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Nov. 10, 2021, 4:33 p.m. EST

10-Q: ENGAGESMART, INC.

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q, as well as our consolidated financial statements and related notes included in our final prospectus filed with the Securities and Exchange Commission (the "SEC") pursuant to Rule 424(b) under the Securities Act of 1933, as amended ("Securities Act"), (File No. 333-259101) on September 24, 2021 ("Final Prospectus"). This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans, and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading "Special Note Regarding Forward-Looking Statements" in this Quarterly Report on Form 10-Q. You should review the disclosure in Part II-Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.

Overview

We are a leading provider of vertically tailored customer engagement software and integrated payments solutions. We offer single instance, multi-tenant, true Software-as-a-Service ("SaaS") vertical solutions that are designed to simplify our customers' engagement with their clients by driving digital adoption and self-service. We serve customers across five core verticals: Health & Wellness, Government, Utilities, Financial Services, and Giving. Our SaaS solutions are purpose-built for each vertical we serve and they simplify and automate mission-critical workflows such as scheduling, client onboarding, client communication, paperless billing, and electronic payment processing. Our solutions transform our customers' digital engagement and empower them to manage, improve, and grow their businesses.

Our vertically-tailored solutions include software and payment tools that automate mission-critical business workflows for customers across our verticals. Our value proposition is focused on transforming our customers' digital engagement through four core SaaS solutions, including:

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Our Business Segments

We have two reportable segments, Enterprise Solutions and SMB Solutions. The chief operating decision maker ("CODM"), which is our chief executive officer, evaluates segment operating performance using revenue and Adjusted EBITDA from reportable segments to make resource allocation decisions and evaluate segment performance.

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Our Revenue Model

We primarily generate two types of revenue: (i) subscription revenue and (ii) transaction and usage-based revenue.

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Our goal is to drive digital adoption of our software solutions, and our transaction and usage-based revenue aligns our success with our customers' success. The more our customers and their clients accelerate digital adoption, the more our revenue increases.

Recent Developments

On September 27, 2021, we completed our initial public offering ("IPO"), in which we issued and sold 13,620,054 shares of common stock at a public offering price of $26.00 per share, including 620,054 shares issued upon the exercise of the underwriters' option to purchase additional shares. We raised net proceeds of $326.3 million, after deducting the underwriting discount of $22.1 million and offering expenses of $5.7 million. Additionally, certain existing shareholders sold an aggregate of 3,112,446 shares at the same price, resulting in net proceeds to the selling stockholders of $75.9 million. On September 27, 2021, we used a portion of the net proceeds from our IPO to repay in full the outstanding borrowings of $114.2 million under our Credit Facilities, as defined below.

On September 27, 2021, we entered into a revolving credit agreement ("New Revolving Credit Facility") which allows us to borrow up to $75.0 million, $7.5 million of which may be comprised of a letter of credit facility. The New Revolving Credit Facility will mature on September 27, 2026 and proceeds of the borrowings under the New Revolving Credit Facility will be used for general corporate purposes. As of September 30, 2021, we have not drawn upon the New Revolving Credit Facility.

Impact of COVID-19 on Our Business

Our customers and partners were impacted and will continue to be impacted by the COVID-19 pandemic, which ultimately affects our business operations and results. The impact of COVID-19 differed across the verticals we serve. For our SMB Solutions segment, clinicians accelerated adoption of our practice management software as they transitioned to virtual healthcare. Our pre-built features such as telehealth, online scheduling, AutoPay, and secure messaging proved to be invaluable to our customers. For our Enterprise Solutions segment, COVID-19 accelerated adoption of our online and automatic payment features, and we were able to provide customers the digital engagement and electronic payment capabilities they needed to serve their clients. On the other hand, certain solutions experienced a slowdown in usage in 2020. For example, elective procedures and nonessential hospital visits were delayed or canceled, and charities and nonprofits were unable to host large, in-person events given shelter-in-place policies. These headwinds were partially offset by our ability to offer digital engagement, such as virtual fundraising and online donations, which enabled our customers to continue hosting events. During the second quarter of 2021, the impact of the COVID-19 pandemic on our solutions began to decrease and our operating results began to normalize.

The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations, cash flows, and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted. Given the evolving nature of COVID-19, we will continue to closely monitor the pandemic's impact on both the verticals we serve and our business specifically. We will continue to prioritize the safety of our employees, customers, their clients and communities in which we operate. Refer to Part II, Item 1A, "Risk Factors - Risks related to our business and industry

Key Business Metric and Non-GAAP Financial Measures

We review the following key business metric and non-GAAP financial measures to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions. Accordingly, we believe our key business metric and non-GAAP financial measures provide useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management team. Our key business metric and non-GAAP financial measures are presented for supplemental informational purposes only, should not be considered a substitute for financial information presented in accordance with GAAP and may be different from similarly titled metrics or measures presented by other companies.

Transactions Processed

We define Transactions Processed as the number of accepted payment transactions, such as credit card and debit card transactions, ACH payments, emerging electronic payments, other communication, text messaging and interactive voice response transactions, and other payment transaction types, which are facilitated through our solutions during a given period. We believe Transactions Processed is a useful key business metric for investors because it directly correlates with transaction and usage-based revenue. We use Transactions Processed to evaluate changes in transaction and usage-based revenue over time.







                                   Three Months Ended          Nine Months Ended
                                      September 30,              September 30,
        








        Transactions Processed        28.6          20.5          80.2         57.2
        


The increase in Transactions Processed for the three and nine months ended September 30, 2021, as compared to the corresponding period in 2020, was driven by the addition of new customers and increased digital payment adoption among existing customers.

Adjusted EBITDA and Adjusted EBITDA Margin

We define Adjusted EBITDA as net loss excluding interest expense, net; benefit for income taxes; depreciation; and amortization of intangible assets, as further adjusted for transaction-related expenses, fair value adjustment of acquired deferred revenue, stock/equity-based compensation, and restructuring charges. We define Adjusted EBITDA Margin as Adjusted EBITDA divided by revenue plus the fair value adjustment of acquired deferred revenue. We believe that Adjusted EBITDA and Adjusted EBITDA Margin, when taken collectively with our GAAP results, may be helpful to investors because it provides consistency and comparability with past financial performance and assists in comparisons with other companies, some of which use similar non-GAAP financial measures to supplement their GAAP results.







                                   Three Months Ended           Nine Months Ended
                                      September 30,               September 30,
                                    2021          2020          2021          2020
                                         (in thousands, except percentages)
        Net loss                 $   (8,292 )    $  (469 )    $ (8,018 )    $ (6,858 )
        Net loss margin               (14.9 )%      (1.2 )%       (5.2 )%       (6.8 )%
        Adjusted EBITDA          $    8,672      $ 8,920      $ 24,355      $ 14,205
        Adjusted EBITDA Margin         15.6 %       22.8 %        15.7 %        13.9 %
        


Adjusted Gross Profit and Adjusted Gross Margin

We define Adjusted Gross Profit as gross profit as adjusted for fair value adjustment of acquired deferred revenue, amortization of intangible assets, stock/equity-based compensation, and transaction-related expenses. We define Adjusted Gross Margin as Adjusted Gross Profit divided by revenue plus the fair value adjustment of acquired deferred revenue. We believe that Adjusted Gross Profit and Adjusted Gross Margin, when taken collectively with our GAAP results, may be helpful to investors because it provides consistency and comparability with past financial performance and assists in comparisons with other companies, some of which use similar non-GAAP financial measures to supplement their GAAP results.







                                  Three Months Ended          Nine Months Ended
                                     September 30,              September 30,
                                   2021          2020         2021          2020
                                        (in thousands, except percentages)
        Gross profit            $   41,256     $ 29,519     $ 114,929     $ 75,173
        Gross profit margin           74.3 %       75.6 %        74.3 %       74.0 %
        Adjusted Gross Profit   $   43,004     $ 31,253     $ 119,907     $ 80,322
        Adjusted Gross Margin         77.5 %       79.8 %        77.5 %       78.7 %
        


Management uses Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Gross Profit, and Adjusted Gross Margin:

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By providing these non-GAAP financial measures, together with a reconciliation to the most directly comparable GAAP measure, we believe we are enhancing investors' understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives. Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Gross Profit, and Adjusted Gross Margin have limitations as analytical tools, and should not be considered in isolation, or as an alternative to, or a substitute for net loss, gross profit, or other financial statement data presented in our consolidated financial statements as indicators of financial performance. Some of the limitations are:

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        Reconciliations of Non-GAAP Financial Measures
        The following tables present the reconciliations for each non-GAAP financial
        measure to the most directly comparable financial measure calculated and
        presented in accordance with GAAP.
                                              Three Months Ended September 30,             Nine Months Ended September 30,
                                                2021                     2020                2021                  2020
                                                                  (in thousands, except percentages)
        Net loss                          $          (8,292 )       $          (469 )   $        (8,018 )     $        (6,858 )
        Adjustments:
        Benefit for income taxes                       (671 )                  (185 )              (623 )              (2,918 )
        Interest expense, net                         3,486                   2,390               8,086                 7,498
        Amortization of intangible                    3,901                   3,900              11,701                11,623
        assets
        Depreciation                                    933                     349               1,919                   876
        Fair value adjustment of                         28                     159                 122                   444
        acquired deferred revenue
        Stock/equity-based compensation               6,603                     166               7,163                   472
        Restructuring charges                          (330 )                 2,434                (241 )               2,434
        Transaction-related expense                   3,014                     176               4,246                   634
        Adjusted EBITDA                   $           8,672         $         8,920     $        24,355       $        14,205
        Adjusted EBITDA Margin                         15.6 %                  22.8 %              15.7 %                13.9 %
        








                                            Three Months Ended September 30,           Nine Months Ended September 30,
                                               2021                  2020                 2021                  2020
                                                                (in thousands, except percentages)
        Gross profit                      $        41,256       $        29,519     $        114,929       $       75,173
        Gross margin                                 74.3 %                75.6 %               74.3 %               74.0 %
        Adjustments:
        Fair value adjustment of                       28                   159                  122                  444
        acquired deferred revenue
        Amortization of intangible                  1,539                 1,538                4,615                4,595
        assets
        Stock/equity-based compensation               152                     4                  160                   11
        Transaction-related expense                    29                    33                   81                   99
        Adjusted Gross Profit             $        43,004       $        31,253     $        119,907       $       80,322
        Adjusted Gross Margin                        77.5 %                79.8 %               77.5 %               78.7 %
        


Components of Results of Operations

Revenue

We generate revenue primarily from providing access to our SaaS solutions via subscription and transaction and usage-based fees for services provided through such solutions. To a lesser extent, we also generate revenue from the sale of implementation and other SaaS solutions, and the sale of hardware.

Cost of Revenue

Cost of revenue primarily consists of personnel-related expenses for our customer support and operations teams, certain variable transaction related costs, amortization of intangible assets related to acquired developed technology, and hosting and data storage costs associated with infrastructure and platform environments. We expect that cost of revenue will increase in absolute dollars, but it may fluctuate as a percentage of revenue from period to period as we continue to invest in growing our business across our segments.

Operating Expenses

General and Administrative

General and administrative expenses consist primarily of personnel-related expenses, professional fees, consulting costs, software costs and non-income tax-related expenses. We expect to incur additional general and administrative expenses as a result of operating as a public company and to support the anticipated growth of our business. We expect that general and administrative expenses will increase, but they may fluctuate as a percentage of revenue from period to period. Over the longer term, we expect general and administrative expenses to decrease as a percentage of revenue as we leverage the scale of our business.

Selling and Marketing

Selling and marketing expenses consist primarily of personnel-related expenses, inclusive of sales commission expense, fees paid to third-party partners, and costs to market and promote our solutions through advertisements and marketing events. We expect our selling and marketing expense to increase in absolute dollars as we continue to invest in new customer acquisition and retention efforts, but they may fluctuate as a percentage of revenue from period to period.

Research and Development

Research and development expenses consist primarily of personnel-related expenses, third-party consulting costs, and software tools associated with developing new products and features or enhancing existing products. Costs associated with developing new products and features that qualify as internal use software are capitalized and amortized. We expect our research and development expenses to increase in absolute dollars, but they may fluctuate as a percentage of revenue from period to period as we expand our research and development team to develop new products and enhance existing products.

Contingent Consideration Net Expense

Contingent consideration net expense consists of increases or decreases in the fair value of our contingent consideration liabilities. We remeasure the fair value of potential future payments based upon the achievement levels of remaining targets at each subsequent reporting period until the contingent liabilities are settled or have expired.

Restructuring Charges

Restructuring charges consist of charges related to our restructuring efforts associated with relocating certain operations. Refer to Note 14 - Restructuring to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information.

Amortization of Intangible Assets

Amortization of intangible assets, within operating expenses, consists primarily of amortization of customer relationships and tradenames assets acquired as part of a business combination. We amortize acquired intangible assets over their estimated useful lives based on the pattern of consumption of the economic benefits or, if that pattern cannot be readily determined, on a straight-line basis.

Other Expense

Interest Expense

Interest expense consists of interest expense on our long-term and related party debt as well as costs incurred to extinguish debt.







        Results of Operations
        The following table sets forth, for the periods presented, each line item from
        our unaudited condensed consolidated statements of operations on a percentage of
        revenue basis. The period-to-period comparison of financial results is not
        necessarily indicative of future results. The information contained in the table
        below should be read in conjunction with our unaudited condensed consolidated
        financial statements and related notes included elsewhere in this Quarterly
        Report on Form 10-Q.
                                                 Three Months Ended September 30,                Nine Months Ended September 30,
                                                  2021                      2020                 2021                    2020
                                                    %                         %                    %                         %
                                                                               (% of total revenue)
        Revenue                                        100.0 %                   100.0 %              100.0 %                   100.0 %
        Cost of revenue                                 25.7 %                    24.4 %               25.7 %                    26.0 %
        Gross profit                                    74.3 %                    75.6 %               74.3 %                    74.0 %
        Operating expenses:
        General and administrative                      27.5 %                    14.7 %               20.7 %                    17.8 %
        Selling and marketing                           34.4 %                    30.6 %               33.1 %                    34.3 %
        Research and development                        16.5 %                    13.5 %               15.5 %                    14.8 %
        Contingent consideration net                     2.1 %                       - %                0.9 %                       - %
        expense
        Restructuring charges                           (0.6 )%                    6.2 %               (0.2 )%                    2.4 %
        Amortization of intangible assets                4.3 %                     6.1 %                4.6 %                     6.9 %
        Total operating expenses                        84.2 %                    71.1 %               74.6 %                    76.3 %
        (Loss) income from operations                   (9.8 )%                    4.5 %               (0.3 )%                   (2.2 )%
        Other income (expense), net:
        Interest expense, including                     (6.3 )%                   (6.1 )%              (5.2 )%                   (7.4 )%
        related party interest
        Other (expense) income, net                     (0.1 )%                   (0.1 )%              (0.1 )%                    0.0 %
        Total other income (expense), net               (6.3 )%                   (6.2 )%              (5.3 )%                   (7.4 )%
        Loss before income taxes                       (16.2 )%                   (1.7 )%              (5.6 )%                   (9.6 )%
        Benefit for income taxes                        (1.2 )%                   (0.5 )%              (0.4 )%                   (2.9 )%
        Net loss and comprehensive loss                (14.9 )%                   (1.2 )%              (5.2 )%                   (6.8 )%
        


. . .

Nov 10, 2021

COMTEX_396687187/2041/2021-11-10T16:33:24

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