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CCC INTELLIGENT SOLUTIONS HOLDINGS INC. – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read together with our audited consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the forward-looking statements included herein. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled "Cautionary Note Regarding Forward-Looking Statements and Risk Factors" and "Risk Factors" as set forth elsewhere in this Annual Report on Form 10-K. Unless otherwise indicated or the context otherwise requires, references to "CCC," "we," "us," "our" and other similar terms refer toCypress Holdings Inc. and its consolidated subsidiaries prior to the Business Combination and toCCC Intelligent Solutions Holdings Inc. and its consolidated subsidiaries after giving effect to the Business Combination.
Business Overview
Founded in 1980, CCC is a leading provider of innovative cloud, mobile, AI, telematics, hyperscale technologies and applications for the P&C insurance economy. Our SaaS platform connects trading partners, facilitates commerce, and supports mission-critical, AI-enabled digital workflows. Leveraging decades of deep domain experience, our industry-leading platform processes more than$100 billion in annual transaction value across this ecosystem, digitizing workflows and connecting more than 30,000 companies across the P&C insurance economy, including insurance carriers, collision repairers, parts suppliers, automotive manufacturers, financial institutions and others. Our business has been built upon two foundational pillars: automotive insurance claims and automotive collision repair. For decades we have delivered leading software solutions to both the insurance and repair industries, including pioneering DRP in theU.S. beginning in 1992. Direct Repair Programs connect auto insurers and collision repair shops to create business value for both parties, and require digital tools to facilitate interactions and manage partner programs. Insurer-to-shop DRP connections have created a strong network effect for CCC's platform, as insurers and repairers both benefit by joining the largest network to maximize opportunities. This has led to a virtuous cycle in which more insurers on the platform drives more value for the collision shops on the platform, and vice versa. We believe we have become a leading insurance and repair SaaS provider in theU.S. by increasing the depth and breadth of our SaaS offerings over many years. Our insurance solutions help insurance carriers manage mission-critical workflows across the claims lifecycle, while building smart, dynamic experiences for their own customers. Our software integrates seamlessly with both legacy and modern systems alike and enables insurers to rapidly innovate on our platform. Our repair solutions help collision repair facilities achieve better performance throughout the collision repair cycle by digitizing processes to drive business growth, streamline operations, and improve repair quality. We have more than 300 insurers on our network, connecting with over 28,000 repair facilities through our multi-tenant cloud platform. We believe our software is the architectural backbone of insurance DRP programs and is the primary driver of material revenue for our collision shop customers and a source of material efficiencies for our insurance carrier customers. Our platform is designed to solve the "many-to-many" problem faced by the insurance economy. There are numerous internally and externally developed insurance software solutions in the market today, with the vast majority of applications focused on insurance-only use cases and not on serving the broader insurance ecosystem. We have prioritized building a leading network around our automotive insurance and collision repair pillars to further digitize interactions and maximize value for our customers. We have tens of thousands of companies on our platform that participate in the insurance economy, including insurers, repairers, parts suppliers, automotive manufacturers, and financial institutions. Our solutions create value for each of these parties by enabling them to connect to our vast network to collaborate with other companies, streamline operations, and reduce processing costs and dollars lost through claims management inefficiencies, or claims leakage. Expanding our platform has added new layers of network effects, further accelerating the adoption of our software solutions. We have processed more than$1 trillion of historical data across our network, allowing us to build proprietary data assets that leverage insurance claims, vehicle repair, automotive parts and other vehicle-specific information. We believe we are uniquely positioned to provide data-driven insights, analytics, and AI-enhanced workflows that strengthen our solutions and improve business outcomes for our customers. Our Smart Suite of AI solutions increases automation across existing insurance and repair processes including vehicle damage detection, claim triage, repair estimating, and intelligent claims review. We deliver real-world AI with more than 100 U.S. auto insurers actively using AI-powered solutions in production environments. We have processed more than 14 million unique claims using CCC deep learning AI as ofDecember 31, 2022 , an increase of more than 50% overDecember 31, 2021 . One of the primary obstacles facing the P&C insurance economy is increasing complexity. Complexity in the P&C insurance economy is driven by technological advancements, Internet of Things ("IoT") data, new business models, supply chain disruption and changing consumer expectations. We believe digitization plays a critical role in managing this growing complexity while meeting consumer expectations. Our technology investments are focused on digitizing complex processes and interactions across our ecosystem, and we believe we are well positioned to power the P&C insurance economy of the future with our data, network, and platform. While our position in the P&C insurance economy is grounded in the automotive insurance sector, the largest insurance sector in theU.S. representing nearly half of DWP, we believe our integrations and cloud platform are capable of driving innovation across the entire P&C insurance economy. Our customers are increasingly looking for CCC to expand its solutions to other parts of their business where they can benefit from our technology, service, and partnership. In response, we are investing in new solutions that we believe will enable us to digitize the entire automotive claims lifecycle, and over time expand into adjacencies including other insurance lines. For example, CCC's acquisition of Safekeep onFebruary 9, 2022 added subrogation solutions that can span insurance lines including automotive, property, and worker's compensation. 37 -------------------------------------------------------------------------------- We have strong customer relationships in the end-markets we serve, and these relationships are a key component of our success given the long-term nature of our contracts and the interconnectedness of our network. We have customer agreements with more than 300 insurers (including carriers, self-insurers and other entities processing insurance claims), including 18 of the top 20 automotive insurance carriers in theU.S. based on DWP, and hundreds of regional carriers. We have more than 30,000 total customers, including over 28,000 automotive collision repair facilities (including repairers and other entities that estimate damaged vehicles), thousands of automotive dealers, 13 of the top 15 automotive manufacturers based on new vehicle sales, and numerous other companies that participate in the P&C insurance economy. We generate revenue through the sale of SaaS subscriptions and other revenue, primarily from professional services. We generated$782.4 million of revenue for the year endedDecember 31, 2022 , an increase of 13.7% from the prior year. Net income for the year endedDecember 31, 2022 was$38.4 million , compared to a net loss for the year endedDecember 31, 2021 of$248.9 million , mainly due to$209.9 million of stock-based compensation expense recognized in conjunction with the Business Combination in the prior year. Adjusted EBITDA increased 16.8% year-over-year to$305.4 million . See our reconciliation of net income to EBITDA and Adjusted EBITDA within the section titled "Non-GAAP Financial Measures."
Basis of Presentation
The Company's consolidated financial statements and accompanying notes included elsewhere in this Annual Report on Form 10-K include the accounts of the Company and its consolidated subsidiaries and were prepared in accordance with GAAP. Intercompany transactions and balances are eliminated in consolidation. The consolidated financial statements include 100% of the accounts of wholly-owned and majority-owned subsidiaries and the ownership interest of the minority investor is recorded as a non-controlling interest in a subsidiary.
The Company operates in one operating segment. The chief operating decision
maker for the Company is the chief executive officer. The chief executive
officer reviews financial information presented on a consolidated basis,
accompanied by information about revenue by type of service and geographic
region, for purposes of allocating resources and evaluating financial
performance.
EffectiveJanuary 1, 2021 , the Company's lease accounting policy follows the guidance from Accounting Standards Codification ("ASC") 842, Leases, which requires companies to recognize on the balance sheet the assets and liabilities for the rights and obligations created by the leased asset. The Company adopted this standard using the modified retrospective approach for all leases entered into before the effective date. Prior to the adoption of ASC 842, the Company's lease accounting recognition policy followed guidance from ASC 840, Leases. Due to the adoption of this guidance, the Company recognized operating right-of-use assets and operating lease liabilities of$47.1 million and$53.0 million , respectively, as of the date of adoption. The difference between the right-of-use assets and lease liabilities on the accompanying consolidated balance sheet is primarily due to the accrual for lease payments as a result of straight-line lease expense and unamortized tenant incentive liability balances. See Note 2 and Note 11 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Key Performance Measures and Operating Metrics
In addition to our GAAP and non-GAAP financial measures, we rely on Software Net
Dollar Retention Rate ("Software NDR") and Software Gross Dollar Retention Rate
("Software GDR") to measure and evaluate our business to make strategic
decisions. Software NDR and Software GDR may not be comparable to or calculated
in the same way as other similarly titled measures used by other companies.
Software NDR
We believe that Software NDR provides our management and our investors with insight into our ability to retain and grow revenue from our existing customers, as well as their potential long-term value to us. We also believe the results shown by this metric reflect the stability of our revenue base, which is one of our core competitive strengths. We calculate Software NDR by dividing (a) annualized software revenue recorded in the last month of the measurement period, for example, December for a quarter endingDecember 31 , for unique billing accounts that generated revenue during the corresponding month of the prior year by (b) annualized software revenue as of the corresponding month of the prior year. The calculation includes changes for these billing accounts, such as change in the solutions purchased, changes in pricing and transaction volume, but does not reflect revenue for new customers added. The calculation excludes: (a) changes in estimates related to the timing of one-time revenue and other revenue, including professional services, and (b) annualized software revenue for smaller customers with annualized software revenue below the threshold of$100,000 for carriers and$4,000 for shops. The customers that do not meet the revenue threshold are small carriers and shops that tend to have different buying behaviors, with a narrower solution focus, and different tenure compared to our core customers (excluded small carriers and shops represent less than 5% of total revenue within these sales channels). Our Software NDR includes carriers and shops who subscribe to our auto physical damage solutions, which account for most of the Company's revenue, and excludes revenue from smaller emerging solutions with international subsidiaries or other ecosystem solutions, such as parts suppliers, diagnostic providers, and other automotive manufacturers, and also excludes CCC Casualty which are largely usage and professional service based solutions. Quarter Ending 2022 2021 2020 Software NDR March 31 114% 106% 105% June 30 111% 110% 103% September 30 110% 113% 103% December 31 106% 115% 103% Software GDR We believe that Software GDR provides our management and our investors with insight into the value our solutions provide to our customers as represented by our ability to retain our existing customer base. We believe the results shown by this metric reflect the strength and stability of our revenue base, which is one of our core competitive strengths. We calculate Software GDR by dividing (a) annualized software 38 -------------------------------------------------------------------------------- revenue recorded in the last month of the measurement period in the prior year, reduced by annualized software revenue for unique billing accounts that are no longer customers as of the current period end by (b) annualized software revenue as of the corresponding month of the prior year. The calculation reflects only customer losses and does not reflect customer expansion or contraction for these billing accounts and does not reflect revenue for new customer billing accounts added. Our Software GDR calculation represents our annualized software revenue that is retained from the prior year and demonstrates that the vast majority of our customers continue to use our solutions and renew their subscriptions. The calculation excludes: (a) changes in estimates related to the timing of one-time revenue and other revenue, including professional services, and (b) annualized software revenue for smaller customers with annualized software revenue below the threshold of$100,000 for carriers and$4,000 for shops. The customers that do not meet the revenue threshold are small carriers and shops that tend to have different buying behaviors, with a narrower solution focus, and different tenure compared to our core customers (excluded small carriers and shops which represent less than 5% of total revenue within these sales channels). Our Software GDR includes carriers and shops who subscribe to our auto physical damage solutions, which account for most of the Company's revenue, and excludes revenue from smaller emerging solutions with international subsidiaries or other ecosystem solutions, such as parts suppliers, diagnostic providers, and other automotive manufacturers, and excludes CCC Casualty which are largely usage and professional service based solutions. Quarter Ending 2022 2021 2020 Software GDR March 31 99% 98% 98% June 30 99% 98% 98% September 30 99% 98% 98% December 31 99% 98% 98%
Key Factors Affecting Operating Results
The following are key factors affecting our operating results in the years
ending
•
Conversion and implementation of new customers: We focus significant resources on attracting and onboarding new customers across the various segments of the P&C insurance economy we serve. We have a strong track record of new customer conversion across all our markets. On average, customer implementations take less than three months to complete. A significant portion of our sales force is focused on converting new customer accounts across our industry, and this will continue to be a focus of our business for the foreseeable future.
•
Long-term customer relationships: We have strong customer relationships in the end-markets we serve, and these relationships are a key component of our success given the long-term nature of our contracts and the interconnectedness of our network. We generate revenue through the sale of SaaS subscriptions and our average contract is approximately three to five years in duration. In 2022, our national carrier customers included 18 of the top 20 automotive insurers based on DWP, with average customer relationships spanning more than 10 years, as evidenced by our historical GDR of 98%-99%, and numerous exclusive arrangements.
•
Expansion of solution adoption from existing customers: A central part of our strategy is expanding solution adoption across our existing customer base. We have developed long-term relationships with our customers and have a proven track record of successfully cross-selling product offerings. We have the opportunity to realize incremental value by selling additional functionality to customers that do not currently utilize our full solution portfolio. As we innovate and bring new technology and solutions to market, we also have the opportunity to realize incremental value by selling new software solutions to our existing customer base. Capitalizing on this opportunity has been a significant driver of our revenue growth and net dollar retention in recent years and will remain a central go-to-market priority.
•
Investment in R&D: We have a strong track record of innovation and new solution delivery with our customers. We remain committed to delivering market-leading technology including AI solutions for the P&C insurance economy. We believe that maintaining our software solution leadership is imperative to our growth plan. As a result, we intend to continue making significant investments in research and development to improve and expand our software solutions. Our research and development expenses totaled$157.0 million ,$166.0 million and$109.5 million in the years endedDecember 31, 2022 , 2021 and 2020, respectively. In 2022, the decrease in our R&D was primarily due to a reduction in stock-based compensation related to the Business Combination. We expect that research and development will remain a key investment area for the foreseeable future.
•
Investment in Platform, Privacy, and Security: Our technology platform is imperative to our strategy as it enables successful customer implementations, new software delivery, and ongoing performance and delivery. In addition to our investments in R&D, we invest in platform infrastructure, maintenance, privacy, and security protocols to enable performance across our technology platform. We expect investment in these areas to continue to increase in absolute dollars for the foreseeable future.
•
Investment in Sales and Marketing: Our sales and marketing efforts are a key component of our growth strategy. Our investments in this area have enabled us to build and sustain our customer base while creating long-term customer relationships. We plan to continue to invest in our sales and marketing efforts, including adding sales personnel and expanding marketing activities, to support our business growth. Our sales and marketing expenses totaled$119.6 million ,$148.9 million and$74.7 million , in the years endedDecember 31, 2022 , 2021 and 2020, respectively. In 2022, the decrease in our sales and marketing was primarily due to a reduction in stock-based compensation related to the Business Combination. As the business continues to grow, we expect sales and marketing expenses to increase in absolute dollars for the foreseeable future. 39 --------------------------------------------------------------------------------
Components of Results of Operations
Revenue
Revenue is derived from the sale of SaaS subscriptions and other revenue, primarily professional services. Software subscription revenues are comprised of fees from customers for the right to use the hosted software over the contract period without taking possession of the software. These revenues are billed on either a subscription or transactional basis with subscription revenue recognized ratably over the contract period and transactional revenue recognized when the transaction for the related service occurs. We generally invoice software subscription agreements monthly either in advance or in arrears, over the subscription period. Software subscription revenue accounted for$752.5 million ,$662.3 million and$573.6 million or 96%, 96% and 91% of total revenue during the years endedDecember 31, 2022 , 2021 and 2020, respectively. We continue to expect software subscription revenue to be a high percentage of total revenue as software subscription revenue continues to be a key strategic priority.
Revenues from professional services include fees from customers for the
Company's First Party Clinical Services and other non-software services.
Revenues from professional services is recognized in the period the service is
performed.
InDecember 2020 , we sold our First Party Clinical Services to a third-party buyer. First Party Clinical Services revenue for the year endedDecember 31, 2020 was$34.7 million . Costs and Expenses Cost of Revenue
Cost of Revenue, Exclusive of Amortization of Acquired Technologies
These costs include costs of software subscription and professional services
revenue. Our cost of software subscription revenue is primarily comprised of
cloud infrastructure costs, information technology ("IT") security costs,
license and royalty fees paid to third parties and personnel-related expenses,
including salaries, other direct personnel-related costs and stock-based
compensation, and depreciation expense, including capitalized development costs.
We expect cost of revenue, exclusive of amortization of acquired technologies,
to increase in absolute dollars as we continue to hire personnel, require
additional cloud infrastructure and incur royalty fees in support of our revenue
growth.
In December 2020 , we sold our First Party Clinical Services to a third-party
buyer. First Party Clinical Services cost of revenue for the year ended December
31, 2020 was $31.3 million .
Amortization of Acquired Technologies
We amortize to cost of revenue the capitalized costs of technologies acquired in
connection with business acquisitions.
Operating expenses
Operating expenses are categorized as follows:
Research and Development
Our research and development expenses consist primarily of personnel-related costs, including stock-based compensation, and costs of external development resources involved in the engineering, design and development of new solutions, as well as expenses associated with significant ongoing improvements to existing solutions. Research and development expenses also include costs for certain IT expenses. Research and development costs, other than software development costs qualifying for capitalization, are expensed as incurred. Capitalized software development costs consist primarily of personnel-related costs. We expect research and development expenses, excluding stock-based compensation, to increase in absolute dollars as we continue to dedicate substantial resources to develop, improve and expand the functionality of our solutions. We also expect an increase in the rate of capitalization of our investments in research and development for the foreseeable future.
Selling and Marketing
Our selling and marketing expenses consist primarily of personnel-related costs for our sales and marketing functions, including sales commissions and stock-based compensation. Additionally, selling and marketing expenses include advertising costs, marketing costs and event costs, including the Company's annual industry conference.
We expect our selling and marketing expenses, excluding stock-based
compensation, to increase on an absolute dollar basis as we continue to increase
investments to support the growth of our business.
General and Administrative
Our general and administrative expenses consist primarily of personnel-related
costs, including stock-based compensation, for our executive management and
administrative employees, including finance and accounting, human resources,
information technology, facilities and legal functions. Additionally, general
and administrative expenses include professional service fees, insurance
premiums, and other corporate expenses that are not allocated to the above
expense categories.
40
--------------------------------------------------------------------------------
We expect our general and administrative expenses, excluding stock-based
compensation, to increase in absolute dollars as we continue to expand our
operations, hire additional personnel, and incur costs as a public company.
Amortization of Intangible Assets
Our amortization of intangible assets consists of the capitalized costs of
customer relationships and favorable lease terms in connection with business
acquisitions.
Non-operating income (expense)
Non-operating income (expense) is categorized as follows:
Interest Expense
Interest expense comprises interest expense accrued or paid on our indebtedness. We expect interest expense to vary each reporting period depending on the amount of outstanding indebtedness and prevailing interest rates.
Interest Income
Interest income comprises interest earned on our cash balances. We expect
interest income to vary each reporting period depending on the amount of our
cash balances in interest bearing accounts and prevailing interest rates.
Change in Fair Value of Derivative Instruments
Change in fair value of derivative instruments comprises the fair value adjustments of our interest rate cap and interest rate swap agreements during each reporting period. We expect the change in fair value of derivative instruments to vary each reporting period depending on the prevailing market factors.
Change in Fair Value of Warrant Liabilities
Change in fair value of warrant liabilities comprises fair value adjustments of the Public Warrants and Private Warrants assumed in connection with the Business Combination. InDecember 2021 , we redeemed all of our outstanding Public Warrants and as ofDecember 31, 2022 and 2021, the Company no longer has Public Warrants outstanding subject to fair value adjustments. We expect the change in fair value of warrant liabilities to vary each reporting period depending on the fair value adjustments and number of exercises and redemptions of our outstanding Private Warrants during each reporting period.
Gain on Sale of
Gain on sale of cost method investment is comprised of proceeds of the sale of
the Company's equity interest in an investee in excess of our cost.
Loss on Early Extinguishment of Debt
Loss on early extinguishment of debt comprises the write-off of deferred
financing fees and original issue discount associated with the
Company's long-term debt at the time of extinguishment.
Other Income-Net
Other income-net consists primarily of foreign currency transaction gains and
losses related to the impact of transactions denominated in a foreign currency.
Income Tax (Provision) Benefit
Income tax (provision) benefit consists ofU.S. federal and state income taxes and income taxes in certain foreign jurisdictions in which we conduct business. Earnings from our non-U.S. activities are subject to local country income tax and may be subject to currentU.S. income tax. Due to cumulative losses, we maintain a full valuation allowance for deferred tax assets in foreign jurisdictions. We expect to maintain this full valuation allowance for the foreseeable future. 41 --------------------------------------------------------------------------------
Results of Operations
Comparison of Fiscal Year EndedDecember 31, 2022 to Fiscal Year EndedDecember 31, 2021 Year Ended December 31, Change (dollar amounts in thousands, except 2022 2021 $ % share and per share data) Revenue$ 782,448 $ 688,288 $ 94,160 13.7 % Cost of revenue, exclusive of amortization of acquired technologies 187,001 169,335 17,666 10.4 % Amortization of acquired technologies 26,938 26,320 618 2.3 % Cost of revenue(1) 213,939 195,655 18,284 9.3 % Gross profit 568,509 492,633 75,876 15.4 % Operating expenses: Research and development(1) 156,957 165,991 (9,034 ) -5.4 % Selling and marketing(1) 119,594 148,861 (29,267 ) -19.7 % General and administrative(1) 167,758 250,098 (82,340 ) -32.9 % Amortization of intangible assets 72,278 72,358 (80 ) -0.1 % Total operating expenses 516,587 637,308 (120,721 ) -18.9 % Operating income (loss) 51,922 (144,675 ) 196,597 NM Other income (expense), net: Interest expense (38,990 ) (58,990 ) 20,000 33.9 % Interest income 908 - - NM Change in fair value of derivative instruments 5,663 8,373 (2,710 ) -32.4 % Change in fair value of warrant liabilities 26,073 (64,501 ) 90,574 NM Gain on sale of cost method investment 3,587 - 3,587 NM Loss on early extinguishment of debt - (15,240 ) 15,240 100.0 % Other income, net 699 114 585 513.2 % Total other (expense) income, net (2,060 ) (130,244 ) 128,184 98.4 % Pretax income (loss) 49,862 (274,919 ) 324,781 NM Income tax (provision) benefit (11,456 ) 26,000 (37,456 ) NM Net income (loss)$ 38,406 $ (248,919 ) $ 287,325 NM Net income (loss) per share attributable to common stockholders: Basic$ 0.06 $ (0.46 ) Diluted$ 0.06 $ (0.46 ) Weighted-average shares used in computing net income (loss) per share attributable to common stockholders: Basic 607,760,886 543,558,222 Diluted 642,841,596 543,558,222 NM-Not Meaningful
(1) Includes stock-based compensation expense as follows (in thousands):
Year Ended December 31,
2022 2021
Cost of revenues $ 5,812 $ 13,644
Research and development 19,536 40,681
Sales and marketing 25,309 65,045
General and administrative 58,840 142,625
Total stock-based compensation expense
Revenues
Revenue increased by$94.2 million to$782.4 million , or 13.7%, for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . The increase in revenue was primarily a result of an 11% growth from existing customer upgrades and expanding solution offerings to these existing customers as well as 3% growth from new customers.
Cost of Revenue
Cost of revenue increased by
year ended
Cost of Revenue, Exclusive of Amortization of Acquired Technologies
42 -------------------------------------------------------------------------------- Cost of revenue, exclusive of amortization of acquired technologies, increased$17.7 million to$187.0 million , or 10.4%, for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . The increase was due to a$5.8 million increase in depreciation expense mainly due to capitalized time for development projects related to investments in new solutions, and platform and infrastructure enhancements, a$5.7 million increase in personnel-related costs, a$5.4 million increase in third party license and royalty fees, a$3.8 million increase in consulting and other professional service costs, a$3.2 million contract termination fee, and a$2.4 million increase in IT related costs, partially offset by a$7.8 million reduction in stock-based compensation, mainly from the vesting term modification completed in conjunction with the Business Combination in the prior year.
Amortization of Acquired Technologies
Amortization of acquired technologies was
the years ended
Gross Profit
Gross profit increased by
year ended
December 31, 2021 . Our gross profit margin increased to 72.7% for the year endedDecember 31, 2022 compared to 71.6% for the year endedDecember 31, 2021 . The increase in both gross profit and gross profit margin was primarily due to increased software subscription revenues and economies of scale resulting from fixed cost arrangements. Research and Development Research and development expense decreased by$9.0 million to$157.0 million , or 5.4%, for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . The decrease was due to a$21.1 million reduction in stock-based compensation, mainly from the vesting term modification completed in conjunction with the Business Combination in the prior year and a$14.4 million increase in the amount of capitalized time on development projects, partially offset by a$16.1 million increase in resource costs, an$8.2 million increase in consulting and other professional service costs and a$3.4 million increase in IT related costs. Selling and Marketing Selling and marketing expense decreased by$29.3 million to$119.6 million , or 19.7%, for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . The decrease was primarily due to a$39.7 million reduction in stock-based compensation, mainly from the vesting term modification completed in conjunction with the Business Combination in the prior year, partially offset by a$9.1 million increase in personnel-related costs, including sales incentives and travel expenses. General and Administrative General and administrative expense decreased by$82.3 million to$167.8 million , or 32.9%, for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . The decrease was primarily due to a$83.8 million reduction in stock-based compensation, mainly from the vesting term modification completed in conjunction with the Business Combination in the prior year and a$5.0 million decrease in consulting and other professional service costs, partially offset by a$3.4 million increase in insurance costs and a$2.7 million increase due to loss on disposal of property and equipment associated with the closure of corporate office facilities.
Amortization of Intangible Assets
Amortization of intangible assets was
years ended
Interest Expense
Interest expense decreased by
year ended
ended
long-term debt during the year ended
Business Combination.
Interest Income
Interest income was
interest income was due to interest earned on our cash balances. We did not
recognize any interest income for the year ended
Change in Fair Value of Derivative Instruments
Change in fair value of derivative instruments was$5.7 million for the year endedDecember 31, 2022 , compared to$8.4 million for the year endedDecember 31, 2021 . The change in fair value recognized for the year endedDecember 31, 2022 was related to the interest rate cap agreement the Company entered into inAugust 2022 and driven by the changes in forward yield curve. The$8.4 million change in fair value of derivative instruments in the prior year was related to the interest rate swap agreements prior to their extinguishment inSeptember 2021 .
Change in Fair Value of Warrant Liabilities
43 -------------------------------------------------------------------------------- Change in fair value of warrant liabilities was$26.1 million for the year endedDecember 31, 2022 . The income from the change in fair value was due to the decrease in the estimated fair value of the Private Warrants, primarily from the lower price of the Company's common stock as ofDecember 31, 2022 , compared toDecember 31, 2021 . The expense for the year endedDecember 31, 2021 was due to the initial recognition of an increase in the estimated fair value of the Public Warrants and Private Warrants.
Gain on Sale for
Gain on sale of cost method investment was$3.6 million for the year endedDecember 31, 2022 . The gain recognized was due to the$3.9 million payment received in exchange for its equity interest in an investee as a result of the acquisition of the investee. The Company did not recognize any gain or loss on sale for cost method investment during the year endedDecember 31, 2021 .
Loss on Early Extinguishment of Debt
There was no loss on early extinguishment of debt during the year endedDecember 31, 2022 . Loss on early extinguishment of debt during the year endedDecember 31, 2021 was$15.2 million due to the early repayments of the total balance outstanding including the refinancing of the Company's First Lien Term Loan (as defined below).
Income Tax (Provision) Benefit
Income tax provision was$11.5 million for the year endedDecember 31, 2022 , compared to an income tax benefit of$26.0 million for the year endedDecember 31, 2021 . The income tax provision for the year endedDecember 31, 2022 was due to the Company's pretax income while the income tax benefit for the year endedDecember 31, 2021 was due to the Company's pretax loss.
Comparison of Fiscal Year Ended
31, 2020
Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations located in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed onMarch 1, 2022 , for the discussion of the comparison of the year endedDecember 31, 2021 to the year endedDecember 31, 2020 , the earliest of the three fiscal years presented in the consolidated financial statements.
Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we believe that Adjusted Gross Profit, Adjusted Operating Expenses, Adjusted Operating Income, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings Per Share, and Free Cash Flow, which are each non-GAAP measures, are useful in evaluating our operational performance. We use this non-GAAP financial information to evaluate our ongoing operations and for internal planning, budgeting and forecasting purposes and setting management bonus programs. We believe that non-GAAP financial information, when taken collectively with GAAP measures, may be helpful to investors in assessing our operating performance and comparing our performance with competitors and other comparable companies, which may present similar non-GAAP financial measures to investors. Our computation of these non-GAAP measures may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate these measures in the same fashion. We endeavor to compensate for the limitation of the non-GAAP measure presented by also providing the most directly comparable GAAP measure and a description of the reconciling items and adjustments to derive the non-GAAP measure. These non-GAAP measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using non-GAAP measures on a supplemental basis.
Adjusted Gross Profit
Adjusted Gross Profit is defined as gross profit adjusted for amortization of acquired technologies, stock-based compensation and related employer payroll tax, contract termination costs, Business Combination transaction costs and the gross profit associated with First Party Clinical Services which was divested as ofDecember 31, 2020 , which are not indicative of our core business operating results. The Adjusted Gross Margin is defined as Adjusted Gross Profit divided by Revenue, less First Party Clinical Services divested revenue of$34,742 for the year endedDecember 31, 2020 .
The following table reconciles Gross Profit to Adjusted Gross Profit for the
years ended
Year ended December
31,
(amounts in thousands, except 2022 2021
2020
percentages)
Gross Profit$ 568,509 $ 492,633 $ 424,346 Amortization of acquired technologies 26,938 26,320
26,303
Stock-based compensation and related employer payroll tax 6,090 13,644
494
Contract termination costs 3,248 - - Business combination transaction costs - 905 - First Party Clinical Services-Gross Profit - - (3,429 ) Adjusted Gross Profit$ 604,785 $ 533,502 $ 447,714 Gross Profit Margin 73 % 72 % 67 % Adjusted Gross Profit Margin 77 % 78 % 75 % 44
--------------------------------------------------------------------------------
Adjusted Operating Expenses
Adjusted Operating Expenses is defined as operating expenses adjusted for
amortization of intangible assets, stock-based compensation expense and related
employer payroll tax, lease abandonment charges, contract termination costs,
merger and acquisition ("M&A") and integration costs, lease overlap costs for
the incremental expenses associated with the Company's new corporate
headquarters prior to termination of its then existing headquarters' lease,
Business Combination transaction costs, litigation costs in legal matters in
which the Company is the plaintiff, change in fair value of contingent
consideration and net income (costs) related to divestiture.
The following table reconciles operating expenses to Adjusted Operating Expenses
for the years ended
Year ended December 31,
(dollar amounts in thousands) 2022 2021 2020
Operating expenses $ 516,587 $ 637,308 $ 347,366
Amortization of intangible assets (72,278 ) (72,358 ) (72,310 )
Stock-based compensation expense and
related
employer payroll tax (105,775 ) (248,351 ) (10,842 )
Lease abandonment (6,137 ) (2,582 ) -
Contract termination costs (3,248 ) - -
M&A and integration costs (1,772 ) - -
Lease overlap costs (1,338 ) (3,697 ) -
Business combination transaction and
related costs (1,330 ) (11,480 ) (1,188 )
Plaintiff litigation costs (894 ) - -
Change in fair value of contingent
consideration 100 - -
Income (costs) related to divestiture, net 877 (2,177 ) (35 )
Adjusted operating expenses $ 324,792 $ 296,663 $ 262,991
Adjusted Operating Income
Adjusted Operating Income is defined as operating income (loss) adjusted for
amortization, stock-based compensation expense and related employer payroll tax,
lease abandonment charges, contract termination costs, M&A and integration
costs, lease overlap costs for the incremental expenses associated with the
Company's new corporate headquarters prior to termination of its then existing
headquarters' lease, Business Combination transaction and related costs,
litigation costs in legal matters in which the Company is the plaintiff, change
in fair value of contingent consideration and net (income) costs related to
divestiture.
The following table reconciles operating income (loss) to Adjusted Operating
Income for the years ended
Year ended December 31,
(dollar amounts in thousands) 2022 2021 2020
Operating income (loss) $ 51,922 $ (144,675 ) $ 76,980
Amortization of intangible assets 72,278 72,358
72,310
Amortization of acquired technologies-Cost of revenue 26,938 26,320
26,303
Stock-based compensation expense and related employer payroll tax 111,865 261,995 11,336 Lease abandonment 6,137 2,582 - Contract termination costs 3,248 - - M&A and integration costs 1,772 - - Lease overlap costs 1,338 3,697 - Business combination transaction and related costs 1,330 12,385
1,188
Plaintiff litigation costs 894 - - Change in fair value of contingent consideration (100 ) - - (Income) costs related to divestiture, net (877 ) 2,177 35 Adjusted operating income$ 276,745 $ 236,839 $ 188,152 Adjusted EBITDA Adjusted EBITDA is defined as net income (loss) adjusted for interest, taxes, depreciation, amortization, stock-based compensation expense and related employer payroll tax, lease abandonment charges, contract termination costs, M&A and integration costs, lease overlap costs for the incremental expenses associated with the Company's new corporate headquarters prior to termination of its then existing headquarters' lease, Business Combination transaction and related costs, litigation costs in legal matters in which the Company is the plaintiff, change in fair value of contingent consideration, net (income) costs related to divestiture, gain on sale of cost method investment, change in fair value of derivative instruments, change in fair value of warrant liabilities, loss on early extinguishment of debt, less revenue and related cost of revenue associated with First Party Clinical Services, which was divested as ofDecember 31, 2020 . Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by Revenue. 45 --------------------------------------------------------------------------------
The following table reconciles net income (loss) to Adjusted EBITDA for the
years ended
Year ended December
31,
(dollar amounts in thousands) 2022 2021 2020 Net income (loss) $ 38,406$ (248,919 ) $ (16,876 ) Interest expense 38,990 58,990 77,003 Interest income (908 ) - - Income tax provision (benefit) 11,456 (26,000 ) (4,679 ) Amortization of intangible assets 72,278 72,358
72,310
Amortization of acquired technologies-Cost of revenue 26,938 26,320
26,303
Depreciation and amortization related to software, equipment and property 27,933 24,451
17,749
EBITDA 215,093 (92,800 ) 171,810 Stock-based compensation expense and related employer payroll tax 111,865 261,995 11,336 Lease abandonment 6,137 2,582 - Contract termination costs 3,248 - - M&A and integration costs 1,772 - - Lease overlap costs 1,338 3,697 - Business combination transaction and related costs 1,330 12,385
1,188
Plaintiff litigation costs 894 - - Change in fair value of contingent consideration (100 ) - - (Income) costs related to divestiture, net (877 ) 2,177 35 Gain on sale of cost method investment (3,587 ) - -
Change in fair value of derivative
instruments (5,663 ) (8,373 ) 13,249 Change in fair value of warrant liabilities (26,073 ) 64,501 - Loss on early extinguishment of debt - 15,240
8,615
First Party Clinical Services-Revenue - - (34,742 ) First Party Clinical Services-Cost of revenue - - 31,313 Adjusted EBITDA$ 305,377 $ 261,404 $ 202,804 Adjusted EBITDA Margin 39 % 38 % 32 %
Adjusted Net Income and Adjusted Earnings Per Share
Adjusted Net Income is defined as net income (loss) adjusted for the after-tax effects of amortization, stock-based compensation expense and related employer payroll tax, lease abandonment charges, contract termination costs, M&A and integration costs, lease overlap costs for the incremental expenses associated with the Company's new corporate headquarters prior to termination of its then existing headquarters' lease, Business Combination transaction and related costs, litigation costs in legal matters in which the Company is the plaintiff, change in fair value of contingent consideration, net (income) costs related to divestiture, gain on sale of cost method investment, change in fair value of derivative instruments, change in fair value of warrant liabilities, loss on early extinguishment of debt, less revenue and related cost of revenue associated with First Party Clinical Services, which was divested as ofDecember 31, 2020 . 46 -------------------------------------------------------------------------------- The following table reconciles net income (loss) to Adjusted Net Income and Adjusted Earnings per Share for the years endedDecember 31, 2022 , 2021 and 2020. Year ended December 31, (dollar amounts in thousands) 2022 2021 2020 Net income (loss)$ 38,406 $ (248,919 ) $ (16,876 ) Amortization of intangible assets 72,278 72,358 72,310 Amortization of acquired technologies-Cost of revenue 26,938 26,320 26,303 Stock-based compensation expense and related employer payroll tax 111,865 261,995 11,336 Lease abandonment 6,137 2,582 - Contract termination costs 3,248 - - M&A and integration costs 1,772 - - Lease overlap costs 1,338 3,697 - Business combination transaction and related costs 1,330 12,385 1,188 Plaintiff litigation costs 894 - - Change in fair value of contingent consideration (100 ) - - (Income) costs related to divestiture, net (877 ) 2,177 35 Gain on sale of cost method investment (3,587 ) - - Change in fair value of derivative instruments (5,663 ) (8,373 ) 13,249 Change in fair value of warrant liabilities (26,073 ) 64,501 - Loss on early extinguishment of debt - 15,240 8,615 First Party Clinical Services-Revenue - - (34,742 ) First Party Clinical Services-Cost of revenue - - 31,313 Tax effect of adjustments (51,495 ) (73,684 ) (33,389 ) Adjusted net income$ 176,411 $ 130,279 $ 79,342 Adjusted net income per share attributable to common stockholders Basic $ 0.29$ 0.24 $ 0.16 Diluted $ 0.27$ 0.23 $ 0.15 Weighted average shares outstanding Basic 607,760,886 543,558,222 504,115,839 Diluted 642,841,596 575,619,243 519,748,819 Free Cash Flow
Free Cash Flow is defined as net cash provided by operating activities less cash
used for the purchases of software, equipment and property, and purchase of
intangible assets.
The following table reconciles net cash provided by operating activities to Free
Cash Flow for the years ended
Year ended December
31,
(dollar amounts in thousands) 2022 2021
2020
Net cash provided by operating activities$ 199,907 $ 127,335 $ 103,943 Less: Purchases of software, equipment, and property (47,951 ) (38,321 ) (30,107 ) Less: Purchase of intangible assets - (49 ) (560 ) Free Cash Flow$ 151,956 $ 88,965 $ 73,276
Liquidity and Capital Resources
We have financed our operations with cash flows from operations. The company generated$199.9 million of cash flows from operating activities for the year-endedDecember 31, 2022 . As ofDecember 31, 2022 , the Company had cash and cash equivalents of$323.8 million and a working capital surplus of$327.5 million . As ofDecember 31, 2022 , the Company had an accumulated deficit totaling$707.9 million and$792.0 million aggregate principal amount outstanding on term loans. We believe that our existing cash and cash equivalents, our cash flows from operating activities and our borrowing capacity under our 2021 Revolving Credit Facility will be sufficient to fund our operations, fund required long-term debt repayments and meet our commitments for capital expenditures for at least the next twelve months. We are not currently a party to any material definitive agreement regarding potential investments in, or acquisitions of, complementary business, applications or technologies. However, we may enter into these types of arrangements, which could reduce our cash and cash equivalents or require us to seek additional equity or debt financing. Additional funds from financing arrangements may not be available on terms favorable to us or at all. We may require additional borrowings under our credit arrangements and alternative forms of financings or investments to achieve our longer-term strategic plans. 47 --------------------------------------------------------------------------------
Debt
OnSeptember 21, 2021 ,CCC Intelligent Solutions Inc. , an indirect wholly owned subsidiary of the Company, together with certain of the Company's subsidiaries acting as guarantors entered into a credit agreement (the "2021 Credit Agreement").
The 2021 Credit Agreement replaced the Company's 2017 First Lien Credit
Agreement (the "First Lien Credit Agreement"), dated as of
amended as of
The proceeds of the 2021 Credit Agreement were used to repay all outstanding
borrowings under the First Lien Credit Agreement.
2021 Credit Agreement-The 2021 Credit Agreement consists of the$800.0 million term loan (the "Term B Loan") and a revolving credit facility for an aggregate principal amount of$250.0 million (the "2021 Revolving Credit Facility" and together with the Term B Loan, the "2021 Credit Facilities"). The 2021 Revolving Credit Facility has a sublimit of$75.0 million for letters of credit. The Company received proceeds of$798.0 million , net of debt discount of$2.0 million , related to the Term B Loan.
Beginning with the quarter ending
quarterly principal payments of
remaining outstanding principal amount required to be paid on the maturity date,
Beginning with the year endingDecember 31, 2022 , the Term B Loan requires a prepayment of principal, subject to certain exceptions, in connection with the receipt of proceeds from certain asset sales, casualty events, and debt issuances by the Company, and up to 50% of annual excess cash flow, as defined in and as further set forth in the 2021 Credit Agreement. When a principal prepayment is required, the prepayment offsets the future quarterly principal payments of the same amount. For the year endedDecember 31, 2022 , the annual excess cash flow calculation did not require the Company to make a prepayment of principal. The Company was not subject to the annual excess cash flow calculation in fiscal year 2021 and no such principal prepayments are required. As ofDecember 31, 2022 and 2021, the amount outstanding under the Term B Loan was$792.0 million and$800 million , respectively, of which,$8.0 million is classified as current. Borrowings under the 2021 Credit Facilities bear interest at rates based on the ratio of the Company's and its subsidiaries' consolidated first lien net indebtedness to the Company's and its subsidiaries' consolidated EBITDA for applicable periods specified in the 2021 Credit Agreement. The interest rate per annum applicable to the loans under the 2021 Credit Facilities are based on a fluctuating rate of interest equal to the sum of an applicable rate and, at the Company's election from time to time, either:
(1)
a base rate determined by reference to the highest of (a) the rate last quoted by theWall Street Journal as the "prime rate," (b) the federal funds effective rate plus 0.50%, (c) one-month LIBOR plus 1.00% and (d) with respect to the Term B Loan, 1.50% and with respect to the 2021 Revolving Credit Facility, 1.00%, or
(2)
a Eurocurrency rate determined by reference to LIBOR (other than with respect to Euros, Euribor and with respect to British Pounds Sterling, SONIA) with a term as selected by the Company, of one, three or six months (subject to (x) in the case of term loans, a 0.50% per annum floor and (y) in the case of revolving loans, a 0.00% per annum floor).
A quarterly commitment fee of up to 0.50% is payable on the unused portion of
the 2021 Revolving Credit Facility.
During the year ended
rate on the outstanding borrowings under the Term B Loan was 4.2% and 3.0%,
respectively. The Company made interest payments of
million
The Company has an outstanding standby letter of credit for$0.7 million which reduces the amount available to be borrowed under the 2021 Revolving Credit Facility. As ofDecember 31, 2022 ,$249.3 million was available to be borrowed under the 2021 Revolving Credit Facility. In addition, beginning with the three months endedMarch 31, 2022 , the terms of the 2021 Credit Agreement include a financial covenant which requires that, at the end of each fiscal quarter, if the aggregate amount of borrowings under the 2021 Revolving Credit Facility exceeds 35% of the aggregate commitments, the Company's leverage ratio cannot exceed 6.25 to 1.00. Borrowings under the 2021 Revolving Credit Facility did not exceed 35% of the aggregate commitments and the Company was not subject to the leverage test during the year endedDecember 31, 2022 .
First Lien Credit Agreement-In
Lien Credit Agreement.
The First Lien Credit Agreement initially consisted of a$1.0 billion term loan and revolving credit facilities for an aggregate principal amount of$100.0 million , with a sublimit of$30.0 million for letters of credit under the First Lien Revolvers. InFebruary 2020 , the Company refinanced its long-term debt and entered into the First Amendment to the First Lien Credit Agreement (the "First Lien Amendment"). The First Lien Amendment provided an incremental term loan, amended the amount of commitments and the maturity dates of the First Lien Credit Agreement's revolving credit facilities.
The First Lien Amendment provided an incremental term loan in the amount of
Revolvers to an aggregate principal amount of
Revolvers continued to have a sublimit of
The First Lien Term Loan required (after giving effect to the First Lien Amendment) quarterly principal payments of approximately$3.5 million untilMarch 31, 2024 , with the remaining outstanding principal amount required to be paid on the maturity date,April 27, 2024 . The First Lien Term Loan required a prepayment of principal, subject to certain exceptions, in connection with the receipt of proceeds from certain asset 48 -------------------------------------------------------------------------------- sales, casualty events, and debt issuances by the Company, and up to 50% of annual excess cash flow, as defined in and as further set forth in the First Lien Credit Agreement. When a principal prepayment was required, the prepayment offset the future quarterly principal payments of the same amount. As ofDecember 31, 2020 , subject to the request of the lenders of the First Lien Term Loan, a principal prepayment of up to$21.9 million was required. InApril 2021 , the Company made a principal prepayment of$1.5 million to those lenders who made such a request. The Company made a principal prepayment of$525.0 million onJuly 30, 2021 . Subsequently, inSeptember 2021 , using the proceeds from the Term B Loan provided in the 2021 Credit Agreement and cash on hand, the Company fully repaid the remaining$804.2 million of outstanding borrowings on the First Lien Term Loan. Amounts outstanding under the First Lien Credit Agreement bore interest at a variable rate of LIBOR, plus up to 3.00% per annum based upon the Company's leverage ratio, as defined in the First Lien Credit Agreement. A quarterly commitment fee of up to 0.50% was payable on the unused portion of the First Lien Revolvers. During the years endedDecember 31, 2021 and 2020, the weighted-average interest rate on the outstanding borrowings under the First Lien Term Loan was 4.1% and 4.2% , respectively. The Company made interest payments of$36.1 million and$53.6 million during the years endedDecember 31, 2021 and 2020, respectively. Interest Rate Cap-InAugust 2022 , the Company entered into an interest rate cap agreement to reduce its exposure to increases in interest rates applicable to its floating rate long-term debt. The aggregate notional value of the interest rate cap agreements is$600.0 million with a cap rate of 4.0% and an expiration date ofJuly 31, 2025 . Interest Rate Swaps-InJune 2017 , the Company entered into three floating to fixed interest rate swap agreements to reduce its exposure to the variability from future cash flows resulting from interest rate risk related to its floating rate long-term debt. InSeptember 2021 , the Company made an aggregate payment of$10.0 million to extinguish the Swap Agreements which were scheduled to expire inJune 2022 .
Contractual Obligations and Commitments
The following table summarizes our contractual obligations and other commitments
as of
Subsequent to
(dollar amounts in thousands) Total 2023 2024-2025
2026-2027 2027
Long-term debt obligations(1)
$ 16,000 $ 752,000 Scheduled interest payments(1) 265,080 47,280 93,120 91,200 33,480
Operating lease obligations(2) 90,143 5,737 14,234
12,681 57,491 Purchase obligations(3) 121,542 25,510 32,525 23,907 39,600 Licensing agreement(4) 44,261 4,918 9,836 9,836 19,671 Total$ 1,313,026 $ 91,445 $ 165,715 $ 153,624 $ 902,242 (1) Includes scheduled principal and interest payments at existing rates atDecember 31, 2022 and assumes no non-mandatory prepayments. Obligations that are repayable prior to maturity at our option are reflected at their contractual maturity date. The scheduled interest payments are determined based on the interest rate in effect atDecember 31, 2022 and do not consider the effect of the interest rate cap agreements. See Note 16 to our consolidated financial statements for additional information.
(2)
Includes leases of facilities that expire at various dates through 2037. Rent expense for leased facilities of$11.7 million ,$13.7 million and$9.7 million was recognized during the years endedDecember 31, 2022 , 2021 and 2020, respectively. See Note 11 to our consolidated financial statements for additional information.
(3)
Includes long-term agreements with suppliers and other parties related to licensing data used in our services, outsourced data center, disaster recovery, and SaaS offerings. See Note 23 to our consolidated financial for additional information.
(4)
A licensing agreement with a third party to obtain a perpetual software license
("Licensing Agreement") for a database structure, tools, and historical claims
data used within the Company's software. Payments include principal and imputed
interest through the contract termination date in December 2031 . See Note 17 to
our consolidated financial statements for additional information.
Cash Flows
The following table provides a summary of cash flow data for the years ended
Year ended December
31,
(dollar amounts in thousands) 2022 2021
2020
Net cash provided by operating activities
$ 103,943 Net cash used in investing activities (76,292 ) (48,598 ) (30,667 ) Net cash provided by (used in) financing activities 17,875 (58,440 ) (4,421 ) Net effect of exchange rate change (246 ) 129 62
Change in cash and cash equivalents
$ 68,917 49
--------------------------------------------------------------------------------
2022
Net cash provided by operating activities was$199.9 million for the year endedDecember 31, 2022 . Net cash provided by operating activities consists of net income of$38.4 million , adjusted for$175.4 million of non-cash items,$2.7 million for changes in working capital and($16.7) million for the effect of changes in other operating assets and liabilities. Non-cash adjustments include stock-based compensation expense of$109.4 million , depreciation and amortization of$127.1 million , non-cash lease expense of$3.7 million , amortization of deferred financing fees and debt discount of$2.1 million , change in fair value of warrant liabilities of($26.1) million , deferred income tax benefits of($34.6) million and a change in fair value of derivative instruments of($5.7) million . The change in working capital was primarily a result of an increase in accounts payable of$15.5 million due to timing of payments, a decrease in other current assets of$9.8 million due to timing of payments for prepaid and other deferred costs, an increase in accrued expenses of$4.8 million and an increase in deferred revenue of$4.2 million due to revenue growth and timing of customer payments, partially offset by an increase in accounts receivable of$19.8 million due to revenue growth and timing of receipt of customer payments and a change in income taxes of$10.0 million due to timing of payments. The change in other operating assets and liabilities was a result of an increase in non-current other assets of$14.5 million due to timing of payments for prepaid and other deferred costs, including the$6.3 million interest rate cap premium payment. Net cash used in investing activities was($76.3) million for the year endedDecember 31, 2022 . Net cash used in investing activities was due to$48.0 million of purchases of software, equipment and property, including capitalized internally developed software projects and$32.2 million for a business acquisition, partially offset by$3.9 million of proceeds from the sale of a cost method investment. Net cash provided by financing activities was$17.9 million for the year endedDecember 31, 2022 . Net cash provided by financing activities was due to$27.7 million of proceeds from stock option exercises and$3.2 million of proceeds from shares purchased through the Company's Employee Stock Purchase Plan, partially offset by$8.0 million of principal payments of long-term debt and$5.0 million of tax payments related to the net share settlement of employee equity awards. 2021 Net cash provided by operating activities was$127.3 million for the year endedDecember 31, 2021 . Net cash provided by operating activities consists of net loss of$248.9 million , adjusted for$420.1 million of non-cash items,($4.5) million for changes in working capital and($39.4) million for the effect of changes in other operating assets and liabilities. Non-cash adjustments include stock-based compensation expense of$262.0 million , depreciation and amortization of$123.1 million , change in fair value of warrant liabilities of$64.5 million , a loss on early extinguishment of debt of$15.2 million ,$6.3 million in non-cash lease expense, amortization of deferred financing fees and debt discount of$4.3 million , deferred income tax benefits of($46.9) million and a change in fair value of interest rate swaps of($8.4) million . The change in working capital was primarily a result of an increase in other current assets of$12.3 million due to timing of payments for prepaid and other deferred costs, an increase in accounts receivable of$4.7 million due to revenue growth and an increase in the current portion of deferred contract costs of$3.1 million due to higher employee sales incentives, partially offset by an increase in accrued expenses of$8.3 million due to timing of payments, an increase in deferred revenue of$4.5 million due to revenue growth and timing of customer payments and an increase in income taxes of$3.8 million due to timing of payments. The change in other operating assets and liabilities was primarily a result of an increase in non-current other assets of$7.8 million due to timing of payments and other deferred costs, an increase in non-current deferred contract costs of$7.7 million due to higher employee sales incentives, a$10.2 million cash settlement of vested phantom stock, and a$10.0 million payment for the early extinguishment of the Company's interest rate swap agreements. Net cash used in investing activities was$48.6 million for the year endedDecember 31, 2021 . Net cash used in investing activities is primarily related to capitalized time on internally developed software projects and purchases of software, equipment and property of$38.3 million and an investment in a limited partnership of$10.2 million . Net cash used in financing activities was$58.4 million for the year endedDecember 31, 2021 . Net cash used in financing activities was primarily related to principal payments of long-term debt of$1,336.2 million , dividends to shareholders prior to the Business Combination of$269.2 million and a deemed distribution to CCCIS option holders of$9.0 million , partially offset by borrowings from the Term B Loan, net of fees paid to the lender, of$789.9 million , and net proceeds from the Business Combination of$763.3 million .
2020
Net cash provided by operating activities was$103.9 million for the year endedDecember 31, 2020 . Net cash provided by operating activities consists of net loss of$16.9 million , adjusted for non-cash items and the effect of changes in working capital. Non-cash adjustments include stock-based compensation expense of$11.3 million , depreciation and amortization of$116.4 million , deferred income tax benefits of($11.1) million , amortization of deferred financing fees of$4.6 million , loss on early extinguishment of debt of$8.6 million , change in fair value of interest rate swaps of$13.2 million and a gain on divestiture of($3.8) million . The change in net operating assets and liabilities was primarily a result of an increase in deferred contract costs of$3.0 million due to the payment of employee sales incentives, an increase in accounts receivable of$10.6 million due to timing of receipts of payments from customers, and an increase in prepayments and other assets of$15.7 million due to non-trade receivables and timing of payments for prepaid and other deferred costs, partially offset by an increase in income taxes of$6.7 million due to timing of tax payments. Net changes in working capital used cash of($12.1) million .
Net cash used in investing activities was
Net cash used in investing activities is primarily related to capitalized time on internally developed software projects and purchases of software, equipment and property of$30.1 million .
Recent Accounting Pronouncements
50 -------------------------------------------------------------------------------- See Note 2 to our audited consolidated financial statements for more information about recent accounting pronouncements, the timing of their adoption, and our assessment, to the extent we have made one, of their potential impact on our financial condition and our results of operations.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires our management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue, costs, and expenses and related disclosures. Our estimates are based on our historical experience, trends and various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these judgments and estimates under different assumptions or conditions and any such differences may be material.
For information on our significant accounting policies, see Note 2 to our
audited consolidated financial statements.
We believe the following critical accounting policies affect our most
significant judgments and estimates used in preparation of our consolidated
financial statements:
• Revenue Recognition
•
Valuation of
•
Stock-based Compensation
•
Valuation of Warrant Liabilities
•
Fair Value of Contingent Consideration
Revenue Recognition
Revenue recognition requires judgment and the use of estimates. The Company generates revenue from subscription-based contracts that are billed either on a subscription or transactional basis. Revenue is derived from the sale of SaaS subscriptions, and other revenue, primarily professional services.
The estimates and assumptions requiring significant judgment under our revenue
recognition policy in accordance with ASC 606 are as follows:
Determine the transaction price
The transaction price is determined based on the consideration to which we expect to be entitled in exchange for services to the customer. Variable consideration is included in the transaction price if, in our judgment, it is probable that no significant future reversal of cumulative revenue under the contract will occur. The sale of our SaaS subscriptions may include variable consideration related to usage-based contracts and provisions for additional fees when the volume of a customer's transactions exceeds agreed upon maximums within defined reporting periods. We estimate variable consideration based on the most likely amount, to the extent that a significant revenue reversal is not probable to occur. The Company may occasionally recognize an adjustment in revenue in the current period for performance obligations partially or fully satisfied in the previous periods resulting from changes in estimates for the transaction price, including any changes to the Company's assessment of whether an estimate of variable consideration is constrained. For the years endedDecember 31, 2022 , 2021 and 2020, the impact on revenue recognized in the respective period, from performance obligations partially or fully satisfied in the previous period, was not significant.
Determine the amortizable life of contract assets
Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for initial contracts are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to generally be between three and five years. We determined the period of benefit by taking into consideration our customer contracts, our technology, and other factors. Most often with larger customers, a new contract or amended master agreement will not include a renewal period that requires assessment of whether the new business and renewal business commissions are commensurate. This is because the solutions and services offered as part of the new contract or amended agreement will be different from the original due to changes in technology and offerings. While the renewal period may be reached, most often a new multi-year agreement is signed that includes new services and features which will pay out a commission on the new services and features at the new business percentage and the renewal services and features at the renewal commission percentage. In situations when the renewal period is triggered, it is typically with smaller customers where the sales commission paid is insignificant. Thus, sales commissions are amortized on a systematic basis over three to five years which corresponds to the period and pattern in which revenue is recognized. Sales commissions for renewal contracts are deferred and then amortized on a straight-line basis over the related contractual renewal period. Amortization expense is included in selling and marketing expenses on the consolidated statements of operations and comprehensive income (loss).
Valuation of
We perform an annual assessment for impairment of goodwill and indefinite-lived
intangible assets each fiscal year, or whenever events occur or circumstances
indicate that it is more likely than not that the fair value of a reporting unit
or indefinite-lived intangible asset is below its carrying value.
51
--------------------------------------------------------------------------------
The Company historically has performed its annual impairment assessment of
goodwill and indefinite life intangible assets as of September 30 of each year.
During 2022, the Company changed the date of its annual impairment assessment to
November 30 to align with its annual business planning and budgeting process and
to allow the Company to maximize the time and resources required to perform the
impairment analysis. This change does not result in a delay, acceleration, or
avoidance of an impairment charge. This change has been applied prospectively as
retrospective application is deemed impracticable due to the inability to
objectively determine the assumptions and significant estimates used in earlier
periods without the benefit of hindsight. Accordingly, the annual impairment
assessment was performed as of September 30, 2022 and updated as of November 30,
2022 .
For the years ended
analysis performed indicated no impairments of goodwill or changes in carrying
values due to impairment.
The quantitative goodwill impairment tests performed as ofSeptember 30, 2022 and updated as ofNovember 30, 2022 primarily use an income approach based on a number of key estimates and assumptions, including revenue and expense growth factors along with applying a discount rate to the estimated cash flows. The discount rates are based on the estimated weighted average cost of capital for each reporting unit and may change from year to year. Weighted average cost of capital includes certain assumptions such as market capital structures, market betas, risk-free rates of return and estimated costs of borrowing. The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment. In estimating the fair value of a reporting unit for the purposes of our annual or periodic impairment analyses, we make estimates and significant judgments about the future cash flows of that reporting unit. Our cash flow forecasts are based on assumptions that represent the highest and best use for our reporting units. Changes in judgment on these assumptions and estimates could result in goodwill impairment charges. We believe that the assumptions and estimates utilized are appropriate based on the information available to management. We have two reporting units, Domestic andChina , for purposes of analyzing goodwill. The most recent annual impairment assessment performed as ofNovember 30, 2022 indicated no impairment for ourChina reporting unit. The quantitative assessment for theChina reporting unit had an estimated fair value that exceeded its carrying value of$76.6 million by approximately 5%. Key financial assumptions utilized to determine the fair value of the reporting unit included revenue growth levels that reflect the rollout of new services and solutions, improving profit margins and a 14% discount rate. The reporting unit's fair value would approximate its carrying value with a 40 basis point increase in the discount rate. As noted above, a considerable amount of management judgment and assumptions are required in performing the annual goodwill impairment assessment. While we believe our judgments and assumptions are reasonable, different assumptions could change the estimated fair values. A number of factors, many of which we have no ability to control, could cause actual results to differ from the estimates and assumptions we employed. These factors include:
•
continued negative impact from the COVID-19 pandemic;
•
a prolonged global or regional economic downturn;
•
a significant decrease in the demand for our services and solutions;
•
the inability to develop new and enhanced services and solutions in a timely
manner;
•
a significant adverse change in legal factors or in the business climate;
•
an adverse action or assessment by a regulator;
•
successful efforts by our competitors to gain market share in our markets;
•
disruptions to the Company's business;
•
unexpected or unplanned changes in the use of assets or entity structure; and
• business divestitures If management's estimates of future operating results change or if there are changes to other assumptions due to these factors, the estimate of the fair value may change significantly. Such change could result in impairment charges in future periods, which could have a significant impact on our operating results and financial condition. Intangible assets with finite lives and software, equipment and property are amortized or depreciated over their estimated useful life on a straight-line basis. We monitor conditions related to these assets to determine whether events and circumstances warrant a revision to the remaining amortization or depreciation period. We test these assets for potential impairment whenever our management concludes events or changes in circumstances indicate that the carrying amount may not be recoverable. The original estimate of an asset's useful life and the impact of an event or circumstance on either an asset's useful life or carrying value involve significant judgment regarding estimates of the future cash flows associated with each asset.
There was no impairment charge recorded during the years ended
2022
Stock-based Compensation
The Company accounts for stock-based compensation plans in accordance with ASC
718, Compensation-Stock Compensation, which requires the recognition of expense
measured based on the grant date fair value of the stock-based compensation
awards. Our stock-based awards
52
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include stock options, restricted stock units ("RSUs") and phantom shares.
Stock-based payment awards that are settled in cash are accounted for as
liabilities. Our stock-based awards have vesting terms that are service-based,
performance-based or performance-based with a market condition.
The grant date fair value of our service-based awards, excluding RSUs, is determined using the Black-Scholes option-pricing model. The fair value of each service-based and performance-based RSU is determined using the fair value of the underlying common stock on the date of grant. The fair value of each award with performance-based with a market condition vesting is determined using a Monte Carlo simulation model. For stock-based awards with only service conditions, we recognize stock-based compensation expense on a straight-line basis over the requisite service period only for the portion of awards expected to vest, based on an estimated forfeiture rate. For stock-based awards with only performance conditions, we recognize stock-based compensation expense on a straight-line basis over the explicit performance period when the performance targets are probable of being achieved. We recognize stock-based compensation expense on awards that are subject to performance-based vesting with a market condition when the performance targets are considered probable of being achieved. The determination of the grant date fair value for these awards is affected by assumptions regarding a number of complex and subjective variables, including expected stock price volatility over the expected term of the award, the risk-free interest rate for the expected term of the award and expected dividends. The market condition of these awards impacts the fair value at grant date and is the reason the Monte Carlo simulation is utilized to determine fair value.
Key assumptions used in the Black-Scholes option pricing model and Monte Carlo
simulation method include:
•
Fair Value of Common Stock-Prior to the Business Combination, there was no public market for our common stock. For those periods included in our consolidated financial statements, fair values of the shares of common stock underlying our stock-based awards were estimated on each grant date by our board of directors. Our board of directors, with input from management considered, among other things, valuations of our common stock, which were prepared in accordance with the guidance provided by theAmerican Institute of Certified Public Accountants 2013 Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation as well as the most recent acquisition of the Company for grants in 2017.
•
Expected Term-The expected term represents the period that stock-based awards are expected to be outstanding and, for time-based awards, is determined using the simplified method that uses the weighted average of the time-to-vesting and the contractual life of the awards.
•
Expected Volatility-As we have limited trading history for our common stock, the expected volatility was estimated based on the average volatility for comparable publicly traded companies over a period equal to the expected term of the stock option grants. The comparable companies were chosen based on their similar size, stage in the life cycle or area of specialty.
•
Risk-Free Interest Rate-The risk-free interest rate is based on the
corresponding with the expected term of awards.
•
Expected Dividend Yield-Historically, we have not paid regular dividends on our common stock and have no plans to pay dividends on our common stock on a regular basis. We do not have a dividend policy. Therefore, we used an expected dividend yield of zero. See Note 21 to our consolidated financial statements for more information concerning certain of the specific assumptions we used in applying the Black-Scholes andMonte Carlo option pricing models to determine the estimated fair value of our stock-based awards with service vesting and performance vesting. Some of these assumptions involve inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation could be materially different.
Valuation of Warrant Liabilities
We account for our Private Warrants in accordance with the guidance contained in ASC 815-40. The warrants do not meet the criteria for equity treatment, thus we classify the warrants as liabilities at their fair value and adjust the warrants to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until the warrants are exercised or redeemed. Any change in fair value is recognized in our consolidated statements of operations and comprehensive income (loss). The fair value of the Private Warrants was determined using the Black-Scholes option pricing model. See Note 6 to our consolidated financial statements for more information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the fair value of our Private Warrants. Some of these assumptions involve inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our warrant liabilities could be materially different.
Fair Value of Contingent Consideration
Earnout liabilities arising from business acquisitions represent contingent
consideration that may be payable in cash and recorded as a liability at fair
value upon acquisition and re-measured at fair value in each subsequent
reporting period. Changes in fair value are recorded in the consolidated
statements of operations.
Determining the fair value of contingent consideration requires us to make assumptions and judgments. We estimate the fair value of contingent consideration using a Monte Carlo simulation model. These estimates involve inherent uncertainties and if different assumptions had been used, including but not limited to forecast inputs and discount rates, the fair value of contingent consideration could have been materially different from the amounts recorded. We have estimated the fair value of the contingent consideration associated with the acquisition of Safekeep as of the acquisition date and reassess our estimate each reporting period. During the year endedDecember 31, 2022 , the Company recorded a gain on the change in fair value of contingent consideration of$0.1 million . 53
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EHEALTH, INC. – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EAGLE BANCORP INC – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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