FORGEROCK, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and forward-looking statements that involve risks and uncertainties. You should review the sections titled "Special Note Regarding Forward-Looking Statements" and "Risk Factors" for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Our fiscal years endedDecember 31, 2022 and 2021 are referred to herein as 2022 and 2021, respectively. We have omitted the financial results for the fiscal year endedDecember 31, 2020 where it would be redundant to the discussion previously included in Part II, Item 7 of our Annual Report on Form 10-K filed with theSEC onMarch 9, 2022 , which discussion is hereby incorporated by reference herein.
Overview
Our vision is a world where you never log in again.
We help make the digital economy possible.ForgeRock supports billions of identities to help people simply and safely access the connected world-from shopping and banking to accessing company networks to get their work done. We make this possible through a unified and extensive identity platform to enable enterprises to provide exceptional digital user experiences without compromising security and privacy. This allows enterprises to deepen their relationships with customers and increase the productivity of their workforce and partners, while at the same time providing better security and regulatory compliance. Our platform is purpose-built for the enterprise and provides mission-critical capabilities, including performance and scale, rich identity functionality, deployment flexibility, and extensive integration and interoperability. Our platform includes a full suite of identity functionality across Customer Identity Access Management (CIAM), Access Management (AM),Identity Governance Administration (IGA), and Autonomous Identity and Access, and a differentiated identity object modeling approach that supports all identity types. We enable enterprises to rapidly integrate and secure thousands of applications across types, deployments, and operating environments such as SaaS, mobile, microservices, web, and legacy, running in public and private cloud, and on-premise. Together, these deep capabilities enable us to provide enterprises with a single view of all their identities in one unified platform and position us as a leader in digital identity for the enterprise market.
We Generate Substantially All of Our Revenue From Subscriptions
Our revenue includes recurring revenue from term licenses, SaaS, and maintenance and support (which we refer to collectively as our subscription revenue). We generate substantially all of our revenue from the sale of subscriptions (which excludes perpetual licenses), which accounted for 95% and 96% of our total revenue in 2022 and 2021, respectively. We have significantly reduced our percentage of revenue from perpetual licenses to approximately 1% of our total revenue in 2022 and 2021. The remainder of our revenue is from professional services, which represented 5% and 3% of our total revenue in 2022 and 2021, respectively. We enable our customers to choose how they want to deploy our software in their heterogeneous environments, including self-managed environments such as public and private cloud environments, and through our SaaS offering, ForgeRock Identity Cloud, or a combination of both. Our subscription contracts are typically non-cancelable and non-refundable, and are largely billed annually upfront. Our weighted average new subscription term from new and existing customers in 2022 and 2021 was 33 months. Our pricing is generally based on the deployment method (SaaS or self-managed), products purchased, identity type (consumer, workforce, or IoT and services), and number of identities managed.
We Focus on
Our go-to-market strategy is primarily focused on selling to large global enterprises, who are consistently investing in identity as a top priority. We focus our sales efforts on decision makers with a purview across the enterprise such as Chief Information Officers, or CIOs, Chief Information Security Officers, or CISOs, Chief Digital Officers, or CDOs, and Chief Technology Officers, or CTOs. We are also increasing our focus on line-of-business owners and developers as core stakeholders. We have been operating globally since our founding and 44% of our revenue in 2022 was generated from customers located inEurope , theMiddle East andAfrica , or EMEA, and theAsia-Pacific , or APAC, region, demonstrating the global demand for our offerings. Our customers are based in more than 50 countries and across a diverse set of industries such as financial services, public sector, technology, telecom and media, medical, services, retail, and manufacturing. Many of our customers are recognized as leaders in their respective industries or public sectors. 61
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Our Go-to-Market Strategy is Driven by Close Collaboration Between Our Sales and Marketing Organizations and Our Partners
We primarily sell subscriptions through our direct sales teams located in geographic regions near our customers. Our sales and marketing organizations work closely to attract and drive awareness and engagement with prospective customers to help them understand our leadership in identity and our product differentiation, and to convert prospects into customers. Our marketing organization engages with prospective customers across physical and digital channels and provides them with solution guides, whitepapers, webinars, presentations, and other content to accelerate their understanding of our platform and drive greater adoption. We are highly focused on embracing and supporting our customers with the implementation of and utilization of our platform through dedicated customer success managers. We also have a strong network of strategic global channel partners that both source and influence opportunities for us -providing leverage and execution capabilities across the globe. These strategic global channel partnerships not only provide us with a significant source of lead generation but also a global network of certified and trained implementation professionals. Our alliances, including global strategic consulting firms and global systems integrators, or GSIs, such as Accenture, Deloitte, and PwC, often promote our platform as part of large-scale digital transformation projects they drive by identifying opportunities in which our platform can help accelerate business initiatives and improve user experience. We also partner with leading regional consulting firms and implementation partners. These highly-skilled regional partners not only provide subject-matter expertise in the implementation of specific use cases, but they also act as an extension of our direct sales force by identifying and referring opportunities to us.
Our Customer Base Includes Many of the World's Leading Brands
Our global customer base includes direct and indirect customers, of which direct customers are those we contract with directly (whether sourced by us or through a partner or reseller), and indirect customers include customers that receive the benefit of using components of our software by contracting with certain third parties, such as resellers, system integrators, managed service providers, or other channel partners, as well as with original equipment manufacturers, or OEMs. We focus on the number of large customers because it represents our ability to land-and-expand with large enterprises and the number of large customers is a key indicator of our ability to grow our business and revenue in future periods. We define a large customer as a customer with$100,000 or greater ARR as of a measurement date. As ofDecember 31, 2022 and 2021, we had 449 and 394 large customers with$100,000 of ARR or greater, respectively, representing 93% and 90% of our total ARR as of such dates. No single customer accounted for more than 4% of our total ARR in 2022 and 3% of our total ARR in 2021 and 2020. No single customer accounted for more than 10% of our total revenue in 2022, 2021 and 2020.
We Have a Robust Land & Expand Model Enabled in Part by Our Flexible Purchasing Options
The breadth of our platform enables many entry points for new customers, and we enable them to purchase one or more product modules for their initial deployment and expand into new modules for additional functionality over time. We believe there is a significant opportunity for revenue expansion across our customer base as our customers increase the number of identities managed through our platform, expand across consumer, workforce and IoT and services use cases, subscribe to additional product offerings, and expand into additional deployments, such as our SaaS offering.
Our Business Has Experienced Strong Growth
We have experienced strong growth from a combination of internal drivers and external drivers. Internal drivers include the continuous innovation of our platform, resulting in new technology, products and deployment offerings, a loyal customer base that continues to increase their spend with us over time, and the acquisition of new customers. For example, we have developed and released our SaaS offering (ForgeRock Identity Cloud), Autonomous Identity and Access in the past two years and both new and existing customers have adopted these offerings. Our effective go-to-market model has also been a driver of our growth, aided by recent leadership recognition by industry analysts. We believe external drivers such as the increasing importance of identity to enterprises, identity being a key enabler of digital transformation, the growing cyber threat landscape and constantly evolving regulatory and compliance requirements are also driving our growth. In 2022 and 2021 our ARR was$229.6 million and$183.1 million , respectively, representing a year-over-year growth rate of 25%. We generate substantially all of our revenue from subscriptions, with 95% and 96% of our total revenue coming from subscriptions in 2022 and 2021, respectively. In 2022 and 2021 our total revenue was$217.5 million and$176.9 million , respectively, representing a year-over-year growth rate of 23%. In the same periods, we incurred net losses of$66.3 million and$47.8 million , respectively. 62
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Pending Merger
OnOctober 10, 2022 , we entered into the Merger Agreement with Parent and Merger Sub, pursuant to which Merger Sub will merge with and intoForgeRock andForgeRock will continue as the surviving corporation in the Merger, as a wholly owned subsidiary of Parent. Parent and Merger Sub are affiliates ofThoma Bravo . Under the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of our Class A common stock and Class B common stock (except for certain shares specified in the Merger Agreement) will be canceled and automatically converted into the right to receive cash in an amount equal to$23.25 per share, without interest. Completion of the Merger remains subject to the satisfaction of certain terms and conditions set forth in the Merger Agreement, including (i) the absence of any order issued by any governmental entity of competent jurisdiction or any law applicable to the merger that, in each case, prevents, materially restrains, or materially impairs the consummation of the Merger; and (ii) the expiration or termination of the waiting period applicable to the Merger pursuant to the HSR Act, and the absence of any agreement with any governmental authority not to consummate the Merger. OnDecember 22, 2022 ,ForgeRock and Parent each received a Second Request from the DOJ in connection with the DOJ's review of the Merger. The issuance of the Second Request extends the waiting period under the HSR Act until 30 days after bothForgeRock and Parent have substantially complied with the Second Request.
On
ForgeRock and entities affiliated withThoma Bravo have entered into the Timing Agreement with the DOJ in connection with the Merger and the Second Request. Under the Timing Agreement,ForgeRock andThoma Bravo have agreed that they will certify compliance with the Second Request no earlier thanMay 1, 2023 , and will not consummate the Merger less than 75 days after compliance with the Second Request. The Timing Agreement does not preventForgeRock andThoma Bravo from consummating the Merger sooner if the DOJ closes its investigation of the Merger before that date. The expiration or termination of the waiting period applicable to the Merger pursuant to the HSR Act (and the absence of any agreement with any governmental authority not to consummate the Merger) is the only remaining approval or regulatory condition required to consummate the closing of the Merger under the Merger Agreement.
Upon consummation of the Merger, we will cease to be a publicly traded company
and our Class A common stock will be delisted from the
Factors Affecting Our Performance
We believe that our future performance will depend on many factors, including the following:
Acquiring New Customers Our results of operations and growth depends in part on our ability to attract new customers and we believe there is a significant opportunity to grow our customer base. To date, we have primarily relied on our marketing efforts, direct sales, channel partners and alliances, industry recognition and referrals to attract new customers. While we believe we have a significant market opportunity and an effective go-to-market strategy to win new customers, we will need to continue to invest in partner and alliance leverage, digital marketing, and expand into new markets and new customer segments to maintain or accelerate our customer growth.
Expanding Usage by Existing Customers
Our business depends, in part, on the degree to which our land-and-expand
strategy is successful. Our customers often initially adopt our platform for a
specific use case, such as consumer identity, and subsequently increase their
adoption as they realize the benefits and flexibility of our platform. We have
been successful in expanding our existing customers' adoption of our platform as
demonstrated by our dollar-based net retention rate, which we consider an
indicator of our ability to retain and expand revenue from existing customers
over time. We continue to invest in our customer success efforts to help our
customers realize the full potential of our platform and expand their usage of
our platform over time.
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Innovating and Advancing Our Platform
We intend to continue to invest in our research and development to extend the capabilities of our digital identity platform. Our investments in research and development drive core technology innovation and bring new products to market. We intend to continue to enhance our platform by developing new products and expanding the functionality of existing products to maintain our technology leadership. For example, since the beginning of 2019, we releasedForgeRock Identity Governance, ForgeRock Identity Cloud, and Autonomous Identity and Access. We have also strengthened our Trust Network of ecosystem partners that bring leading-edge authentication, biometrics, digital identity proofing, risk management, and other complementary technologies.
Expanding Strategic Partnerships and Alliances
Our growth depends in part on our ability to expand our strategic partnerships. We have four types of strategic alliances and partners: (1) GSIs and implementation partners, (2) OEM partners or customers who utilize components of our platform to deliver services, (3) strategic partners such asForgeRock is a premier partner for digital identity, and (4) Trust Network partners who provide complementary technologies that plug into our platform. Our partners help source and support relationships with new and existing customers, as well as provide technology and go-to-market benefits. We believe we have a meaningful opportunity to increase our revenue through strategic partners and our growth depends in part on the strength of these partnerships.
Mix of Multi-Year Subscription Licenses and SaaS, and Seasonality
Subscription term licenses are often deployed by our customers in public cloud environments such as AWS, GCP, or Azure. Under ASC 606, for self-managed term-based subscription licenses, we recognize approximately half of the total contract value of the portion upfront as license revenue, with the remainder attributable to maintenance and support that is recognized ratably over the license term. If the total contract value of our subscription term licenses increases as a percentage of total contract value of all our subscriptions, more revenue would be recognized upfront. For our SaaS offering, the ForgeRock Identity Cloud, 100% of revenue is recognized ratably over the subscription term. If the total contract value of our SaaS subscriptions increases as a percentage of total contract value of all our subscriptions, less revenue would be recognized upfront. For the reasons stated above, our revenue is affected by the overall growth in our business and changes in our revenue mix of self-managed subscriptions and SaaS subscriptions. As a result, our year-over-year growth rates for total revenue may not be comparable due to changes in revenue mix.
We also experience seasonality in our business which could continue to affect our financial results.
Key Business Metrics
Annual Recurring Revenue (ARR)
We believe that ARR is a key metric to measure our business performance because
it is driven by our ability to acquire new customers and to maintain and expand
our relationship with existing customers. We define ARR as the annualized value
of all contractual subscription agreements as of the end of the period. To the
extent that we are negotiating a renewal with a customer after the expiration of
the subscription, we continue to include that revenue in ARR if we are actively
in discussion with such an organization for a new subscription or renewal, or
until such organization notifies us that it is not renewing its subscription. We
perform this calculation on an individual customer basis by dividing the total
dollar amount of the customer's contract by the total contract term stated in
months and multiplying this amount by 12 to annualize. Calculated ARR for each
individual customer is then aggregated to arrive at total ARR.
ARR does not have a standardized meaning and therefore may not be comparable to
similarly titled measures presented by other companies. ARR should be viewed
independently of revenue, deferred revenue and remaining performance obligations
computed and/or disclosed in accordance with GAAP and is not intended to be
combined with or to replace any of those items. Specifically, ARR, as calculated
under the definition herein, does not adjust for the timing impact of revenue
recognition for specific performance obligations identified within a contract.
ARR is not a forecast and the active contracts at the date used in calculating
ARR may or may not be extended by our customers.
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The following chart sets forth our ARR as of the end of our last two years:
As of December 31, Change
2022 2021 Amount Percent
(dollars in thousands)
ARR $ 229,600 $ 183,100 $ 46,500 25%
Dollar-Based Net Retention Rate
Our ability to drive growth and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with customers. An important way in which we track our performance in this area is by measuring the dollar-based net retention rate (our Net Retention Rate). We calculate our Net Retention Rate by first identifying customers (the Base Customers) in a particular quarter (theBase Quarter ). We then divide the ARR in the same quarter of the subsequent year attributable to the Base Customers (theComparison Quarter ) by the ARR attributable to those Base Customers in theBase Quarter . Our Net Retention Rate captures any increase or decrease in ARR from the Base Customers from theBase Quarter to theComparison Quarter . We expand our relationships with customers as they purchase more identities, add more use cases across consumer, workforce, and IoT and services, subscribe to additional product offerings, and add additional deployment options such as our SaaS offering. The following table sets forth our Net Retention Rate as of the end of our last two years: As of December 31, 2022 2021 Change Dollar-Based Net Retention Rate 113% 112% 1% Number of Large Customers We focus on the number of large customers because it represents our ability to land-and-expand with large enterprises and the number of large customers is a key indicator of our ability to grow our business and revenue in future periods. We define a large customer as a customer with$100,000 or greater ARR as of a measurement date. We believe that our ability to increase the number of large customers on our platform is an indicator of our market penetration, the growth of our business, and our potential future business opportunities. Over time, large customers have constituted a greater share of our revenue, which has contributed to an increase in average revenue per customer. We define a customer as a separate and distinct buying entity, such as a company, an educational or government institution, or a distinct business unit of a large company that has an active contract with us or one of our partners to access our platform. The following table sets forth our large customers as of the end of our last two years: As of December 31, Change 2022 2021 Amount Percent Large Customers 449 394 55 14% 65
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Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we believe the following non-GAAP financial measures are useful to investors in evaluating our operating performance and liquidity. We use non-GAAP financial measures to understand and evaluate our core operating performance and trends, to prepare our annual budget, to monitor and assess our liquidity, and to develop short-term and long-term operating plans. We believe that the non-GAAP financial measures we review are each a useful measure to us and to our investors because they provide consistency and comparability with our past performance and between periods, as these metrics generally eliminate the effects of the variability of certain charges and expenses that may not reflect our overall operating performance and liquidity. We believe that non-GAAP financial measures, when taken collectively with GAAP financial information, can be helpful to us and to investors because it provides consistency and comparability with past performance and assists in comparisons with other companies, some of which use similar non-GAAP financial information to supplement their GAAP results. The non-GAAP financial information is presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with GAAP and may be different from similarly-titled non-GAAP measures used by other companies. The principal limitation of these non-GAAP financial measures is that they exclude expenses that are required by GAAP to be recorded in our condensed consolidated financial statements. In addition, they are subject to inherent limitations as they reflect the exercise of judgment by our management about which expenses are excluded or included in determining these non-GAAP financial measures. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures.
Non-GAAP Gross Profit and Non-GAAP Gross Margin
Gross profit is defined as GAAP revenue less cost of revenue and gross margin is GAAP gross profit as a percentage of total revenue. We define non-GAAP gross profit and non-GAAP gross margin as GAAP gross profit and GAAP gross margin, in each case adjusted to exclude stock-based compensation expense.
A reconciliation of Non-GAAP gross profit to GAAP gross profit, and non-GAAP gross margin to GAAP gross margin, is as follows:
Year ended December 31,
2022 2021
(dollars in thousands)
Gross Profit $ 177,972 $ 144,005
Add: Stock-based compensation included in cost of revenue 2,852 617
Non-GAAP gross profit $ 180,824 $ 144,622
Gross margin 82% 81%
Non-GAAP gross margin 83% 82%
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Non-GAAP Operating Loss and Non-GAAP Operating Margin
We define non-GAAP operating loss and non-GAAP operating margin as GAAP operating loss and GAAP operating margin, adjusted for stock-based compensation expense and acquisition-related costs.
A reconciliation of non-GAAP operating loss and non-GAAP operating margin to
GAAP operating loss and GAAP operating margin, the most directly comparable GAAP
measures, is as follows:
Year ended December 31,
2022 2021
(dollars in thousands)
Operating loss $ (66,556) $ (28,441)
Add: Stock-based compensation expense 32,760 10,666
Add: Acquisition-related costs 6,173 - Non-GAAP operating loss $ (27,623)$ (17,775) Operating margin (31 %) (16 %) Non-GAAP operating margin (13 %) (10 %) Adjusted EBITDA
We define Adjusted EBITDA as operating loss, adjusted for depreciation, stock-based compensation expense and acquisition-related costs.
A reconciliation of Adjusted EBITDA to operating loss, the most directly comparable GAAP measure, is as follows:
Year ended December 31,
2022 2021
(in thousands)
Operating loss $ (66,556) $ (28,441)
Add: Depreciation 1,064 1,061
Add: Stock-based compensation 32,760 10,666
Add: Acquisition-related costs 6,173 -
Adjusted EBITDA $ (26,559) $ (16,714)
Free Cash Flow
We define free cash flow as net cash used in operating activities less cash used for purchases of property and equipment.
A reconciliation of free cash flow to net cash used in operating activities, the most directly comparable GAAP measure, is as follows:
Year ended December 31,
2022 2021
(in thousands)
Net cash used in operating activities $ (45,006) $ (36,783)
Purchases of property and equipment (1,619) (1,113)
Free cash flow$ (46,625) $ (37,896) Net cash provided by (used in) investing activities$ 30,012 $ (244,446) Net cash provided by financing activities 15,899 310,512 Cash paid for interest 3,244 3,629 67
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Components of Results of Operations
Revenue
We derive revenue primarily from subscriptions and, to a lesser extent, professional services and perpetual licenses.
Subscriptions and Perpetual Licenses. Subscriptions and perpetual licenses revenue consist of the following:
Subscription Term Licenses. We sell subscriptions for our solutions that are self-managed by our customer within our customer's IT infrastructure or cloud infrastructure. These subscriptions include licenses and technical support and access to new software updates on a when-and-if available basis. We recognize the license portion, which is approximately half of the total contract value, upon the later of the delivery of the software and commencement of the subscription term. The remainder is recognized ratably over the subscription term as support & maintenance revenue. We typically invoice our customers annually in advance. Subscription SaaS, Support & Maintenance. We sell SaaS subscriptions for access to the ForgeRock Identity Cloud, our SaaS offering. We sell support and maintenance bundled with license in the self-managed software subscription offering, or as a standalone for the perpetual license support & maintenance renewal. For our SaaS offerings, we recognize revenue ratably over the period beginning on the latter of the commencement of the subscription term or the provisioning of the SaaS service, to the end of the subscription term. For support and maintenance, we recognize revenue ratably over the period beginning on the latter of the commencement of the subscription term or the delivery of the software to the end of the subscription term. Perpetual Licenses. We also sell perpetual licenses to our self-managed solutions. Revenue from our perpetual licenses is recognized when the software is delivered or made available to the customer. Perpetual license revenue decreased by$(1.2) million , or (70)%, in 2022 compared to 2021. In both 2022 and 2021, revenue from perpetual licenses represented less than 1% of our total revenue. This reflects a shift by our customers away from purchasing perpetual licenses in favor of subscription term licenses or SaaS subscriptions. We do not expect perpetual license revenue to be material in future periods. Subscriptions and perpetual licenses revenue represented approximately 95% and 97% of our total revenue in 2022 and 2021, respectively. We expect that substantially all our revenue will be generated from subscriptions for the foreseeable future. Our subscriptions revenue may fluctuate due to the timing and relative mix between revenue from subscription term licenses and subscription SaaS, support & maintenance. Over time, we expect a greater percentage of our subscriptions and perpetual licenses revenue will come from our ForgeRock Identity Cloud offering. This will have a negative impact on our near-term revenue growth as SaaS subscription revenue is recognized ratably. Professional Services. Professional services 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 or subscription related to the configuration and operation of our solutions. Our professional services are generally priced on a time and materials or fixed package basis and is generally invoiced upfront. Revenue from professional services is recognized as the service hours are used or milestones are achieved. Revenue from our training services is recognized on the date the services are completed. Revenue from training subscription is recognized ratably over the term of the subscription. Revenue from professional services represented 5% and 3% of our total revenue in 2022 and 2021, respectively. We expect our professional services revenue to increase in absolute dollars as our business continues to grow, but we do not expect professional services revenue to fluctuate significantly as a percentage of total revenue over time.
Overhead Allocation and Employee Compensation Costs
We allocate shared costs, such as facilities costs (including rent, utilities
and depreciation on assets shared by all departments) and certain information
technology costs to all departments based on headcount. As such, allocated
shared costs are reflected in each cost of revenue and operating expense
category. Employee compensation costs include salaries, bonuses, benefits and
stock-based compensation for each cost of revenue and operating expense
category, sales commissions for sales and marketing and any compensation related
taxes.
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Cost of Revenue
Subscriptions and Perpetual Licenses. Subscriptions and perpetual licenses cost of revenue consists of personnel costs, including salaries, bonuses, and benefits, as well as stock-based compensation, for employees associated with our subscription offerings and customer support, allocated overhead costs, and third-party costs, including cloud infrastructure costs and other expenses directly associated with our customer support. We expect our subscriptions and perpetual licenses cost of revenue to increase in absolute dollars to the extent our subscriptions revenue increases. As a percentage of revenue, we expect subscriptions and perpetual licenses cost of revenue to increase as a percentage of total revenue in the near term as we grow our SaaS subscription business, but to decrease as a percentage of our total revenue over the long-term as our SaaS subscription revenue grows. Professional Services. Professional services cost of revenue consists of personnel costs, including salaries, bonuses and benefits, as well as stock-based compensation, for employees associated with our professional services and training services, allocated overhead costs, and third-party costs, including other costs directly associated with our professional and training services. We expect our professional services cost of revenue to increase in absolute dollars as our business continues to grow. As a percentage of revenue, we expect professional services cost of revenue to fluctuate over time as we continue to invest in our growth. The cost of providing professional services has historically been higher than the associated revenue we generate, as we use professional services to help drive customer success and increased subscriptions and perpetual licenses revenue.
Gross Profit and Gross Margin
Gross profit (revenue less cost of revenue) and gross margin (gross profit as a percentage of total revenue) have been and will continue to be affected by various factors, including the timing of our acquisition of new customers and the renewal of and expansion of sales to existing customers, the mix between revenue from subscription term licenses and subscription SaaS, support & maintenance, the costs associated with operating our platform, the extent to which we expand our customer support team, and the extent to which we can increase the efficiency of our technology and infrastructure through technological improvements. We expect our gross profit to increase in absolute dollars as total revenue increases but our gross margin to decrease as we invest further in our cloud-based infrastructure to support our subscription SaaS offering. We expect subscriptions and perpetual licenses cost of revenue to increase consistently with the growth in our subscriptions and perpetual licenses revenue, although our gross margin could fluctuate from period-to-period.
Operating Expenses
Our operating expenses consist of research and development, sales and marketing,
and general and administrative expenses. Personnel costs are the most
significant component of operating expenses and consist of salaries, benefits,
bonuses, payroll taxes, stock-based compensation expense and, with regard to
sales and marketing expenses, sales commissions.
Research and Development. Research and development expenses primarily consist of
personnel costs, outside consultants, and overhead. We focus our research and
development efforts on developing new solutions, core technologies, and to
further enhance the functionality, reliability, performance and flexibility of
existing solutions. We expect our research and development expenses will
increase in absolute dollars as our business grows. However, we expect our
research and development expenses will decrease as a percentage of total revenue
over the long-term, although they may fluctuate as a percentage of total revenue
from period-to-period depending on the timing of expenses.
Sales and Marketing. Sales and marketing expenses primarily consist of personnel
costs, costs of general marketing and promotional activities, travel-related
expenses, and overhead. Certain sales commissions earned by our sales force on
subscription contracts are deferred and amortized over the period of benefit
which is generally four to five years. We expect to continue to invest in our
sales force domestically and internationally, as well as in our channel
relationships. We expect our sales and marketing expenses to increase in
absolute dollars and continue to be our largest operating expense category for
the foreseeable future. However, we expect our sales and marketing expenses will
decrease as a percentage of total revenue over the long-term, although they may
fluctuate as a percentage of total revenue from period-to-period depending on
the timing of expenses.
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General and Administrative. General and administrative expenses consist primarily of personnel costs associated with our executive, human resource, legal, facilities, accounting and finance, information security, and information technology departments. In addition, general and administrative expenses include third-party professional fees and overhead. We expect that our general and administrative expenses will increase in absolute dollars as our business grows. Our general and administrative expenses have increased as a result of, among other things, costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of theSEC , including regarding internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, and increased expenses for insurance, investor relations and professional services. However, we expect that our general and administrative expenses will decrease as a percentage of total revenue over the long-term, although they may fluctuate as a percentage of total revenue from period-to-period depending on the timing of expenses.
Acquisition-related costs. Acquisition-related costs primarily consist of legal
and professional service fees incurred as part of the Company's proposed
acquisition by
Interest and Other Income (Expense), Net
Interest Expense. Interest expense consists primarily of interest payments on our outstanding borrowings under our Credit Facilities as well as the amortization of associated deferred financing costs. See "Liquidity and Capital Resources" for additional information. Other Income (Expense), Net. Other income (expense), net primarily consists of gains and losses from foreign currency transactions denominated in a currency other than the functional currency, fair value changes on a preferred stock tranche option and warrants, and interest income. We expect our exposure to fluctuations in foreign currencies will increase as we continue to expand our business internationally. Provision for Income Taxes
Provision for income taxes consists primarily of income taxes related to
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Results of Operations
The following tables set forth our results of operations for the periods presented:
Year ended December 31,
2022 2021
(in thousands)
Revenue:
Subscription term licenses $ 87,292 $ 84,611
Subscription SaaS, support & maintenance 119,003 85,434
Perpetual licenses 515 1,695
Total subscriptions and perpetual licenses 206,810 171,740
Professional services 10,702 5,193
Total revenue 217,512 176,933
Cost of revenue:
Subscriptions and perpetual licenses 27,768 17,535
Professional services 11,772 15,393
Total cost of revenue 39,540 32,928
Gross profit 177,972 144,005
Operating expenses:
Research and development 61,837 43,497
Sales and marketing 118,794 88,620
General and administrative 57,724 40,329
Acquisition-related costs 6,173 -
Total operating expenses 244,528 172,446
Operating loss (66,556) (28,441)
Foreign currency gain (loss) 2,568 (3,819)
Fair value adjustment on warrants and preferred stock tranche option
- (10,068)
Interest expense (3,577) (4,516)
Other income (expense), net 2,971 (40)
Interest and other expense, net 1,962 (18,443)
Loss before income taxes (64,594) (46,884)
Provision for income taxes 1,678 884
Net loss $ (66,272) $ (47,768) (1) Includes stock-based compensation expense as follows:
Year ended December 31,
2022 2021
(in thousands)
Cost of revenue $ 2,852 $ 617
Research and development 6,738 1,924
Sales and marketing 12,044 3,495
General and administrative 11,126 4,630
Total stock-based compensation $ 32,760 $ 10,666
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The following table sets forth our results of operations for the periods
presented as a percentage of our total revenue:
Year ended December 31,
2022 2021
Revenue:
Subscription term licenses 40% 48% Subscription SaaS, support & maintenance 55% 48% Perpetual licenses 0% 1% Total subscriptions and perpetual licenses 95% 97% Professional services 5% 3% Total revenue 100% 100% Cost of revenue: Subscriptions and perpetual licenses 13% 10% Professional services 5% 9% Total cost of revenue 18% 19% Gross profit 82% 81% Operating expenses: Research and development 28% 25% Sales and marketing 55% 50% General and administrative 27% 23% Acquisition-related costs 3% -% Total operating expenses 113% 98% Operating loss (31)% (17)% Foreign currency gain (loss) 1% (2)%
Fair value adjustment on warrants and preferred stock tranche option
-% (6)%
Interest expense (2)% (3)%
Other income (expense), net 1% 0%
Interest and other expense, net 0% (11)%
Loss before income taxes (31)% (28)%
Provision for income taxes 1% 0%
Net loss (32)% (28)%
Comparison of the Years Ended December 31, 2022 and 2021
Revenue Year ended December 31, Change
2022 2021 Amount Percent
(dollars in thousands)
Revenue:
Subscription term licenses $ 87,292 $ 84,611 $ 2,681 3%
Subscription SaaS, support & maintenance 119,003 85,434 33,569 39%
Perpetual licenses 515 1,695 (1,180) (70)%
Total subscriptions and perpetual licenses 206,810 171,740 35,070 20%
Professional services 10,702 5,193 5,509 106%
Total revenue $ 217,512 $ 176,933 $ 40,579 23%
Total revenue increased by
Subscriptions and perpetual licenses revenue increased by$35.1 million , or 20%, in 2022 compared to 2021. Subscription term licenses revenue increased by$2.7 million , or 3%, in 2022 compared to 2021. Subscription SaaS, support & maintenance revenue increased by$33.6 million , or 39%, in 2022 compared to 2021. The increases in subscription term licenses and subscription SaaS, support & maintenance revenue were driven by the addition of new customers as well as an increase in identities, use cases, product modules, and deployments from existing customers. SaaS, support and maintenance revenue increased due to the steady growth of the installment base, as well as the increased adoption of our SaaS offerings. 72
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Professional services revenue increased by
Cost of Revenue, Gross Profit and Gross
Margin Year ended December 31, Change
2022 2021 Amount Percent
(dollars in thousands)
Cost of revenue:
Subscriptions and perpetual licenses $ 27,768 $ 17,535 $ 10,233 58%
Professional services 11,772 15,393 (3,621) (24)%
Total cost of revenue $ 39,540 $ 32,928 $ 6,612 20%
Gross margin:
Subscriptions and perpetual licenses 87% 90%
Professional services (10)% (196)%
Total gross margin 82% 81%
Cost of revenue increased by $6.6 million , or 20%, in 2022 compared to 2021.
Subscriptions and perpetual licenses cost of revenue increased by $10.2 million ,
or 58% in 2022 compared to 2021, primarily due to a 22% increase in headcount
and related personnel costs, which includes $1.7 million of stock-based
compensation expense. The increase in headcount supports the growth of our
offerings, ongoing maintenance for our expanding customer base and our
investment in cloud infrastructure costs for our ForgeRock Identity Cloud
offering. An increase in Google Cloud expenses of $2.4 million is driven by an
increase in the number of customers using the Company's SaaS offering on
Google 's platform. Professional services cost of revenue decreased by $3.6
million , or 24%, in 2022 compared to 2021, primarily due to a decrease of
$1.3 million in payroll costs for certain employees whose nature of work has
evolved from directly supporting customers to now being directly aligned with
our Sales & Marketing efforts around customer renewals and churn mitigation.
Gross margin for subscriptions and perpetual licenses was 87% compared to 90% in
2022 and 2021, respectively. The decrease in gross margin for subscriptions and
perpetual licenses was due to investments to support the anticipated growth in
new customers. While our gross margins for subscription and perpetual licenses
revenue may fluctuate in the near-term as we invest in our growth, we expect our
subscription revenue gross margin to stabilize over the long-term as we achieve
additional economies of scale. Gross margin for professional services increased
to (10)% in 2022 from (196)% in 2021. The improvement in gross margin for
professional services was primarily due to an increase in revenue from
professional services delivery.
Operating expenses Year ended December 31, Change
2022 2021 Amount Percent
(dollars in thousands)
Operating expenses:
Research and development $ 61,837 $ 43,497 $ 18,340 42%
Sales and marketing 118,794 88,620 30,174 34%
General and administrative 57,724 40,329 17,395 43%
Acquisition-related costs 6,173 - 6,173 100%
Total operating expenses $ 244,528 $ 172,446 $ 72,082 42%
Research and development. Research and development expenses increased $18.3
million , or 42%, in 2022 compared to 2021. The increase was primarily due to an
increase of $12.0 million in personnel costs related to higher headcount to
support our continued research and development efforts in enhancing our
offerings, including $4.8 million in stock-based compensation expense. Other
increases include a $2.6 million increase in IT outsourcing costs related to our
cloud strategy and a $2.1 million increase in professional fees.
Sales and marketing. Sales and marketing expenses increased $30.2 million , or
34%, in 2022 compared to 2021. The increase was primarily due to an increase of
$21.8 million in personnel costs, including $8.5 million in stock-based
compensation expense related to the expansion of our sales force and our
marketing department. Additionally, there was also a $1.9 million increase in
marketing costs as we increase awareness campaigns. Moreover, there was a
$3.7 million increase in travel-related expenses due to the easing of COVID-19
pandemic travel restrictions.
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General and administrative. General and administrative expenses increased$17.4 million , or 43%, in 2022 compared to 2021. The increase was primarily due to an increase of$10.0 million in personnel costs, including$6.5 million in stock-based compensation expense due to a higher headcount. There was also a$6.3 million increase in third-party professional fees, insurance and related costs of becoming a public company. Acquisition-related costs. Acquisition-related costs increased by$6.2 million in 2022 compared to 2021. The increase was related to accruals of professional service and legal fees related to the proposed acquisition of the Company byThoma Bravo . Interest and other expense, net Year ended December 31, Change 2022 2021 Amount Percent (dollars in thousands) Interest and other expense, net: Foreign currency (loss) gain$ 2,568 $ (3,819) $ 6,387 (167)% Fair value adjustment on warrants and preferred stock tranche option - (10,068) 10,068 (100)% Interest expense (3,577) (4,516) 939 (21)% Other, net 2,971 (40) 3,011 (7528)%
Total interest and other expense, net
(111)%
Interest and other expense, net, decreased
We recorded a net foreign currency gain of$2.6 million in 2022 compared to a net foreign currency loss of$3.8 million in 2021, primarily due to fluctuations in foreign currency remeasurement on intercompany balances denominated in Norwegian krone, Euros and the British pound. On September, 30, 2021, we reclassified certain intercompany balances considered long-term in nature. Accordingly, foreign currency remeasurement gains and losses related to these balances are being reported in the accumulated other comprehensive income in stockholders' equity (deficit) on the consolidated balance sheet effectiveOctober 1, 2021 . In 2022, we did not record a fair value mark-to-market adjustment, compared to an adjustment of$(10.1) million in 2021 relating to a preferred stock tranche option to purchase Series E-1 preferred shares held by one of our Series E preferred stock investors totaling$4.2 million and certain outstanding warrants of$5.9 million . The option was exercised inApril 2021 and certain warrants were exercised inSeptember 2021 .
Interest expense decreased by
Other, net increased by$3.0 million primarily due to an increase in interest income from higher average investment balances due to the proceeds from the IPO and higher returns on investments as a result of rising interest rates.
Provision For Income Taxes
In 2022, we recorded a provision for income taxes of$1.7 million and$0.9 million in 2022 and 2021, respectively. In 2022 and 2021, the federal statutory income tax rate of 21% differs from the effective tax rate primarily due to the valuation allowance against related deferred taxes. Our valuation allowance was$91.3 million and$65.4 million as ofDecember 31, 2022 and 2021, respectively. 74
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Liquidity and Capital Resources
As ofDecember 31, 2022 , our principal sources of liquidity were cash, cash equivalents and short-term investments of$336.1 million , which were held for working capital purposes. InSeptember 2021 andApril 2021 , we received$295.7 million and$20.0 million , respectively, of net cash proceeds from the IPO and exercise of a preferred stock tranche option that was exercised by one of our investors. Our cash equivalents were comprised primarily of money market funds and our short-term investments were comprised of marketable securities. We have generated significant operating losses and negative cash flows from operations as reflected in our accumulated deficit and consolidated statements of cash flows. We expect to continue to incur operating losses and negative cash flows from operations for the foreseeable future. InSeptember 2021 , we executed an amendment to theAmended Restated Plain English Growth Capital Loan and Security Agreement with TriplePoint Venture Growth BDC Corp. andTriplePoint Capital LLC , or the amended "A&R Loan Agreement". The amended A&R Loan Agreement became effective once the registration statement in connection with the initial public offering was declared effective onSeptember 16, 2021 . The key provisions of the amendment include: (1) a covenant requiring the maintenance of a$20.0 million cash balance, (2) change in the interest rate for outstanding term loan to be eight percent (8.00%) per annum on the existing loans, (3) extension of the maturity dates by twenty-four months, (4) change in the prepayment penalties and (5) and a change in the prepayment premium. The principal will be due at the end of the term of the respective advance. As ofDecember 31, 2022 , the balance outstanding under our term loan facility was$40.0 million and is included in long-term debt on our consolidated balance sheet, with the first principal repayment of$30.0 million due in 2025. We believe our existing cash, cash equivalents, short-term investments and cash provided by sales of our products and services will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months following the date of this report. We use our cash for a variety of needs, including but not limited to ongoing investments in our business, strategic acquisitions, capital expenditures, investment in our infrastructure, including non-cancellable purchase commitments, and debt repayment obligations. Our future capital requirements will depend on many factors, including our licenses growth rate, licenses renewal activity, billing frequency, the timing and extent of spending required to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced product offerings, the continuing market adoption of our platform and further investment in general and administrative functions to meet the compliance requirements of being a public company. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies this could reduce our ability to compete successfully and harm our business, financial condition, and results of operations. All of our obligations under our term loan facility are guaranteed byForgeRock US, Inc. andForgeRock Limited and, subject to certain exceptions, secured by a security interest in substantially all of our assets, excluding intellectual property, which is subject to a negative pledge. A significant majority of our customers pay in advance for their subscriptions. Therefore, a substantial source of our cash is from our deferred revenue, which is included on our consolidated balance sheet as a liability. Deferred revenue consists of the unearned portion of billed fees for our subscriptions, which is recognized as revenue in accordance with our revenue recognition policy. As ofDecember 31, 2022 , we had deferred revenue of$83.3 million , of which$82.0 million is recorded as a current liability and is expected to be recorded as revenue in the next 12 months, provided all other revenue recognition criteria have been met. In the ordinary course of business, the Company enters into various purchase commitments primarily related to third-party cloud hosting and data services, information technology operations and marketing events. Total noncancelable purchase commitments as ofDecember 31, 2022 were approximately$50.9 million throughDecember 31, 2024 of which$25.9 million are due in the year endingDecember 31, 2023 . 75
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Merger Agreement
OnOctober 10, 2022 , we entered into the Merger Agreement. We have agreed to various representations, warranties, covenants and agreements, including, among others, agreements to conduct our business in the ordinary course during the period between the execution of the Merger Agreement and the effective time of the Merger. If the Merger Agreement is terminated in certain circumstances, including by us in order to enter into a superior proposal or by Parent because the Board withdraws its recommendation in favor of the Merger, we would be required to pay Parent a termination fee of$60.0 million . In addition, without the consent of Parent, we may not take, authorize, agree or commit to do certain actions outside of the ordinary course of business, including incurring material capital expenditures above specified thresholds, or issuing additional debt. We do not believe that the restrictions in the Merger Agreement will prevent us from meeting our debt obligations, ongoing costs of operations, working capital needs or capital expenditure requirements.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Year ended December 31,
2022 2021
(in thousands)
Cash used in operating activities $ (45,006) $ (36,783)
Cash used provided by (used in) investing activities 30,012 (244,446)
Cash provided by financing activities 15,899 310,512
Effects of changes in foreign currency exchange rates on cash and cash equivalents
1,982 (888)
Net increase in cash, cash equivalents and restricted cash
$ 28,395 Operating activities Our largest source of operating cash is cash collections from our customers for subscription, support and maintenance services. Our primary uses of cash from operating activities are for employee-related expenditures, research, development, marketing expenses and third-party hosting costs. Historically, we have generated negative cash flows from operating activities and have supplemented working capital requirements through net proceeds from the sale of equity securities and term loans. During the twelve months endedDecember 31, 2022 cash used in operating activities was$(45.0) million primarily due to our net loss of$(66.3) million and net cash outflows of$(28.5) million used in our operating assets and liabilities. Non-cash charges primarily consisted of amortization of deferred commissions of$15.2 million driven by the timing of revenue recognition, and stock-based compensation of$32.8 million . The primary drivers of the changes in operating assets and liabilities related to a change in deferred commissions of$(21.5) million driven by the timing of commission payments, a$(5.1) million change in contract and other non-current assets due to the issuance of invoices and timing of revenue recognition, a$(13.4) million change in accounts receivable, a$7.4 million change in accrued expenses and other liabilities due to the timing of cash disbursements and a$5.6 million change in deferred revenue. During the twelve months endedDecember 31, 2021 cash used in operating activities was$(36.8) million primarily due to our net loss of$(47.8) million and net cash outflows of$(31.3) million used in our operating assets and liabilities. Non-cash charges primarily consisted of amortization of deferred commissions of$14.0 million driven by the timing of revenue recognition, and stock-based compensation of$10.7 million . The primary drivers of the changes in operating assets and liabilities related to a change in deferred commissions of$(23.3) million driven by the timing of commission payments, a$(10.5) million change in contract and other non-current assets due to the issuance of invoices and timing of revenue recognition, a$(20.7) million change in accounts receivable, a$10.9 million change in accrued expenses and other liabilities due to the timing of cash disbursements and a$20.0 million change in deferred revenue. 76
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Investing activities
Net cash provided by investing activities during the twelve months endedDecember 31, 2022 of$30.0 million was primarily attributable to maturities of short-term investments of$158.6 million and sales of short-term investments of$39.4 million and partially offset by purchases of short-term investments of$166.4 million and purchases of property and equipment of$1.6 million . Net cash used in investing activities during the twelve months endedDecember 31, 2021 of$(244.4) million was primarily attributable to purchases of short-term investments of$277.1 million , purchases of property and equipment of$1.1 million , and partially offset by maturities of short-term investments of$31.9 million . Financing activities Cash provided by financing activities during the twelve months endedDecember 31, 2022 was$15.9 million primarily as a result of proceeds from the exercise of employee stock options of$12.2 million and employee stock plan purchases of$7.0 million , partially offset by$3.2 million employee payroll taxes paid for net shares settlement of restricted stock units. Cash provided by financing activities during the twelve months endedDecember 31, 2021 was$310.5 million primarily as a result of proceeds consisting of$295.7 million of aggregate net proceeds from our IPO, net of underwriting discounts and commissions and offering costs paid, the issuance of Series E-1 convertible preferred stock of$20.0 million and proceeds from the exercise of employee stock options of$4.9 million partially offset by$3.9 million employee payroll taxes paid for net shares settlement of restricted stock units on IPO and$6.0 million paid for offering costs.
JOBS Act Accounting Election
The JOBS Act permits an emerging growth company to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. OnJune 30, 2022 , the last day of the Company's second fiscal quarter in 2022, the market value of the Company's common stock held by non-affiliates exceeded$700 million . Accordingly, the Company was deemed a large accelerated filer as ofDecember 31, 2022 and can no longer take advantage of the extended timeline to comply with new or revised accounting standards applicable to public companies beginning with this Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions, impacting our reported results of operations and financial condition. Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of assets and liabilities and the recognition of income and expenses. Management considers these accounting policies to be critical accounting policies. The estimates and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results are described below. Refer to "Note 2 - Summary of Significant Accounting Policies" to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for more detailed information regarding our significant accounting policies.
Revenue Recognition
We recognize revenue under ASC 606. In accordance with ASC 606, revenue is
recognized when promised goods or services are transferred to a customer. The
amount of revenue recognized reflects the consideration that we expected to be
entitled to receive in exchange for these goods or services. We recognize
revenue from contracts with customers using the five-step method described in
Note 2 of the notes to our consolidated financial statements, included in Part
II, Item 8 of this Annual Report on Form 10-K for more detailed information
regarding our significant accounting policies.
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We recognize revenue when we satisfy a performance obligation by transferring control of our product or service to a customer. We identify performance obligations in a contract based on the goods and services that will be transferred to the customer. Those goods or services must (i) be capable of being distinct, so the customer can benefit from a good or service either on its own or together with readily available resources (either from third parties or from us) and (ii) be distinct in the context of the contract, where the transfer of control is separately identifiable from other promises in the contract. Our performance obligations are and can include the following deliverables: licenses, SaaS, support & maintenance, and professional services. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price, or SSP. The SSP is determined based on the prices at which we separately sell our products and services, assuming the majority of these separate transactions fall within a pricing range. In instances where SSP is not directly observable, such as when we do not sell the subscription license or the maintenance and support separately, we determine the SSP using information that may include market conditions and other observable inputs that can require significant judgment. We have determined that our pricing for subscription term licenses and SaaS is highly variable and therefore allocates the transaction price to those performance obligations using the residual approach. Estimates of SSP could change over time based on changes in our pricing practices or other factors. The evaluation is made annually with any changes made prospectively by maximizing all observable inputs. Revenue from our subscription term licenses is recognized when the software is delivered or made available to the customer. Subscription SaaS, support & maintenance revenue is recognized over the contract term as services are delivered. The changes in our pricing or the market conditions considered in determining SSP of our performance obligations between point-in-time license and over-time maintenance performance obligations could affect the timing and amount of revenue recognized.
Deferred Revenue and Sales Commissions
Deferred revenue consists of customer billings in advance of revenue being recognized. Amounts anticipated to be recognized within one year of the balance sheet date are recorded as deferred revenue, current; the remaining portion is recorded as deferred revenue, noncurrent in the consolidated balance sheets. Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for new revenue contracts and additional sales to existing customers are deferred and recorded in deferred commissions, current and noncurrent in the consolidated balance sheets. Deferred commissions are amortized consistent with the pattern of revenue recognition for each performance obligation for contracts for which the commissions paid were earned. Commissions paid for the ratable performance obligation in the initial acquisition of a contract are amortized over the estimated period of benefit.
We had total deferred commissions on our balance sheet of
Stock-based Compensation
We account for the measurement and recognition of stock-based compensation
expense in accordance with the provisions of ASC 718, Compensation-Stock
Compensation, or ASC 718. ASC 718 requires compensation expense for all
stock-based compensation awards made to employees, nonemployees and directors to
be measured and recognized based on the grant date fair value of the awards. We
recognize forfeitures as they occur.
Stock-based compensation expense for service-based awards is determined based on
the grant-date fair value and is recognized on a straight-line basis over the
requisite service period of the award, which is typically the vesting term of
the award. Stock-based compensation expense for awards subject to performance
conditions are determined based on the grant-date fair value and is recognized
on a graded vesting basis over the term of the award once it is probable that
the performance conditions will be met.
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Following the IPO, the Company grants equity awards to employees under the 2021 Equity Incentive Plan four times each year, onFebruary 20th ,May 20th ,August 20th andNovember 20th , or prior business day. The restricted stock units granted in 2022 translates to an added stock-based compensation expense of approximately$96.3 million to be recognized over four years. In future periods, we expect our stock-based compensation expense to increase as a result of our existing, unrecognized stock-based compensation that will be recognized as the awards vest, and as we grant additional stock-based awards to attract and retain employees. Stock Options The fair value of each time-based option grant is estimated on the date of the grant using the Black-Scholes option pricing model. The model requires certain subjective assumptions as inputs, including the following: 1.Volatility: Since our common stock did not have a trading history, expected volatility was estimated based on the average of the historical volatilities of the common stock of publicly-traded entities in our peer group within our industry and with characteristics similar to us. 2.Fair value of common stock: Prior to our IPO inSeptember 2021 when our common stock was not yet publicly traded, we estimated the fair value of our common stock. Our board of directors considered numerous objective and subjective factors to determine the fair value of our common stock at each meeting in which awards were approved. After the IPO, we use the market closing price of our Class A common stock on the date of grant for the fair value to be used in the Black-Scholes pricing model. After our IPO and as we continue to accumulate additional data related to our common stock, we may refine our estimates of expected volatility which could materially impact our future stock-based compensation expense. As we continue to accumulate additional data related to our Class A common stock, we may have refinements to the estimates of our expected volatility and expected terms, which could materially impact our future stock-based compensation expense.
Restricted Stock Units
The fair value of RSUs is estimated based on the fair value of our common stock on the date of grant. Prior to our IPO we issued 240,000 and 111,111 RSUs in 2016 and 2018, respectively. The fair value of the RSUs that are subject to vesting is recognized as a compensation expense over the requisite service or performance period, using the accelerated attribution method, once the liquidity event-related vesting condition becomes probable of being achieved. Our RSUs vest upon the satisfaction of (i) either a performance-based vesting condition or a service-based vesting condition and/or a (ii) liquidity event-related vesting condition. The service-based vesting condition is satisfied by the award holder providing services to us over a specific period. For some of our RSUs awards, the performance-based vesting condition is satisfied by our achievement of certain contracted ARR targets. On IPO we recorded a cumulative stock-based compensation expense of$0.9 million for those RSUs for which the performance-based and service-based vesting conditions had been satisfied. After the IPO, we primarily grant RSUs to our employees and it is our practice to convey the grant in the form of a dollar value to the employee. To translate that dollar value to quantity of shares granted, we use the 30 day average market closing price of our Class A common stock ending on the date of grant to calculate the quantity of RSUs to be awarded. The RSU quantity granted is then multiplied by the grant date closing price of our Class A common stock to estimate the fair value. Stock-based compensation expense for the service-based awards is determined based on the grant-date fair value and is recognized on a straight-line basis over the requisite service period of the award, which is typically the vesting term of the award.
Employee Stock Purchase Plan
The purchase rights issued under our 2021 Employee Stock Purchase Plan (the "2021 ESPP") were based on the fair value of the awards on the date of grant. We used the market closing price of our Class A common stock on the date of grant for the fair value to be used in the Black-Scholes pricing model. This cost was recognized as an expense following the straight-line attribution method over the offering period for the purchase rights issued under the 2021 ESPP. The Company used the Black-Scholes option pricing model to measure the fair value of the purchase rights issued under the 2021 ESPP.
As per the Agreement and Plan of Merger (the "Merger Agreement") entered on
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Accounting for Income Taxes
Deferred tax assets and liabilities are recognized based on the future tax
consequences attributable to temporary differences that exist between the
financial statement carrying value of assets and liabilities and their
respective tax bases, and tax attributes such as net operating losses and tax
credit carryforwards on a taxing jurisdiction basis. We measure deferred tax
assets and liabilities using enacted tax rates that will apply in the years in
which we expect the temporary differences to be recovered or settled. The
accounting standard for income taxes requires a reduction of the carrying
amounts of deferred tax assets by recording a valuation allowance if, based on
the available evidence, it is more likely than not (defined by the accounting
standard as a likelihood of more than 50%) that such assets will not be
realized.
A tax benefit from an uncertain income tax position may be recognized in the
financial statements only if it is more likely than not that the position is
sustainable, based solely on its technical merits and consideration of the
relevant taxing authorities' widely understood administrative practices and
precedents. We recognize interest and penalties related to unrecognized tax
benefits within income tax expense (benefit) in the consolidated statements of
operations.
The valuation of deferred tax assets requires judgment in assessing the likely
future tax consequences of events that have been recognized in our financial
statements or tax returns. Our accounting for deferred tax consequences
represents our best estimate of those future tax consequences. In assessing the
need for a valuation allowance, we consider both positive and negative evidence
related to the likelihood of realization of the deferred tax assets. If, based
on the weight of that available evidence, it is more likely than not the
deferred tax assets will not be realized, we record a valuation allowance. The
weight given to the positive and negative evidence is commensurate with the
extent to which the evidence may be objectively verified. This assessment, which
is completed on a taxing jurisdiction basis, takes into account a number of
types of evidence, including the following: 1) the nature, frequency and
severity of current and cumulative financial reporting losses, 2) sources of
future taxable income, 3) taxable income in prior carryback years, if carryback
is permitted under the tax law and 4) tax planning strategies.
The calculation of our tax liabilities involves assessing uncertainties in the
application of complex tax regulations in multiple tax jurisdictions. We may be
periodically reviewed by domestic and foreign tax authorities regarding the
amount of taxes due. These reviews may include questions regarding the timing
and amount of deductions and the allocation of income among the various tax
jurisdictions that we operate within. In evaluating the exposure associated with
various filing positions, we record estimated reserves when it is
more-likely-than-not that an uncertain tax position will not be sustained upon
examination by a taxing authority.
In assessing the tax benefit from an uncertain income tax position, the tax
position that meets the more-likely-than not recognition threshold is initially
and subsequently measured as the largest amount of tax benefit that is greater
than a 50% likelihood of being realized upon ultimate settlement with a taxing
authority that has full knowledge of all relevant information. In the past, we
have estimated the value of certain intercompany transactions using a discounted
cash flow approach. Significant assumptions used to estimate the fair market
value include projected revenue growth and projected operating margins.
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Given our common stock was not yet publicly traded, our board of directors established the fair value of the shares of common stock underlying our stock options. These estimates were based in part upon valuations provided by third-party valuation firms.
As there was no public market for our common stock, our board of directors exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of our common stock in accordance with theAmerican Institute of Certified Public Accountants Practice Guide , Valuation of Privately-Held Company Equity Securities Issued as Compensation, or the AICPA Guide. The factors considered by our board of directors in estimating the fair value of our common stock included the following:
•contemporaneous valuations performed regularly by unrelated third-party specialists;
•rights, preferences, and privileges of our redeemable convertible preferred stock relative to those of our common stock;
•our historical operating and financial performance;
•relevant precedent transactions involving our capital stock;
•likelihood of achieving a liquidity event, such as the consummation of an initial public offering or the sale of our company given prevailing market conditions and the nature and history of our business;
•forecasted exit prices assuming IPO event;
•market multiples of comparable companies in our industry;
•stage of development;
•industry information such as market size and growth;
•the lack of marketability of our securities because we are a private company; and
•general macroeconomic conditions.
In valuing our common stock, our board of directors determined the value using
both the income and the market approach valuation methods. The income approach
estimates value based on the expectation of future cash flows that a company
will generate. These future cash flows are discounted to their present values
using a discount rate based on our weighted average cost of capital ("WACC"). To
derive our WACC, a cost of equity was developed using the Capital Asset Pricing
Model and comparable company betas, and a cost of debt was determined based on
our estimated cost of borrowing. The costs of debt and equity were then weighted
based on our actual capital structure. The market approach estimates value based
on a comparison of our company to comparable public companies in a similar line
of business. From the comparable companies, a representative market multiple was
determined and subsequently applied to our financial results to estimate our
enterprise value.
Application of these approaches involved the use of estimates, judgments, and
assumptions that are highly complex and subjective, including those regarding
our future expected revenue, expenses, cash flows, discount rates, market
multiples, the selection of comparable public companies and the probability of
future events. Changes in any or all of these estimates and assumptions impacted
our valuations at each valuation date and could have had a material impact on
the valuation of our common stock.
Prior to May 2020 , the equity valuation was based on both the income and the
market approach valuation methods and the Option Pricing Method, or OPM, was
selected as the principal equity allocation method. Both these methods were
consistent with prior valuations. For options granted starting after December
15, 2020 , we have used a hybrid method to determine the fair value of our common
stock. Under the hybrid method, multiple valuation approaches were used and then
combined into a single probability weighted valuation. Our approaches included
the use of initial public offering scenarios and a scenario assuming continued
operations as a private entity.
Application of these approaches involved the use of estimates, judgment and
assumptions that are highly complex and subjective, such as those regarding our
expected future revenue, expenses and future cash flows, discount rates, market
multiples, the selection of comparable companies and the probability of possible
future events. Changes in any or all of these estimates and assumptions or the
relationships between those assumptions could have impacted our valuations as of
each valuation date and may have a material impact on the valuation of our
common stock, warrants and preferred stock tranche option.
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Post IPO
Following our IPO, we used the publicly quoted price as the fair value of our Class A common stock.
Recent Accounting Pronouncements
For a description of our recently adopted accounting pronouncements and recently issued accounting standards not yet adopted, see "Note 2 - Summary of Significant Accounting Policies - Recent Accounting Pronouncements" to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
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