% of our revenue in the years ended December 31, 2022 and 2021 was recurring or re-occurring, and we maintained an annualized net pro forma revenue retention rate of approximately 100% for the quarter ended December 31, 2022. We believe the retention and growth of revenue from our existing customers is a helpful measure of the health of our business and our future growth prospects. Our ability to cross sell additional products and services to our existing customers can increase customer
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engagement with our suite of solutions and thus have a positive impact on our net pro forma revenue retention rate. For example, we have leveraged our land and expand strategy to cross sell solutions to our existing customers, which has supported our high net pro forma revenue retention rate by increasing customer utilization of our solutions, educating customers as to how our platform and synergies can support their businesses and, in turn, improving customer stickiness.
We calculate our monthly net pro forma revenue retention rate for a particular month as the recurring or re-occurring revenue gained/lost from existing customers, less the recurring or re-occurring revenue lost from cancelled customers, as a percentage of total recurring or re-occurring revenue 12 months prior, divided by 12. For existing customers, we consider customers that existed 11 or more months prior to the current month and that do not have an end date (i.e., cancelled relationship) on or after the first day of the current month. For example, the recurring or re-occurring revenue gained/lost from existing customers in November 2022 is the difference between the recurring or re-occurring revenue generated in November 2022 and the same such revenue generated in November 2021, for customers with a start date prior to December 1, 2021 and no end date or cancelled relationship on or after November 1, 2022. For cancelled customers, we examine customers that cancelled their relationships on or after the first day of the month that is 12 months prior to the current month and before the first day of the current month. For example, the recurring or reoccurring revenue lost from cancelled customers in November 2022 is the difference between the recurring or re-occurring revenue generated in November 2022 and the same such revenue generated in November 2021, for customers that cancelled on or after November 1, 2021 and before November 1, 2022. Net pro forma revenue retention is calculated as if acquisitions that were closed during the prior period presented were closed on the first day of such period presented. Our calculation of net pro forma revenue retention rate for any fiscal period includes the positive recurring and re-occurring revenue impacts of selling new solutions to existing customers and the negative impacts of contraction and attrition among this set of customers. Our net pro forma revenue retention rate may fluctuate as a result of a number of factors, including the growing level of our revenue base, the level of penetration within our customer base, expansion of solutions, new acquisitions and our ability to retain our customers. Our calculation of net pro forma revenue retention rate may differ from similarly titled metrics presented by other companies.
This rate for any fiscal period includes the positive recurring and re-occurring revenue impacts of selling new solutions to existing customers and the negative impacts of contraction and attrition among this set of customers. Our net pro forma revenue retention rate may fluctuate as a result of a number of factors, including the growing level of our revenue base, the level of penetration within our customer base, expansion of solutions, new acquisitions and our ability to retain our customers. Our calculation of net pro forma revenue retention rate may differ from similarly titled metrics presented by other companies.
We acquire companies to deepen our competitive moats in existing verticals, and enter new verticals and geographies. We have acquired 52 companies since our inception. We have an established framework for identification, execution, integration and onboarding of targets, which leverages our significant acquisition experience and utilizes internal criteria for evaluating acquisition candidates and prospective businesses. We have developed and refined our internal criteria over time with our acquisitions, which has helped us to more readily identify attractive and complementary targets that can be efficiently onboarded. These acquired solutions can bring deep industry expertise and vertically-tailored software solutions that provide additional sources of growth. We believe that our methodology, track record and reputation for sourcing, evaluating and integrating acquisitions positions us as an “acquirer-of-choice” for potential targets.
Impact of Macroeconomic Climate
The macroeconomic climate continues to see pressure from global developments such as the COVID-19 pandemic, rising inflation, the strengthened US Dollar, rising interest rates and supply chain disruptions. These developments may have an adverse effect on our revenues and demand for our products and services, as well as on our costs of doing business. We have taken and will continue to take actions to help mitigate the impact of these economic challenges, but there can be no assurance as to the effectiveness of our efforts going forward.
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For more information regarding the potential impact of the COVID-19 pandemic on our business, refer to Part I. Item 1A. “Risk Factors—Risks Related to our Business—The COVID-19 pandemic has impacted, and a future pandemic, epidemic or outbreak of an infectious disease could impact, our business, financial condition and results of operations, as well as the business or operations of third parties with whom we conduct business.”
Key Factors Affecting Our Performance
We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges.
Expanding into New Products and Verticals
Given our position in the service SMB ecosystem, as well as our relationships and level of engagement with our customers, we use insights gained through our customer relationships and lifecycle to identify additional solutions that are value-additive for our customers. These insights allow us to continually assess opportunities to develop or acquire solutions to further grow our business by expanding market share, cross-selling solutions and enhancing customer stickiness to improve customer retention. Additionally, we have completed acquisitions to enter new micro-verticals and geographies.
Pursuing Acquisitions to Expand our Reach
We acquire companies to accelerate our position as a market leader, fill gaps within our vertically tailored solutions, deepen our competitive moats in existing verticals and enter new verticals and geographies. We have acquired 52 companies since our inception, including five in 2021 and nine in 2020. We have an established framework for identification, execution, integration and onboarding of targets, which leverages our significant acquisition experience and utilizes internal criteria for evaluating acquisition candidates and prospective businesses. We have developed and refined our internal criteria over time with our acquisitions, which has helped us to more readily identify attractive and complementary targets that can be efficiently onboarded. These acquired solutions can bring deep industry expertise and vertically-tailored software solutions that provide additional sources of growth. We believe that our methodology, track record and reputation for sourcing, evaluating and integrating acquisitions positions us as an “acquirer-of-choice” for potential targets.
Although we expect to continue to acquire companies and other assets in the future, such acquisitions pose a number of challenges and risks. For additional information, see Part I. Item 1A. “Risk Factors—Risks Related to Our Business—Our recent growth rates may not be sustainable or indicative of future growth and we expect our growth rate to slow,” “—We may reduce our rate of acquisitions and may be unsuccessful in achieving continued growth through acquisitions” and “—Revenues and profits generated through acquisitions may be less than anticipated, and we may fail to uncover all liabilities of acquisition targets through the due diligence process prior to an acquisition, resulting in unanticipated costs, losses or a decline in profits, as well as potential impairment charges. Claims against us relating to any acquisition may necessitate our seeking claims against the seller for which the seller may not indemnify us or that may exceed the seller’s indemnification obligations.”
Acquiring New Customers
Sustaining our growth requires continued adoption of our solutions by new customers. Through acquisitions and organic growth of our business, the number of customers on our platform increased from over 600,000 at the end of 2021 to more than 685,000 at the end of 2022. We will continue to invest in our efficient go-to-market strategy as we further penetrate our addressable markets. Our financial performance will depend in large part on the overall demand for our solutions from service SMBs.
Increasing Revenue from Existing Customers
As of December 31, 2022, we had more than 685,000 customers worldwide, including approximately 320,000, 95,000 and 69,000 customers in our Home Services, Health Services and Fitness & Wellness Services verticals, respectively. For the year ended December 31, 2022, we estimate that approximately 90% of our customers
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contributed less than $2,000 in revenue and less than 5% contributed more than $5,000 in revenue.
We define a customer as an individual or entity that utilized or was capable of utilizing an EverCommerce solution or service for which they paid any one or combination of recurring, re-occurring or transactional fees in a given period. For solutions contracting with entities that service groups of customers, for example franchises or other multi-location businesses, the customer is counted at the level of the individual business utilizing the solution.
We believe we have the opportunity to drive incremental revenue growth from our existing customer base through increased cross-selling of our integrated solutions, including digital payments, customer engagement and marketing technology. We earn transaction fees for payment transactions initiated on our platform, and our revenue and payment volumes grow as customers process more transactions on our platform. Integrating our payments platform across our EverPro, EverWell and EverHealth suites of solutions can improve customer retention and satisfaction as it drives operating efficiencies for quicker and more efficient billing and payment collection. We generate subscription and marketing technology revenue from cross-selling our customer engagement and Marketing Technology Solutions across our customer base. These solutions increase customer loyalty, repeat purchases, improve customer experiences and help businesses to manage campaigns and generate quality leads.
Continued Investment in Growth
We continue to drive awareness and generate demand for our solutions in order to acquire new customers and develop new service SMB relationships, as we believe that we still have a significant market opportunity ahead of us. We will continue to expand efforts to market our solutions directly to SMBs through online digital marketing, raising brand awareness at conferences and events, and other marketing channels. We believe this investment, coupled with our attractive unit economics, will enable us to grow our customer base and continue our strategy of profitable growth.
We intend to increase our investment in our solutions to maintain our position as a leading provider of integrated SaaS solutions for service SMBs. To drive adoption and increase penetration within our base, we will continue to introduce new features and upgrade our technology solutions. We believe that investment in technology development will contribute to our long-term growth, but may also negatively impact our short-term profitability.
In 2022, we continued to invest in scalable operations and necessary functions to support operating as a public company. In 2023 and beyond, smaller incremental investments will be needed to support Sarbanes-Oxley compliance.
Key Business and Financial Metrics
In addition to our results and measures of performance determined in accordance with Generally Accepted Accounting Principles (”GAAP”), we believe the following key business and non-GAAP financial measures are useful in evaluating and comparing our financial and operational performance over multiple periods, identifying trends affecting our business, formulating business plans and making strategic decisions.
Pro Forma Revenue Growth Rate
Pro Forma Revenue Growth Rate is a key performance measure that our management uses to assess our consolidated operating performance over time. Management also uses this metric for planning and forecasting purposes.
Our year-over-year Pro Forma Revenue Growth Rate is calculated as though all acquisitions closed as of the end of the latest period were closed as of the first day of the prior year period presented. In calculating Pro Forma Revenue Growth Rate, we add the revenue from acquisitions for the reporting periods prior to the date of acquisition (including estimated purchase accounting adjustments) to our results of operations, and then calculate our revenue growth rate between the two reported periods. As a result, Pro Forma Revenue Growth Rate includes pro forma revenue from businesses acquired during the period, including revenue generated during periods when we did not yet own the acquired businesses. In including such pre-acquisition revenue, Pro Forma Revenue Growth Rate allows
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us to measure the underlying revenue growth of our business as it stands as of the end of the respective period, which we believe provides insight into our then-current operations. Pro Forma Revenue Growth Rate does not represent organic revenue generated by our business as it stood at the beginning of the respective period. Pro Forma Revenue Growth Rates are not necessarily indicative of either future results of operations or actual results that might have been achieved had the acquisitions been consummated on the first day of the prior year period presented. We believe that this metric is useful to investors in analyzing our financial and operational performance period over period and evaluating the growth of our business, normalizing for the impact of acquisitions. This metric is particularly useful to management due to the number of acquired entities.
Our Pro Forma Revenue Growth rate was 15.6% for the year ended December 31, 2022 reflective of the underlying growth in our business including new customers and providing more solutions to existing customers.
Non-GAAP Financial Measures
Adjusted Gross Profit
Adjusted Gross Profit is a key performance measure that our management uses to assess our operational performance, as it represents the results of revenues and direct costs, which are key components of our operations. We believe that this non-GAAP financial measure is useful to investors and other interested parties in analyzing our financial performance because it reflects the gross profitability of our operations, and excludes the indirect costs associated with our sales and marketing, product development, general and administrative activities and depreciation and amortization and the impact of our financing methods and income taxes.
We calculate Adjusted Gross Profit as gross profit (as defined below) adjusted to exclude depreciation and amortization allocated to cost of revenues. Adjusted Gross Profit should be viewed as a measure of operating performance that is a supplement to, and not a substitute for, operating income or loss, net earnings or loss and other GAAP measures of income (loss) or profitability. The following table presents a reconciliation of gross profit, the most directly comparable financial measure calculated in accordance with GAAP, to Adjusted Gross Profit on a consolidated basis.
| Year ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||||
| (in thousands) | ||||||||
| Gross profit(1) | $ | 380,122 | (2) | $ | 308,301 | (3) | ||
| Depreciation and amortization | 23,249 | 19,608 | ||||||
| Adjusted gross profit | $ | 403,371 | $ | 327,909 |
(1)Gross profit is calculated as total revenues less cost of revenues (exclusive of depreciation and amortization), amortization of developed technology, amortization of capitalized software and depreciation expense (allocated to cost of revenues).
(2)For the year ended December 31, 2022, gross profit represents total revenues of $620.7 million less cost of revenues (exclusive of depreciation and amortization) of $217.4 million, amortization of developed technology of $16.4 million, amortization of capitalized software of $5.7 million and depreciation expense (allocated to cost of revenues) of $1.1 million.
(3)For the year ended December 31, 2021, gross profit represents total revenues of $490.1 million less cost of revenues (exclusive of depreciation and amortization) of $162.2 million, amortization of developed technology of $14.7 million, amortization of capitalized software of $3.7 million and depreciation expense (allocated to cost of revenues) of $1.2 million.
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Adjusted EBITDA
Adjusted EBITDA is a key performance measure that our management uses to assess our financial performance and is also used for internal planning and forecasting purposes. We believe that this non-GAAP financial measure is useful to investors and other interested parties in analyzing our financial performance because it provides a comparable overview of our operations across historical periods. In addition, we believe that providing Adjusted EBITDA, together with a reconciliation of net income (loss) to Adjusted EBITDA, helps investors make comparisons between our company and other companies that may have different capital structures, different tax rates and/or different forms of employee compensation.
Adjusted EBITDA is used by our management team as an additional measure of our performance for purposes of business decision-making, including managing expenditures, and evaluating potential acquisitions. Period-to-period comparisons of Adjusted EBITDA help our management identify additional trends in our financial results that may not be shown solely by period-to-period comparisons of net income (loss) or income (loss) from continuing operations. In addition, we may use Adjusted EBITDA in the incentive compensation programs applicable to some of our employees. Our Management recognizes that Adjusted EBITDA has inherent limitations because of the excluded items, and may not be directly comparable to similarly titled metrics used by other companies.
We calculate Adjusted EBITDA as net income (loss) adjusted to exclude interest and other expense, net, income tax expense (benefit), loss on debt extinguishment, depreciation and amortization, other amortization, acquisition related costs, stock-based compensation and other non-recurring costs. Other amortization includes amortization for capitalized contract acquisition costs. Acquisition related costs are specific deal-related costs such as legal fees, financial and tax due diligence, consulting and escrow fees. Other non-recurring costs are expenses such as system implementation costs and severance related to planned restructuring activities. Acquisition related costs and other non-recurring costs are excluded as they are not representative of our underlying operating performance. Adjusted EBITDA should be viewed as a measure of operating performance that is a supplement to, and not a substitute for, operating income or loss, net earnings or loss and other GAAP measures of income (loss). The following table presents a reconciliation of net loss, the most directly comparable financial measure calculated in accordance with GAAP, to Adjusted EBITDA on a consolidated basis.
| Year ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||
| (in thousands) | ||||||
| Net loss | $ | (59,816) | $ | (81,966) | ||
| Adjusted to exclude the following: | ||||||
| Interest and other expense, net | 33,902 | 36,111 | ||||
| Income tax benefit | (4,680) | (10,051) | ||||
| Loss on debt extinguishment | — | 28,714 | ||||
| Depreciation and amortization | 110,801 | 101,437 | ||||
| Other amortization | 4,261 | 2,814 | ||||
| Acquisition related costs | 1,028 | 3,452 | ||||
| Stock-based compensation | 26,818 | 22,095 | ||||
| Other non-recurring costs | 6,735 | 4,592 | ||||
| Adjusted EBITDA | $ | 119,049 | $ | 107,198 |
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Description of Certain Components of Financial Data
Revenues
We derive our revenue from three primary sources which are described in detail below: (i) Subscription and Transaction Fees, which are primarily recurring revenue streams, (ii) Marketing Technology Solutions, which includes both recurring and re-occurring revenue streams and (iii) Other revenue, which consists primarily of the sale of distinct professional services and hardware. Our revenue recognition policies are discussed in more detail under “Critical Accounting Policies and Significant Judgments and Estimates.”
Subscription and Transaction Fees: Revenue includes (i) recurring monthly, quarterly and annual SaaS subscriptions and software license and maintenance fees from the sale of our Business Management, Customer Engagement and Billing and Payment solutions; (ii) payment processing fees based on the transaction volumes processed through our integrated payment solutions and processing fees based on transaction volumes for our revenue cycle management, chronic care management and health insurance clearinghouse solutions; and (iii) membership subscriptions and our share of rebates from suppliers generated though group purchasing programs. Our revenue from payment processing fees is recorded net of credit card and ACH processing and interchange charges in the month the services are performed.
Marketing Technology Solutions: Revenue includes (i) recurring revenues for managing digital advertising programs on behalf of our customers including website hosting, search engine management and optimization, social media management and blog automation; and (ii) re-occurring fees paid by service professionals for consumer leads generated by our various platforms.
Other: Revenue includes (i) consulting, implementation, training and other professional services; (ii) website development; (iii) revenue from various business development partnerships; (iv) event income; and (v) hardware sales related to our business management or payment software solutions.
Cost of Revenues
Cost of revenue (exclusive of depreciation and amortization) consists of expenses related to delivering our services and products and providing support to our customers and includes employee costs and related overhead, customer credit card processing fees, targeted mail costs, third party fulfillment costs and software hosting expenses.
We expect that cost of revenue as a percentage of revenue will fluctuate from period to period based on a variety of factors, including the mix of revenue between Subscription and Transaction Fees and Marketing Technology Solutions, labor costs, third-party expenses and acquisitions. In particular, Marketing Technology Solutions revenue generally has a higher cost of revenue as a percentage of revenue than our subscription and transaction fee revenue. For the year ended December 31, 2022, revenue from subscription and transaction fees increased 32.3% compared to the year ended December 31, 2021, whereas Marketing Technology Solutions revenue increased 13.8%. To the extent our Marketing Technology Solutions revenue grows at a faster rate, whether by acquisition or otherwise, than our Subscription and Transaction Fees revenue, it could negatively impact our cost of revenues as a percentage of revenue.
Sales and Marketing
Sales and marketing expense consists primarily of employee costs for our sales and marketing personnel, including salaries, benefits, bonuses, stock-based compensation and sales commissions. Sales and marketing expenses also include advertising costs, travel-related expenses and costs to market and promote our products, direct customer acquisition costs, costs related to conferences and events and partner/broker commissions. Software and subscription services dedicated for use by our sales and marketing organization, and outside services contracted for sales and marketing purposes are also included in sales and marketing expense. Sales commissions that are incremental to obtaining a customer contract are deferred and amortized ratably over the estimated period of our relationship with
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that customer. We expect our sales and marketing expenses will increase in absolute dollars and may increase as a percentage of revenue for the foreseeable future as we continue to increase investments to support our growth.
Product Development
Product development expense consists primarily of employee costs for our product development personnel, including salaries, benefits, stock-based compensation and bonuses. Product development expenses also include third-party outsourced technology costs incurred in developing our platforms, and computer equipment, software and subscription services dedicated for use by our product development organization. We expect our product development expenses to increase in absolute dollars and remain generally consistent as a percentage of revenue for the foreseeable future as we continue to dedicate substantial resources to develop, improve and expand the functionality of our solutions.
General and Administrative
General and administrative expense consists of employee costs for our executive leadership, accounting, finance, legal, human resources and other administrative personnel, including salaries, benefits, bonuses and stock-based compensation. General and administrative expenses also include external legal, accounting and other professional services fees, rent, software and subscription services dedicated for use by our general and administrative employees and other general corporate expenses. We expect general and administrative expense to increase on an absolute dollar basis for the foreseeable future as we continue to increase investments to support our growth and due to increased costs as a result of being a public company. As we are able to further scale our operations in the future, we would expect that general and administrative expenses would decrease as a percentage of revenue.
Depreciation and Amortization
Depreciation and amortization primarily relate to intangible assets, property and equipment and capitalized software.
Interest and Other Expense, net
Interest and other expense, net, primarily consists of interest expense on long-term debt, net of interest income, as well as loss on interest rate swap. It also includes amortization expense of financing costs and discounts, as well as realized and unrealized gains and losses.
Loss on Debt Extinguishment
Loss on debt extinguishment represents the difference between the amount paid to extinguish the debt and the carrying value of the debt, inclusive of the write-off of previously deferred financing costs.
Income Tax Benefit (Expense)
We account for income taxes in accordance with ASC 740, Income Taxes. ASC 740 requires deferred tax assets and liabilities to be recognized for temporary differences between the tax basis and financial reporting basis of assets and liabilities, computed at the expected tax rates for the periods in which the assets or liabilities will be realized, as well as for the expected tax benefit (expense) of net operating loss and tax credit carryforwards. Income taxes are recognized for the amount of taxes payable by the Company's corporate subsidiaries for the current year and for the impact of deferred tax assets and liabilities, which represent future tax consequences of events that have been recognized differently in the financial statements than for tax purposes.
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Results of Operations
The following tables summarize key components of our results of operations for the periods presented. The period-to-period comparisons of our historical results are not necessarily indicative of the results that may be expected in the future. We operate as a single reportable segment to reflect the way our chief operating decision maker (“CODM”) reviews and assesses the performance of our business. For additional information concerning our accounting policies, see Note 2 in the notes to the consolidated financial statements included in this Annual Report on Form 10-K.
Impact of Acquisitions
The comparability of our operating results is impacted by our business combinations and acquisitions. In our discussion of changes in our results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021, we quantitatively disclose the impact of the growth in certain of our revenues where such discussions would be meaningful. Expense contributions from our recent acquisitions for each of the respective period comparisons generally were not separately identifiable due to the integration of these businesses into our existing operations, and as such the discussion is focused on major changes in components of costs.
Comparison of the years ended December 31, 2022 and 2021
| Year ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||
| (in thousands) | ||||||
| Revenues: | ||||||
| Subscription and transaction fees | $ | 465,345 | $ | 351,831 | ||
| Marketing technology solutions | 134,596 | 118,275 | ||||
| Other | 20,805 | 20,033 | ||||
| Total revenues | 620,746 | 490,139 | ||||
| Operating expenses: | ||||||
| Cost of revenues (1) (exclusive of depreciation and amortization presented separately below) | 217,375 | 162,230 | ||||
| Sales and marketing (1) | 119,059 | 93,789 | ||||
| Product development (1) | 71,622 | 49,506 | ||||
| General and administrative (1) | 132,483 | 110,369 | ||||
| Depreciation and amortization | 110,801 | 101,437 | ||||
| Total operating expenses | 651,340 | 517,331 | ||||
| Operating loss | (30,594) | (27,192) | ||||
| Interest and other expense, net | (33,902) | (36,111) | ||||
| Loss on debt extinguishment | — | (28,714) | ||||
| Net loss before income tax benefit | (64,496) | (92,017) | ||||
| Income tax benefit | 4,680 | 10,051 | ||||
| Net loss | $ | (59,816) | $ | (81,966) |
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(1)Includes stock-based compensation expense as follows:
| Year ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||
| (in thousands) | ||||||
| Cost of revenues | $ | 373 | $ | 39 | ||
| Sales and marketing | 1,503 | 506 | ||||
| Product development | 1,854 | 551 | ||||
| General and administrative | 23,088 | 20,999 | ||||
| Total stock-based compensation expense | $ | 26,818 | $ | 22,095 |
Revenues
| Year ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Amount | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Revenues: | ||||||||||||||
| Subscription and transaction fees | $ | 465,345 | $ | 351,831 | $ | 113,514 | 32.3 | % | ||||||
| Marketing technology solutions | 134,596 | 118,275 | 16,321 | 13.8 | % | |||||||||
| Other | 20,805 | 20,033 | 772 | 3.9 | % | |||||||||
| Total revenues | $ | 620,746 | $ | 490,139 | $ | 130,607 | 26.6 | % |
Revenues increased $130.6 million or 26.6% for the year ended December 31, 2022 as compared to the year ended December 31, 2021. This increase was primarily driven by increases in subscription and transaction fees of $113.5 million and marketing technology solutions of $16.3 million due to our pro forma revenue growth of 15.6% in the year ended December 31, 2022. Additionally, subscription and transaction fees increased by $61.1 million from revenue earned from acquisitions completed in 2021.
Cost of Revenues
| Year ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Amount | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Cost of revenues (exclusive of depreciation and amortization presented separately below) | $ | 217,375 | $ | 162,230 | $ | 55,145 | 34.0 | % | ||||||
| Percentage of revenues | 35.0 | % | 33.1 | % |
Cost of revenues increased by $55.1 million or 34.0% for the year ended December 31, 2022 as compared to the year ended December 31, 2021. This increase is primarily comprised of an additional $10.3 million in personnel and compensation expense, $10.3 million of media spend, $9.1 million in contract services, $7.4 million in application programming interface fees and $4.2 million of hosting expense. As a percentage of revenue, cost of revenues was 35.0% and 33.1% for the years ended December 31, 2022 and 2021, respectively.
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Sales and Marketing
| Year ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Amount | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Sales and marketing | $ | 119,059 | $ | 93,789 | $ | 25,270 | 26.9 | % | ||||||
| Percentage of revenues | 19.2 | % | 19.1 | % |
Sales and marketing expenses increased by $25.3 million or 26.9% for the year ended December 31, 2022 as compared to the year ended December 31, 2021. This increase was primarily driven by an additional $15.6 million in personnel and compensation expense, $2.2 million in advertising spend and $2.0 million in conference expense, due to the continued investment in growth through various marketing channels. As a percentage of revenue, sales and marketing expenses were 19.2% and 19.1% for the years ended December 31, 2022 and 2021, respectively.
Product Development
| Year ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Amount | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Product development | $ | 71,622 | $ | 49,506 | $ | 22,116 | 44.7 | % | ||||||
| Percentage of revenues | 11.5 | % | 10.1 | % |
Product development expenses increased by $22.1 million or 44.7% for the year ended December 31, 2022 as compared to the year ended December 31, 2021. This increase was primarily driven by additional product development related personnel expenses of $16.3 million, as a result of investments in our technology teams to support our various solutions as well as centralized security operations, information technology and cloud engineering. As a percentage of revenue, product development expenses were 11.5% and 10.1% for the years ended December 31, 2022 and 2021, respectively.
General and Administrative
| Year ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Amount | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| General and administrative | $ | 132,483 | $ | 110,369 | $ | 22,114 | 20.0 | % | ||||||
| Percentage of revenues | 21.3 | % | 22.5 | % |
General and administrative expenses increased by $22.1 million or 20.0% for the year ended December 31, 2022 as compared to the year ended December 31, 2021. This increase was primarily driven by an additional $10.4 million of personnel and compensation expense, $2.4 million of software and tools spend, $2.1 million of stock based compensation expense and $2.1 million of insurance expense, due to the continued investment in infrastructure required to support our growth, scalable operations and being a public company. As a percentage of revenue, general and administrative expenses were 21.3% and 22.5% for the years ended December 31, 2022 and 2021, respectively.
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Depreciation and Amortization
| Year ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Amount | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Depreciation and amortization | $ | 110,801 | $ | 101,437 | $ | 9,364 | 9.2 | % | ||||||
| Percentage of revenues | 17.8 | % | 20.7 | % |
Depreciation and amortization expenses increased by $9.4 million or 9.2% for the year ended December 31, 2022 as compared to the year ended December 31, 2021. This increase was primarily driven by an increase of $7.3 million in intangible assets’ amortization as a result of intangible asset additions from our 2021 acquisitions. As a percentage of revenue, depreciation and amortization expenses were 17.8% and 20.7% for the years ended December 31, 2022 and 2021, respectively.
Interest and Other Expense, net
| Year ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Amount | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Interest and other expense, net | $ | 33,902 | $ | 36,111 | $ | (2,209) | (6.1) | % | ||||||
| Percentage of revenues | 5.5 | % | 7.4 | % |
Interest and other expense, net, decreased by $2.2 million or 6.1% for the year ended December 31, 2022 as compared to the year ended December 31, 2021. This decrease was primarily due to an overall lower outstanding debt balance in 2022 compared to 2021, as the Company refinanced its former credit facilities on July 6, 2021, offset by the loss on interest rate swap recognized in 2022. As a percentage of revenue, interest and other expense, net were 5.5% and 7.4% for the years ended December 31, 2022 and 2021, respectively.
Loss on Debt Extinguishment
| Year ended December 31, | Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Amount | % | ||||||||||
| (dollars in thousands) | |||||||||||||
| Loss on debt extinguishment | $ | — | $ | 28,714 | $ | (28,714) | N.M. | ||||||
| Percentage of revenues | — | % | 5.9 | % |
_______________
N.M. — Not Meaningful.
Loss on debt extinguishment decreased by $28.7 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021. In the year ended December 31, 2021, the Company recorded a loss on debt extinguishment of approximately $28.7 million. For additional information concerning our loss on debt extinguishment, see Note 10 in the notes to the consolidated financial statements included in our 2021 Annual Report on Form 10-K.
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Income Tax Benefit
| Year ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Amount | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Income tax benefit | $ | 4,680 | $ | 10,051 | $ | (5,371) | (53.4) | % | ||||||
| Percentage of revenues | 0.8 | % | 2.1 | % |
Income tax benefit decreased by $5.4 million or 53.4% for the year ended December 31, 2022 as compared to the year ended December 31, 2021. This decrease was primarily driven by an increase in the valuation allowance against deferred tax assets. The main drivers of the change in valuation allowance were the reversal of deferred tax liabilities related to purchased intangibles and the change in presentation of lease-related deferred tax assets and liabilities from the adoption of ASC 842. Additionally, we restructured the ownership of certain intellectual property during the year, which resulted in an income tax benefit.
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Liquidity and Capital Resources
To date, our primary sources of liquidity have been net cash provided by operating activities, proceeds from preferred stock and common stock issuances, including our recent initial public offering (“IPO”) of common stock, 2021 private placement of common stock and proceeds from long-term debt.
Our primary use of liquidity has been acquisitions of businesses. For a description of our recent acquisitions, see Note 3 in the notes to the consolidated financial statements included in this Annual Report on Form 10-K. Absent significant deterioration of market conditions, we expect that working capital requirements, capital expenditures, acquisitions, the Company’s stock repurchase program (discussed below), debt servicing and lease obligations will be our principal needs for liquidity going forward. During the year ended December 31, 2021, we completed five acquisitions for total consideration of $367.1 million. During the year ended December 31, 2020, we completed nine acquisitions for total consideration of $415.3 million.
As of December 31, 2022, we had cash, cash equivalents and restricted cash of $95.8 million, $190.0 million of available borrowing capacity under our Revolver (as defined below) and $543.1 million outstanding under our Term Loans (as defined below). We believe that our existing cash, cash equivalents and restricted cash, availability under our Credit Facilities (as defined below) and our cash flows from operations will be sufficient to fund our working capital requirements and planned capital expenditures, and to service our debt obligations for at least the next twelve months. However, our future working capital requirements will depend on many factors, including our rate of revenue growth, the timing and size of future acquisitions and the timing of introductions of new products and services. We expect to consummate acquisitions of complementary businesses in the future that could require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us, or at all. If we are unable to raise additional funds when desired, our business, financial condition and results of operations could be adversely affected. See Part I, Item 1A.“Risk Factors.”
Initial Public Offering
On July 6, 2021, we completed our Initial Public Offering (“IPO”) which resulted in the issuance and sale of 19,117,648 shares of common stock at the IPO price of $17.00 generating net proceeds of $303.9 million after deducting underwriting discounts. Additionally, we incurred other IPO related fees of $6.9 million. On July 29, 2021, the underwriters of our IPO fully exercised their over-allotment option, resulting in the sale of an additional 2.8 million shares at the IPO price of $17.00 per share and after underwriter discounts, net proceeds were $43.9 million.
Private Placement
On July 6, 2021 we sold 4,411,764 shares of our common stock to entities affiliated with Silver Lake in a private placement (the “Private Placement”) at a purchase price equal to the IPO price of $17.00 per share of common stock for net proceeds of $75.0 million.
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Cash Flows
The following table sets forth cash flow data:
| Year ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||
| (in thousands) | ||||||
| Net cash provided by operating activities | $ | 64,802 | $ | 37,482 | ||
| Net cash used in investing activities | (18,080) | (379,668) | ||||
| Net cash provided by (used in) financing activities | (47,309) | 341,183 | ||||
| Effect of foreign currency exchange rate changes on cash | (1,148) | 224 | ||||
| Net decrease in cash, cash equivalents and restricted cash | $ | (1,735) | $ | (779) |
Cash Flow from Operating Activities
Net cash provided by operating activities was $64.8 million for the year ended December 31, 2022, compared to $37.5 million for the year ended December 31, 2021. Changes in net cash provided by operating activities result primarily from cash received from net sales within our subscription and transaction fees and marketing technology solutions. Other drivers of the changes in net cash provided by operating activities include payments for personnel expenses for our employees, costs related to delivering our services and products, partner commissions, advertising and interest on our long-term debt.
The increase in cash provided for the year ended December 31, 2022 compared to the year ended December 31, 2021 was primarily due to higher cash collections from our subscription and transaction fees and marketing technology solutions of approximately $121.2 million offset by investments made to support the growth of our business including personnel expenses of $51.2 million, costs directly related to the delivery of our services and products of $41.3 million and the timing of payments.
Cash Flow from Investing Activities
During the year ended December 31, 2022, net cash used in investing activities was $18.1 million. The cash used was driven primarily by costs to develop software of $15.5 million. The remainder was for purchases of property and equipment.
During the year ended December 31, 2021, net cash used in investing activities was $379.7 million. The cash used was driven primarily by acquisition of companies, net of cash acquired, of $364.9 million. The remainder was for purchases of property and equipment and cost to develop software.
Cash Flow from Financing Activities
During the year ended December 31, 2022, net cash used in financing activities was $47.3 million. The cash used was primarily driven by the repurchase and retirement of shares of our common stock of $43.0 million. For additional information regarding our repurchase and retirement of shares of our common stock, refer to Note 11 in the notes to the consolidated financial statements included in this Annual Report on Form 10-K. The remainder was for payments on long-term debt offset by net proceeds from common stock issuances.
During the year ended December 31, 2021, net cash provided by financing activities was $341.2 million. The cash provided was driven primarily by net proceeds from preferred and common stock issuances of $109.8 million and $415.7 million, respectively, and proceeds from long-term debt of $851.0 million, partially offset by payments on long-term debt of $1,028.5 million.
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Credit Facilities
Prior to our IPO, subsidiaries of the Company were party to a credit facility that provided for (i) a term loan in an aggregate principal amount of $415.0 million (the “Legacy Term Loan”), (ii) commitments for delayed draw term loans up to an aggregate principal amount of $385.0 million (the “Legacy Delayed Draw Term Loans”), (iii) commitments for revolving loans up to an aggregate principal amount of $50.0 million (the “Legacy Revolver”) and (iv) a sub-limit of the Revolver available for letters of credit up to an aggregate face amount of $10.0 million, or the letters of credit (the Legacy Term Loan, Legacy Delayed Draw Term Loans and Legacy Revolver are referred to herein as the “Legacy Credit Facilities”).
In connection with our IPO, on July 6, 2021 we refinanced our Legacy Credit Facilities and EverCommerce Solutions Inc., as borrower, and EverCommerce Intermediate Inc. entered into a new credit agreement (the “Credit Agreement”) in an aggregate principal amount of $540.0 million, consisting of (i) an aggregate principal amount of $350.0 million (the “Initial Term Loans”), (ii) a revolver with a capacity of $190.0 million (the “Revolver”) and (iii) a sub-limit of the Revolver available for letters of credit up to an aggregate face amount of $20.0 million. We used the net proceeds of the Initial Term Loans and a portion of the funds available under our Revolver, together with the net proceeds from the IPO, to repay all amounts outstanding under our Legacy Credit Facilities. In November 2021, the Company drew an additional $155.0 million on the Revolver to fund an acquisition. Subsequently, in November 2021, the Company drew an additional $200.0 million (the “Additional Term Loans,” and collectively with the Initial Term Loans, the “Term Loans”) as permitted by the Credit Agreement. The Company used the proceeds of the Additional Term Loans to repay all amounts outstanding on the Revolver and for general corporate purposes. The Initial Term Loans, Revolver and Additional Term Loans are collectively referred to herein as the “Credit Facilities.”
Simultaneously with the execution of the Credit Facilities, we and various of our subsidiaries entered into a collateral agreement and guarantee agreement. Pursuant to the guarantee agreement, EverCommerce Intermediate Inc. and various of our subsidiaries are guarantors of the obligations under the Credit Facilities. Pursuant to the collateral agreement, the Credit Facilities are secured by liens on substantially all of our assets, including our intellectual property and the equity interests of our various subsidiaries, including EverCommerce Solutions Inc.
The Credit Facilities contain certain affirmative and negative covenants, including, among other things, restrictions on indebtedness, issuance of preferred equity interests, liens, fundamental changes and asset sales, investments, negative pledges, repurchases of stock, dividends and other distributions, and transactions with affiliates. In addition, we are subject to a financial covenant with respect to the Revolver whereby, if the aggregate principal amount of revolving loans (excluding letters of credit) outstanding on the last day of any fiscal quarter exceeds 35% of the aggregate commitments available under the Revolver, then our first lien leverage ratio as of the last day of such fiscal quarter must be 7.50 to 1.00 or less.
Borrowings under the Credit Facilities are available as ABR or Eurocurrency borrowings. ABR borrowings under the Credit Facilities accrue interest at an alternate base rate plus an applicable rate, and Eurocurrency borrowings accrue interest at an adjusted LIBOR rate plus an applicable rate. The ABR rate represents the greater of the prime rate, Federal Reserve Bank of New York rate plus ½ of 1%, and an adjusted LIBOR rate for a one month interest period plus 1%. The applicable rate for the Term Loans and the Revolver loans is 3% for Eurocurrency borrowings and 2% for ABR Borrowings, in each case subject to change based on our first lien net leverage ratio.
Effective October 31, 2022, the Company entered into an interest rate swap agreement in connection with the Company’s Credit Facilities for a notional amount of $200.0 million to convert a portion of the Term Loans from a floating rate to a fixed rate (the “Swap Agreement”). The arrangement has a term of five years with a fixed rate in the agreement of 4.2295%.
On March 14, 2023, the Company entered into a second interest rate swap agreement in connection with the Company’s Credit Facilities for a notional amount of $100.0 million to convert a portion of the Term Loans from a floating rate to a fixed rate. This swap agreement is effective March 31, 2023 and has a term of approximately 4.5 years with a fixed rate in the agreement of 3.969%.
With respect to ABR borrowings, interest payments are due on a quarterly basis on the last business day of each March, June, September and December. With respect to Eurocurrency borrowings, interest payments are due on the
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last business day of the interest period applicable to the borrowing and, in the case of a Eurocurrency borrowing with an interest period of more than three months’ duration, each day prior to the last day of such interest period that occurs at intervals of three months’ duration after the first day of such interest period.
The Revolver has a variable commitment fee, which is based on our first lien leverage ratio. We expect the commitment fee to range from 0.25% to 0.375% per annum. We are obligated to pay a fixed fronting fee for letters of credit of 0.125% per annum.
Amounts borrowed under the Revolver may be repaid and re-borrowed through maturity of the Revolver in July 2026. The Term Loans mature in July 2028. The Term Loans may be repaid or prepaid but may not be re-borrowed.
As of December 31, 2022, there was $543.1 million outstanding under our Credit Facilities, all of which was related to the Term Loans as no amounts were outstanding under the Revolver. The effective interest rate on the Term Loans was approximately 5.2% for the year ended December 31, 2022.
As of December 31, 2022, we were in compliance with the covenants under the Credit Facilities.
Stock Repurchase Program
On June 14, 2022, our Board of Directors approved a stock repurchase program with authorization to purchase up to $50.0 million in shares of the Company’s common stock through the expiration of the program on December 21, 2022 (the “Repurchase Program”). Repurchases under the program may be made in the open market, in privately negotiated transactions or otherwise, with the amount and timing of repurchases to be determined at the Company’s discretion, depending on market conditions and corporate needs. This program does not obligate the Company to acquire any particular amount of common stock and may be modified, suspended or terminated at any time at the discretion of the Board of Directors. The Company expects to fund repurchases with existing cash on hand. The Company repurchased and retired 4,951,966 shares of common stock for $43.0 million, including transaction fees, during the year ended December 31, 2022.
On November 7, 2022, our Board of Directors approved an expansion of the Repurchase Program with authorization to purchase up to an additional $50.0 million in shares of the Company’s common stock ($100.0 million total) and an extension to the expiration of the Repurchase Program through December 31, 2023. As of December 31, 2022, $57.1 million remains available under the Repurchase Program.
Contractual Obligations
Refer to Notes 9, 10 and 17 in the notes to the consolidated financial statements included in this Annual Report on Form 10-K for a discussion of our debt, operating lease and contractual obligations, respectively.
Additionally, on March 14, 2023, the Company entered into an interest rate swap agreement in connection with the Company’s Credit Facilities for a notional amount of $100.0 million to convert a portion of the Term Loans from a floating rate to a fixed rate. This swap agreement is effective March 31, 2023 and has a term of approximately 4.5 years with a fixed rate in the agreement of 3.969%.
Critical Accounting Estimates
Our financial statements are prepared in accordance with U.S. GAAP. The preparation of our financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.
While our significant accounting policies are described in further detail in Note 2 in the notes to the consolidated financial statements included in this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.
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Revenue Recognition
Revenues are derived from subscription and transaction fees, marketing technology solutions, and other revenues. We recognize revenue when our customers obtain control of goods or services in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. In determining the total consideration that we expect to receive, we include variable consideration only to the extent that it is probable that a significant reversal of cumulative revenue will not occur when the uncertainty is resolved. Consideration subject to a constraint on revenue recognition has not been significant. Additionally, there have not been material changes in these estimates or assumptions pertaining to constraints on revenue recognition over the reporting periods presented. In the future, if there are material changes in the underlying estimates and assumptions pertaining to constraints on revenue recognition, the financial statements could be materially impacted.
Subscription and Transaction Fees:
Subscription revenue primarily consists of the sale of SaaS offerings, software licenses and related support services and payment processing services.
The timing of revenue recognition within our software subscription services is dictated by the nature of the underlying performance obligation. Our SaaS offerings and license support services are generally recognized ratably over the contractual period that the services are delivered, beginning on the date our service is made available to customers. Revenues generated from the sale of on-premise perpetual or term licenses are generally recognized at the point in time when the software is made available to the customer to download or use. Subscription revenue related contracts can be both short and long-term, with stated contract terms that range from one month to five years. Our contracts may contain termination for convenience provisions that allow the Company, customer or both parties the ability to terminate for convenience, either at any time or upon providing a specified notice period, without a penalty.
Transaction fees relate to payment processing and group purchasing program administration services. In fulfillment of our payment processing services, we partner with third-party merchants and processors who assist us in fulfillment of our obligations to customers. We have concluded that we do not possess the ability to control the underlying services provided by third parties in the fulfillment of our obligations to customers and therefore recognize revenue net of interchange fees retained by the card issuing financial institutions and fees charged by payment networks. Transaction services contracts with customers are generally for a term of one month and automatically renew each month.
We also receive rebates from contracted suppliers in exchange for our program administration services. Rebates earned are based on a defined percentage of the purchase price of goods and services sold to members under the contract the Company has negotiated with its suppliers. Administration services contracts with customers are generally for an annual or monthly term and renew automatically upon lapse of the current term.
Marketing Technology Solutions:
Marketing technology solutions consist of digital advertising management and consumer connection services.
Revenue generated from digital advertising management services is recognized on a ratable basis over the service period as the customer simultaneously receives and consumes the benefits of the management services evenly throughout the contract period. Revenue generated from consumer connection services may be recognized at either a point-in-time or an over-time basis as each connection is delivered.
Marketing technology solutions service related contracts are typically short-term with stated contract terms that are less than one year.
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Other:
Other revenues generally consist of fees associated with the sale of distinct professional services and hardware. Contract terms for other revenue arrangements are generally short-term, with stated contract terms that are less than one year.
Our professional services associated with our subscription revenue generally relate to standard implementation, configuration, installation, or training services applied to both SaaS and on-premise deployment models. Marketing revenue related professional service fees are derived from website design, creation or enhancement services. Professional service revenue is recognized over time as the services are performed, as the customer simultaneously receives and consumes the benefit of these services.
Hardware revenue is recognized at a point-in time and consists of equipment that supports or enables our products or services within subscription and transaction fees offerings.
Performance Obligations and Standalone Selling Price:
Our contracts at times include the sale of multiple promised goods or services that have been determined to be distinct. The transaction price for contracts with multiple performance obligations is allocated based on the relative stand-alone selling price of each performance obligation within the contract.
Judgement can be involved when determining the stand-alone selling price of products and services. For the majority of the Company’s SaaS, on-premise license and professional services, we establish a stand-alone selling price based on observable selling prices to similar classes of customers. If the stand-alone selling price is not observable through past transactions, we estimate the stand-alone selling price taking into consideration available information such as market conditions and internally approved pricing guidelines related to the performance obligation. As permitted under ASC 606, at times we have established the stand-alone selling price of performance obligations as a range and utilize this range to determine whether there is a discount that needs to be allocated based on the relative stand-alone selling price of the various performance obligations.
At contract inception, we perform a review of each performance obligation’s selling price against the established stand-alone selling price range. If any performance obligations are priced outside of the established stand-alone selling price range, we reallocate the total transaction price to each performance obligation based on the relative stand-alone selling price for each performance. The established range is reassessed on a periodic basis when facts and circumstances surrounding these established ranges change.
Business Combinations, Goodwill and Intangible Assets
Our acquisitions have been accounted for under the acquisition method. Net assets and results of operations are included in our financial statements commencing at the respective acquisition dates. We allocate the fair value of the purchase consideration of our acquisitions to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recognized as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets. Intangible assets primarily consist of customer relationships which include government contracts, developed technology, trademarks and trade names, and non-compete agreements, which are recorded at acquisition date fair value, less accumulated amortization. These estimates and assumptions can include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted average cost of capital, and the estimated useful lives. Changes in these assumptions could affect the carrying value of these assets.
We perform an impairment test annually in the fourth quarter or whenever events or changes in circumstances indicate that the carrying value of goodwill might not be fully recoverable. In accordance with applicable accounting guidance, a company can assess qualitative factors to determine whether it is necessary to perform a goodwill impairment test. Alternatively, a company may elect to proceed directly to a quantitative goodwill impairment test. The Company performed a qualitative annual impairment assessment for the years ended December 31, 2022, 2021
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and 2020. For the qualitative assessments, we reviewed factors including macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, changes in any key personnel, any changes in composition of carrying amount of our assets and changes in our stock price. There were no reasonable changes to the methods and assumptions that would have resulted in an impairment. In the future, if there are material changes in the underlying estimates and assumptions pertaining to the impairment assessment, the financial statements could be materially impacted. For each year end, we determined that it was more likely than not that the fair value of each of our reporting units was more than the respective related carrying amounts, including goodwill, and therefore did not record any goodwill impairment.
Intangible assets are initially valued at fair value using generally accepted valuation methods appropriate for the type of intangible asset. Intangible assets with definite lives are amortized over their estimated useful lives and are reviewed for impairment if indicators of impairment arise. Indicators we reviewed included whether there was a significant decrease in market prices of our assets, a significant adverse change in the extent or manner in which our assets are being used, a significant adverse change in legal factors affecting our assets and a cash flow loss. The Company did not identify indicators of impairment for the years ended December 31, 2022, 2021 and 2020. In the future, if there are material changes in the underlying estimates and assumptions pertaining to the impairment assessment, the financial statements could be materially impacted.
The Company completed five and nine business acquisitions in 2021 and 2020, respectively, and as a result recorded $132.5 million and $173.6 million in intangible assets and $255.7 million and $240.8 million of goodwill using the aforementioned valuation estimates, respectively. There were no material changes to prior estimates for the years ended December 31, 2021 and 2020.
Income Taxes
Deferred income tax assets and liabilities are determined based upon the net tax effect of the differences between the financial statement carrying amounts and the tax basis of assets and liabilities and are measured using the enacted tax rate expected to apply to taxable income or loss in the years in which the differences are expected to be reversed. A valuation allowance is used to reduce some or all of the deferred tax assets if, based upon the weight of available evidence, it is more likely than not that those deferred tax assets will not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, recent financial operations and their associated valuation allowances, if any.
We recognize the tax benefit from an uncertain tax position only when it is more likely than not, based on the technical merits of the position, that the tax position will be sustained upon examination, including the resolution of any related appeals or litigation. The tax benefits recognized in the consolidated financial statements from such a position are measured as the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.
The Company recorded an additional $16.7 million and $14.5 million in valuation allowance on our deferred tax assets in 2022 and 2021, respectively, using the aforementioned approach. The Company recorded $0.4 million and $0.1 million in unrecognized tax benefits for the years ended December 31, 2022 and 2021, respectively.
Valuation allowances are currently assessed based on scheduling the reversal of temporary differences, without consideration to future projections of income, given the Company’s history of losses. This approach may change in the future, requiring the use of estimates or assumptions with regard to future taxable income in assessing the need for and quantum of valuation allowances.
Stock-Based Compensation
All stock-based compensation, including grants of common stock options and restricted stock, are valued at fair value on the date of grant. We use the Black-Scholes option-pricing model to estimate the fair value of common stock options granted with time-based vesting. The following inputs are considered in estimating the fair value:
Risk-free interest rate: The risk-free rate is based on observed interest rates appropriate for the terms of our awards.
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Dividend yield: The dividend yield is based on history and the expectation of paying no dividends.
Expected term: The expected term is based on the “simplified” method that measures the expected term as the average of the vesting period and the contractual term, given our limited stock option exercise data. Once we have sufficient option exercise data we will calculate the expected term based on our history of option exercises.
Expected volatility: We do not have a sufficient history of market prices of our common stock, and as such volatility is estimated, using historical volatilities of comparable public entities. Once we have sufficient history of trading prices we will use our calculated volatility.
There have not been material changes in these estimates or assumptions over the reporting periods presented. In the future, if there are material changes in the underlying estimates and assumptions pertaining to stock-based compensation, the financial statements could be materially impacted.
Recent Accounting Pronouncements
See Note 2 in the notes to the consolidated financial statements included in this Annual Report on Form 10-K for a discussion of accounting pronouncements recently adopted and recently issued accounting pronouncements not yet adopted and their potential impact to our financial statements.
Election Under the Jumpstart Our Business Startups Act of 2012
The Company currently qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Accordingly, the Company is provided 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.
The Company has elected to adopt new or revised accounting guidance within the same time period as private companies, unless management determines it is preferable to take advantage of early adoption provisions offered within the applicable guidance. 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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