NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies
SailPoint Technologies Holdings, Inc., (“we,” “our” or the “Company”) was incorporated in the state of Delaware on August 8, 2014, in preparation for the purchase of SailPoint Technologies, Inc. The purchase occurred on September 8, 2014 and our certificate of incorporation was amended and restated as of such date. SailPoint Technologies, Inc. was formed July 14, 2004 as a Delaware corporation. The Company designs, develops, and markets identity security software that helps organizations govern user access to critical systems and data. The Company currently markets its products and services worldwide.
Basis of Presentation
The accompanying consolidated financial statements, which include the accounts of the Company and its wholly owned subsidiaries, have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements include the accounts of SailPoint Technologies Holdings, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Certain items have been reclassified in the prior year financial statements to conform to the presentation and classifications used in the current year. These reclassifications had no net effect on the Company’s consolidated operating results, financial position or cash flows.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the 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. Management periodically evaluates such estimates and assumptions for continued reasonableness. In particular, we make estimates with respect to the fair value allocation of multiple performance obligations in revenue recognition, the expected period of benefit of deferred contract acquisition costs, the collectability of accounts receivable, stock-based compensation expense, fair value of the Notes (as defined below), recognition and measurement of income tax positions, realizability of deferred tax assets and the valuation, and estimated useful lives and impairment of intangible assets and goodwill arising from business combinations. Appropriate adjustments, if any, to the estimates used are made prospectively based upon such periodic evaluation. Actual results could differ from those estimates.
Judgment is required to determine the standalone selling price (“SSP”) for each distinct performance obligation. We use a single amount to estimate SSP for items that are not sold separately. We use a range to determine SSP based on the selling price of the products and services when sold separately. The SSP range is used to allocate the total transaction price to each performance obligation in a contract and to apply a discount that will be allocated based on the relative SSP of the various products and services. When we do not have a directly observable SSP for a particular product or service, we estimate SSP by our overall pricing objectives, taking into consideration market factors, pricing practices including historical discounting, historical standalone sales of similar products, customer demographics, geographic locations, and the number and types of users within our contracts. The determination of SSP using the adjusted market assessment approach is made by the Company’s management.We allocate the transaction price to each performance obligation identified in the contract on a relative SSP basis and recognize revenue when or as we satisfy a performance obligation by transferring control of a product or service to a customer.
Due to the COVID-19 pandemic, there is ongoing uncertainty and significant disruption in the global economy and financial markets. We are not aware of any specific event or circumstances that would require an update to our estimates, judgments or assumptions or a revision to the carrying value of our assets or liabilities as of the date of issuance of these financial statements. These estimates, judgments and assumptions may change in the future, as new events occur or additional information is obtained.
Cash, Cash Equivalents and Restricted Cash
We consider all highly liquid investments with an original maturity of three months or less from date of purchase to be cash equivalents. The Company is required to maintain cash collateral for an unconditional standby letter of credit in the amount of $6.0 million related to the Company’s corporate headquarters lease as well as a small amount of restricted cash to guarantee rent payments in a foreign subsidiary.
Fair Value of Financial Instruments
Assets and liabilities recorded at fair value in the financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels which are directly related to the amount of subjectivity associated with the inputs to the valuation of these assets or liabilities are as follows:
•Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
•Level 2: Observable inputs, other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•Level 3: Unobservable inputs reflecting our own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
Concentration of Credit and Other Risks
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and accounts receivable. The Company maintains its cash in bank deposit accounts that, at times, may exceed federally insured limits. There was no concentration of credit risk for customers as of December 31, 2021 and 2020 as no individual entity represented more than 10% of the balance in accounts receivable. Management considers concentration of credit risk to be minimal with respect to accounts receivable due to the positive historical collection experience of the Company and despite the geographic concentrations related to the Company’s customers. No customer represented more than 10% of revenue during the years ended December 31, 2021, 2020 and 2019. The Company does not experience concentration of credit risk in foreign countries as no foreign country represents more than 10% of the Company’s consolidated revenues or net assets.
The Company’s revenue by geographic region based on the customer’s location is presented in Note 17 “Geographic Information”
Accounts Receivable and Allowance for Expected Credit Losses
The Company continuously assesses the collectability of outstanding customer invoices and in doing so, the Company assesses the need to maintain an allowance for expected credit losses resulting from the non-collection of customer receivables. The allowance for expected credit losses is a valuation account that is deducted from the financial asset’s amortized cost basis to present the net amount expected to be collected on contracts with customers. Accounts receivable and contract assets are written off when management believes non-collectability is confirmed. Recoveries of financial assets previously written off shall be recorded directly to earnings when received.
Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts over a financial asset’s contractual term. The Company’s historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made from qualitative and quantitative factors if economic conditions at the reporting date reflect stronger or weaker economic performance than the historical data implies based on management’s expectations of economic conditions on certain indicators of the Company, industry and economy. We review factors such as past collection experience, age of the accounts receivable balance, significant trends in current balances, internal operations and macroeconomic conditions. The Company evaluates these economic conditions and makes adjustments to historical loss information for certain economic risk factors.
In development of the expected credit loss model, we evaluated our financial assets with similar risk characteristics on a collective (pool) basis for their respective estimated and expected credit loss allowance. A financial asset will be measured individually only if it does not share similar risk characteristics with other financial assets. We believe that historical credit loss patterns by aging bucket and invoice type for accounts receivable are the most significant risk characteristics. Additionally, we analyze renewals and new business separately due to varying historical loss patterns. The Company expected credit loss is determined for the contractual life of the financial asset, for which accounts receivable and contract assets can be viewed as one financial asset. However, a low percentage of our contract assets do not convert to accounts receivable. Therefore, we consider all contract assets as a single pool.
For periods prior to the adoption of Accounting Standards Codification (“ASC”) 326, Financial Instruments - Credit Losses ("ASC 326"), the Company determined that an allowance for doubtful accounts was not required for the periods presented.
Property and Equipment, Net
Property and equipment, net, is stated at cost less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the respective assets, generally three years to five years. Leasehold improvements are depreciated over the shorter of the estimated useful life of the asset or the related lease term. Repairs and maintenance costs are expensed as incurred.
Property and equipment is reviewed for impairment whenever events or circumstances indicate their carrying value may not be recoverable. When such events or circumstances arise, an estimate of future undiscounted cash flows produced by the asset, or the appropriate grouping of assets, is compared to the asset’s carrying value to determine if an impairment exists. If the asset is determined to be impaired, the impairment loss is measured based on the excess of the carrying value over the assets fair value. Assets to be disposed of are reported at the lower of carrying value or net realizable value.
Goodwill
Goodwill represents the excess of acquisition cost over the fair value of net tangible and identified net assets acquired. Goodwill is not amortized, but rather tested for impairment annually, or more often if and when events or circumstances indicate that the carrying value may not be recoverable. For purposes of assessing potential impairment, we estimate the fair value of the reporting unit, based on our market capitalization, and compare this amount to the carrying value of the reporting unit. If we determine that the carrying value of the reporting unit exceeds its fair value, an impairment charge would be required. We have determined that we operate as one reporting unit and may first assess qualitative factors to determine whether the existence of events or circumstances indicate impairment test on goodwill is required. Goodwill is tested on an annual basis as of October 31, or sooner if an indicator of impairment occurs. The Company internally monitors business and market conditions for evidence of triggering events.
Intangible Assets, Net
Intangible assets are amortized on a straight-line basis over their estimated useful lives. The Company's intangible assets primarily consist of customer lists, developed technology, and trade names and marks. The Company periodically reviews the estimated remaining useful life of our intangible assets and whether events or changes in circumstances warrant a revision to the remaining period of amortization. Periodically, the Company evaluates the recoverability of its long-lived assets, including intangible assets, for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is measured by comparison of the carrying amount of each asset, or related asset group, to the future undiscounted cash flows the asset is expected to generate. If the undiscounted cash flows used in the test for recoverability are less than the carrying amount of these assets, the carrying amount of such assets is reduced to fair value.
Business Combinations
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired 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 recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets may include, but are not limited to, future expected cash flows from acquired users, acquired technology, and trade names from a market participant perspective, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which is one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
Software Development Costs
Software development costs for products intended to be sold, leased or otherwise marketed are expensed as incurred until technological feasibility has been established, at which time such costs are capitalized until the product is available for
general release to customers. Technological feasibility is established when a product design and working model have been completed and the completeness of the working model and its consistency with the product design have been confirmed by testing. To date, the establishment of technological feasibility of the Company’s products and general release of such software have substantially coincided. As a result, we have not capitalized any software development costs through December 31, 2021 and all such costs have been recorded as research and development expenses as incurred in the consolidated statements of operations.
Capitalized Software and Cloud-computing Arrangements
The Company evaluates whether the cloud-computing arrangement (“CCA”) includes a license to internal-use software. If the CCA includes a software license, the Company accounts for the software license as an intangible asset. Acquired software licenses are recognized and measured at cost, which includes the present value of the license obligation if the license is to be paid for over time. If the CCA does not include a software license, the Company accounts for the arrangement as a service contract (or hosting arrangement) and hosting costs are generally expensed as incurred.
The Company evaluates upfront costs including implementation, set-up or other costs (collectively, implementation costs) for hosting arrangements under the internal-use software framework. Costs related to preliminary project activities and post implementation activities are expensed as incurred, whereas costs incurred in the development stage are generally capitalized. Capitalized implementation costs of $0.4 million are recorded in prepayments and other current assets and $0.2 million are recorded in other non-current assets and amortized over the expected term of the arrangement, which includes consideration of the non-cancellable contractual term and reasonably certain renewal options. During the year ended December 31, 2021, the Company’s capitalized implementation costs related to hosting arrangements were not material.
Comprehensive Income (Loss)
The Company has not entered into transactions that require presentation as other comprehensive income (loss). Total comprehensive income (loss) is equal to net income (loss) for all periods presented.
Revenue Recognition
Revenue consists of fees for perpetual and term licenses for the Company’s software products, post-contract customer support (referred to as maintenance and support), software as a service (“SaaS”) subscriptions, other subscription services and professional services including training and other revenue. The following describes the nature of the Company’s primary types of revenues and the revenue recognition policies as they pertain to the types of transactions the Company enters into with its customers.
License Revenue
License revenue includes perpetual and term license fees which provide customers with the same functionality and differ mainly in the duration over which the customer benefits from the use of software. Both revenues from perpetual and term license performance obligations are generally recognized upfront at the point in time when the software license has been delivered. All perpetual license transactions generally include maintenance and support at no additional charge for the first year. We allocate a portion of the total contract value based on stand-alone selling price and recognize subscription revenue over the term.
Subscription Revenue
Our subscription revenue consists of (i) fees for access to, and related support for, our SaaS offerings, (ii) fees for ongoing maintenance and support of our licensed solutions and (iii) other subscription services, which includes our cloud managed services. We typically invoice subscription fees in advance in annual installments and recognize subscription revenue ratably over the term of the applicable agreement. Maintenance and support contracts generally have a term of one year and SaaS contracts usually have a term of one to three years, which is initially deferred and recognized ratably over the life of the contract. Maintenance and support agreements consist of fees for providing software updates on a when and if available basis and for providing technical support for software products for a specified term. We believe that our when and if available software updates and technical support each have the same pattern of transfer to the customer and are substantially the same. Therefore, we consider these to be a single distinct performance obligation. Revenue allocated to maintenance and support
agreements are recognized ratably over the contract term beginning on the delivery date of each offering. Expenses related to our subscriptions are recognized as incurred. Unearned subscription revenue is included in deferred revenue. The Company’s subscription arrangements are generally non-cancelable and do not contain refund-type provisions. In instances that subscription arrangements are deemed cancellable, which is rare, the Company will adjust the transaction price and period for revenue recognition accordingly to be reflective of the contract term in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”).
Services and Other Revenue
Services and other revenue consist primarily of fees from professional services provided to our customers and partners to configure and optimize the use of our solutions as well as training services related to the configuration and operation of our platform. The Company’s professional services contracts are either on a time-and-materials (input) or consumption-based (output) on a fixed fee or prepaid basis.
For services that are contracted for at a fixed price, progress is generally measured based on hours incurred as a percentage of the total estimated hours required for complete satisfaction of the related performance obligations. For services that are contracted on a time-and-materials or prepaid basis, progress is generally based on actual hours expended. These input methods (e.g. hours incurred or expended) are considered a faithful depiction of our efforts to satisfy services contracts as they represent the performance obligation consumed by the customer and performed by the entity and therefore reflect the transfer of services to a customer under such contracts.
Services revenues are generally recognized over time as the services are performed. Revenues for fixed price services and prepaids are generally recognized over time applying input methods to estimate progress to completion. Revenues for consumption-based services are generally recognized as the services are performed. Training revenues are recognized as the services are performed over time.
Deferred Contract Acquisition Costs
Sales commissions paid to our sales force and the related employer payroll taxes, collectively “deferred contract acquisition costs,” are considered incremental and recoverable costs of obtaining a contract with a customer. The Company capitalizes and amortizes incremental costs of obtaining a contract, such as certain sales commission costs and related payroll taxes, over the expected period of benefit provided. The Company typically pays sales commissions for both initial and follow-on sales of perpetual licenses, inclusive of initial maintenance and support, term licenses and SaaS subscriptions. Initial commissions are allocated to each performance obligation within the contract. The portion allocated to the perpetual license element is expensed at the time the license is delivered. Commissions allocated to the remaining elements are capitalized and amortized over an expected period of benefit. The Company has determined the expected period of benefit to be five years. In addition, the Company pays sales commissions for renewals of term licenses and subscription offerings at a lower rate as they are not commensurate with the initial contract term. These renewal commissions are amortized over each renewal’s benefit term. The Company does not pay sales commissions on renewals of maintenance and support agreements related to perpetual licenses.
The portion of deferred contract acquisition costs that we anticipate will be recognized within twelve months is recorded as current deferred contract acquisition costs and the remaining portion is recorded as non-current deferred contract acquisition costs in the consolidated balance sheets. We determined the period of benefit by taking into consideration our customer contracts, customer turnover rates, the life of our technology and other factors. The Company applied the practical expedient to expense costs as incurred if the expected amortization period is one year or less. Amortization of deferred contract acquisition costs is included in sales and marketing expenses in the accompanying consolidated statements of operations.
Contract Balances
Deferred revenue
We typically invoice our customers for subscription fees in advance on either an annual, two- or three-year basis, with payment due at the start of the subscription term. For subscription fees, which includes SaaS, maintenance and support and other subscription services, the timing of payments is typically upfront. Therefore, a contract liability or deferred revenue is created because payment is made in advance of performance and these performance obligations are satisfied over time. Timing may differ between the satisfaction of performance obligations and the invoicing and collection of amounts related to our contracts with customers. Our standard payment terms are generally net 30 days but may vary. Liabilities are recorded for amounts that are collected in advance of the satisfaction of performance obligations. Invoice amounts for non-cancelable
services starting in future periods are included in contract assets and deferred revenue, which are netted together resulting in either deferred revenue or a contract asset balance. The portion of deferred revenue that we anticipate will be recognized within twelve months is recorded as current deferred revenue and the remaining portion is recorded as non-current deferred revenue in the consolidated balance sheets.
Contract assets
Contract assets relate to the Company’s rights to consideration for performance obligations satisfied but not billed at the reporting date on contracts. Contract assets are transferred to accounts receivable when the rights become unconditional. Contract assets are included in prepayments and other current assets and other non-current assets in the consolidated balance sheets, net of an allowance for expected credit losses.
Cost of Revenue
Cost of License Revenue. Cost of license revenue consists of amortization expense for developed technology acquired and third-party royalties.
Cost of Subscription Revenue. Cost of subscription revenue consists primarily of employee-based costs (which consists of salaries, benefits, bonuses and stock-based compensation and allocated overhead), costs of our customer support organization, contractor costs to supplement our staff levels, amortization expense and impairments charges for developed technology acquired and third-party cloud-based hosting costs.
Cost of Services and Other Revenue. Cost of services and other revenue consists primarily of employee-based costs of our professional services and training organizations, travel-related costs and contractor costs to supplement our staff levels.
Impairment of Intangible Assets. Impairment of intangible assets consists of impairments charges for developed technology acquired. This is a component of cost of subscription revenue that was broken out for financial statement purposes.
Research and Development Expenses
Research and development expenses consist primarily of employee-based costs, software and hosting arrangement expenses (which includes cloud-based hosting costs related to the development of our cloud-based solution), professional services expense and amortization expense for acquired intangible assets.
Advertising Expenses
Advertising costs are expensed as incurred and are included in sales and marketing expense. Advertising expenses were approximately $11.2 million, $10.7 million and $11.3 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Stock-Based Compensation
The Company measures stock-based compensation expense for equity instruments granted to employees and board members based upon the estimated fair value of the award at the date of grant adjusted for actual forfeitures. The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing model, which requires us to estimate the expected term, fair value of common stock, expected volatility, risk-free interest rate, and dividend yield.
The risk-free interest rate is based on the U.S. treasury yield curve for the term consistent with the life of the stock options as of the date of grant. The Company has elected to apply the “shortcut approach” in developing the estimate of expected term for “plain vanilla” stock options by using the mid-point between the vesting date and contractual termination date. The Company has not paid and does not anticipate paying cash dividends on its common stock in the foreseeable future; therefore, the expected dividend yield is assumed to be zero.
During 2019, the Company began to determine volatility by introducing the Company’s own historical volatility measurements once two years of historical data became available in the public market. The Company used a blend of the Company’s volatility and industry peers to arrive at a volatility consistent with the life of the options. During 2021 and 2020, the Company continued to increase the weighting factor of the Company’s own volatility as additional time periods became
available. Beginning from the fourth quarter of fiscal year 2021, the Company began to use its own sufficient historical trading prices to calculate the expected volatility and no longer places any weighting on industry peers.
Stock-based compensation expense resulting from this valuation is recognized in the consolidated statements of operations on a straight-line basis over the period during which an employee provides the requisite service in exchange for the award. The Company analyzes the facts and circumstances of each equity instrument to determine if modification accounting is required. When a modification is triggered, the revised fair value is calculated, and additional stock-based compensation is recognized over the remaining service period of the modified instrument.
Restricted stock units (“RSUs”) are generally subject to forfeiture if employment terminates prior to the vesting date. We expense the cost of the RSUs, which is determined to be the fair market value of the shares of common stock underlying the RSUs on the date of grant, ratably over the period during which the vesting restrictions lapse.
In November 2017, the Company’s board of directors adopted the Employee Stock Purchase Plan (the “ESPP”). The ESPP became effective November of 2017, after the date our registration statement was declared effective by the SEC. The first offering period opened July 1, 2018 and permitted eligible employees to purchase shares by authorizing payroll deductions from 1% to 15% of employee’s eligible compensation during the offering period, which is generally six-months, with an annual cap of $25,000 in fair market value, determined at the grant date. Unless an employee has previously withdrawn from the offering, his or her accumulated payroll deductions will be used to purchase shares after the closing of the offering period at a price equal to 85% of the closing price of the shares at the opening or closing of the offering period, whichever is lower.
ESPP purchase rights have an expected volatility consistent with our volatility estimates that are used to value our stock options. The expected term represents the period of time the ESPP purchase rights are expected to be outstanding and approximates the offering period. Stock-based compensation expense associated with ESPP purchase rights is recognized on a straight-line basis over the offering period.
Foreign Currency Translation
The functional currency of our non-U.S. subsidiaries is the U.S. dollar; therefore, all gains and losses on currency transactions are expensed as incurred.
Income Taxes
The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Valuation allowances are provided if it is more likely than not that some or all of the deferred tax assets will not be realized.
The Company accounts for uncertainty of income taxes based on a “more-likely-than-not” threshold for the recognition and de-recognition of tax positions, which includes the accounting for interest and penalties relating to tax positions.
Convertible Senior Notes
The Company accounts for the 0.125% Convertible Senior Notes due 2024 (the “Notes”; see Note 10) in accordance with FASB ASC Subtopic 470-20, Debt with Conversion and Other Options. Pursuant to ASC Subtopic 470-20, as amended by Accounting Standards Update (“ASU”) 2020-06, issuers of certain convertible debt instruments, such as the Notes, that have a net settlement feature and may be settled wholly or partially in cash upon conversion are required to be accounted for wholly as debt. See Recently Adopted Accounting Pronouncements below for a discussion on the adoption of ASU 2020-06. Prior to the adoption of ASU 2020-06, the Company separately accounted for the liability and equity components of the instrument. The carrying amount of the liability component of the instrument was computed by estimating the fair value of a similar liability without the conversion option. The amount of the equity component was then calculated by deducting the fair value of the liability component from the principal amount of the instrument. The difference between the principal amount and the liability component represents a debt discount that is amortized to interest expense over the respective terms of the Notes using an effective interest rate method.
Leases
The Company accounts for a contract as a lease when it has the right to control the asset for a period of time while obtaining substantially all of the assets’ economic benefits. The Company’s leases are primarily for office space. At the inception or modification of an arrangement, we determine whether the arrangement is or contains a lease based on the unique facts and circumstances present and if so, the classification of the lease.
Right-of-use (“ROU”) assets and lease liabilities are recognized at the present value of future lease payments over the lease term. ROU assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. The implicit rates within our operating leases are generally not determinable and therefore we use the incremental borrowing rate (“IBR”) at the lease commencement date to determine the present value of lease payments. The determination of our IBR requires judgment. We determine our IBR for each lease using our estimated borrowing rate, adjusted for various factors including level of collateralization and term to align with the terms of the lease. ROU assets include any upfront lease payments made and exclude lease incentives. The Company leases its facilities under non-cancelable operating lease agreements. We have lease agreements with lease and non-lease components which we account for as a single lease component. The Company’s non-lease components are primarily related to property taxes, insurance and maintenance costs, which are typically variable in nature, and are expensed in the period incurred. Certain of these facility leases contain predetermined fixed escalations of the minimum rentals, and the Company recognizes expense for these leases on a straight-line basis over the full term of the lease arrangement. Certain of our leases include options to extend or terminate the lease. An option to extend the lease is considered in connection with determining the ROU asset and lease liability when it is reasonably certain we will exercise that option. An option to terminate is considered unless it is reasonably certain we will not exercise the option. We elected the practical expedient to not recognize operating lease right-of-use assets and operating lease liabilities that arise from short-term leases with an initial term of 12 months or less and recognize the associated lease payments in the consolidated statements of operations on a straight-line basis over the lease term. The depreciable life of related leasehold improvements is based on the shorter of the estimated life of the asset or the lease term.
Net Income (Loss) Per Share
Basic net income (loss) per share attributable to common stockholders is calculated by dividing the net income (loss) attributable to common stockholders for the period, defined as net income (loss), by the weighted-average number of shares of common stock outstanding during the period, without consideration of potentially dilutive securities. Diluted earnings per share includes the dilutive effect of common stock equivalents and is calculated using the weighted-average number of common stock and the common stock equivalents outstanding during the reporting period. In periods when the Company recognizes a net loss, the Company excludes the impact of outstanding stock awards and shares related to the Notes from the diluted loss per share calculation as their inclusion would have an anti-dilutive effect.
Recently Adopted Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liability and equity, including convertible instruments and contracts in an entity’s own equity. Among other changes, ASU 2020-06 removes from GAAP the liability and equity separation model for convertible instruments with a cash conversion feature, and as a result, after adoption, entities will no longer separately present in equity an embedded conversion feature for such debt. Similarly, the embedded conversion feature will no longer be amortized as interest expense over the life of the instrument. Instead, entities will account for a convertible debt instrument wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC Topic 815, Derivatives and Hedging, or (2) a convertible debt instrument was issued at a substantial premium. Among other potential impacts, this change will reduce reported interest expense, increase reported net income, and result in a reclassification of certain conversion feature balance sheet amounts from stockholders’ equity to liabilities as it relates to the Notes. Additionally, ASU 2020-06 requires the application of the as if-converted method to calculate the impact of convertible instruments on diluted earnings per share. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, with early adoption permitted for fiscal years beginning after December 15, 2020, and can be adopted on either the fully retrospective or modified retrospective basis.
The Company early adopted ASU 2020-06 effective January 1, 2021 using the modified retrospective approach, which requires a cumulative adjustment to be recorded to accumulated deficit. Adoption of ASU 2020-06 resulted in a material effect on the consolidated balance sheet as the Company no longer separately presents in equity an embedded conversion feature. The impact to the consolidated balance sheet was an increase of the Notes by $66.8 million, a decrease of our deferred tax liability by $4.6 million, a decrease of our additional paid in capital by $65.5 million and a decrease of our accumulated deficit by $3.4 million. Interest expense recognized was reduced by approximately $17.1 million as a result of accounting for the convertible debt instrument as a single liability measured at its amortized cost. This adoption did not have a material impact on the
Company's consolidated statement of cash flows. The Company will prospectively utilize the as if-converted method to calculate the impact of convertible instruments on diluted earnings per share.
Recently Issued Accounting Standards Not Yet Adopted
In October 2021, the FASB issued ASU 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires application of ASC 606, Revenue from Contracts with Customers, to recognize and measure contract assets and liabilities from contracts with customers acquired in a business combination. ASU 2021-08 creates an exception to the general recognition and measurement principle in ASC 805, Business Combinations, and will result in recognition of contract assets and contract liabilities consistent with those recorded by the acquiree immediately before the acquisition date. The guidance is effective for us beginning January 1, 2023 and interim periods therein, with early adoption permitted.
2. Revenue Recognition
Disaggregation of revenue
The following table presents the Company’s revenue by timing of revenue recognition during the reporting periods to understand the risks of timing of transfer of control and cash flows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Licenses | | SaaS (1) | | Maintenance and Support (1) | | Other Subscription Services(1) | | Total Subscription | | Services and Other |
| (In thousands) |
| Year Ended December 31, 2021 | | | | | | | | | | | |
| Revenue recognized at a point in time | $ | 113,004 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Revenue recognized over time | — | | | 112,720 | | | 153,621 | | | 6,856 | | | 273,197 | | | 52,753 | |
| Total revenue | $ | 113,004 | | | $ | 112,720 | | | $ | 153,621 | | | $ | 6,856 | | | $ | 273,197 | | | $ | 52,753 | |
| | | | | | | | | | | |
| Year Ended December 31, 2020 | | | | | | | | | | | |
| Revenue recognized at a point in time | $ | 120,874 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Revenue recognized over time | — | | | 66,913 | | | 126,792 | | | 3,112 | | | 196,817 | | | 47,563 | |
| Total revenue | $ | 120,874 | | | $ | 66,913 | | | $ | 126,792 | | | $ | 3,112 | | | $ | 196,817 | | | $ | 47,563 | |
| | | | | | | | | | | |
| Year Ended December 31, 2019 | | | | | | | | | | | |
| Revenue recognized at a point in time | $ | 102,800 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Revenue recognized over time | — | | | 42,432 | | | 100,435 | | | 523 | | | 143,390 | | | 42,325 | |
| Total revenue | $ | 102,800 | | | $ | 42,432 | | | $ | 100,435 | | | $ | 523 | | | $ | 143,390 | | | $ | 42,325 | |
(1) Subscription revenue is further disaggregated into SaaS, Maintenance and Support and Other Subscription Services revenue in the table above.
Contract Balances
A summary of the activity impacting our contract balances during the reporting periods is presented below:
| | | | | | | | | | | |
| Contract Acquisition Costs |
| Year Ended December 31, |
| 2021 | | 2020 |
| (In thousands) |
| Beginning Balance | $ | 54,102 | | | $ | 35,152 | |
| Additional deferred contract acquisition costs | 60,799 | | | 32,634 | |
| Amortization of deferred contract acquisition costs | (20,210) | | | (13,684) | |
| Ending Balance | $ | 94,691 | | | $ | 54,102 | |
There were no material impairments of deferred contract acquisition costs for the years ended December 31, 2021, 2020 and 2019.
| | | | | | | | | | | |
| Deferred Revenue |
| Year Ended December 31, |
| 2021 | | 2020 |
| (In thousands) |
| Beginning Balance | $ | 184,718 | | | $ | 152,033 | |
| Increase, net | 59,412 | | | 32,685 | |
| Ending Balance | $ | 244,130 | | | $ | 184,718 | |
Deferred revenue, which is netted with unbilled amounts at the contract level, is a contract liability, consists primarily of payments received in advance of revenue recognition under the Company’s contracts with customers and is recognized as the revenue recognition criteria are met. Revenue recognized during the 2021, 2020 and 2019 reporting periods that was previously deferred was $203.4 million, $147.5 million and $113.0 million, respectively. The difference between the opening and closing balances of the Company’s contract assets and deferred revenue primarily results from the timing difference between the Company’s performance and the customer billings.
Contract assets primarily relate to unbilled amounts, which are netted with deferred revenue at the contract level, and typically result from sales contracts when revenue recognized exceeds the amount billed to the customer, and the right to payment is subject to more than the passage of time. Contract assets are transferred to accounts receivable when the rights become unconditional and the customer is billed. Contract assets are included in prepayments and other current assets and other non-current assets in the consolidated balance sheets. During the years ended December 31, 2021 and 2020, amounts reclassified from contract assets to accounts receivable were $20.2 million and $6.2 million, respectively.
Remaining performance obligations
Our contracts with customers include amounts allocated to performance obligations that will be satisfied at a later date. These remaining performance obligations represent contract revenue that has not yet been recognized and is included in deferred revenues, the balance of which includes both invoices that have been issued to customers but have not been recognized as revenues and amounts that will be invoiced and recognized as revenue in future periods. As of December 31, 2021, amounts allocated to these additional performance obligations are $559.9 million, of which we expect to recognize $299.7 million as revenue over the next 12 months with the remaining balance recognized thereafter over the period from 2023 to 2028. The additional performance obligations include $80.8 million of current unbilled receivables and $234.8 million of long-term unbilled receivables.
3. Allowance for Expected Credit Losses
The following tables present the changes in the allowance for expected credit losses for financial assets measured at amortized cost:
| | | | | | | | | | | |
| Accounts Receivable |
| Year Ended December 31, |
| 2021 | | 2020 |
| (In thousands) |
| Beginning Balance | $ | 376 | | | $ | — | |
| Adoption of ASC 326 | — | | | 407 | |
| Provision for credit losses | 1,095 | | | 757 | |
| Write-offs | (907) | | | (788) | |
| Ending Balance | $ | 564 | | | $ | 376 | |
| | | | | | | | | | | |
| Contract Assets |
| Year Ended December 31, |
| 2021 | | 2020 |
| (In thousands) |
| Beginning Balance | $ | 50 | | | $ | — | |
| Adoption of ASC 326 | — | | | 65 | |
| Provision for (reduction in) credit losses | 2,336 | | | (15) | |
| Write-offs | — | | | — | |
| Ending Balance | $ | 2,386 | | | $ | 50 | |
As of December 31, 2021, SailPoint evaluated economic conditions and made adjustments to historical loss information for certain economic risk factors, such as COVID-19. Recoveries of financial assets previously written off are recorded directly to earnings when received, which were $0.4 million and $0.2 million for the years ended December 31, 2021 and 2020, respectively. Total bad debt expense recognized prior to our adoption of ASC 326 for the year ended December 31, 2019 was $0.2 million.
4. Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present information about the Company’s financial assets that are measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (In thousands) |
| Assets: | | | | | | | |
| Cash equivalents: | | | | | | | |
| Money market funds | $ | 24,996 | | | — | | | — | | | $ | 24,996 | |
| Total cash equivalents | $ | 24,996 | | | — | | | — | | | $ | 24,996 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (In thousands) |
| Assets: | | | | | | | |
| Cash equivalents: | | | | | | | |
| Money market funds | $ | 511,229 | | | — | | | — | | | $ | 511,229 | |
| Total cash equivalents | $ | 511,229 | | | — | | | — | | | $ | 511,229 | |
The Company’s carrying amounts of financial instruments, including cash, accounts receivable, accounts payable, and accrued expenses are considered Level 1 and approximate their fair values due to their short maturities as of December 31, 2021 and 2020 and are excluded from the fair value tables above.
See Note 10 “Convertible Senior Notes and Capped Call Transactions” for the carrying amount and estimated fair value of our Notes as of December 31, 2021.
5. Business Combinations
2021 Acquisitions
Intello
On February 22, 2021, the Company acquired Intello Inc. (“Intello”), a Delaware corporation, pursuant to an Agreement and Plan of Merger whereby Intello became a wholly owned subsidiary of the Company. Intello is an early-stage SaaS management company that helps organizations discover, manage, and secure SaaS applications. The aggregate consideration paid in connection with this acquisition was $42.9 million, net of cash acquired.
The following table summarizes the final purchase price allocation as of the date of acquisition:
| | | | | |
| As of |
| February 22, 2021 |
| (In thousands) |
| Cash and cash equivalents | $ | 1,143 | |
| Accounts receivable | 146 | |
| Prepayments and other current assets | 43 | |
| Property and equipment, net | 17 | |
| Goodwill | 32,425 | |
| Intangible assets | 12,300 | |
| Accrued expenses and other liabilities | (97) | |
| Deferred tax liability - non-current | (1,409) | |
| Deferred revenue | (536) | |
| Total fair value of assets acquired and liabilities assumed | $ | 44,032 | |
The following table presents the estimated fair values and useful lives of the identifiable intangible assets acquired:
| | | | | | | | | | | |
| Amount | | Estimated Useful Life |
| (In thousands) | | (In years) |
| Developed technology | $ | 9,500 | | | 5 |
| Customer lists | $ | 2,800 | | | 3 |
The fair value of developed technology was estimated using the relief from royalty method (Level 3) utilizing assumptions for annual obsolescence, royalty rates, tax rate and discount rate. The fair value of customer lists was estimated using the replacement cost method (Level 3), which utilized assumptions for the cost to recreate the relationships, such as the timing and resources required, distributor's profit mark-up and opportunity cost.
ERP Maestro
On March 15, 2021, the Company acquired ERP Maestro, Inc. (“ERP Maestro”), a Florida corporation, pursuant to an Agreement and Plan of Merger whereby ERP Maestro became a wholly owned subsidiary of the Company. ERP Maestro is an early-stage SaaS governance, risk and compliance solution that provides separation-of-duty controls monitoring for an organization’s most critical applications. The aggregate consideration paid in connection with this acquisition was $28.1 million, net of cash acquired.
The following table summarizes the final purchase price allocation as of the date of acquisition:
| | | | | |
| As of |
| March 15, 2021 |
| (In thousands) |
| Cash and cash equivalents | $ | 924 | |
| Accounts receivable | 850 | |
| Prepayments and other current assets | 59 | |
| Property and equipment, net | 152 | |
| Right-of-use assets | 223 | |
| Goodwill | 15,902 | |
| Intangible assets | 13,900 | |
| Accrued expenses and other liabilities | (503) | |
| Deferred tax liability - non-current | (1,314) | |
| Deferred revenue | (1,200) | |
| Total fair value of assets acquired and liabilities assumed | $ | 28,993 | |
The following table presents the estimated fair values and useful lives of the identifiable intangible assets acquired:
| | | | | | | | | | | |
| Amount | | Estimated Useful Life |
| (In thousands) | | (In years) |
| Developed technology | $ | 10,000 | | | 5 |
| Customer lists | $ | 3,900 | | | 3 |
The fair value of developed technology was estimated using the replacement cost method (Level 3) utilizing assumptions for the cost to replace, such as the workforce, timing and resources required, annual obsolescence, as well as a theoretical developer’s profit margin and entrepreneurial incentive and opportunity cost. The fair value of customer lists was estimated using the replacement cost method (Level 3), which utilized assumptions for the cost to recreate the customer relationships, such as the timing and resources required, distributor's profit mark-up and opportunity cost and customer age.
2019 Acquisitions
Orkus
On October 15, 2019, the Company acquired 100% of the equity interest in Orkus, Inc. (“Orkus”), a Delaware corporation engaged in the development and license of software products to assist customers in monitoring and controlling access and authorization across hybrid cloud assets. Total consideration related to the acquisition was $16.5 million in cash, of which $2.0 million was to be paid upon the lapse of an indemnification period of 12 months and 24 months of the acquisition date. As of December 31, 2021, all consideration has been paid. As of December 31, 2020, $1.0 million of the holdback amount is reflected within accrued expenses and other liabilities on the consolidated balance sheets.
The following table summarizes the final purchase price allocation as of the date of acquisition:
| | | | | |
| As of |
| October 15, 2019 |
| (In thousands) |
| Cash and cash equivalents | $ | — | |
| Prepayments and other current assets | 34 | |
| Right-of-use assets | 90 | |
| Goodwill | 7,637 | |
| Intangible assets | 9,760 | |
| Accounts payable | (21) | |
| Accrued expenses and other liabilities | (133) | |
| Deferred tax liability - non-current | (861) | |
| Total fair value of assets acquired and liabilities assumed | $ | 16,506 | |
The following table presents the estimated fair values and useful lives of the identifiable intangible assets acquired:
| | | | | | | | | | | |
| Amount | | Estimated
Useful Life |
| (In thousands) | | (In years) |
| Developed technology | $ | 9,760 | | | 5 |
The fair value of developed technology was estimated using the replacement cost method (Level 3), which utilized assumptions for the cost to replace, such as the workforce, timing and resources required, as well as a theoretical developer’s profit margin and entrepreneurial incentive and opportunity cost.
Overwatch.ID
On October 15, 2019, the Company acquired 100% of the equity interest in Overwatch.ID, Inc. (“Overwatch.ID”), a Delaware corporation engaged in the development and license of software products focused on access controls security for cloud applications, cloud computing, hybrid IT environments, and on-premises infrastructure. The consideration related to the acquisition was $20.9 million in cash, of which $3.0 million was to be paid upon the lapse of an indemnification period of 12 months and 18 months of the acquisition date. As of December 31, 2021, all consideration has been paid. As of December 31, 2020, $1.5 million of the holdback amount is reflected within accrued expenses and other liabilities on the consolidated balance sheets.
The following table summarizes the final purchase price allocation as of the date of acquisition:
| | | | | |
| As of |
| October 15, 2019 |
| (In thousands) |
| Cash and cash equivalents | $ | 45 | |
| Accounts receivable | 66 | |
| Prepayments and other current assets | 103 | |
| Deferred tax asset - non-current | 687 | |
| Right-of-use assets | 175 | |
| Goodwill | 14,107 | |
| Intangible assets | 6,610 | |
| Accounts payable | (256) | |
| Accrued expenses and other liabilities | (185) | |
| Deferred revenue | (466) | |
| Total fair value of assets acquired and liabilities assumed | $ | 20,886 | |
The following table presents the estimated fair values and useful lives of the identifiable intangible assets acquired:
| | | | | | | | | | | |
| Amount | | Estimated Useful Life |
| (In thousands) | | (In years) |
| Developed technology | $ | 6,610 | | | 5 |
The fair value of developed technology was estimated using the replacement cost method (Level 3), which utilized assumptions for the cost to replace, such as the workforce, timing and resources required, as well as a theoretical developer’s profit margin and entrepreneurial incentive and opportunity cost.
Additional Acquisition Related Information
The operating results of the acquired companies are included in our consolidated statements of operations from the respective dates of acquisition. Pro forma results of operations have not been presented because the effects of these acquisitions, individually and in the aggregate, were not material to our consolidated statements of operations. During the years ended December 31, 2021 and December 31, 2019, acquisition related costs were $2.2 million and $1.0 million, respectively, which include legal, accounting and consulting professional service fees and have been included primarily in general and administrative expenses on the consolidated statement of operations.
These acquisitions have been accounted for as business combinations. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the respective acquisition date. The Company finalized the purchase price within the required one-year measurement period as of the dates of acquisition.
The Company believes that for each acquisition, the acquired companies will provide opportunities for growth through investing in additional products and capabilities, among other factors. This contributed to a purchase price in excess of the estimated fair value of each acquired company’s net identifiable assets acquired and, as a result, goodwill was recorded in connection with each acquisition. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. Goodwill arising from these acquisitions are not deductible for tax purposes.
6. Goodwill and Intangible Assets
Goodwill
The following table reflects goodwill activity for the year ended December 31, 2021:
| | | | | |
| (In thousands) |
| Balance, December 31, 2020 | $ | 241,103 | |
| Goodwill acquired | 47,307 | |
| Measurement period adjustments | 1,020 | |
| Balance, December 31, 2021 | $ | 289,430 | |
All goodwill balances are subject to annual goodwill impairment testing. As of October 31, 2021, 2020 and 2019, the Company performed a qualitative analysis and concluded that no impairment for goodwill was required. There were no impairments of goodwill during the years ended December 31, 2021, 2020 and 2019.
Intangible Assets
Total cost and amortization of intangible assets comprised of the following:
| | | | | | | | | | | | | | | | | |
| | | As of |
| Weighted Average
Useful Life | | December 31, 2021 | | December 31, 2020 |
| Intangible assets, net | (In years) | | (In thousands) |
| Customer lists | 14.6 | | $ | 49,200 | | | $ | 42,500 | |
| Developed technology | 8.6 | | 66,260 | | | 51,760 | |
| Trade names and trademarks | 17 | | 24,500 | | | 24,500 | |
| Other | 4.8 | | 2,976 | | | 3,746 | |
| Total intangible assets | | | 142,936 | | | 122,506 | |
| Less: Accumulated amortization | | | (69,467) | | | (58,544) | |
| Total intangible assets, net | | | $ | 73,469 | | | $ | 63,962 | |
Periodically, the Company evaluates intangible assets for triggering events for indications of possible impairment. During the year ended December 31, 2021, the Company recorded an impairment charge of $0.7 million related to certain developed technology assets due to a decrease in the fair value of the underlying assets. Due to our strategic decision to discontinue further investment and enhancements in the standalone existing technology, we recorded an impairment charge of $5.1 million related to certain developed technology assets during the year ended December 31, 2020. There were no impairments for intangible assets during the year ended December 31, 2019.
Amortization expense for the periods presented is as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
| Cost of revenue - licenses | $ | 3,674 | | | $ | 4,031 | | | $ | 4,032 | |
| Cost of revenue - subscription | 5,539 | | | 3,549 | | | 1,076 | |
| Research and development | 674 | | | 703 | | | 647 | |
| Sales and marketing | 6,101 | | | 4,274 | | | 4,273 | |
| Total amortization expense | $ | 15,988 | | | $ | 12,557 | | | $ | 10,028 | |
The total estimated future amortization expense of these intangible assets as of December 31, 2021 is as follows:
| | | | | |
| Year Ending December 31, | (In thousands) |
| 2022 | $ | 16,719 | |
| 2023 | 16,557 | |
| 2024 | 12,674 | |
| 2025 | 8,175 | |
| 2026 | 4,968 | |
| Thereafter | 14,376 | |
| Total amortization expense | $ | 73,469 | |
7. Leases
Operating Leases
As of December 31, 2021, our leases, primarily relating to office leases, have remaining lease terms of less than 1 year to 8 years. Certain leases include early termination and/or extension options; however, exercises of these options are at the Company’s sole discretion. As of December 31, 2021, the Company determined it is not reasonably certain it will exercise the options to extend its leases or terminate them early. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. As of December 31, 2021 and 2020, we have no financing leases.
The rates implicit in the Company’s leases are not readily determinable. Therefore, in order to value the Company’s lease liabilities, the Company uses an IBR which reflects the fixed rate at which the Company could borrow a similar amount in the same currency, for the same term, and with similar collateral as in the lease at the commencement date. As of December 31, 2021, the Company measures its lease liabilities at the net present value of the remaining lease payments discounted at the weighted average discount rate of 4.14%. The Company's IBR is estimated to approximate the interest rate on similar terms and payments and in economic environments where the leased asset is located. The weighted average remaining term of the Company’s operating leases is 6.9 years.
Operating lease costs for the periods presented were as follows:
| | | | | | | | | | | |
| Year Ended |
| December 31, 2021 | | December 31, 2020 |
| (In thousands) |
| Lease cost | | | |
| Operating lease cost | $ | 5,097 | | | $ | 5,155 | |
| Variable lease cost | 2,521 | | | 2,434 | |
| Short-term lease cost | 782 | | | 395 | |
| Total lease cost | $ | 8,400 | | | $ | 7,984 | |
Facilities costs (including rent and utilities) are considered shared costs and are allocated to departments based on headcount. As such, allocated shared costs are reflected in each cost of revenue and operating expense category.
Other supplemental cash flow information related to operating leases for the periods presented is as follows:
| | | | | | | | | | | |
| Year Ended |
| December 31, 2021 | | December 31, 2020 |
| (In thousands) |
| Cash paid for amounts included in the measurement of lease liabilities | | | |
| Operating cash flows from operating leases | $ | 6,199 | | | $ | 5,181 | |
| Right-of-use assets obtained in exchange for lease liabilities | | | |
| Operating leases | $ | 472 | | | $ | 106 | |
The undiscounted annual future minimum lease payments are summarized by year in the table below:
| | | | | |
| Year Ending December 31, | (In thousands) |
| 2022 | $ | 6,128 | |
| 2023 | 5,210 | |
| 2024 | 5,033 | |
| 2025 | 4,890 | |
| 2026 | 5,036 | |
| Thereafter | 12,357 | |
| Total minimum lease payments | $ | 38,654 | |
| Less: interest | (5,042) | |
| Total present value of operating lease liabilities | $ | 33,612 | |
8. Commitments and Contingencies
As of December 31, 2021, we had in aggregate $18.2 million in contractual commitments associated with agreements that are enforceable and legally binding, of which $12.3 million are due within the next 12 months. Such amounts do not include obligations under contracts that we can cancel without significant penalty and purchase orders as the purchase orders represent authorizations to purchase rather than binding agreements.
Indemnification Arrangements
In the ordinary course of business, the Company enters into contractual arrangements under which it agrees to provide indemnification of varying scope and terms to customers, business partners and other parties with respect to certain matters, including, losses arising out of the breach of such agreements, intellectual property infringement claims made by third parties, and other liabilities with respect to our products and services and business. In these circumstances, payment may be conditional on the other party making a claim pursuant to the procedures specified in a particular contract. The Company includes service level commitments to our cloud customers warranting certain levels of uptime reliability and performance and permitting those customers to receive credits in the event that we fail to meet those levels.
To date, the Company has not incurred any material costs as a result of these commitments, and we expect the time between any potential claims and issuance of the credits to be short. As a result, we have not accrued any liabilities related to these commitments in our consolidated financial statements.
Litigation Claims and Assessments
The Company is subject to claims and suits that may arise from time to time in the ordinary course of business. In addition, some legal actions, claims and governmental inquiries may be instituted or asserted in the future against us and our subsidiaries. Although the outcome of our legal proceedings cannot be predicted with certainty and no assurances can be provided, based upon current information, we do not believe the liabilities, if any, which may ultimately result from the outcome of such matters, individually or in the aggregate, will have a material adverse impact on our consolidated financial statements.
9. Credit Agreement
On March 11, 2019, SailPoint Technologies, Inc., as borrower (the “Borrower”), and certain of our other wholly owned subsidiaries entered into a credit agreement (as amended, restated, amended and restated, supplemented or otherwise
modified from time to time through the date hereof, the “Credit Agreement”). The Credit Agreement is guaranteed by SailPoint Technologies Intermediate Holdings, LLC, a wholly owned subsidiary, and the Borrower’s material domestic subsidiaries (the “Guarantors” and, together with the Borrower, the “Loan Parties”) and is supported by a security interest in substantially all of the Loan Parties’ personal property and assets.
In September 2019, the Company amended the Credit Agreement in connection with the issuance and sale of the Notes. Such amendment included a decrease in the commitments for revolving credit loans from $150.0 million to $75.0 million, with a $15.0 million letter of credit sublimit, which amount can be increased or decreased under certain circumstances and is subject to certain financial covenants. In addition, the Credit Agreement provides for the ability to incur uncommitted term loan facilities if, among other things, the Senior Net Leverage Ratio (as defined in the Credit Agreement), calculated giving pro forma effect to the requested term loan facility, is no greater than 3.50 to 1.00. Borrowings pursuant to the Credit Agreement may be used for working capital and other general corporate purposes, including acquisitions permitted under the Credit Agreement. The Credit Agreement contains certain customary representations and warranties and affirmative and negative covenants. The Credit Agreement has established priority for the lenders party over all assets of the Company.
The interest rates applicable to revolving credit loans under the Credit Agreement are at the Company’s option. The Company pays an unused commitment fee during the term of the Credit Agreement ranging from 0.20% to 0.30% per annum based on the Senior Secured Net Leverage Ratio. Borrowings under the Credit Agreement are scheduled to mature on March 11, 2024.
The Company had no outstanding revolving credit loan balance under the Credit Agreement as of December 31, 2021 and 2020. The Company was in compliance with all applicable covenants as of December 31, 2021.
The Company incurred total debt issuance costs of $0.8 million in connection with the Credit Agreement, which the net balance is included in other non-current assets on the accompanying consolidated balance sheets as of December 31, 2021 and 2020. These costs are being amortized to interest expense over the life of the Credit Agreement on a straight-line basis. Amortization of debt issuance costs for the years ended December 31, 2021, 2020 and 2019 were $0.2 million, $0.2 million and $0.1 million, respectively, and were recorded in interest expense on the accompanying consolidated statements of operations.
10. Convertible Senior Notes and Capped Call Transactions
In September 2019, the Company issued and sold $400.0 million aggregate principal amount of 0.125% Convertible Senior Notes due 2024 in a private offering (the “Offering”) to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The net proceeds from the Offering were approximately $391.2 million, after deducting discounts and commissions and other fees and expenses payable by the Company in connection with the Offering. The Company used $37.1 million of the net proceeds from the Offering to pay the cost of the privately negotiated capped call transactions (the “Capped Call Transactions”) it entered into with the initial purchasers of the Notes or their respective affiliates and another financial institution.
The Notes were issued pursuant to an indenture (the “Indenture”), by and between the Company and U.S. Bank National Association, as trustee. The Notes are senior unsecured obligations of the Company and will mature on September 15, 2024, unless earlier redeemed, repurchased or converted. The Notes bear interest at a fixed rate of 0.125% per year payable semiannually in arrears on March 15 and September 15 of each year.
The Notes will be convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding March 15, 2024, only under the following circumstances:
•during any calendar quarter commencing after the calendar quarter ending on December 31, 2019 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock, for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
•during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price (as defined in the Indenture) per $1,000 principal amount of the Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of common stock and the conversion rate for the Notes on each such trading day;
•if the Company calls any or all of the Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; and
•upon the occurrence of specified corporate events as set forth in the Indenture.
On or after March 15, 2024 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances.
Upon conversion, the Company may satisfy its conversion obligation by paying and/or delivering, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election, in the manner and subject to the terms and conditions provided in the Indenture. It is the Company’s current intent to settle the principal amount of the Notes with cash. The Notes are convertible at an initial conversion rate of approximately 35.1849 shares of common stock per $1,000 principal amount of the Notes, which is equivalent to an initial conversion price of approximately $28.42 per share of common stock, subject to adjustment upon the occurrence of specified events in accordance with the terms of the Indenture.
In addition, following certain corporate events that occur prior to the maturity date or if the Company delivers a notice of redemption, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its Notes in connection with such a corporate event or notice of redemption, as the case may be. For example, upon the occurrence of a make-whole fundamental change, as defined in the Indenture, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its Notes in connection with such make-whole fundamental change or during the relevant redemption period.
The Company may not redeem the Notes prior to September 20, 2022. The Company may redeem for cash all or any portion of the Notes, at its option, on or after September 20, 2022, if the last reported sale price of common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Notes, which means that the Company is not required to redeem or retire the Notes periodically.
If the Company undergoes a fundamental change (as defined in the Indenture), holders may require the Company to repurchase for cash all or any portion of their Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The Indenture includes customary covenants and sets forth certain events of default after which the Notes may be declared immediately due and payable and sets forth certain types of bankruptcy or insolvency events of default involving the Company after which the Notes become automatically due and payable. The Company was in compliance with all applicable covenants as of December 31, 2021.
For at least 20 trading days during the period of 30 consecutive trading days ended September 30, 2020, the last reported sale price of the Company’s common stock was equal to or exceeded 130% of the conversion price of the Notes on each applicable trading day. This conversion trigger has been met each quarter since then, including the quarter ended December 31, 2021. As a result, the Notes continue to be convertible at the option of the holders during the fiscal quarter ended December 31, 2021 and remained classified as current liabilities on the consolidated balance sheet as of December 31, 2021.
During the year ended December 31, 2021, upon the request of certain holders, the Company settled the conversion of the $10.2 million in aggregate principal amount of the Notes (the “2021 Converted Notes”) with cash and settled all other amounts owed to the respective holders through the issuance of 181,629 shares of the Company's common stock with an aggregate fair value of approximately $10.1 million. The Company recognized an immaterial amount related to the acceleration of unamortized debt issuance costs related to these early note conversions, which was recorded in interest expense on the accompanying consolidated statements of operations. As of the date of this filing, no other holders of the Notes have submitted requests for conversion.
Transaction costs related to the issuance of the Notes were $8.8 million and are being amortized to interest expense at an effective interest method rate of 0.57% over the term of the Notes.
As of December 31, 2021, the Notes have a remaining life of 33 months.
The net carrying amount of the liability and equity components of the Notes for the periods presented is as follows:
| | | | | | | | | | | |
| As of |
| December 31, 2021 | | December 31, 2020 |
| (In thousands) |
| Liability component | | | |
| Principal | $ | 389,840 | | | $ | 400,000 | |
Unamortized discount (1) | — | | | (68,270) | |
Unamortized issuance costs (1) | (4,668) | | | (5,058) | |
| Net carrying amount | $ | 385,172 | | | $ | 326,672 | |
| | | |
Equity component, net of issuance costs (1) | $ | — | | | $ | 86,764 | |
(1) See Note 1 “Description of Business and Summary of Significant Accounting Policies” for more information regarding the effect of adoption of ASU 2020-06.
The interest expense recognized related to the Notes for the periods presented is as follows:
| | | | | | | | | | | |
| Year Ended |
| December 31, 2021 | | December 31, 2020 |
| (In thousands) |
| Contractual interest expense | $ | 484 | | | $ | 664 | |
| Amortization of debt discount (1) | — | | | 16,272 | |
| Amortization of debt issuance costs (2) | 1,872 | | | 1,349 | |
| Total | $ | 2,356 | | | $ | 18,285 | |
(1) See Note 1 “Description of Business and Summary of Significant Accounting Policies” for more information regarding the effect of adoption of ASU 2020-06.
(2) Amortization of debt issuance costs includes the acceleration of unamortized debt issuance costs related to the partial conversion of the Notes.
As of December 31, 2021, the total estimated fair value of the Notes was $692.7 million. The fair value was determined based on the closing trading price per $100 of the Notes as of the last day of trading for the period. The fair value of the Notes is primarily affected by the trading price of our common stock and market interest rates. The fair value of the Notes is considered Level 2 within the fair value hierarchy and was determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, such as the quoted price of the Notes in an over-the-counter market.
Capped Call Transactions
In September 2019, in connection with the pricing of the Notes and in connection with the initial purchasers’ exercise in full of their option to purchase additional Notes, the Company entered into privately negotiated Capped Call Transactions with the initial purchasers or their respective affiliates and another financial institution. The Capped Call Transactions are generally expected to reduce potential dilution to common stock upon any conversion of the Notes and/or offset any potential cash payments the Company is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap. The Capped Call Transactions have an initial strike price of $28.42 per share, which corresponds to the initial conversion price of the Notes and is subject to certain adjustments, and an initial cap price of $41.34 per share, which is subject to certain adjustments. For accounting purposes, the Capped Call Transactions are separate transactions and not part of the terms of the Notes. As the Capped Call Transactions are considered indexed to our own stock and are considered equity classified, they are recorded in stockholders’ equity and are not accounted for as derivatives. The cost of $37.1 million incurred in connection with the Capped Call Transactions was recorded as a reduction to additional paid in capital.
The Capped Call Transactions initially covered, subject to anti-dilution adjustments substantially similar to those applicable to the Notes, approximately 14.1 million shares of common stock. In connection with the settlement of the 2021 Converted Notes during the year ended December 31, 2021, the Company terminated a pro rata amount of the Capped Call Transactions pursuant to the terms thereof. As a result of this pro rata termination, the Company received 37,301 shares of its common stock with an aggregate value of approximately $1.9 million based on the trading price of our common stock at that time. As of December 31, 2021, the Capped Call Transactions cover, subject to anti-dilution adjustments, 13.7 million shares of our common stock.
11. Related Party Transactions
The Company did not have any related party balances or incur any material related party transactions as of and during the years ended December 31, 2021, 2020 and 2019.
12. Stockholders' Equity
In November 2017, the board of directors and stockholders approved the Amended and Restated Certificate of Incorporation to increase the authorized capital stock to 310 million shares, consisting of 300 million shares of common stock and 10 million shares of preferred stock, each with par value of $0.0001 per share.
Common Stock
The Company’s Amended and Restated Certificate of Incorporation authorizes issuance of 300 million shares of common stock with a par value of $0.0001 per share. The common stock confers upon its holders the right to participate in the general meetings of the Company, to vote at such meetings (each share represents one vote), to elect board members and to participate in any distribution of dividends, payments of the Company’s debts, other payments required by law, or other property and amounts payable upon shares of preferred stock, including the distribution of surplus assets upon liquidation equally on a per share basis. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of holders of any preferred stock that may be issued in the future.
Preferred Stock
The company is authorized, subject to any limitations prescribed by law, without stockholder approval, to issue up to an aggregate of 10 million shares of preferred stock, in one or more series, each series to have such rights, preferences and limitations, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences as determined by the board of directors. As of December 31, 2021, the Company does not have any shares of preferred stock outstanding and currently has no plans to issue shares of preferred stock.
13. Stock-Based Compensation
2015 Stock Option Plans
In 2015, the Company adopted (i) the Amended and Restated 2015 Stock Option and Grant Plan and (ii) the 2015 Stock Incentive Plan (together the “2015 Stock Option Plans”) under which it may grant incentive stock options (“ISOs”), nonqualified stock options for the right to purchase shares of common stock and restricted stock units (“RSUs”). The 2015 Stock Option Plans reserve 5.0 million shares of common stock for issuance pursuant to ISOs, 0.5 million shares of common stock for issuance pursuant to RSUs and 0.25 million shares of common stock for issuance under the 2015 Stock Incentive Plan. Under the 2015 Stock Option Plan, ISOs may not be granted at less than fair market value on the date of the grant and generally vest over a four-year period based on continued service. Options generally expire ten years after the grant date.
As of December 31, 2021, 0.7 million shares were available for issuance under the 2015 Stock Option Plans, including approximately 36 thousand shares available for issuance under the 2015 Stock Incentive Plan. The Company currently uses authorized and unissued shares to satisfy share award exercises.
2017 Long Term Incentive Plan
In November 2017, the Company’s Board of Directors (the “Board”) adopted the 2017 Long Term Incentive Plan (the “2017 Plan”) under which it may grant stock options to purchase shares of common stock and RSUs. As of December 31, 2021, the Company had reserved 22.1 million shares of common stock available for issuance under the 2017 Plan to employees,
directors, officers and consultants of the Company and its subsidiaries. The number of shares of common stock available for issuance under the 2017 Plan will be increased on each January 1 hereafter by 4.4 million shares of common stock. Options and RSUs granted under the 2017 Plan generally vest over terms of one to four years based on continued service and generally expire ten years after the grant date. Common stock subject to an award that expires or is canceled, forfeited, exchanged, settled in cash or otherwise terminated without delivery of shares, and shares withheld or surrendered to pay the exercise price of, or to satisfy the withholding obligations with respect to an award, will become available for future grants under the 2017 Plan.
As of December 31, 2021, 13.5 million shares were available for issuance under the 2017 Plan. The Company currently uses authorized and unissued shares to satisfy share award exercises.
The fair value for the Company’s stock options granted and Employee Stock Purchase Plan ("ESPP") purchase rights, as discussed further below, during the periods presented were estimated at grant date using a Black-Scholes option-pricing model using the following weighted average assumptions:
| | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 | | December 31, 2019 |
| Stock Options | | | | | |
| Expected dividend rate | —% | | —% | | —% |
| Expected volatility | 47.3%- 50.8% | | 50.0% - 56.2% | | 38.8% - 46.0% |
| Risk-free interest rate | 0.80% - 1.14% | | 0.36% - 1.53% | | 1.39% - 2.59% |
| Expected term (in years) | 6.25 | | 6.25 | | 6.25 |
| | | | | |
| ESPP | | | | | |
| Expected dividend rate | —% | | —% | | —% |
| Expected volatility | 47.9% - 50.8% | | 48.1% - 56.2% | | 39.8% - 48.1% |
| Risk-free interest rate | 0.04% - 0.09% | | 0.10% - 1.57% | | 1.62% - 2.44% |
| Expected term (in years) | 0.50 | | 0.50 | | 0.42 0.50 |
Stock Options
The following table summarizes stock option activity for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number
of Options | | Weighted
Average
Exercise
Price | | Weighted
Average
Remaining
Contractual
Term | | Aggregate
Intrinsic
Value |
| (In thousands) | | (Per share) | | (Years) | | (In thousands) |
| Balances at December 31, 2018 | 2,817 | | | $ | 6.64 | | | 8.0 | | $ | 47,589 | |
| Granted | 1,068 | | | $ | 26.63 | | | | | |
| Exercised | (730) | | | $ | 4.18 | | | | | |
| Forfeited | (369) | | | $ | 16.31 | | | | | |
| Balances at December 31, 2019 | 2,786 | | | $ | 13.67 | | | 7.7 | | $ | 31,489 | |
| Options vested and expected to vest at December 31, 2019 | 2,786 | | | $ | 13.67 | | | 7.7 | | $ | 31,489 | |
| Options vested and exercisable at December 31, 2019 | 1,143 | | | $ | 6.17 | | | 6.4 | | $ | 19,964 | |
| Balances at December 31, 2019 | 2,786 | | | $ | 13.67 | | | 7.7 | | $ | 31,489 | |
| Granted | 617 | | | $ | 25.30 | | | | | |
| Exercised | (763) | | | $ | 7.82 | | | | | |
| Forfeited | (236) | | | $ | 20.35 | | | | | |
| Balances at December 31, 2020 | 2,404 | | | $ | 17.85 | | | 7.7 | | $ | 85,064 | |
| Options vested and expected to vest at December 31, 2020 | 2,404 | | | $ | 17.85 | | | 7.7 | | $ | 85,064 | |
| Options vested and exercisable at December 31, 2020 | 1,064 | | | $ | 12.00 | | | 6.7 | | $ | 43,889 | |
| Balance at December 31, 2020 | 2,404 | | | $ | 17.85 | | | 7.7 | | $ | 85,064 | |
| Granted | 304 | | | $ | 60.57 | | | | | |
| Exercised | (609) | | | $ | 12.50 | | | | | |
| Forfeited | (198) | | | $ | 26.39 | | | | | |
| Balances at December 31, 2021 | 1,901 | | | $ | 25.52 | | | 7.0 | | $ | 46,895 | |
| Options vested and expected to vest at December 31, 2021 | 1,901 | | | $ | 25.52 | | | 7.0 | | $ | 46,895 | |
| Options vested and exercisable at December 31, 2021 | 1,097 | | | $ | 16.70 | | | 6.2 | | $ | 34,711 | |
The following table summarizes the status of the Company’s non-vested stock options for the periods presented:
| | | | | | | | | | | |
| Number of
Shares | | Weighted
Average
Grant Date
Fair Value |
| (In thousands) | | (Per share) |
| Non-vested at December 31, 2018 | 1,728 | | | $ | 5.47 | |
| Granted | 1,068 | | | $ | 11.36 | |
| Vested | (781) | | | $ | 5.35 | |
| Forfeited | (370) | | | $ | 7.60 | |
| Non-vested at December 31, 2019 | 1,645 | | | $ | 8.88 | |
| Granted | 617 | | | $ | 13.44 | |
| Vested | (686) | | | $ | 8.36 | |
| Forfeited | (236) | | | $ | 9.44 | |
| Non-vested at December 31, 2020 | 1,340 | | | $ | 11.17 | |
| Granted | 304 | | | $ | 29.51 | |
| Vested | (642) | | | $ | 10.54 | |
| Forfeited | (198) | | | $ | 12.90 | |
| Non-vested at December 31, 2021 | 804 | | | $ | 18.18 | |
The Company expects all outstanding stock options at December 31, 2021 to fully vest. The total fair value of shares vested during the years ended December 31, 2021, 2020 and 2019 was $6.8 million, $5.7 million and $4.2 million, respectively.
The total unrecognized compensation expense related to non-vested stock options granted is $12.5 million and is expected to be recognized over a weighted average period of 2.2 years as of December 31, 2021.
Incentive Unit Plan
In 2014 and 2015, the Company granted shares of the Company’s common stock (the “incentive units”) to certain members of management pursuant to restricted stock agreements.
The incentive units were granted with an exercise price equal to the fair market value on the date of grant, are subject to vesting, and if exercised in advance of vesting were subject to the Company’s right to repurchase until vested.
The Company did not grant any additional incentive units during the years ended December 31, 2021, 2020 or 2019. During the year ended December 31, 2019, all of the remaining 0.7 million incentive units were vested with a weighted average grant date fair value of $0.05 per share. Therefore, as of December 31, 2021, there is no further unrecognized compensation expense or intrinsic value related to non-vested incentive units.
Restricted Stock Units
The following provides a summary of the RSU activity for the Company for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of
Shares | | Weighted
Average
Grant Date
Fair Value | | Weighted
Average
Remaining
Contractual
Term | | Aggregate
Intrinsic
Value |
| (In thousands) | | (Per share) | | (Years) | | (In thousands) |
| Balances at December 31, 2018 | 1,148 | | | $ | 15.40 | | | 1.8 | | $ | 26,967 | |
| Granted | 1,363 | | | $ | 27.22 | | | | | |
| Vested | (336) | | | $ | 15.94 | | | | | |
| Forfeited | (294) | | | $ | 20.47 | | | | | |
| Balances at December 31, 2019 | 1,881 | | | $ | 23.08 | | | 1.6 | | $ | 44,386 | |
| Units expected to vest at December 31, 2019 | 1,881 | | | $ | 23.08 | | | 1.6 | | $ | 44,386 | |
| Balances at December 31, 2019 | 1,881 | | | $ | 23.08 | | | 1.6 | | $ | 44,386 | |
| Granted | 2,113 | | | $ | 24.13 | | | | | |
| Vested | (589) | | | $ | 22.26 | | | | | |
| Forfeited | (270) | | | $ | 23.63 | | | | | |
| Balances at December 31, 2020 | 3,135 | | | $ | 23.90 | | | 1.4 | | $ | 166,927 | |
| Units expected to vest at December 31, 2020 | 3,135 | | | $ | 23.90 | | | 1.4 | | $ | 166,927 | |
| Balances at December 31, 2020 | 3,135 | | | $ | 23.90 | | | 1.4 | | $ | 166,927 | |
| Granted | 2,544 | | | $ | 53.47 | | | | | |
| Vested | (1,467) | | | $ | 27.71 | | | | | |
| Forfeited | (581) | | | $ | 35.84 | | | | | |
| Balances at December 31, 2021 | 3,631 | | | $ | 41.17 | | | 1.4 | | $ | 175,508 | |
| Units expected to vest at December 31, 2021 | 3,631 | | | $ | 41.17 | | | 1.4 | | $ | 175,508 | |
The Company expects all outstanding RSUs to fully vest. The total unrecognized compensation expense related to RSUs was $132.6 million as of December 31, 2021 and is expected to be recognized over a weighted average period of 2.7 years.
Employee Stock Purchase Plan
The Company initially reserved 1.8 million shares of common stock for issuance under the ESPP. The number of shares available for issuance under the ESPP will increases each January 1 by 0.9 million shares of common stock. The ESPP will continue in effect unless terminated prior thereto by the Company’s Board or Compensation Committee, each of which has the right to terminate the ESPP at any time.
As of December 31, 2021, 3.2 million shares were available for issuance under the ESPP. During the years ended December 31, 2021, 2020 and 2019, approximately 0.3 million, 0.4 million and 0.4 million shares of common stock have been purchased or distributed pursuant to the ESPP, respectively.
A summary of the Company’s stock-based compensation expense, which includes stock options, incentive units, RSUs and the ESPP, is presented below:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
| Stock options | $ | 6,544 | | | $ | 5,725 | | | $ | 4,958 | |
| Incentive units | — | | | — | | | 351 | |
| RSUs | 41,690 | | | 20,819 | | | 11,213 | |
| ESPP | 3,523 | | | 2,513 | | | 2,192 | |
| Total stock-based compensation expense | $ | 51,757 | | | $ | 29,057 | | | $ | 18,714 | |
A summary of the Company’s stock-based compensation expense as recognized on the consolidated statements of operations is presented below:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
| Cost of revenue - subscription | $ | 3,688 | | | $ | 1,758 | | | $ | 1,142 | |
| Cost of revenue - services and other | 3,733 | | | 1,963 | | | 1,379 | |
| Research and development | 12,827 | | | 6,282 | | | 3,517 | |
| General and administrative | 10,563 | | | 6,802 | | | 5,990 | |
| Sales and marketing | 20,946 | | | 12,252 | | | 6,686 | |
| Total stock-based compensation expense | $ | 51,757 | | | $ | 29,057 | | | $ | 18,714 | |
14. Balance Sheet Related Items
Property and Equipment, Net
The cost and accumulated depreciation of property and equipment are as follows:
| | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2020 |
| (In thousands) |
| Computer equipment | $ | 15,431 | | | $ | 12,691 | |
| Furniture and fixtures | 4,626 | | | 4,392 | |
| Leasehold improvements | 14,948 | | | 14,761 | |
| Other | 1,583 | | | 1,534 | |
| Total property and equipment | $ | 36,588 | | | $ | 33,378 | |
| Less: accumulated depreciation | (19,437) | | | (13,935) | |
| Total property and equipment, net | $ | 17,151 | | | $ | 19,443 | |
Depreciation expense was $6.4 million, $5.7 million and $5.0 million for the years ended December 31, 2021, 2020 and 2019, respectively. There were no impairments of our property and equipment for the years ended December 31, 2021, 2020 and 2019.
Prepayments and Other Current Assets and Other Non-Current Assets
Prepayments and other current assets and other non-current assets include the balance of contract assets, prepaid expenses, and other assets. The current portion of these assets is included in prepayments and other current assets and the non-current portion is included in other non-current assets, both of which are contained within the accompanying consolidated balance sheets.
Prepayments and other current assets consisted of the following:
| | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2020 |
| (In thousands) |
| Contract assets | 31,640 | | | 10,679 | |
| Prepaid expenses | 13,746 | | | 12,411 | |
| Other | 4,060 | | | 2,814 | |
| Total prepayments and other current assets | $ | 49,446 | | | $ | 25,904 | |
Other non-current assets consisted of the following:
| | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2020 |
| (In thousands) |
| Contract assets | 16,991 | | | 14,225 | |
| Prepaid expenses | 597 | | | 132 | |
| Other | 386 | | | 659 | |
| Total other non-current assets | $ | 17,974 | | | $ | 15,016 | |
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following:
| | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2020 |
| (In thousands) |
| Commissions | $ | 27,578 | | | $ | 15,169 | |
| Bonus | 24,753 | | | 20,525 | |
| Operating lease liabilities - current | 4,795 | | | 4,435 | |
| Payroll and related benefits | 10,505 | | | 6,163 | |
| Indemnification holdbacks | — | | | 2,500 | |
| Other | 22,341 | | | 10,668 | |
| Total accrued expenses and other liabilities | $ | 89,972 | | | $ | 59,460 | |
15. Income Taxes
Income Taxes
Provision for income taxes consists of U.S. and state income taxes and income taxes in certain foreign jurisdictions in which the Company conducts business.
The following table presents consolidated loss before income taxes:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
| Domestic | $ | (64,507) | | | $ | (15,159) | | | $ | (11,289) | |
| Foreign | 3,059 | | | (524) | | | (1,799) | |
| Total loss before income taxes | $ | (61,448) | | | $ | (15,683) | | | $ | (13,088) | |
The provision expense (benefit) for income taxes consisted of the following:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
| Current | | | | | |
| Federal | $ | — | | | $ | — | | | $ | — | |
| State | 116 | | | 399 | | | 845 | |
| Foreign | 3,417 | | | 1,999 | | | 1,820 | |
| Total current | 3,533 | | | 2,398 | | | 2,665 | |
| Deferred | | | | | |
| Federal | (2,488) | | | (6,242) | | | (5,731) | |
| State | (932) | | | (940) | | | (1,354) | |
| Foreign | 73 | | | (136) | | | (168) | |
| Total deferred | (3,347) | | | (7,318) | | | (7,253) | |
| Provision expense (benefit) for income taxes | $ | 186 | | | $ | (4,920) | | | $ | (4,588) | |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred taxes are as follows:
| | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2020 |
| (In thousands) |
| Deferred tax assets: | | | |
| Research and development and other credits | $ | 18,099 | | | $ | 12,346 | |
| Net operating loss carryforward | 39,998 | | | 10,370 | |
| Disallowed interest carryforward | 2,262 | | | — | |
| Deferred revenue | 15,225 | | | 11,574 | |
| Stock compensation | 5,687 | | | 4,959 | |
| Operating lease liabilities | 8,102 | | | 9,170 | |
| Accrued expenses | 5,684 | | | 5,094 | |
| Convertible debt premium | 4,905 | | | 6,878 | |
| Other | 209 | | | 187 | |
| Total deferred tax assets | 100,171 | | | 60,578 | |
| Less valuation allowance for deferred tax assets | (47,321) | | | (7,435) | |
| Net deferred tax asset | 52,850 | | | 53,143 | |
| Deferred tax liabilities: | | | |
| Depreciable and amortizable assets | (3,096) | | | (3,471) | |
| Operating lease ROU assets | (5,723) | | | (6,601) | |
| Prepaid expenses | (23,120) | | | (13,331) | |
| Convertible senior notes | — | | | (16,405) | |
| Intangibles | (16,864) | | | (14,664) | |
| Total deferred tax liabilities | (48,803) | | | (54,472) | |
| Net deferred tax asset (liability) | $ | 4,047 | | | $ | (1,329) | |
As of December 31, 2021, the Company has federal, state and foreign net operating loss carryforwards of $138.0 million, $81.2 million and $21.7 million, respectively. Approximately $12.6 million of the federal net operating loss carryforwards will begin to expire in 2033 and $125.4 million do not expire. The state net operating loss carryforwards will begin to expire in 2029, if not utilized. The foreign net operating losses do not expire.
As of December 31, 2021, the Company has federal and state research and development credit carryforwards of $15.6 million and $4.7 million, respectively. The federal and state research and development credits will begin to expire in 2025 and 2034, respectively, if not utilized.
The use of certain loss and credit carryforwards is subject to an annual limitation, which may cause them to expire unused. Management has determined that the annual limitation will result in the expiration of approximately $13.2 million and $0.8 million of net operating losses and research and development carryforwards, respectively.
Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company's ability to realize its deferred tax assets, in each jurisdiction, is dependent upon the generation of future taxable income. The Company has a valuation allowance of $47.3 million and $7.4 million as of December 31, 2021 and 2020, respectively, related to loss and credit carryforwards. The increase in valuation allowance is primarily due to acquiring and generating net operating loss carryforwards and the decrease in objectively verifiable future taxable income for convertible senior notes upon early adoption of ASU 2020-06.
The following table reconciles the Company’s effective tax rate to the federal statutory tax rate:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| U.S. federal taxes at statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State taxes, net of federal benefit | 5.0 | | | 5.4 | | | 4.1 | |
| Foreign tax rate differentials | (0.4) | | | (1.0) | | | (0.8) | |
| Foreign tax on earnings | (1.7) | | | (4.4) | | | (5.2) | |
| Research and development credits | 7.8 | | | 19.4 | | | 14.4 | |
| Nondeductible officer compensation | (3.5) | | | (0.5) | | | (0.9) | |
| Stock-based compensation | 13.6 | | | 11.5 | | | 16.9 | |
| Change in valuation allowance | (38.7) | | | (16.3) | | | (11.3) | |
| Other | (3.4) | | | (3.7) | | | (3.1) | |
| Total | (0.3) | % | | 31.4 | % | | 35.1 | % |
The reconciliation of unrecognized tax benefits is as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
| Beginning Balance | $ | 2,506 | | | $ | 2,307 | | | $ | 2,287 | |
| Additions based on tax positions related to prior year | — | | | 31 | | | — | |
| Reductions based on tax positions related to prior year | (1,078) | | | (229) | | | (204) | |
| Additions based on tax positions related to current year | 1,025 | | | 397 | | | 224 | |
| Ending Balance | $ | 2,453 | | | $ | 2,506 | | | $ | 2,307 | |
Included in the balance of unrecognized tax benefits as of December 31, 2021, 2020 and 2019 is $0.8 million, $2.5 million and $2.3 million, respectively, of tax benefits that, if recognized, would affect the Company's effective tax rate.
The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. During the years ended December 31, 2021, 2020 and 2019 the Company did not record any material interest or penalties.
The Company files income tax returns in the U.S. federal, states, and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years before 2018 and is no longer subject to state, local and foreign income tax examinations by tax authorities for years before 2015. The Company is currently under audit for income tax in a single foreign jurisdiction. The audit is ongoing and is not expected to materially impact the consolidated financial statements.
The global intangible low-taxed income (“GILTI”) provisions will be applied providing an incremental tax on low taxed foreign income. The GILTI provisions require us to include in our U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. For the years ended December 31, 2021 and 2020, the
Company determined it was in an aggregated net loss position with respect to its controlled foreign corporations. Thus, there is no GILTI tax liability as of December 31, 2021 or 2020.
16. Net Loss Per Share Attributable to Common Stockholders
Basic and diluted net loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated using our weighted average outstanding common shares including the dilutive effect of stock awards and shares related to the Notes. In periods when the Company recognizes a net loss, the Company excludes the impact of outstanding stock awards and shares related to the Notes from the diluted loss per share calculation as their inclusion would have an anti-dilutive effect.
The following table sets forth the calculation of basic and diluted net loss per share for the periods presented: | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands, except per share data) |
| Numerator | | | | | |
| Net loss | $ | (61,634) | | | $ | (10,763) | | | $ | (8,500) | |
| | | | | |
| Net loss available to common stockholders | $ | (61,634) | | | $ | (10,763) | | | $ | (8,500) | |
| | | | | |
| Denominator | | | | | |
| Weighted average shares outstanding | | | | | |
| Basic | 92,664 | | | 90,512 | | | 88,907 | |
| Diluted | 92,664 | | | 90,512 | | | 88,907 | |
| | | | | |
| Net loss attributable to common stockholders per share | | | | | |
| Basic | $ | (0.67) | | | $ | (0.12) | | | $ | (0.10) | |
| Diluted | $ | (0.67) | | | $ | (0.12) | | | $ | (0.10) | |
The following weighted average outstanding shares of common stock equivalents were excluded from the computation of the diluted net loss per share attributable to common stockholders for the periods presented because their effect would have been anti-dilutive:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
| Stock options to purchase common stock | 2,245 | | | 2,738 | | | 3,037 | |
| RSUs issued and outstanding | 3,536 | | | 3,027 | | | 1,899 | |
| ESPP | 84 | | | 115 | | | 15 | |
| Convertible senior notes | 10,182 | | | 1,311 | | | — | |
| Total | 16,047 | | | 7,191 | | | 4,951 | |
As we expect to settle the principal amount of the Notes in cash and any excess in shares of the Company’s common stock, the Company uses the if-converted method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread of approximately 13.7 million shares will have a dilutive impact on diluted net income per share of common stock when the average market price of our common stock for a given period exceeds the conversion price of $28.42 per share.
The denominator for diluted net income per share does not include any effect from the Capped Call Transactions the Company entered into concurrently with the issuance of the Notes as this effect would be anti-dilutive. In the event of conversion, if shares are delivered to the Company under the capped call, they will offset the dilutive effect of the shares that the Company would issue under the Notes.
17. Geographic Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision makers in deciding how to allocate resources and in assessing performance. Our chief operating decision makers allocate resources and assess performance based on financial information presented at a consolidated level. Accordingly, the Company determined that we operate as one reportable segment.
The following is a summary of consolidated revenues within geographic areas for the periods presented:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
| United States | $ | 302,524 | | | $ | 263,332 | | | $ | 204,500 | |
EMEA (1) | 80,838 | | | 62,249 | | | 54,315 | |
Rest of the World (1) | 55,592 | | | 39,673 | | | 29,700 | |
| Total revenue | $ | 438,954 | | | $ | 365,254 | | | $ | 288,515 | |
(1)No single country outside of the United states represented more than 10% of our revenue.
18. Employee Benefit Plans
The Company has established a defined contribution savings plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). The 401(k) Plan covers substantially all employees who meet minimum age and service requirements and allows participants to defer a percentage of their annual compensation as defined in the 401(k) Plan. The Company matches portions of employees' voluntary contributions. Additional employer contributions in the form of profit sharing may also be made at the Company's discretion. The Company recorded expense of $2.2 million for matching contributions to the 401(k) Plan for the year ended December 31, 2021.