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As filed with the Securities and Exchange Commission on April 29, 2022

Registration No. 333-253626

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 8

to the

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Intermedia Cloud Communications, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   7372   37-1837321
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)

100 Mathilda Place, Suite 600

Sunnyvale, CA 94086

Telephone: (650) 641-4000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Michael J. Gold

President and Chief Executive Officer

100 Mathilda Place, Suite 600

Sunnyvale, CA 94086

Telephone: (650) 641-4000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

Copies of all communications, including communications sent to agent for service, should be sent to:
Robert M. Hayward, P.C.
Alexander M. Schwartz
Kirkland & Ellis LLP
300 North LaSalle
Chicago, IL 60654
(312) 862-2000
  Rezwan Pavri
Allison Spinner
Jeana S. Kim
Wilson Sonsini Goodrich & Rosati P.C.
650 Page Mill Road
Palo Alto, CA 94304-1050
(650) 493-9300

Approximate date of commencement of proposed sale to the public:

As soon as practicable after this Registration Statement becomes effective.

 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. Neither we nor the Selling Shareholder may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and neither we, nor the Selling Shareholder, are soliciting offers to buy these securities in any jurisdiction where the offer and sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued April 29, 2022

                Shares

 

LOGO

COMMON STOCK

 

 

Intermedia Cloud Communications, Inc. is offering                  shares of our common stock, and Ivy Parent Holdings, LLC (the “Selling Shareholder”) is offering                  shares of our common stock. We will not receive any proceeds from the sale of shares by the Selling Shareholder. This is our initial public offering, and no public market currently exists for shares of our common stock. We anticipate that the initial public offering price will be between $         and $         per share.

 

 

Immediately after this offering, assuming an offering size as set forth above, funds controlled by our equity sponsor, Madison Dearborn Partners, LLC, will beneficially own approximately    % of our outstanding common stock (or     % of our outstanding common stock if the underwriters’ option to purchase additional shares from the Selling Shareholder is exercised in full). As a result, we expect to be a “controlled company” within the meaning of the corporate governance standards of the NASDAQ Global Select Market (“Nasdaq”). See “Management—Corporate Governance—Controlled Company Status.”

 

 

We have applied to list our common stock on Nasdaq under the symbol “INTM.”

 

 

We are an “emerging growth company” as defined under the federal securities laws, and as such, we have elected to comply with certain reduced reporting requirements for this prospectus and may elect to do so in future filings. Investing in our common stock involves risks. See “Risk Factors” beginning on page 21.

 

 

PRICE $            A SHARE

 

 

 

     Price
to
Public
     Underwriting
Discounts and
Commissions(1)
     Proceeds to
Intermedia
     Proceeds to
the Selling
Shareholder
 

Per Share

   $                $                $                $            

Total

   $        $        $        $    

 

(1)

See the section titled “Underwriters” for a description of compensation payable to the underwriters.

At our request, the underwriters have reserved up to 5% of the shares of common stock offered by this prospectus for sale, at the initial public offering price, for sale to certain individuals through a directed share program. See “Underwriters—Directed Share Program.”

In addition, NEC Corporation has indicated its intent to purchase $40.0 million in shares of our common stock at the initial public offering price per share in a private placement that would be expected to close concurrently with, and would be conditioned upon consummation of, this offering. Any shares sold in the concurrent private placement will constitute restricted securities under the Securities Act of 1933, as amended. If the concurrent private placement is consummated, Morgan Stanley & Co. LLC would serve as placement agent for the private placement and would receive a placement agent fee that is based upon a percentage of the total purchase price of the private placement shares. The closing of this offering is not conditioned upon the closing of the concurrent private placement.

We have granted the underwriters the right to purchase up to an additional                  shares of our common stock from the Selling Shareholder at the initial public offering price less the underwriting discount.

The Securities and Exchange Commission and state regulators have not approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock to purchasers on or about         , 2022.

 

 

 

MORGAN STANLEY   J.P. MORGAN

 

CREDIT SUISSE   EVERCORE ISI   JEFFERIES

 

WILLIAM BLAIR   KEYBANC CAPITAL MARKETS   TD SECURITIES     LOOP CAPITAL MARKETS  

                    , 2022


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LOGO

Fully Integrated Experience PC and Mac Platforms, iPhone, and Android Devices 1 Phone with caller ID, hold, park, flip, transfer, conference & more 2 Group chat 3 Video conferencing 4 File sharing & Collaboration 5 Call history 6 Transcribed voicemails 7 Contact Center 8 Receptionist view 9 Presence 10 Start meetings, place calls, search in chat, add participants to any chat 11 HD-quality video conferencing, screen sharing, recording & transcription, annotation, notes & AI virtual assistant 12 Integrated company directory


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Neither we nor the Selling Shareholder nor any of the underwriters have authorized anyone to provide any information or make any representations other than those contained in this prospectus or in any free writing prospectus filed with the Securities and Exchange Commission, or the SEC. Neither we, the Selling Shareholder, nor any of the underwriters take any responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the Selling Shareholder are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock. Our business, financial condition, results of operations, and prospects may have changed since such date.

Through and including                 , 2022 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

For investors outside of the United States, neither we nor the Selling Shareholder nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about, and to observe any restrictions relating to, this offering and the distribution of this prospectus outside of the United States.


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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in our common stock. For a more complete understanding of us and this offering, you should read and carefully consider the entire prospectus, including the more detailed information set forth under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes. Some of the statements in this prospectus are forward-looking statements. See “Forward-Looking Statements.”

Unless the context otherwise requires, the terms “Intermedia,” the “Company,” “our company,” “we,” “us” and “our” in this prospectus refer to Intermedia Cloud Communications, Inc. and, where appropriate, its consolidated subsidiaries. The terms “MDP” and “our Sponsor” refer to Madison Dearborn Partners, LLC, our equity sponsor, and the term “MDP Funds” refers to Madison Dearborn Capital Partners VII-A, L.P., Madison Dearborn Capital Partners VII-C, L.P. and Madison Dearborn Capital Partners VII Executive-A, L.P.

Our Mission

Our mission is to empower our partners to provide businesses a unified and seamless communications and collaboration platform that enables employees to work better from anywhere.

Overview

We provide a leading, proprietary cloud-based communications and collaboration platform, purpose-built for our extensive and expanding network of more than 7,200 channel partners and used by a growing base of over 126,000 business customers as of December 31, 2021. Through our platform, our partners provide their customers our comprehensive portfolio of enterprise-grade, seamlessly integrated Unified Communications-as-a-Service (UCaaS) solutions, including our flagship product Intermedia Unite®, as well as a suite of Business Cloud Applications (BCA) that includes cloud-based email, security and productivity applications. Our UCaaS solutions benefit from strong growth, with UCaaS annualized recurring revenue (ARR) growing at 31.9% over the 12-month period ended December 31, 2021, as our partners enable businesses to modernize their legacy communications architectures. Our broad solution portfolio is popular among our partners, with partners selling both UCaaS and BCA solutions (Combo Partners) generating 78% of our Partner UCaaS ARR as of December 31, 2021. Our BCA solutions are synergistic to the growth of our UCaaS solutions, especially in light of our partner-focused go-to-market model, as we continue to migrate our large base of BCA partners to start selling UCaaS solutions and as our partners cross-sell UCaaS solutions to their BCA customers. To incentivize and empower our partners to grow their businesses on our platform, we offer them a highly differentiated Customer Ownership Reseller model, branded CORE. This model enables them to resell, package and manage our solutions as if they were their own, at highly attractive economic terms while maintaining ownership of their customer relationships. We further differentiate from our competition by providing our partners world-class customer support, J.D. Power-certified six years in a row and with an average monthly Net Promoter Score (NPS) of 83 for the year ended December 31, 2021, and HostPilot®, a comprehensive and intuitive management interface, which allows our partners and end customers to manage our full suite of solutions across users and devices from a single control panel. Our recently expanded ten-year exclusive strategic partnership with NEC Platforms, Ltd. (the subsidiary of NEC Corporation that is responsible for NEC’s unified communications business) and its consolidated organizations (NEC), which began in April 2020, provides a foundation to significantly accelerate our partner-led growth strategy. Pursuant to the partnership, NEC and its partner network offer our UCaaS solutions for resale on a private label basis to an estimated installed base of approximately 80 million on-premise NEC business phone users, which makes NEC the global market share leader within the small and medium-sized businesses (SMBs) market. In October 2021,

 

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we and NEC agreed (i) to extend the initial term of our partnership from five to ten years and (ii) to designate NEC as our exclusive reseller in Japan for the duration of that initial term. Additionally, NEC Corporation has indicated its intent to purchase $40 million of our common stock concurrently with, and conditioned upon, the closing of this offering, as further described below, at the initial public offering price per share. We believe this signifies the strength of our NEC partnership and the positive momentum we have built together.

We employ a channel-first strategy whereby we distribute our solutions predominantly through our Managed Service Provider (MSP) and Value Added Reseller (VAR) partners. This broadens our sales reach considerably to customers of all sizes, especially in our target market of SMBs, which rely heavily on channel partners to address their IT needs and are not the primary focus of many of our competitors. We establish long-term, strategic and mutually beneficial relationships with our partners, providing them with the tools, capabilities and support to effectively sell our solutions, serve their customers and achieve sustainable growth. We believe our approach is significantly more partner-friendly than our competitors’ primary go-to-market approach, which is centered on our competitors owning the end customer relationship themselves, either through direct sales or by limiting their partners to commission-based sales agent roles.

The most popular model among our partners is our CORE model, which enables our partners to sell our solutions using their own brand or on a co-branded basis, with their own pricing structure, and potentially as part of a broader solutions package they have assembled. This model allows our partners to retain direct sales, support and billing relationships with their customers. While we believe the commissions we pay our sales agents are competitive, CORE partners can earn up to five times higher revenue and up to two times higher profit than our sales agents. In addition, we benefit from significant financial and operational leverage as our partners are responsible for the majority of the customer-facing activities including sales, marketing, onboarding, support, billing and collections. Based on a 2019 market study that we commissioned (the 2019 Market Study), 95% of MSPs and VARs prefer a reseller model over a sales agent model. We believe our differentiated CORE reseller model results in high loyalty among our partners, incentivizes them to grow their businesses on our platform and helps us recruit new partners to our platform.

We are party to a recently expanded, exclusive strategic partnership with NEC with an initial term of ten years through April 2030, whereby NEC offers our UCaaS solutions for resale on a private label basis, directly and through its own partner network, to its global customer base. NEC’s on-premise business phone installed base, estimated at approximately 80 million global users, is the largest installed base within the SMB segment and third largest across all customer segments, globally. The NEC partnership provides us with a significant long-term growth opportunity and a platform to expand internationally while also underscoring the strong appeal of our differentiated partnership strategy. As of December 31, 2021, 837 NEC partners across 8 countries including the United States, Canada and Japan had accepted NEC’s partner agreement to sell our UCaaS solutions under the NEC brand. We expect the number of NEC partners to grow significantly as we continue to strengthen our relationship with NEC and expand our presence globally.

We estimate the total addressable market for our UCaaS and BCA solutions to be $78 billion. The fast growth of our UCaaS solutions, with a total addressable market of $56 billion, is primarily driven by our partners using our solutions to upgrade their customers’ legacy communications systems, which are not designed to address the evolving work environment and need for connected, seamless and modern architectures. Gartner Inc. (Gartner) has estimated that there are 431.3 million business telephony users globally. Synergy Research Group estimates that the number of UCaaS subscribers globally was over 17 million as of June 9, 2021, implying a strong demand backdrop for our UCaaS solutions.

Substantially all of our revenue is recurring from the sale of subscriptions for our solutions predominantly by our partners, who contributed 75.3% of our ARR as of December 31, 2021. We own the underlying core

 

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technology of our proprietary platform, allowing us to achieve compelling unit economics and strong profit margins. To date we have primarily targeted end-customers in the United States, but are actively expanding our presence internationally by leveraging our partner network, including our recent exclusive partnership with NEC.

Our revenue was $251.6 million in the year ended December 31, 2020 and $273.2 million in the year ended December 31, 2021. Our fast-growing UCaaS Solutions product group, which includes video, voice, chat, contact center, and file backup and collaboration solutions delivered 31.9% ARR growth over the 12-month period ended December 31, 2021, and contributed 35.4% and 42.6% of our total ARR as of December 31, 2020 and December 31, 2021, respectively. ARR from our BCA product group, which includes cloud-based email solutions, email protection, archiving and encryption services, file backup and collaboration solutions, productivity services and other services including SIP trunking, declined 2.5% over the 12-month period ended December 31, 2021, and contributed 64.6% and 57.4% of our total ARR as of December 31, 2020 and December 31, 2021, respectively. In the year ended December 31, 2020, our net loss was $21.7 million, representing a net loss margin of 8.6%, and our Adjusted EBITDA was $46.7 million, representing an Adjusted EBITDA margin of 18.6%. In the year ended December 31, 2021, our net loss was $24.4 million, representing a net loss margin of 8.9%, and our Adjusted EBITDA was $33.9 million, representing an Adjusted EBITDA margin of 12.4%. See “Selected Consolidated Financial Data—Non-GAAP Financial Measures—Adjusted EBITDA and Adjusted EBITDA margin” for a definition of Adjusted EBITDA and Adjusted EBITDA margin and a reconciliation to the most directly comparable GAAP financial measure.

Industry Trends in Our Favor

Companies are modernizing their legacy communications architectures. According to Gartner, in 2021, an estimated 71% of global business telephony users were still utilizing on premises-based telephony. These legacy PBX telephony systems are operated by companies such as Cisco, Avaya, NEC and others, and are not designed to address the evolving work environment and need for connected, seamless and modern architectures. Rapid technological development over recent years has enabled the rise of cloud-based, device-agnostic communications and collaboration solutions that are rapidly displacing legacy communications infrastructures.

SMBs are reliant on channel partners to address their IT needs. Channel partners provide SMBs with a single reliable and comprehensive source to meet their complex IT needs. In the United States, an estimated 70% of more than $500 billion in IT spending by U.S. companies flows through or is influenced by the approximately 160,000 solution providers in the country’s IT channel ecosystem, according to a 2020 study by CompTIA. Channel partners have become the de facto and trusted technology advisors for the SMB segment that represents a base of 31.7 million companies in the U.S. alone, according to the U.S. Small Business Administration Office of Advocacy. Within this base of channel partners, according to the 2019 Market Study, 95% of MSPs and VARs prefer a reseller model in lieu of a traditional agent-based approach. This highlights the significant opportunity ahead of us to tap the broader channel partner network and offer them our differentiated CORE model.

The IT environment is being consolidated, with fully integrated solutions replacing suboptimal, siloed point solutions. As organizations upgrade their existing legacy communications architectures, they are faced with a range of digital and cloud-based solutions that are often disparate and siloed. The deployment of multiple point solutions has resulted in increasingly complex IT environments that, for the IT administrator and partner, are inefficient and expensive to manage and, for the end user, are difficult to navigate and deliver a suboptimal user experience. Now more than ever, there is a need for unified, fully integrated, feature-rich and simplified IT solutions. This need is particularly strong among SMBs that are served by MSPs or VARs.

Collaboration platforms are fundamental to the effectiveness of increasingly distributed organizations. With the increasing prevalence of distributed and mobile workforces along with the proliferation of the work- from-home environment accelerated by the COVID-19 pandemic, effective, device-agnostic communication and collaboration solutions are becoming increasingly critical to enable companies and their employees, irrespective of their physical location, to disseminate information, stay connected and engage internally and externally.

 

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Our Market Opportunity

We estimate the total addressable global market for our UCaaS and BCA solutions to be $78 billion.

Our UCaaS solutions address the Unified Communications, Collaboration and Public Cloud-Based Contact Center markets, which we estimate to amount to $50 billion based on IDC data, and File Sync and Share market, which MarketsandMarkets has estimated to amount to $6 billion globally. Additionally, we have observed the following trends:

 

   

Gartner has estimated that of the 431.3 million business telephony users globally, only 126.3 million had migrated to cloud-based solutions by the end of 2021, representing a penetration rate of 29.3%. Gartner further estimates that in 2026 the number of global business telephony users on cloud-based solutions will be 216.7 million, representing an estimated compound annual growth rate of 11.4%. Gartner estimates that there were 305.0 million on-premise business telephony users in 2021. The migration to the cloud of NEC’s installed base of on-premise business telephony users, estimated to be approximately 80 million globally, represents an attractive opportunity that we are well positioned to address through our exclusive strategic partnership with NEC.

 

   

The North American business telephony market, our primary operating market today, is undergoing a migration to cloud-based solutions similar to the global market. According to Gartner, the number of business telephony users in North America in 2021 was 113.9 million, of which 49.8 million had migrated to cloud-based solutions, representing a penetration rate of 43.8%. In 2026, Gartner expects 74.4 million business telephony users to be on cloud-based solutions, representing an estimated compound annual growth rate of 8.4%.

 

   

Synergy Research Group estimates that the number of UCaaS subscribers globally was over 17 million as of June 9, 2021, with U.S. subscribers representing over 75% of total subscribers.

 

   

Omdia further estimates that by the end of 2021, there were 10.6 million contact center agent positions globally, of which 3.8 million were using cloud hosted solutions, representing a penetration rate of 35.8%. Omdia estimates that by the end of 2024, 5.0 million contact center agent positions will be using cloud hosted solutions, representing an estimated compound annual growth rate of 9.6%.

Our BCA solutions address markets whose combined global size is estimated to be $22 billion according to various third-party market sources.

Our Differentiated Partnership Strategy

We primarily target small and medium-sized businesses (SMBs) with our solutions. We have built our business around a channel-first strategy whereby we distribute our solutions predominantly through our growing partner network. This model allows us to efficiently expand and accelerate our sales reach and better address our large but fragmented target market of SMBs, which rely heavily on channel partners to address their IT needs. Consequently, competition in the SMB market is less intense than in the enterprise market as most of our competitors lack a channel partner-focused infrastructure and approach similar to ours that would allow them to grow efficiently in the SMB market, and have strategically chosen to primarily target the enterprise market. While we primarily target SMBs, we also serve our enterprise customers through our partner network.

Our philosophy is to empower our partners. We strive to eliminate the challenges that our partners face in addressing their customers’ needs by providing them with the tools, capabilities and support to effectively sell our solutions, serve their customers and achieve sustainable growth. Guided by this approach, we have been able to grow our partner network to more than 7,200 loyal and motivated partners as of December 31, 2021 and establish a position as an integral part of their businesses.

 

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The Key Benefits of Our Differentiated Partnership Strategy for Our Partners:

 

   

Platform built for partners. We have built our platform to both serve the needs of our end customers and to empower our partners. Our HostPilot cloud management platform provides our partners with an effective platform to market and sell our solutions to new customers and manage their existing customers. In addition, our integrations with leading third-party applications enable our partners to offer more comprehensive solutions to their customers and transfer data efficiently from our platform into the systems they use to manage their own businesses.

 

   

Highly attractive customer ownership reseller model. Our CORE model allows our partners to retain the direct sales, support and billing relationships with their customers and to integrate our solutions into their broader portfolio of solutions on their own terms, including pricing, packaging, billing and solution-bundling. This structure gives our partners greater control over the growth and profitability of their businesses. Because in this model the contract to deliver our solutions is between our partner and our end customer, it allows our partners to recognize the entirety of the amounts paid by the customers as revenue. While we believe the commissions we pay our sales agents are competitive, CORE partners can earn up to five times higher revenue and up to two times higher profit than our sales agents. This contrasts with the traditional approach adopted by most of our competitors in which our competitors own the end customer relationship themselves, either through direct sales or by limiting their partners to commission-based sales agent roles, while their partners’ customer relationships are gradually disintermediated by our competitors. Based on the 2019 Market Study, 95% of MSPs and VARs prefer a reseller model over a sales agent model.

 

   

Flexibility. We offer our partners the flexibility to choose, on a customer by customer basis, whether they wish to sell under our CORE model or act as our commissioned agent to sell Intermedia-branded bundled solutions, where we are responsible for support and billing.

 

   

Business support. We provide rebrandable marketing materials, marketing automation (including pre-built campaigns) and dedicated co-marketing assistance to our partners. Through Intermedia University, our digital training portal, we educate our partners on the underlying capabilities and technology of our solutions as well as how to sell, market and provide support for our solutions. We also provide technical and onboarding support to our partners to allow them to deliver a seamless experience to their customers and have developed a set of proprietary management tools that allow our partners to operate their businesses and serve their customers more efficiently.

The Key Benefits of Our Differentiated Partnership Strategy for Us:

 

   

Expansion of our partner network. Our partnership strategy is built on the alignment of interests between us and our partners, which we believe increases our partners’ loyalty and helps us to establish long-term, mutually beneficial relationships with them. This contributes to our ability to retain our existing partner relationships as well as actively recruit new partners to our platform, and therefore expand our partner network.

 

   

Partner network that is incentivized to sell our solutions. Due to the potential for higher revenue and more control over the customer relationship under our CORE model, compared to our competitors’ sales agent model and its associated risk of customer relationship disintermediation, our partners are highly incentivized to sell our solutions to their customers and to deepen their relationship with us.

 

   

Ability to scale our business in a capital efficient manner. In our CORE model, which represented 57% of our partner ARR as of December 31, 2021, our partners are responsible for the majority of the customer-facing activities, providing us with significant financial and operational leverage. In particular, our partners leverage our tools and support to handle sales, marketing, customer onboarding, billing and collections and incur the costs associated with those activities. In addition, while we

 

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provide 24/7 technical support to our partners, they are responsible for providing the higher touch implementation and ongoing support services to their customers, which allows us to avoid the significant costs associated with providing support and service activities to our entire end customer base.

Our Platform

We provide a leading, proprietary cloud-based communications and collaboration platform for our end customers and our partners that serve them. The seamlessly integrated solutions on our platform are delivered and centrally managed through our proprietary HostPilot cloud management platform, which is the primary interface through which our partners market and sell our solutions to new customers and manage their existing customers and their solutions, and through which our direct customers manage their services with us. In addition, our HostPilot platform offers integrations with leading third-party applications to deliver more comprehensive solutions to our end customers and enable our partners to transfer data efficiently from our platform into the systems they use to manage their own businesses. Our platform is recognized as a leading, proprietary cloud- based communications and collaboration platform based on third-party industry reports and industry awards.

The Key Benefits of Our Platform for Our Partners:

 

   

Flexible pricing models and product configurations. Our platform allows our CORE partners to configure and set pricing for customized solutions assembled from our broad product portfolio.

 

   

Capabilities for rebranding. Through our platform, our partners are able to deliver rebranded or unbranded solutions to their customers, as if the solutions were end-to-end delivered by our partners, including using their own brand for customer control panel appearance, system-generated email communications, sales and marketing materials, quotes, invoices, educational and support materials and technical documentation.

 

   

Sales and marketing support. We provide our partners with rebrandable marketing materials and sales tools, enabling them to effectively communicate with their customers and sell our solutions. We also support our partners by providing them with sales leads.

 

   

Education and training. Our digital self-paced training portal, Intermedia University, is accessible through HostPilot and allows our partners to access courses on sales training, marketing, product features and product support to improve our partners’ ability to sell our solutions and to support their customers. In addition, we provide our partners with a rebrandable Knowledge Base that they can offer to their customers and use for their own needs.

 

   

Quality assurance tools. Our platform offers various tools to ensure the quality of service before, during and after the sale, including Intermedia’s proprietary pre-qualification and network assessment tool, referred to as VoIP Scout, as well as an AI-based carrier downtime monitoring and alerting tool.

 

   

Central cloud management platform. HostPilot enables our partners to manage their customers’ use of our solutions from an easy-to-use central control panel, as well as provision new accounts and add solutions to existing accounts. We also provide advanced migration and provisioning tools and wizards to facilitate frictionless transition to our platform.

 

   

Automation of billing and taxation. Our platform automates billing and calculates taxes payable by customers at federal, state and county levels. This allows our partners in the United States to avoid the complex tax analysis and administration required as a result of the intricacy of the U.S. telecom taxation rules, which given its complexity and associated costs has historically prevented many channel partners from selling voice solutions to their customers.

 

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Platform integration with leading partner support solutions. HostPilot integrates with leading third- party partner support solutions such as ConnectWise, Autotask and Salesforce for easy billing, ticketing and quality of service issue reporting, and includes an open application programming interface (API) for custom integrations.

The Key Benefits of Our Platform for Our End Customers:

 

   

Comprehensive portfolio of solutions. Our platform includes a comprehensive portfolio of enterprise- grade communications and collaboration solutions including video, voice, chat, contact center, email, productivity, file sharing, backup, archiving and security.

 

   

Integrated platform. Our platform seamlessly integrates our products into a one-stop solution with a common, intuitive user interface which allows our end customers to manage an integrated set of communications and collaboration solutions and to avoid the cost, IT management complexity and interoperability issues that commonly arise with multiple, disparate point solution vendors.

 

   

Omni-channel communications on any device. Our platform enables end users to connect with other users flexibly and fluidly through any relevant communications channel using a device of their choice, including business phone, desktop, tablet or smartphone. Furthermore, end users can interact through multiple channels and devices, in parallel during the same engagement.

 

   

Empowering a distributed workforce. Our platform enables employees to work virtually anywhere. Whether in the actual office, at home, or anywhere else, our customers’ workforce is armed with an entire office communications and collaboration suite for seamless business operations at all times.

 

   

Easy onboarding, set-up and use. The solutions on our platform are designed for quick and smooth onboarding, set-up and ease of use, for both our end customers’ IT administrators and end users. In particular, our pre-integrated solutions provide intuitive, easy-to-use functionality and common user interface for end users across all levels of the organization. With comprehensive tools and J.D. Power- certified support, set-up and management require minimal resources, which administrators without extensive IT expertise are able to carry out. Specifically, our Cloud Concierge team is committed to transitioning customers to our solutions seamlessly and at no extra cost, with no data loss, no downtime and no disruption to their business.

 

   

All solutions managed from a single control panel. Our proprietary HostPilot cloud management platform integrates solutions, users and devices by enabling IT administrators to simultaneously manage more than 30 business solutions for their entire employee base from a single control panel. HostPilot provides a command post with a common set of intuitive controls with unified control protocols, avoiding the inefficiency and friction associated with multiple disparate solutions.

 

   

Flexible integration with other business solutions. The ability to integrate our solutions into our clients’ broader IT stack is an important consideration for our end customers. Consequently, we have designed our platform to integrate with cloud solutions in other business categories such as Google Workspace, ServiceNow, Zendesk, Oracle NetSuite, Salesforce, SugarCRM, Zoho, Slack, and the Microsoft 365 ecosystem of applications. In addition, our platform supports integration with on-premise applications.

 

   

Security, privacy protection and compliance. We protect the users of our end customers and their data with powerful, up-to-date security protocols with a layered security model. Our monitored, secure data centers are geographically dispersed. We use redundant, enterprise-class firewall systems to help prevent unwarranted intrusions and operate multiple intrusion protection systems to help detect and deter malicious traffic. In addition, our solutions comply with major legal and regulatory frameworks.

 

   

Uptime and reliability. We offer a financially backed 99.999% uptime service level agreement (SLA) for our primary solutions, which translates to less than 26 seconds of downtime a month, representing

 

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superior reliability in our industry. We believe our reliability is one of the key drivers of our growth and customer retention.

Our Key Competitive Strengths

 

   

Differentiated value proposition for our partners. Unlike most of our competitors, we allow our partners to operate as customer ownership resellers whereby they retain direct sales, support and billing relationships with their customers. While we believe the commissions we pay our sales agents are competitive, CORE partners can earn up to five times higher revenue and up to two times higher profit than our sales agents. This approach combined with the sales and marketing materials and support, 24/7 technical support, and training that we provide to our partners has resulted in us establishing long-term, strategic and mutually beneficial relationships with them, further incentivizing our partners to sell our solutions to their customers.

 

   

Distribution power of our more than 7,200 active partners, including NEC, as of December 31, 2021. Our vast and growing partner network gives us tremendous leverage to grow our end customer base, increase revenue from our existing end customers and expand our footprint to new geographies without commensurate investment in our sales, marketing or support functions. In particular, NEC’s business phone installed base is estimated at approximately 80 million on-premise business phone users globally, whose migration to cloud-based solutions represents a significant long-term growth opportunity for us.

 

   

Comprehensive portfolio of integrated and proprietary cloud communications and collaboration solutions. Due to the breadth of our application portfolio, we are able to offer comprehensive, integrated, and easy-to-use solutions to meet our end customers’ and partners’ communication and collaboration needs, which saves them from the complexity of sourcing, integrating and managing multiple disparate solutions from different vendors. We own the underlying core technology of our proprietary platform and continue to develop it in-house, which allows us to rapidly adapt to evolving customer and partner requirements as well as achieve compelling unit economics and strong profit margins.

 

   

Our BCA solutions product group and the related partner ecosystem is synergistic to the growth of our UCaaS solutions product group. Our partners value our broad solution portfolio due to the opportunity to achieve greater revenues and stronger customer retention with limited incremental operating costs given the ability to manage all solutions from the HostPilot management platform. This is illustrated by the fact that our partners that are selling both UCaaS and BCA solutions (Combo Partners) generated 78% of our Partner UCaaS ARR as of December 31, 2021. Furthermore, the penetration of UCaaS solutions among the BCA customer base of our Combo Partners has more than doubled from 8.5% as of December 31, 2018 to 18.3% as of December 31, 2021, which is a testament to our partners’ success in cross-selling. In addition, the approximately 3,800 partners that are currently only selling our BCA solutions provide us with a low-cost opportunity to source new partners to sell our UCaaS solutions and drive growth of our UCaaS solutions product group. Our success in migrating BCA partners to start selling UCaaS solutions is underscored by the fact that 72% of our current Combo Partners started the partnership with us by selling BCA solutions.

 

   

Award-winning customer support. We were the first cloud provider to be recognized by J.D. Power for the quality of its customer support, and we are the only cloud provider to have earned the prestigious recognition for six years in a row. Our teams consistently achieve very high NPS, a testament to our excellent customer support. For the year ended December 31, 2021, the average monthly NPS for our onboarding and technical support was 83, which is an outstanding score in our industry. For further discussion on our NPS, see “Market and Industry Data.”

 

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Track record and focus on innovative solutions. Our long track record of innovation includes our HostPilot control panel, our CORE partner model, and our pioneering role in converging UCaaS, video and web conferencing, Contact Center as a Service (CCaaS) and business email solutions. In addition, as of December 31, 2021, almost 40% of our employees were dedicated to intellectual property development, a metric that is far above industry standard.

 

   

Employee-friendly culture that allows us to attract and retain talent. We have sought to create a workplace and culture that is positive, employee-friendly and encourages our employees to work towards our shared goals of delivering innovative solutions to our end customers and supporting our partners. The strength of our culture and employee satisfaction are underpinned by our Glassdoor ratings, which as of March 2022 include a 4.7 overall rating, 97% friend recommendation rating, and 97% CEO approval rating, which are among the highest ratings across all companies for which Glassdoor ratings are available.

Our Growth Strategy

 

   

Drive deeper relationships with our existing partners. Our growth accelerates as our existing partners add new customers, upgrade solution packages or sell additional solutions to our existing end customers. Our partnership strategy, including the flexibility of go-to-market alternatives we offer to our partners, our highly attractive CORE model, and the extensive support we provide to our partners, creates strong incentives for our partners to grow their businesses on our platform. Additionally, as of December 31, 2021, approximately 2,100 of our more than 7,200 partners had customers who subscribed to offerings from both UCaaS and BCA product groups while contributing approximately 69% of partner ARR, implying a significant upside opportunity from continued cross-selling.

 

   

Focus on growing in our SMB target market. Our channel-first strategy and partner relationships position us optimally to grow within our SMB target market, which is fragmented and where end customers rely heavily on channel partners to address their IT needs. Consequently, competition in the SMB market is less intense than in the enterprise market as most of our competitors lack a channel partner-focused infrastructure and approach similar to ours that would allow them to grow efficiently in the SMB market, and have strategically chosen to primarily target the enterprise market. While our primary focus is on the SMB market, we also serve enterprise customers through our various channels and our enterprise-grade products.

 

   

Leverage our exclusive, strategic partnership with NEC. Through our exclusive arrangement with NEC, NEC and its partner network offer NEC-branded versions of our cloud-based communications and collaboration solutions for resale to NEC’s global customer base estimated at approximately 80 million on-premise business phone users.

 

   

Continue to drive growth of our UCaaS business through innovative solutions. We will continue to pursue growth of our UCaaS business by introducing new features and integrating new technologies and solutions that our innovation pipeline delivers to meet the needs of our end customers. Our architecture is designed to allow for frictionless integration of new solutions, which enables us to react quickly to changing market conditions. For the twelve-month period ended December 31, 2021, our team completed over 1,100 product features. In addition, our speed of delivery increased by 39% and productivity improved by 10% when comparing the quarter ended December 31, 2021 to the quarter ended December 31, 2020.

 

   

Expand internationally. We have historically primarily focused on the North American market with 95% of our revenue in the year ended December 31, 2021 derived from customers based in the United States. More recently, we started expanding and localizing our solutions portfolio for the European and Asia-Pacific (APAC) markets and have started hiring to establish presence in these markets. Our international expansion will be primarily pursued through our exclusive strategic partnership with

 

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NEC, whose customer base is global with particularly strong presence in the Asia-Pacific (APAC) region.

 

   

Grow our partner network. We have developed a highly efficient partner recruitment, onboarding and enablement engine, which allows us to grow our partner network efficiently. As our partner network grows, we gain access to a larger base of potential end customers, which provides an expanding pipeline that drives the growth of our business.

 

   

Selectively pursue acquisitions and strategic investments. We may continue to selectively pursue acquisitions and strategic investments in order to strengthen our platform with new capabilities and solutions as well as to expand our position in our existing markets or to establish a presence in new markets.

Summary of Risks Associated with Our Business, Our Indebtedness, this Offering and Our Common Stock

There are a number of risks related to our business, our indebtedness, this offering and our common stock that you should consider before you decide to participate in this offering. You should carefully consider all the information presented in the section entitled “Risk Factors” in this prospectus. Some of the principal risks include the following:

 

   

We face intense competition in our market, especially from larger, well-established companies, and we may lack sufficient financial or other resources to maintain or improve our competitive position. The markets for communications, collaboration, security and productivity solutions are fragmented, intensely competitive and rapidly changing. We offer a diverse range of integrated communications solutions, including our Unified Communications-as-a-Service (UCaaS) solutions and business cloud applications solutions. Across our portfolio of solutions, we compete with a broad range of UCaaS point solution providers, legacy communications providers and email and productivity suite providers, as well as other traditional providers of Internet, IT and telephony services. If our solutions fail to meet the needs of our end customers and partners, or if our competitors create comparable solutions or go-to-market models that limit or eliminate our competitive differentiators, our competitive position may be harmed.

 

   

If we are unable to increase our sales to existing partners and end customers or attract new partners and end customers to purchase our solutions on a cost-effective basis, our business will be materially and adversely affected. Our future success depends, in part, on our ability to expand the deployment of our solutions with existing partners, which are both the primary source of revenue for our solutions and our primary channel to effectively reaching their end customers with our solutions, as well as with our existing end customers. This includes our ability to successfully convince our partners to migrate their existing end customers to our solutions, to sell our solutions to new end customers and to expand their existing end customers’ use of our portfolio of solutions. If our efforts to attract new partners are not successful, our revenue and rate of revenue growth may decline, we may not achieve profitability and our future results of operations could be materially harmed. Additionally, if our and our partners’ efforts to convince end customers to expand their use of our solutions and purchase additional functionalities are not successful, our business may suffer.

 

   

We rely heavily on partners for a significant portion of sales of our solutions, and if these partners fail to perform, or if they fail to comply with legal requirements when selling our solutions, our ability to sell and distribute our solutions will be significantly impaired, we could incur legal liability and our operating results may be harmed. Our success is significantly dependent upon establishing and maintaining relationships with a variety of partners, and we anticipate that we will continue to depend on these partners in order to grow our business. Our partners include MSPs, VARs, telecommunications companies and other third-party firms. It may take several months

 

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or more for a new partner to achieve productivity. In addition, our partners may be unsuccessful in marketing, selling and supporting our solutions and can cease marketing or reselling our solutions at any time with limited or no notice. We may not be able to incentivize these partners to sell our solutions to their end customers. Our agreements with our partners (other than NEC) are generally non-exclusive, such that those partners may offer customers the products and services of several different companies, including those that compete with ours. We also cannot be certain that we will retain these partners or that we will be able to secure additional or replacement partners, or that our partners will retain their customers to which they resell our products.

 

   

The COVID-19 pandemic could materially adversely affect our business, operating results, financial condition and prospects. The severity, magnitude and duration of the current COVID-19 pandemic is uncertain and rapidly changing. The COVID-19 pandemic has resulted in governmental authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders and shutdowns. These measures have impacted and may further impact all or portions of our facilities, workforce and operations, the operations and behavior of our end customers and end users and the operations of our respective vendors and suppliers. While these measures have not had a material adverse impact on our results of operations to date, our results of operations could be materially adversely affected in the future if such measures were to continue or new measures were imposed.

 

   

Our existing indebtedness could adversely affect our business and growth prospects. As of December 31, 2021, we had a total term loan balance of $266.0 million outstanding under our Term Loan Facility and $12.0 million outstanding under our revolving loan facility (our Revolving Credit Facility, and together with the Term Loan Facility, our Credit Facilities). In addition, as of December 31, 2020 and as of December 31, 2021, we had $52.0 million and $40.0 million, respectively, of additional borrowing capacity under our Revolving Credit Facility. On February 3, 2022 and April 4, 2022, we withdrew $10.0 million and $5.0 million, respectively, on our Revolving Credit Facility, with $25.0 million remaining available under the Revolving Credit Facility after giving effect to such withdrawals. On March 28, 2022, we entered into an amendment to the documentation for our Credit Facilities to extend the maturity date of the existing Revolving Credit Facility from the original maturity date of July 19, 2023 to October 18, 2024 and convert all LIBOR referenced rates to rates tied to the secured overnight financing rate. The borrowing capacity under our Credit Facilities remains the same. On April 14, 2022, we entered into an agreement with BMO Harris Bank N.A. (“BMO”) for a line of credit (“BMO LOC”) with a borrowing capacity of up to $30.0 million. We drew $25.0 million on the BMO LOC and used the proceeds, along with cash on hand, to pay down the outstanding balance on the Revolving Credit Facility. Advances under the BMO LOC are guaranteed by certain MDP investment funds. Our indebtedness, or any additional indebtedness we may incur, could require us to divert funds identified for other purposes for debt service and impair our liquidity position. If we cannot generate sufficient cash flow from operations to service our debt, we may need to refinance our debt, dispose of assets or issue equity to obtain necessary funds.

 

   

MDP controls us, and its interests may conflict with ours or yours in the future. Immediately following this offering and the concurrent private placement, the MDP Funds will beneficially own, through their control of Ivy Parent Holdings, LLC, approximately     % of our common stock, or     % if the underwriters exercise in full their option to purchase additional shares from the Selling Shareholder, which means that, based on its percentage voting power held after the offering, the MDP Funds (as defined below) will control the vote of all matters submitted to a vote of our Board or shareholders, which will enable it to control the election of the members of the Board, among other things, and all other corporate decisions. Accordingly, for such period of time as it has control, the MDP Funds will have significant influence with respect to our management, business plans and policies, including the appointment and removal of our officers, decisions on whether to raise future capital and amending our charter and bylaws, which govern the rights attached to our common stock, and their interest in such matters may conflict with yours or ours.

 

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An active, liquid trading market for our common stock may not develop, which may limit your ability to sell your shares. The initial public offering price will be determined by negotiations between us and the underwriters and may not be indicative of market prices of our common stock that will prevail in the open market after the offering. The failure of an active and liquid trading market to develop and continue would likely have a material adverse effect on the value of our common stock, which may impair our ability to raise capital to pursue our growth strategies, to continue to fund operations and to pursue acquisitions using our shares as consideration.

These and other risks are more fully described in the section entitled “Risk Factors” in this prospectus. If any of these risks actually occurs, our business, financial condition, results of operations, cash flows and prospects could be materially and adversely affected. As a result, you could lose all or part of your investment in our common stock.

Key Business Metrics

In addition to our GAAP financial information, we review several operating and financial metrics, including the following key business metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions. For more information regarding these metrics, please see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics.”

 

       Year Ended December 31  
       2020      2021  
      

(in thousands except

partners and percentages)

 

Annual Recurring Revenue

       

Total ARR

     $ 262,185      $ 287,492  

UCaaS ARR

     $ 92,847      $ 122,449  

UCaaS ARR YoY Growth

       28      32

Partner Metrics

       

Partner ARR

     $ 192,935      $ 216,429  

Partner Gross Sales ARR

     $ 42,698      $ 43,943  

Number of Partners

       7,017        7,243  

Our Sponsor

We have a valuable relationship with our equity sponsor, Madison Dearborn Partners, LLC (MDP). MDP manages several private equity funds that own an interest in us (the “MDP Funds”). In 2016, MDP formed our company for the purpose of acquiring all of the capital stock of Intermedia Holdings, Inc. We refer to this transaction as the “MDP Acquisition.” In connection with this offering, we will enter into a Director Nomination Agreement with the MDP Funds that provides such MDP Funds the right to designate all nominees to our board of directors (our Board) so long as the MDP Funds own 40% or more of the total shares of our common stock beneficially owned by the MDP Funds immediately prior to completion of this offering, as adjusted for any reorganization, recapitalization, stock dividend, stock split, reverse stock split or similar changes in the Company’s capitalization (Original Amount); and a number of directors related to the MDP Funds’ percentage of ownership of common stock when such funds own less than 40% of the Original Amount, subject to certain other conditions. See “Certain Relationships and Related Party Transactions—Related Party Transactions—Director Nomination Agreement” for more details with respect to the Director Nomination Agreement. In addition, our bylaws will provide that the directors nominated by the MDP Funds will have the right to designate the Chairman of the Board for so long as the MDP Funds beneficially own at least 15% or more of the voting power of the then outstanding shares of our capital stock then entitled to vote generally in the election of directors.

 

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Madison Dearborn Partners, LLC is a leading private equity investment firm based in Chicago. Since MDP’s formation in 1992, the firm has raised aggregate capital of over $28 billion and has completed over 150 investments. MDP invests across five dedicated industry verticals, including Basic Industries; Business and Government Software and Services; Financial and Transaction Services; Health Care; and Telecom, Media and Technology Services. MDP’s objective is to invest in companies in partnership with outstanding management teams to achieve significant long-term appreciation in equity value.

Concurrent Private Placement

NEC Corporation has indicated its intent to purchase $40.0 million in shares of our common stock at the initial public offering price per share in a private placement that would be expected to close concurrently with, and would be conditioned upon consummation of, this offering. Any shares sold in the concurrent private placement will constitute restricted securities under the Securities Act of 1933, as amended. If the concurrent private placement is consummated, Morgan Stanley & Co. LLC would serve as placement agent for the private placement and would receive a placement agent fee that is based upon a percentage of the total purchase price of the private placement shares. The closing of this offering is not conditioned upon the closing of the concurrent private placement. The closing of the concurrent private placement would be subject to customary closing conditions.

NEC Corporation has also agreed to a lock-up agreement with the underwriters pursuant to which the shares purchased in the concurrent private placement (if any) will be locked up for a period of 180 days from the date of this prospectus, subject to certain exceptions. See “Underwriters” for additional information.

General Corporate Information

Intermedia was founded in 1993. We were incorporated in 2016 as Ivy Holding Corp., a Delaware corporation, in connection with the MDP Acquisition. In January 2021, we changed the name of our company to Intermedia Cloud Communications, Inc. Our principal executive offices are located at 100 Mathilda Place, Suite 600, Sunnyvale, California 94086. Our telephone number is (650) 641-4000. Our website address is www.intermedia.com. The information contained in, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider any information contained on, or that can be accessed through, our website as part of this prospectus or in deciding whether to purchase our common stock. We are a holding company and all of our business operations are conducted through our subsidiaries.

This prospectus includes our trademarks and service marks, such as “Intermedia,” “Intermedia Unite,” “HostPilot,” “AnyMeeting” and “SecuriSync,” which are protected under applicable intellectual property laws and are our property. This prospectus also contains trademarks, service marks, trade names and copyrights of other companies, such as “Microsoft” and “NEC,” which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names.

Implications of Being an Emerging Growth Company

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We will remain an emerging growth company until the earliest of (1) the last day of the fiscal year following the fifth anniversary of the completion of this offering, (2) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion, (3) the date on which we are deemed to be a large accelerated filer (this means the market value of common that is held by non-affiliates exceeds $700.0 million as of the end of the second quarter of that fiscal year) or (4) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

 

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An emerging growth company may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

 

   

not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act;

 

   

reduced disclosure obligations regarding executive compensation in periodic reports, proxy statements and registration statements; and

 

   

exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

We have elected to take advantage of certain of the reduced disclosure obligations regarding financial statements (such as not being required to provide audited financial statements for the year ended December 31, 2018 or five years of Selected Consolidated Financial Data) in this prospectus and executive compensation in this prospectus and expect to elect to take advantage of other reduced burdens in future filings. As a result, the information that we provide to our shareholders may be different than you might receive from other public reporting companies in which you hold equity interests.

The JOBS Act also permits an emerging growth company like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to “opt-in” to this extended transition period for complying with new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that comply with such new or revised accounting standards on a non-delayed basis.

 

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THE OFFERING

 

Common stock offered by us

                shares.

 

Common stock offered by the Selling Shareholder

                shares.

 

Common stock offered in the concurrent private placement

                shares.

 

Option to purchase additional shares from the Selling Shareholder    

                shares.

 

Common stock to be outstanding after this offering and the concurrent private placement

                shares.

 

Use of proceeds

We estimate that our net proceeds from this offering will be approximately $         million, assuming an initial public offering price of $        per share, which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us. In addition, we expect to receive net proceeds of $        million from the sale of shares of our common stock to NEC Corporation in the anticipated concurrent private placement, after deducting estimated placement agent fees payable by us. We will not receive any of the proceeds from the sale of the shares being offered by the Selling Shareholder.

 

  The principal purposes of this offering and the concurrent private placement are to increase our capitalization and financial flexibility, create a public market for our common stock and enable access to the public equity markets for us and our shareholders. We expect to use approximately $        million of the net proceeds of this offering and the net proceeds from the concurrent private placement to repay outstanding borrowings under our term loan facility, or our Term Loan Facility, and the remainder of such net proceeds will be used for general corporate purposes or, potentially, for future additional repayment of our outstanding borrowings. At this time, other than the repayment of indebtedness under our Term Loan Facility, we have not specifically identified a large single use for which we intend to use the net proceeds and, accordingly, we are not able to allocate the net proceeds among any of these potential uses in light of the variety of factors that will impact how such net proceeds are ultimately utilized by us. We may also use a portion of our net proceeds to acquire or invest in complementary businesses, products, services or technologies. However, we do not have binding commitments for any acquisitions or investments at this time. See “Use of Proceeds” for additional information.

 

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Controlled company

After this offering, assuming an offering size as set forth in this section, and the concurrent private placement, the MDP Funds will beneficially own approximately    % of our common stock (or     % of our common stock if the underwriters’ option to purchase additional shares from the Selling Shareholder is exercised in full). As a result, we expect to be a controlled company within the meaning of the corporate governance standards of Nasdaq. See “Management— Corporate Governance—Controlled Company Status.”

 

Directed share program

At our request, the underwriters have reserved up to                    shares of our common stock, or 5% of the shares of our common stock to be offered by this prospectus for sale, at the initial public offering price, for sale to certain individuals through a directed share program. Shares purchased through the directed share program will not be subject to a lock-up restriction, except in the case of shares purchased by any of our directors or officers and certain of our employees and existing equityholders. The number of shares of our common stock available for sale to the general public will be reduced to the extent these individuals or entities purchase such reserved shares. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus.

 

Risk factors

Investing in our common stock involves a high degree of risk. See “Risk Factors” elsewhere in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

 

Proposed trading symbol

“INTM.”

The number of shares of common stock to be outstanding following this offering and the concurrent private placement is based on 47,806,669 shares of common stock outstanding as of December 31, 2021, and excludes:

 

   

up to 860,132 shares of common stock issuable upon the exercise of options outstanding under the 2017 Stock Option Plan as of December 31, 2021 with a weighted-average exercise price of $4.72 per share;

 

   

up to 1,981,511 shares of common stock issuable upon the vesting and settlement of restricted stock units outstanding under our 2021 Long-Term Incentive Plan (2021 Plan) as of December 31, 2021, subject to a service-based vesting condition as well as a performance-based vesting condition that will be satisfied in connection with this offering;

 

   

up to 283,000 shares of common stock issuable upon the exercise of options outstanding under the 2021 Plan as of December 31, 2021, with a weighted-average exercise price of $13.42 per share;

 

   

up to 200,000 shares of common stock issuable upon the exercise of warrants outstanding as of December 31, 2021, with a weighted-average exercise price of $5.76 per share;

 

   

147,464 shares of common stock reserved for future issuance under the 2017 Stock Option Plan;

 

   

                shares of common stock reserved for future issuance under the 2022 Employee Stock Purchase Plan (“ESPP”), which will be adopted in connection with this offering;

 

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                shares of common stock (assuming an initial public offering price of $        per share, which is the midpoint of the estimated public offering price range set forth on the cover of this prospectus) underlying the grants of restricted stock units to be issued upon the closing of this offering to certain of our employees and members of our board of directors under the 2021 Plan;

 

   

                shares of common stock (assuming an initial public offering price of $        per share, which is the midpoint of the estimated public offering price range set forth on the cover of this prospectus) underlying the grants of stock options to be issued upon the closing of this offering to certain of our employees under the 2021 Plan, with an exercise price equal to the initial public offering price;

 

   

292,192 shares of common stock reserved for future issuance under the 2021 Plan; and

 

   

any shares of common stock that may become issuable under the warrant issued to NEC, as further described in “Certain Relationships and Related Party Transactions—Related Party Transactions—Warrants Issued by Ivy Parent.”

Unless otherwise indicated, all information in this prospectus assumes:

 

   

the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws, each in connection with the closing of this offering;

 

   

no exercise of outstanding options or warrants after December 31, 2021; and

 

   

no exercise by the underwriters of their option to purchase up to                 additional shares of common stock from the Selling Shareholder.

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables summarize our consolidated financial data. The summary consolidated statement of income data and summary consolidated statement of cash flow data for the years ended December 31, 2020 and 2021 and the summary consolidated balance sheet data as of December 31, 2020 and 2021 are derived from our audited consolidated financial statements that are included elsewhere in this prospectus.

Our historical results are not necessarily indicative of the results that may be expected in the future. You should read the summary historical financial data below in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this prospectus.

 

     Year Ended December 31  
     2020     2021  
     (in thousands, except share and
per share data)
 

Consolidated Statement of Income Data:

    

Revenue:

    

Subscription

   $ 244,626     $ 264,938  

Product

     6,969       8,286  
  

 

 

   

 

 

 

Total revenue

     251,595       273,224  
  

 

 

   

 

 

 

Cost of revenue:

    

Cost of subscription revenue(1)

     127,075       141,659  

Cost of product revenue

     10,659       16,033  
  

 

 

   

 

 

 

Total cost of revenue

     137,734       157,692  
  

 

 

   

 

 

 

Gross profit

     113,861       115,532  
  

 

 

   

 

 

 

Operating expenses:

    

Sales and marketing(1)

     46,754       56,003  

Research and development(1)

     18,651       20,612  

General and administrative(1)

     29,761       37,047  

Depreciation and amortization

     15,576       14,412  
  

 

 

   

 

 

 

Total operating expenses

     110,742       128,074  
  

 

 

   

 

 

 

Interest expense

     (24,010     (24,887

Interest income

     69       127  

Other income (expense), net

     (5,215     5,083  
  

 

 

   

 

 

 

Total other expense

     (29,156     (19,677
  

 

 

   

 

 

 

Loss before income taxes

     (26,037     (32,219

Income tax benefit

     4,292       7,790  
  

 

 

   

 

 

 

Net loss

   $ (21,745   $ (24,429
  

 

 

   

 

 

 

Per share data:(2)

    

Net loss per share attributable to common stockholders, basic and diluted

   $ (0.46   $ (0.51

Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted

     47,789,265       47,796,949  
  

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(3)

     $ (0.51

Pro forma weighted-average common stock outstanding, basic and diluted
(unaudited)(3)

       47,796,949  
    

 

 

 

 

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    Year Ended December 31,  
          2020                     2021            
    (dollar amounts in thousands)  

Consolidated Statement of Cash Flow Data:

   

Net cash provided by operating activities

  $ 16,979     $ 865  

Net cash used in investing activities

    (19,302     (20,833

Net cash provided by financing activities

    4,652       6,377  

Selected Financial Data (unaudited):

   

Net loss

    (21,745     (24,429

Net loss margin

    (8.6 )%      (8.9 )% 

GAAP Subscription gross margin

    48.1     46.5

GAAP Product gross margin

    (52.9 )%      (93.5 )% 

Adjusted EBITDA(4)

    46,707       33,908  

Adjusted EBITDA margin(5)

    18.6     12.4

Non-GAAP Subscription gross margin(6)

    56.8     55.0

Non-GAAP Product gross margin(7)

    (52.9 )%      (93.5 )% 

 

  (1)

Includes stock-based compensation, unit-based compensation and warrant expense as follows:

 

     Year Ended December 31  
       2020                    2021            
     (in thousands)  

Cost of subscription revenue

   $ 174      $ 360  

Sales and marketing

     2,256        834  

Research and development

     815        479  

General and administrative

     1,464        884  
  

 

 

    

 

 

 

Total

   $ 4,709      $ 2,557  
  

 

 

    

 

 

 

 

  (2)

See Note 14 to our consolidated financial statements appearing elsewhere in this prospectus for an explanation of the method used to calculate our basic and diluted net loss per share and the weighted- average number of shares used in the computation of the per share amounts.

  (3)

The unaudited pro forma net loss per share attributable to common stockholders was computed using the weighted-average number of shares of common stock outstanding. No pro forma adjustments were recorded.

  (4)

We define Adjusted EBITDA for a particular period as net income (loss) before interest and other expenses, net, income tax benefit, depreciation and amortization, stock-based and unit-based compensation, Class B common stock warrants, transaction related expenses and restructuring and other expenses. For a reconciliation of Adjusted EBITDA to net loss, the most directly comparable measure calculated and presented in accordance with GAAP, see “Selected Consolidated Financial Data—Non-GAAP Financial Measures.”

  (5)

We define Adjusted EBITDA margin as Adjusted EBITDA divided by revenue for the same period. See “Selected Consolidated Financial Data—Non-GAAP Financial Measures” for a reconciliation to Net loss margin, the most directly comparable GAAP financial measure.

  (6)

We define Non-GAAP Subscription gross margin as Non-GAAP subscription gross profit divided by GAAP subscription revenue. See “Selected Consolidated Financial Data—Non-GAAP Financial Measures” for a reconciliation of Non-GAAP Subscription gross margin to GAAP Subscription gross margin, the most directly comparable GAAP financial measure.

 

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  (7)

We define Non-GAAP Product gross margin as Non-GAAP product gross profit divided by GAAP product revenue. See “Selected Consolidated Financial Data—Non-GAAP Financial Measures” for a reconciliation of Non-GAAP Product gross margin to GAAP Product gross margin, the most directly comparable GAAP financial measure.

 

     As of December 31,      Pro forma
as adjusted
(a)(b)
 
     2020      2021  
     Actual  
     (in thousands)         

Consolidated Balance Sheet Data:

        

Cash and cash equivalents

   $ 23,625      $ 10,030      $                

Working capital (deficit)(c)

     1,509        (16,532   

Total assets

     488,818        473,784     

Total debt(d)

     263,833        273,843     

Total liabilities

     361,522        364,445     

Total stockholders’ equity

     127,296        109,339     

 

  a)

Gives effect to the issuance by us of              shares of common stock in this offering and the application of the net proceeds from this offering and the concurrent private placement to repay $            million of outstanding borrowings under our Term Loan Facility as set forth under “Use of Proceeds”, assuming an initial public offering price of $            per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us and giving effect to the concurrent private placement.

  b)

A $1.00 increase or decrease in the assumed initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease each of cash and cash equivalents, working capital, total assets and total stockholders’ equity on a pro forma basis by approximately $            million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducing the underwriting discount and estimated offering expenses payable by us and giving effect to the concurrent private placement. Similarly, each 1,000,000 increase or decrease in the number of shares offered would increase or decrease the net proceeds to us from this offering and the concurrent private placement by approximately $            million, assuming that the assumed initial public offering price per share for the offering remains at $             , which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us.

  c)

We define working capital (deficit) as current assets less current liabilities.

  d)

Net of debt issuance costs of $5.5 million and $4.1 million as of December 31, 2020 and 2021, respectively.

 

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RISK FACTORS

This offering and an investment in our common stock involve a high degree of risk. You should carefully consider the risks described below, together with the financial and other information contained in this prospectus, before you decide to purchase shares of our common stock. If any of the following risks actually occurs, our business, financial condition, results of operations, cash flows and prospects could be materially and adversely affected. As a result, the trading price of our common stock could decline and you could lose all or part of your investment in our common stock.

Risks Relating to Our Business

We face intense competition in our market, especially from larger, well-established companies, and we may lack sufficient financial or other resources to maintain or improve our competitive position.

The markets for communications, collaboration, security and productivity solutions are fragmented, intensely competitive and rapidly changing. With the introduction of new technologies and market entrants, both traditional and cloud-based, we expect competition to intensify in the future. In addition, pricing pressures and increased competition generally could result in reduced sales, harm to our operating results or prevent our solutions from achieving or maintaining widespread market acceptance. In some cases, we may compete against existing solutions that our potential end customers and partners have already made significant expenditures to acquire and implement.

We offer a diverse range of integrated communications solutions, including our Unified Communications- as-a-Service (UCaaS) solutions and business cloud applications solutions. Across our portfolio of solutions, we compete with a broad range of UCaaS and CCaaS point solution providers (such as 8x8, Inc. (8x8), Five9, Inc. (Five9), RingCentral, Inc. (RingCentral), Vonage Holdings Corp. (Vonage) and Zoom Video Communications, Inc. (Zoom)), legacy communications providers (such as Cisco Systems, Inc. (Cisco) and Avaya, Inc. (Avaya)) and email and productivity suite providers (such as GoDaddy, Inc. (GoDaddy), Google, Inc. (Google), Microsoft Corporation (Microsoft), Rackspace Hosting, Inc. (Rackspace) and Zix Corporation (acquired by OpenText Corporation) (Zix)), as well as other traditional providers of Internet, IT and telephony services. Many of our actual and potential competitors enjoy competitive advantages over us, such as greater name recognition, longer operating histories, more varied products and services and larger research and development and sales and marketing budgets, as well as greater financial, technical and other resources. In addition, many of our competitors have established marketing relationships and access to larger customer bases and have distribution agreements with many consultants, system integrators and partners, and certain of our competitors offer, or may in the future offer, lower priced or free products or services that compete with our solutions. Furthermore, some of the commercially available solutions in the markets in which we compete, such as video and web conferencing solutions of our competitors, including Zoom, have seen dramatically increased adoption, usage and publicity in connection with the global response to the COVID-19 pandemic. Also, certain of our competitors offer niche or specialty products and dedicate their entire research and development and sales and marketing budgets to the enhancement of a single product or focused set of products. We have experienced pricing pressure and intense competition from many of those competitors, and we expect to experience continued pricing pressure and intense competition from our competitors in the future.

While our solutions offer the benefits associated with having a broad and integrated suite of solutions on a single platform with a common control panel and a single support organization, products offered by our competitors, some of whom are larger organizations than we are or specialty providers, may have, or may be perceived as having, additional features or functionalities that are not available on our corresponding applications, and these features or functionalities may be appealing to our actual or potential end customers and partners. Our current and potential competitors may also combine with one another, or establish strategic relationships among themselves or with third parties, any of which may further enhance their ability to compete. Additionally, if our competitors include additional features or functionalities that are not available on our corresponding applications, we may have to invest more in our research and development to compete with these

 

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products. While we serve both enterprise and SMB customers, because we primarily target SMBs, if our competitors begin placing a greater emphasis on meeting the requirements of the segments of the SMB market, through changes in pricing, functionality, application delivery, integration, packaging or other means, our competitive position may be harmed and we could experience a loss of end customers or partners for our solutions and a reduction in our revenue. If we are not able to compete effectively, our operating results would be harmed. If our solutions fail to meet the needs of our end customers and partners, or if our competitors create comparable solutions or go-to-market models that limit or eliminate our competitive differentiators, our competitive position may be harmed.

If we are unable to increase our sales to existing partners and end customers or attract new partners and end customers to purchase our solutions on a cost-effective basis, our business will be materially and adversely affected.

Our future success depends, in part, on our ability to expand the deployment of our solutions with existing partners, which are both the primary source of revenue for our solutions and our primary channel to effectively reaching their customers with our solutions, as well as with our existing end customers. This includes our ability to successfully convince our partners to migrate their existing customers to our solutions, to sell our solutions to new end customers and to expand their existing customers’ use of our portfolio of solutions.

Similarly, to increase our revenue and achieve and maintain profitability, an important component of our business is our ability to add new partners to purchase our solutions for resale to their customers. In either case, to do so, we must successfully convince our partners, both initially and continually over time, that our solutions provide partners and end customers with significant advantages over alternative solutions and are more marketable to end customers, including SMBs. In addition, our ability to expand our sales to existing partners and to attract new partners may now or in the future be impacted by numerous other factors, many of which are out of our control, including potential partners’ commitments to legacy telecommunications and collaboration software and technology providers and products; partners’ preference for working with other providers of similar products; partners’ and end customers’ real or perceived switching costs; our failure to recruit, train, retain and motivate sufficient numbers of sales and marketing personnel; our failure to develop or expand relationships with our partners or to attract new partners; failure by us to help our partners successfully deploy, troubleshoot and manage our solutions for their customers; negative media or industry or financial analyst commentary regarding us or our solutions; litigation; and deteriorating general economic conditions. If our efforts to attract new partners are not successful, our revenue and rate of revenue growth may decline, we may not achieve profitability and our future results of operations could be materially harmed.

Currently, a substantial majority of our solutions are sold on a recurring subscription basis, and we rely on end customer demand to drive partner purchases of our solutions. Therefore, our success and ability to grow also depend in part on our ability, and our partners’ ability, to sell additional solutions to existing end customers and expand their use of our portfolio of business solutions. This may require increasingly sophisticated and more costly sales efforts and a longer sales cycle. Any increase in the costs necessary to upgrade, expand and retain existing end customers could materially and adversely affect our financial performance. If our and our partners’ efforts to convince end customers to expand their use of our solutions and purchase additional functionalities are not successful, our business may suffer. In addition, such increased costs could cause us to increase our subscription rates, which could increase our turnover rate.

In addition, to grow our business, we must continue (both through our partners and directly) to attract new end customers on a cost-effective basis. We use and periodically adjust the mix of marketing and advertising programs to promote our subscriptions, including to potential end customers who do not yet use cloud solutions and to potential partners for our solutions. Significant increases in the cost of our promotional offers in order to remain competitive with our industry or of one or more of our advertising channels, or other increases in the cost of acquisition of these end customers and partners, would increase our expenses or may cause us to choose less expensive and perhaps less effective channels to promote our solutions. If we are unable to maintain effective

 

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marketing and advertising programs or are otherwise unable to attract new end customers on a cost-effective basis, our expenses could increase substantially, our rate of revenue growth may decline, and our results of operations may suffer.

Our future operating results will rely in part upon the successful execution of our strategic partnerships with NEC and others, which may not be successful.

A strategic partnership between two independent businesses is a complex, costly, and time-consuming process that requires significant and continuing management attention and resources. Realizing the benefits of our strategic partnerships, particularly our relationship with NEC, will depend in part on our ability to work with our strategic partners to develop, market and sell NEC-branded versions of our solutions, such as NEC UNIVERGE BLUE® CONNECT, UNIVERGE BLUE ENGAGE, UNIVERGE BLUE MEET, UNIVERGE BLUE SHARE and UNIVERGE BLUE CONNECT BRIDGE. Setting up and maintaining the operations and processes of this strategic partnership, along with any other strategic partnerships into which we may enter in the future, may cause us to incur significant costs, disrupt our business and, if implemented ineffectively, would limit the expected benefits to us. In addition, we anticipate that we will be reliant on NEC’s partner network and NEC itself for driving sales, and if they are unable to drive sales in sufficient volumes or as quickly as we expect, we may be unable to realize sufficient returns on such investments. The process of bringing the NEC-branded solutions to market, and driving sales of such solutions, in multiple markets internationally may take longer than anticipated or may ultimately fail to be successful for many potential commercial or competitive reasons, which could negate or reduce our anticipated benefits and revenue opportunities. In addition, NEC may choose to de-emphasize sales of cloud-based solutions, such as by dedicating greater focus and resources to sales of traditional telephony solutions or by discontinuing or selling its cloud-based communications operations. Additionally, if NEC terminates the agreement, either as a result of a material breach by us of the agreement or by choosing not to renew the agreement at the end of its term, such a termination would adversely affect our future operating results. We have limited experience to date in expanding our business internationally, and we may encounter difficulties in effectively and efficiently establishing the infrastructure necessary to support the international operations contemplated in connection with our strategic partnership with NEC. The failure to successfully and timely implement and operate our strategic partnerships could harm our ability to realize the anticipated benefits of these partnerships and could adversely affect our results of operations.

We rely heavily on partners for a significant portion of sales of our solutions, and if these partners fail to perform, or if they fail to comply with legal requirements when selling our solutions, our ability to sell and distribute our solutions will be significantly impaired, we could incur legal liability and our operating results may be harmed.

Our success is significantly dependent upon establishing and maintaining relationships with a variety of partners, and we anticipate that we will continue to depend on these partners in order to grow our business. Our partners include MSPs, VARs, telecommunications companies and other third-party firms. While we believe the partner network provides high-quality customer support and enables higher retention as partners provide local, direct sales and technical support, it has also caused us to become dependent on third parties for the distribution of our solutions.

We provide our partners with training materials and programs to assist them in selling our solutions, but there can be no assurance that these steps will be utilized or effective. Even following an effective onboarding of a partner that understands our products and how to manage them on behalf of their customers, it may take several months or more for a new partner to achieve productivity. In addition, our partners may be unsuccessful in marketing, selling and supporting our solutions and can cease marketing or reselling our solutions at any time with limited or no notice. We may not be able to incentivize these partners to sell our solutions to their end customers. Our agreements with our partners (other than NEC) are generally non-exclusive, such that those partners may offer customers the products and services of several different companies, including those that compete with ours, and some of our partners have more established relationships with our competitors. These

 

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partners may also have incentives to promote our competitors’ products and may devote more resources to the marketing, sales and support of competitive products. Our agreements with our partners may generally be terminated for any reason by either party, subject to compliance with the notice requirements set forth in the applicable agreement.

We cannot be certain that we will retain these partners or that we will be able to secure additional or replacement partners. We also cannot be certain that our partners will retain their customers to which they resell our products. Our partner sales structure could subject us to lawsuits, potential liability and reputational harm if, for example, any of our partners misrepresent the functionality of our solutions, improperly market our solutions to customers or violate laws or our corporate policies in the sale, marketing or implementation of our solutions.

We also typically rely on partners, particularly under our Customer Ownership Reseller (CORE) model, to provide customer service and support to their customers. After our solutions are deployed by a partner within a customer’s network, the end customer depends on the partner’s technical support services to resolve any issues relating to our products and realize the full benefits that our offerings provide. Although we make available to our partners training materials in relation to our solutions, and we provide substantial customer support to our partners to troubleshoot technical issues, our partner structure requires us to cede some degree of control over certain aspects of our business, including the quality of our partners’ support to their customers. Furthermore, we rely on our partners to comply with applicable laws and regulations, including the delivery of required notifications and disclosures to end customers in connection with our emergency calling service. Because our partners market, sell, implement and support our solutions without our direct oversight, any misrepresentation or inappropriate marketing or implementation of our solutions by our partners may cause end customers to be disappointed in our solutions or cause end users to seek redress or assistance from us directly. Additionally, if our partners do not effectively provide support to the satisfaction of their customers, we may be required to provide direct support to such end customers, which would require us to hire additional personnel and to invest in additional resources. Our inability to effectively manage our sales channels or partners, or our partners’ failure to provide high-quality service or to comply with laws, could lead to customer dissatisfaction, loss of end customers, dilution of our brand, harm to our reputation, increased risk and liability associated with potential legal or regulatory violations, decreased overall demand for our solutions or loss of revenue, any of which could have a negative impact on our business and operating results.

If our end customers and partners fail to renew their subscriptions with us, our results of operations and our growth could be materially adversely affected.

Our ability to achieve and maintain profitability and grow our business depends in part on our end customers and partners (on behalf of their customers) renewing their subscriptions with us. Most of our end customers and partners can terminate their subscriptions with us on relatively short notice, as our solutions are typically sold as month-to-month subscriptions with no early termination fees. Our end customers and partners generally have no obligation to renew their subscriptions, and we cannot assure that end customers and partners will renew subscriptions at the same or higher level of service, if at all. For the twelve months ended December 31, 2020 and December 31, 2021, our average monthly churn rate (based on monthly revenue lost from established end customers that cancelled at least one of their subscriptions for our solutions during the applicable month) was 1.2% and 1.2%, respectively. Although our customer and revenue retention has historically been high, and although our churn rate has remained relatively stable over the past three years, some of our end customers and partners may elect not to renew their subscriptions with us.

End customers and partners may choose not to renew subscriptions to our solutions as a result of a number of factors, including dissatisfaction with our solutions or the customer support services offered by us or our partners, any perceived ineffectiveness or lack of functionality, reliability or security of our solutions or the prices and features of our solutions relative to the products and services of our competitors. We may also experience an increase in customer churn due to factors beyond our control, including mergers and acquisitions affecting our end customer or partner base, the failure or unwillingness of end customers to pay their monthly

 

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subscription fees due to financial constraints, the effects of global economic conditions or reductions in end customers’ spending levels. If we were to experience a significant reduction in sales to or through one of our larger end customers or partners, such as Mitel, it may be particularly difficult to replace the reduction in revenue or new sales from such party quickly or at all. For example, our partnership with Costco Business Services terminated in April 2022. We will no longer sell our products to new Costco customers, but our existing contracts with customers that we have acquired through the Costco partnership are not impacted by this termination. We expect to retain those existing customers and to continue to sell products to those customers. The Costco partnership was primarily a co-marketing arrangement designed to generate leads from Costco’s members. Members that purchased our services became Intermedia customers and are under contract with, and supported and billed by, Intermedia. For the quarter ended December 31, 2021, sales driven by our partnership with Costco represented less than 5% of our Gross Sales ARR.

Furthermore, we rely in part on the revenue from customers that subscribe to our email solutions to support the overall growth of our business, and if we lost a substantial amount of the revenue derived from these customers, our overall growth could be adversely affected. If our end customers or partners do not renew their subscriptions with us or renew their subscriptions with us on less favorable terms, our revenue may decline and we may not be able to lower our operating expenses quickly enough to accommodate any such decline without adversely impacting our operating results.

The COVID-19 pandemic could materially adversely affect our business, operating results, financial condition and prospects.

The severity, magnitude and duration of the current COVID-19 pandemic is uncertain and rapidly changing. The COVID-19 pandemic has resulted in governmental authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders and shutdowns. These measures have impacted and may further impact all or portions of our facilities, workforce and operations, the behavior of our end customers and end users and the operations of our respective vendors and suppliers. While these measures have not had a material adverse impact on our results of operations to date, our results of operations could be materially adversely affected in the future if such measures were to continue or new measures were imposed. Concern over the impact of the COVID-19 pandemic may delay the purchasing decisions of certain prospective end customers and/or cause them to consider purchasing solutions for fewer end users than originally anticipated. While governmental authorities have taken measures to try to contain the COVID-19 pandemic, there is considerable uncertainty regarding such measures and potential future measures. There is no certainty that measures taken by governmental authorities will be sufficient to mitigate the risks posed by the COVID-19 pandemic, and our ability to perform critical functions could be harmed.

In response to disruptions caused by the COVID-19 pandemic, we have implemented a number of measures designed to protect the health and safety of our workforce and position us to maintain our healthy financial position. These measures include restrictions on non-essential business travel, the institution of work-from-home policies wherever feasible and the implementation of strategies for workplace safety at our facilities to the limited extent that they remain open. We are following the guidance from public health officials and government agencies with respect to such facilities, including implementation of enhanced cleaning measures, social distancing guidelines and wearing of masks (where required). We will continue to incur increased costs for our operations during this pandemic that are difficult to predict with certainty. As a result, our business, results of operations, cash flows or financial condition may be affected by the COVID-19 pandemic disruptions and could continue to be adversely impacted in the future. There is no assurance the measures we have taken or may take in the future will be successful in managing the uncertainties caused by the COVID-19 pandemic.

While most of our operations can be performed remotely, there is no guarantee that we will be as effective while working remotely. Significant management time and resources may be diverted from our ordinary business operations in order to develop, implement and manage workplace safety strategies and conditions as we attempt to return to office workplaces.

 

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As a result of the COVID-19 pandemic, we may (1) decide to postpone or cancel planned investments in our business in response to changes in our business, or (2) experience difficulties in recruiting or retaining personnel, each of which may impact our ability to respond to our end customers’ needs and fulfill contractual obligations. In addition, as a result of financial or operational difficulties, our suppliers and partners may experience delays or interruptions in their ability to provide services to us or our end customers, if they are able to do so at all, which could interrupt our end customers’ access to our solutions and which could adversely affect their perception of our platform’s reliability and result in higher partner or end customer churn or increased liability exposure. We rely upon third parties for certain critical inputs to our business and platform, such as data centers and technology infrastructure. Any disruptions to services provided to us by third parties that we rely upon to provide our platform, including as a result of actions outside of our control, could significantly impact the continued performance of our platform. Additionally, the COVID-19 pandemic makes it more difficult for us to send someone in person to resolve issues at our data centers.

The COVID-19 pandemic has also significantly increased economic and demand uncertainty globally, as well as record levels of unemployment in the United States. As a result, the COVID-19 pandemic has caused an economic slowdown, and it is possible that it could cause a global recession. This economic uncertainty of the COVID-19 pandemic has led to a general decrease in consumer spending and decrease in consumer confidence. Our revenue, results of operations and cash flows depend on the overall demand for our platform. Some of our end customers have experienced and may continue to experience financial hardships that, to date, have resulted in minimal instances of delayed or uncollectible payments, though this could increase in the future. To add to the uncertainty, the pace and nature of any economic recovery is unclear after this unprecedented shutdown of the economy. As our end customers increase the number of employees working from home, we have seen increased demand for and usage of our solutions to support the acceleration of the trend toward increased remote work. However, our end customers are susceptible to this economic uncertainty, which may result in laying off employees, filing for bankruptcy, cutting back on services generally or going out of business. In particular, SMBs are typically more susceptible to the adverse effects of economic fluctuations, including as a result of the COVID-19 pandemic. As a result, we may be susceptible to increased customer churn as a result of the current COVID-19 pandemic. In addition, as local, state and national governments continue to roll back stay-at-home orders or reduce the severity of lockdowns, transitions back to on-site working could result in a decrease in the use of cloud communications solutions such as ours. All of these factors could have a negative impact on our revenue, cash flows and results of operations.

The scope and duration of the COVID-19 pandemic, including the current resurgences as a result of the Delta and other variants in various regions in the United States and globally, and other future resurgences, the pace at which government restrictions are lifted or whether additional actions may be taken to contain the virus, the impact on our customers and partners and suppliers, the speed and extent to which markets fully recover from the disruptions caused by the pandemic, and the impact of these factors on our business, will depend on future developments that are highly uncertain and cannot be predicted with confidence. It is possible that changes in economic conditions and steps taken by the federal government and the Federal Reserve in response to the COVID-19 pandemic could lead to higher inflation than we had anticipated, which could in turn lead to an increase in our costs of products and services and other operating expenses. In addition, to the extent the COVID-19 pandemic adversely affects our operations and global economic conditions more generally, it may also have the effect of heightening many of the other risks described herein.

Our operating results may fluctuate significantly, which makes our future results difficult to predict and may result in our operating results falling below expectations or our guidance, which could cause the price of our common stock to decline.

Our operating results may fluctuate as a result of a variety of factors, many of which are outside of our control. If our operating results or guidance fall below the expectations of research analysts or investors, the price of our common stock could decline substantially. Fluctuations in our operating results or guidance may be due to a number of factors, including, but not limited to:

 

   

our ability to attract new end customers and partners, obtain renewals from existing end customers and partners and increase sales to existing end customers and partners;

 

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the timing and success of new solution introductions and upgrades by us or our competitors;

 

   

our ability to achieve successful results in our strategic partnerships, including with NEC;

 

   

service outages or actual or perceived security breaches and other incidents;

 

   

changes in our pricing policies or those of our competitors;

 

   

changes in the mix and selling prices of our solutions;

 

   

changes in promotions or discounts that we offer to end customers or partners;

 

   

our ability to expand our solutions into international markets;

 

   

the amount and timing of operating costs and capital expenditures related to the operation, maintenance and expansion of our business;

 

   

the timing of costs related to the development or acquisition of technologies, services or businesses;

 

   

the impact of natural disasters or global pandemics, including COVID-19, on the global economy and the businesses of our partners, end customers and potential purchases of our solutions;

 

   

the timing of collection of payments from partners;

 

   

the financial condition of our end customers and partners;

 

   

changes in the number of end users of our solutions by our end customers;

 

   

the purchasing and budgeting cycles of our end customers and partners; and

 

   

general economic, industry and market conditions.

We rely on licenses from third parties for certain of the applications or features of our solutions, particularly with Microsoft.

Our platform, especially our UCaaS solutions and our administrative control panel, HostPilot, are primarily comprised of our proprietary technologies. However, we also rely on software licensed from third parties to offer applications or features, particularly with respect to our BCA solutions. If the third-party providers of those software licenses experience service interruptions or other degradations in the quality, reliability or security of their services, our partners and end customers may, in turn, experience service interruptions or lose confidence in our solutions. Our reputation could be damaged, we could be exposed to liability for the actions of our third-party software providers and we could lose partners and end customers.

For example, we have a strategic partnership with Microsoft, which began in 2006, through which we leverage Microsoft Exchange and Microsoft 365 email and productivity services as part of our BCA solutions. 35% of our revenue was reliant on offerings of Microsoft products in the year ended December 31, 2021. Under our agreements with Microsoft, including our high-volume services and cloud partner agreements and the associated product schedules, we license or have the right to resell certain Microsoft products. These agreements remain in effect until terminated, and either party may terminate these agreements with prior written notice, although the individual product schedules (where applicable) may continue in effect until they expire or are separately terminated. Once any such agreements and product schedules are terminated or expire, however, we may not be able to offer certain Microsoft products, including our email solutions. If Microsoft terminates our ability to sell Microsoft services, we may be unable to obtain or develop satisfactory replacement services in a timely or cost-effective manner. Microsoft recently announced the retirement of its high-volume services program for Exchange licensing after December 31, 2023, which may affect the pricing of its products to us. If Microsoft changes its product pricing to us based on this announcement or otherwise, we may be unable to pass through such changes to our end customers, or may experience a deterioration in relationships with our end customers or an increase in non-renewals or terminations of subscriptions as a result of pricing increases. Any such termination or change in pricing by Microsoft could negatively impact our revenue, gross profit and operating results.

 

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A cyber-attack, information security breach or denial of service event could delay or interrupt service to our end customers, harm our reputation or subject us to significant liability.

Our operations depend on our ability to protect our production and corporate information technology services from interruption or damage from unauthorized entry, computer malware or other events beyond our control. A fundamental requirement for operating an Internet-based, worldwide cloud software solution and electronically billing our customers and partners, and also providing data necessary for our partners to bill their own customers, is the secure transmission of confidential information and media over public networks. Although we have developed systems and processes that are designed to protect consumer information and prevent fraudulent credit card transactions, other security breaches and incidents, failure to prevent or mitigate such fraud, breaches or incidents may subject us to costly breach notification and other mitigation obligations, class action lawsuits, regulatory investigations and other proceedings, claims, fines, forfeitures or penalties from governmental agencies that could adversely affect our business, operating results and financial condition. We have, from time to time, been subject to communications fraud and cyber-attacks by malicious actors, and denial of service events, and we may be subject to similar attacks in the future. We cannot assure you that our backup systems, regular data backups, security controls and other procedures currently in place, or that may be in place in the future, will be adequate to prevent significant damage, system failure, service outages, data breach, data loss or increased charges from our technology vendors. Also, our solutions are Internet-based. The amount of data we store for our end customers increases as our business grows. We host services, which includes hosting customer data, both in co-located data centers and in public cloud services. Our solutions allow end users to store messages (including email, voicemail, chat and other forms of communications), files, video recordings, tasks, calendar events, contacts and other data within our solutions. We also maintain sensitive data related to our technology and business, and that of our employees, partners and end customers, including customer communications content, intellectual property, proprietary business information, credit card information, customer files, account information stored on our HostPilot platform control panel and personally identifiable information (also called personal data) on our own systems and in multiple vendors’ cloud services. As a result of maintaining larger volumes of data and end user files, or movement into new customer segments and acquisition of larger and more recognized end customers, we may become more of a target for hackers, nation states and other malicious actors or other third parties looking to gain access to the sensitive and personal data of our partners and end customers. In addition, we depend on third-party vendors for critical services, and those vendors may be susceptible to security breaches and, in some cases, may have access to our data and our partners’ and end customers’ data.

Despite the implementation of security measures by us or our vendors, our computing devices, infrastructure or networks or our vendors’ computing devices, infrastructure or networks, may be vulnerable to hackers, computer viruses, worms, ransomware, other malicious software programs or other disruptive problems that are caused by or through a security weakness or vulnerability in our or our vendors’ infrastructure, network or business practices or our or our vendors’ customers, employees, business partners, consultants or other Internet users who attempt to invade our or our vendors’ corporate and personal computers, tablets, mobile devices, software, data networks or voice networks. If there is a security weakness or vulnerability in our, our vendors’ or our end customers’ infrastructure, networks or business practices that is successfully targeted, we could face increased costs, liability claims, including contractual liability claims relating to security obligations in agreements with our partners and our end customers, fines, claims, investigations and other proceedings, reduced revenue or harm to our reputation or competitive position. For instance, a cyber-attack may make it more difficult to bill our partners and end customers in a timely manner, which could affect our ability to make necessary business payments and may impact our ability to report our earnings accurately and in a timely manner. In addition, even if not targeted, in strengthening our security controls or in remediating security vulnerabilities, we could incur increased costs and capital expenditures. The constantly increasing prevalence of remote working is generally increasing the attack surface available to criminals, as more companies and individuals work online, and as such, the risk of a cybersecurity incident potentially occurring, and our investment in risk mitigations against such an incident, is increasing. We cannot provide assurances that our preventative efforts will be successful.

We may also experience losses due to subscriber fraud and theft of service, including an outside party causing us to fraudulently transfer money. Subscribers have, in the past, fraudulently obtained access to our service, hardware and international toll calls without paying for them, such as by submitting fraudulent credit

 

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card information. If our anti-fraud procedures are not adequate or effective, consumer fraud and theft of service could have a material adverse effect on our business, financial condition and operating results.

We rely on encryption and authentication technology to provide for secure transmission of and access to confidential information, including customer credit card numbers, debit card numbers, direct debit information, customer communications, and files uploaded by our end customers. Advances in computer capabilities, new discoveries in the field of cryptography, discovery of software bugs or vulnerabilities, discovery of hardware bugs or vulnerabilities, social engineering activities or other developments may result in a compromise or breach of the technology we use to protect our data and our customer data or of the data itself.

Additionally, third parties have attempted in the past, and may attempt in the future, to induce domestic and international employees, consultants or end customers into disclosing sensitive information, such as customer content, user names, provisioning data, customer proprietary network information (CPNI) or other information in order to gain access to our end users’ accounts or data or to our data. CPNI includes information such as the phone numbers called by an end user, the frequency, duration, and timing of such calls, and any solutions purchased by the end user, such as call waiting, call forwarding, and caller ID, in addition to other information that may appear on an end customer’s bill. Third parties may also attempt to induce employees, consultants, end customers or end users into disclosing CPNI or other information we or our third-party vendors process or otherwise maintain, including sensitive information regarding our intellectual property and other confidential business information, our end customers, customer information, or credentials to access our information technology systems or those of our third-party vendors. In addition, the techniques used to obtain unauthorized access, to perform hacking, phishing and social engineering or to sabotage systems change and evolve frequently and may not be recognized until launched against a target, or may not be detected or understood until well after such actions are conducted. We and our third-party vendors may be unable to anticipate these techniques or to implement adequate preventative measures, and any security breach or other incident may take longer than expected to remediate or otherwise address. Any system failure or security breach that we or our third-party vendors suffer or are perceived to have suffered, including any such failure or breach that causes interruptions or data loss in our operations or in the computer systems of our end customers or leads to the misappropriation of our or our end customers’ confidential or personal information, could result in significant liability to us, fines, claims, regulatory investigations and other proceedings, loss of our intellectual property, a perception that our solutions are not secure, cause us to be required, or for us to otherwise deem it appropriate, to notify customers, regulators, the media or other third parties, cause considerable harm to our reputation and market position, and deter current and potential end customers from using our solutions. Any of these events could have a material adverse effect on our business, results of operations and financial condition.

While we maintain cybersecurity insurance, our insurance may be insufficient to cover all liabilities incurred by privacy or security incidents. We also cannot be certain that our insurance coverage will be adequate for data handling or data security liabilities actually incurred, that insurance will continue to be available to us on economically reasonable terms, or at all, or that an insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, including our financial condition, operating results and reputation.

Laws, regulations, and enforcement actions relating to security and privacy of information continue to evolve. We have incurred and expect to continue to incur significant expenses to prevent security incidents. It is possible that, in order to support changes to applicable laws, regulations, standards, codes of conduct and contractual and other obligations to which we are or may become subject, and to support our expansion of sales into new geographic areas or into new industry segments, we will need to increase or change our cybersecurity systems, policies or measures and our related expenditures. Further, it is possible that changes to laws, regulations, codes of conduct, standards or other obligations relating to security and privacy may make it more expensive to operate in certain jurisdictions and may increase our risk of non-compliance.

 

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Interruptions in our services caused by undetected errors, failures or bugs in our solutions, our third-party providers’ solutions or our network infrastructure could harm our reputation, result in significant costs to us, and impair our ability to sell our solutions.

Our solutions may have errors or defects that could result in unanticipated interruptions of service. Internet- based services frequently contain undetected errors and bugs when first introduced or when new versions or enhancements are released. While historically the majority of our end customers have been SMBs, as we continue to expand our solutions to enterprise customers, the use of our solutions in complicated, large-scale network environments may increase our exposure to undetected errors, failures or bugs in our solutions. Additionally, undetected errors, failures or bugs in our solutions may increase if our solutions are used with improper network configurations, poor Internet connectivity, or outdated or inadequate hardware. Although we test our solutions to detect and correct errors and defects before their general release, we have, from time to time, experienced significant interruptions in our solutions as a result of such errors or defects and may experience future interruptions of service if we fail to detect and correct these errors and defects. The costs incurred in correcting such defects or errors may be substantial and could harm our results of operations. In addition, we rely on hardware purchased or leased and software licensed from third parties to offer our solutions.

In addition, our solutions require us to operate a highly complex network infrastructure, which relies on the successful combination and interaction among proprietary software solutions, third-party hardware and software products, third-party data center providers, and third-party communications vendors such as Internet service providers and telecommunications carriers. A failure in any of these products, solutions or systems may be caused by software or hardware defects, human error or intentional misconduct by our personnel or by the personnel of our third-party providers, natural disaster or other events. Any such event may result in a service degradation, disruption or outage for the end customers of our solutions, a loss of data stored within our solutions, a security vulnerability impacting our solutions or other adverse consequences for the users of our solutions.

Any defects in, or unavailability of, our or third-party software or hardware that cause interruptions of our solutions, loss of data, security issues or other negative consequences for the users of our solutions could, among other things:

 

   

cause a reduction in our revenue or delay in market acceptance of our solutions;

 

   

require us to pay penalties or issue credits or refunds to our partners and end customers or expose us to claims for damages;

 

   

cause us to lose existing partners and end customers and make it more difficult to attract new partners and end customers;

 

   

divert our development resources or require us to make extensive changes to our software or network infrastructure, which would increase our expenses and slow innovation;

 

   

increase our technical support costs; and

 

   

harm our reputation and brand or those of our partners.

Interruptions or delays in service from our third-party data center hosting facilities and co-location facilities could impair the delivery of our solutions, require us to issue credits or pay penalties and harm our business.

We currently serve our North American end customers from geographically disparate data center hosting facilities in North America, where we lease space from CoreSite, Equinix and other providers, and we serve our European end customers from a combination of co-location facilities and third-party data center hosting facilities in Europe. We also use third-party co-location facilities and third-party data center hosting facilities located in various other international regions to serve our end customers in these regions. Certain of our solutions are hosted by third-party data center facilities, primarily AWS. We do not control the operation of these third-party co-location facilities or third-party data center hosting facilities, and they are vulnerable to damage or

 

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interruption from natural disasters, public health crises, power loss, telecommunications failures, and similar events. They may also be subject to human error or to break-ins, sabotage, acts of vandalism or terrorism, and similar misconduct. Damage to, or failure of, these facilities, the communications network providers with whom we or they contract, or with the systems by which our communications providers allocate capacity among their customers, including us, or software errors, have in the past and could in the future result in interruptions in the delivery of our solutions.

Additionally, we may move or transfer our data and our end customers’ data to other data centers as a result of, among other things, the addition of new data centers, expansion or consolidation of our existing data centers, inability to renew the leases on our existing data centers on acceptable terms or at all or closure of the facilities in which our data centers are located. We may incur significant costs in connection with such transfers. In addition, despite precautions that we take during this process, any unsuccessful data transfers may impair or cause disruptions in the delivery of our solutions. Interruptions in the delivery of our solutions may reduce our revenues, may require us to issue credits or pay penalties, subject us to claims and litigation, cause end customers to terminate their agreements with us and adversely affect our renewal rates and our ability to attract new end customers and partners. Our ability to attract and retain end customers and partners depends on our ability to provide customers with highly reliable services and even minor interruptions in the delivery of our solutions could harm our brand and reputation and have a material adverse effect on our business.

While our UCaaS solutions are generally structured with redundancy across multiple data centers, certain of our BCA solutions, including email, are by default configured with redundancy across multiple servers within a data center, but not across multiple data centers. As a result, if a permanent loss of a data center that houses our BCA solutions were to occur, such as by a catastrophic fire or other disaster, we may not be able to recover the data stored in such data center without incurring significant expense, if we are able to recover it at all. In addition, any financial difficulties, such as bankruptcy or foreclosure, faced by our third-party data center operators or any of the service providers with which we or they contract may have negative effects on our business, the nature and extent of which are difficult to predict. Additionally, if our data centers are unable to keep up with our increasing needs for capacity, our ability to grow our business could be materially and adversely impacted.

We may not be able to respond to rapid technological changes, extend our platform or develop new features.

The cloud-based communications and collaboration industry is an emerging market that is characterized by rapid development of and changes in customer requirements, frequent introductions of new and enhanced services and continuing and rapid technological advancement. Our ability to grow our partner and end customer base and increase our revenue will depend heavily on our ability to enhance and improve our solutions, introduce new features and products and design our solutions to interoperate seamlessly with one another and across an increasing range of devices, operating systems and third-party applications. Our continued growth depends on continued use of voice and video communications by businesses and future demand for and adoption of Internet voice and video communications systems and services. In addition, to compete successfully in this emerging market, we must anticipate and adapt to technological changes and evolving industry standards and continue to design, develop, manufacture and sell new and enhanced solutions that provide increasingly higher levels of performance and reliability at lower cost. We invest significantly in research and development and our future success will depend on our ability to introduce and sell new solutions, features and functionality that enhance or are beyond the solution that we currently offer, as well as to improve usability and support and increase customer satisfaction. There can be no assurance that our enhancements to our platform or our new solutions, features or capabilities will be compelling to our partners and end customers or gain market acceptance. If our research and development investments do not accurately anticipate partner and end customer demand or if we fail to develop our platform or solutions in a manner that satisfies partner and end customer preferences and requirements in a timely and cost-effective manner or if we are unable to hire qualified personnel to help us develop our platform and solutions to meet partner and end customer demand, we may fail to retain our existing partners and end customers or increase demand for our subscriptions, either of which may materially and adversely impact our results of operations.

 

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The introduction of new products and services by competitors or the development of entirely new technologies to replace existing offerings could make our solutions obsolete or adversely affect our business, results of operations and financial condition. Announcements of future releases and new services and technologies by our competitors or us could cause end customers to defer purchases of our existing subscriptions, which also could have a material adverse effect on our business, financial condition or results of operations. We may experience difficulties with software development design or marketing that could delay or prevent our development, introduction or implementation of new product experiences, features or capabilities. We have in the past experienced delays in our internally planned release dates of new features and capabilities, and there can be no assurance that new product experiences, features or capabilities will be released according to schedule. Any delays could result in adverse publicity, loss of or delays in revenue or market acceptance or claims by end customers brought against us, all of which could harm our business. Moreover, the development of new or enhanced solutions and new productivity features of our platform may require substantial investment, and we must continue to invest a significant amount of resources in our research and development efforts to develop these solutions to remain competitive. We can provide no assurance that such investments will be successful. If partners and end customers do not widely adopt our new solutions, features and capabilities, we may not be able to realize a return on our investment. Certain of our solutions depend on open standards such as SIP and IP. These standards may change, and we may be unable to adjust to them quickly enough, or at all. If we are unable to develop, license or acquire new solutions, features and capabilities for our platform on a timely and cost- effective basis, or if such enhancements do not achieve market acceptance, our business would be harmed.

A significant number of our development, operations and support employees have historically been located in Russia, which subjects us to political uncertainties relating to Russia and U.S.-Russian relations, the current Russia-Ukraine conflict, and the Russian legal system, and any favorable or unfavorable developments in Russia-U.S. relations, currency exchange rates or the Russian legal environment could have an impact on our operating results.

A significant number of our development, operations and support employees are located in Russia. As of December 31, 2021, we had a total of 517 full-time-equivalent employees, or FTEs, located in Russia. Political and economic relations between Russia and the United States, two of the primary jurisdictions in which we operate, are complex and have recently been very volatile and involved the imposition of sanctions. Our operations in Russia are subject to political risks and uncertainties inherent in Russia.

In February 2022, the Russian Federation launched a military invasion into Ukraine. Russian actions with respect to Ukraine have resulted in certain sanctions against Russia being imposed by the United States, the EU, the U.K. and other jurisdictions. Neither we, nor any of our Russian operations or assets, are a target of current sanctions. However, we cannot predict the impact of Russian actions in Ukraine and any heightened military conflict or geopolitical instability that may follow, including heightened operating risks and product development disruptions in Russia, additional sanctions or counter-sanctions, heightened inflation, devaluation of the Russian ruble, and cyber disruptions or attacks. We are currently taking steps to reduce our exposure to risks related to doing business in Russia, including without limitation by relocating employees to expand the geographic diversification of our operations, but such efforts could cause us to incur significant incremental costs and ultimately may not be successful. Furthermore, our efforts to relocate employees may result in reduced productivity, slower development and release of new products or product features, decreased service levels for our partners and customers, and significant organizational distraction, and the new locations into which we expand our operations may, in turn, be subject to instability or volatility.

The future scope and application of sanctions in relation to Russia is impossible to predict and may be materially affected by political developments, including adoption of U.S. legislative proposals for imposition of additional sanctions related to Russia or the escalation of Russia’s conflict with Ukraine. Similarly, the EU and U.K. sanctions on Russia may continue to be extended and could also change in scope or application as a result

 

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of political developments. If relations between Russia and the United States and its allies deteriorate, further economic sanctions may be imposed against Russia and Russian interests, and the Russian government may curtail or cease its cooperation with the United States. For example, sanctions could limit our ability to fund our Russian operations and pay our Russian-based employees. If this should happen, our operations in Russia could be negatively impacted, further scaled back or shut down entirely. Such an event could cause decreased service levels for our end customers and a delay in new product releases or enhancements. Furthermore, if we had to further scale down or close our Russian operations, there would be significant time and cost required to relocate those operations elsewhere, which could have an adverse impact on our overall cost structure. Our business activities in Russia also subject us to risks associated with changes in and interpretations of Russian law, including laws related to employment, the protection and ownership of intellectual property and United States ownership of Russian operations.

Because of our operations in Russia, a portion of our operating expenses are denominated in Russian rubles. In the past, Russia has at times experienced a high rate of inflation, and therefore the currency exchange rate between the Russian ruble and the U.S. dollar has had a favorable impact on our operating results during such times of inflation. Conversely, if the exchange rate between the Russian ruble and the U.S. dollar declines for any reason, including as a result of improved relations between Russia and the United States, it could have a negative impact on our operating results.

If we do not effectively manage any future growth, particularly of our UCaaS solutions and internationally, our operating results will be adversely affected.

We anticipate that we will significantly expand our operations and operational and financial infrastructure in the near term, including internationally. The anticipated future growth of our business will place a significant strain on our management, administrative, operational and financial infrastructure, particularly with respect to entering new international markets. Our success will depend in part on our ability to manage this growth effectively. To manage the expected growth of our operations, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures and improve and upgrade our systems and infrastructure in anticipation of such growth. Many of our core corporate and internal applications, such as our billing system and administrative control panel, are internally developed. As a result, certain of our essential business activities rely on internally developed solutions, which may not be able to accommodate or successfully interoperate with new technologies or with third-party services that are used by us, our partners or our end customers, or which may not be sufficiently scalable or adaptable to rapid growth, our portfolio of solutions or legal or regulatory developments in any of the jurisdictions in which we operate. Additionally, the third-party applications we purchase for these services may have similar issues with interoperability, scalability and adoptability. Any disruption in our ability to execute our core business activities as a result of any of these factors could significantly impair our ability to operate our business, and our business could be materially and adversely impacted. Failure to effectively manage growth could result in difficulty or delays in delivering our solutions to end customers and partners, declines in quality or customer satisfaction, reductions in customer retention, increases in costs, difficulties in introducing new applications or features or other operational challenges. Our growth in recent years has primarily been driven by our UCaaS solutions, and we expect our UCaaS solutions to continue to be the main growth driver of our business. As a result, any failure to effectively manage growth in our UCaaS solutions is likely to have a material adverse impact of our overall growth. Any of these events could harm our business performance and operating results.

Our success depends in part on our continuing relationships with strategic vendors that we rely on for our infrastructure, network connectivity, provisioning and compliance services, and any diminished relationships with these strategic vendors could harm our business.

Our third-party network service providers grant us access to their Internet protocol networks and public switched telephone networks, and administer call termination and origination services, including 911 emergency calling in the U.S. and equivalent services internationally, and local number portability for our end customers.

 

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Further, our server infrastructure and application virtualization, which are essential to our ability to deliver our solutions to our end customers, use software that we have licensed from VMware. We expect that we will continue to rely heavily on third-party vendors to provide key network, infrastructure, provisioning and compliance services for the foreseeable future.

The agreements we have entered into with our strategic vendors generally provide that either party may terminate, in some cases on relatively short notice. Accordingly, the products and services they provide to us may not continue to be available to us on commercially reasonable terms, or at all. Though most of our subscriptions are sold by us on a month-to-month basis, because some of our contracts with our end customers and partners restrict our ability to terminate the agreement or increase pricing on short notice, we may be unable to pass along any sudden price increases to our end customers and partners until the renewal period for such contract, which could harm our operating results. Additionally, any loss of the right to use any of the software provided to us by our strategic vendors could result in our inability to meet our contractual commitments to provide such software or related solutions or to continue offering key elements of our solutions or delays in the provisioning of our solutions until similar software is either developed by us, or, if available from other third parties, is identified, obtained and integrated. Any such difficulties with our strategic vendors could harm our business and operating results.

If problems occur with any of our third-party strategic vendors, it may cause errors, poor service quality, and other technical issues in our solutions, and we may encounter difficulty identifying the source of the problem. These third-party vendors may be adversely impacted or overloaded by large increases in traffic, either as a result of the COVID-19 pandemic or otherwise, which could increase our exposure to damage from service interruptions. Any errors, poor service quality or other technical issues in our solutions, whether caused by our systems or a third-party network or service provider, could negatively affect our ability to deliver our solutions to end customers and may result in the loss of our existing end customers, delay or loss of market acceptance of our solutions, termination of our relationships and agreements with our partners or carriers or liability for failure to meet service level agreements, and may seriously harm our business and results of operations.

We rely on third parties, including third parties outside the U.S., for some of our customer support and software development.

Our customer service and support is currently provided through our employees in the U.S., Canada and Russia, as well as through third-party providers located in Nicaragua and India. Our third-party providers generally provide customer service and support to our end customers without identifying themselves as independent parties. As we expand our operations internationally, we may need to make significant expenditures and investments in our customer service and support to adequately address the complex needs of international customers, such as support in additional foreign languages. If we are unable to do so, our business may be harmed. Our award-winning customer support is a key differentiator for our solutions relative to our competitors, and we believe that our new end customer and partner signups are highly dependent on our business reputation and on positive recommendations from our existing end customers and partners. Any failure by us or our third- party providers to deliver high-quality support, or a market perception that we do not maintain high-quality support for our partners and end customers, would harm our business. If our third-party vendors do not deliver high-quality services to our partners and end customers, our reputation could be damaged, we could be exposed to liability for their actions and we could lose partners and end customers.

We also outsource some of our software development and design activities to third-party contractors located in India, Russia, Israel and the Czech Republic. Our dependence on third-party contractors creates a number of risks, in particular, the risk that we may not maintain quality, control or effective management with respect to these business activities and the risk that the countries in which such contractors are located may not offer adequate protection or enforcement rights with respect to our intellectual property. Furthermore, these third parties may be

 

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adversely impacted by the COVID-19 pandemic as a result of widespread illness and disruptions or restrictions on employees’ ability to work, which may continue to affect their ability to perform satisfactorily or at all.

We may experience additional risks as a result of our reliance on third parties located outside of the United States, including adverse regulatory regimes, political instability, inconsistent standards of performance, language barriers and other risks associated with doing business internationally. The ability of these third parties to deliver their customer support and software development services also may be disrupted by natural disasters, inclement weather conditions, civil unrest, strikes, and other adverse events in the regions in which their teams are located.

We anticipate that we will continue to depend on these and other third-party relationships in order to grow our business for the foreseeable future. If we are unsuccessful in maintaining existing and, if needed, establishing new relationships with third parties, our ability to efficiently operate existing solutions or develop new solutions and provide adequate customer support could be impaired, and, as a result, our competitive position or our results of operations could suffer.

We currently maintain offices and/or employees in Russia, Canada, the United Kingdom, the Netherlands and Japan and are in the process of expanding our international operations. Operating in foreign countries and expanding our international operations subject us to additional risks, including regulatory risks which may harm our ability to increase or maintain our international operations and investments.

A key element of our growth strategy is to further expand our partner and customer base internationally and successfully operate in data centers in foreign markets. We currently maintain offices and/or employees in Russia, Canada, the United Kingdom, the Netherlands and Japan and are in the process of expanding our international operations, but we have limited experience operating in foreign jurisdictions other than Russia, where a significant number of our development, operations and support employees are located. Our inexperience in operating our business globally increases the risk that international expansion efforts that we may undertake will not be successful. In addition, our presence in foreign countries may subject us to additional risks including:

 

   

localization of our solutions, including translation into foreign languages and adaptation for local practices;

 

   

lack of familiarity with and unexpected changes in foreign regulatory requirements;

 

   

the burdens of complying with a wide variety of foreign laws and legal standards, including privacy, telecommunications regulations and data protection requirements related to our solutions, partners, end customers and employees;

 

   

difficulties in and incremental costs associated with managing and staffing international operations;

 

   

fluctuations in currency exchange rates, the impact of inflation and the related effects on our operating results;

 

   

potentially adverse tax consequences, including the complexities of transfer pricing, foreign value added tax systems and restrictions on the repatriation of earnings;

 

   

dependence on certain third parties, including partners with whom we do not have extensive experience;

 

   

increased financial accounting and reporting burdens and complexities;

 

   

political, social and economic instability abroad, terrorist attacks and security concerns in general;

 

   

reduced or different protection for intellectual property rights in some countries and practical difficulties of enforcing rights abroad;

 

   

potential work stoppages, strikes or employee unionization in any of the countries in which we operate;

 

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export controls and economic sanctions administered by the Department of Commerce Bureau of Industry and Security (BIS) and the Treasury Department’s Office of Foreign Assets Control (OFAC);

 

   

operations at our research and development center in St. Petersburg, Russia may be materially impacted as a result of ongoing military action by Russia in Ukraine, and our business, financial condition and results of operations may be materially adversely affected by any negative impact on the global economy resulting from the conflict in Ukraine;

 

   

our current operations are international in scope, and we plan further geographic expansion, which will create a variety of operational challenges;

 

   

risks arising from geopolitical crises, such as the Russian invasion of Ukraine;

 

   

potential sanctions imposed by the United States and the European Union (EU), on Russian businesses, or potential restrictions imposed by Russia against U.S. companies operating in Russia;

 

   

possible deterioration in political relations between the U.S. and Russia;

 

   

political and economic instability created by the U.K.’s departure from the EU (Brexit);

 

   

increased capital expenditure requirements in order to open additional data centers to comply with applicable privacy, data protection and information security laws and regulations of new international locations; and

 

   

compliance with various anti-bribery and anti-corruption laws such as the Foreign Corrupt Practices Act (FCPA), and the United Kingdom Bribery Act of 2010 (U.K. Bribery Act).

If we are unable to protect our intellectual property rights, primarily our trade secrets, our competitive position could be harmed or we could be required to incur significant expenses to enforce our rights.

We rely heavily on our unpatented proprietary technology and confidential and proprietary information, including trade secrets and know-how. Despite our efforts to protect the proprietary and confidential nature of such technology and information, unauthorized parties may attempt to misappropriate, reverse engineer or otherwise obtain and use them. The contractual provisions in confidentiality agreements and other agreements that we generally enter into with employees, consultants, vendors, partners and our customers may not prevent unauthorized use or disclosure of our proprietary technology or intellectual property rights and may not provide an adequate remedy in the event of unauthorized use or disclosure of our proprietary technology or intellectual property rights. Moreover, our reliance on unpatented proprietary technology and confidential and proprietary information, as opposed to registered patents, may limit the protections available to us in defending or enforcing our intellectual property rights. Policing and enforcing against unauthorized use of our technologies, products and intellectual property is difficult, expensive and time-consuming, and such challenges are further intensified in foreign countries where the laws may not be as protective of intellectual property rights as those in the United States and where mechanisms for enforcement of intellectual property rights may be weak. As we expand our international activities, our exposure to unauthorized copying and use of our products and proprietary information may increase. We may be unable to determine the extent of any unauthorized use or infringement of our solutions, technologies or intellectual property rights. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Accordingly, we simply may not be able to prevent third parties from infringing upon or misappropriating our intellectual property. Our inability to adequately protect and enforce our technology, information and intellectual property would have a material adverse effect on our business.

Intellectual property rights are evolving in Russia and other countries in which we have personnel developing intellectual property, but are not fully developed and may not protect our rights to the same extent as in the United States. Employees located in such countries have contributed to the development of a substantial portion of our intellectual property. Our rights in this intellectual property, therefore, may derive from, or may be

 

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affected by, intellectual property laws of countries other than the United States. If the application of these laws to our intellectual property rights proves inadequate, then we may not be able to fully avail ourselves of our inability to adequately protect and enforce our technology, information and intellectual property would have a material adverse effect on our business.

We have in the past, and may again in the future, be subject to claims by others that we infringe their proprietary technology, which could force us to pay damages or prevent us from using certain technology in our solutions.

There may be intellectual property rights held by others, including issued or pending patents, copyrights, trademarks and service marks, that cover significant aspects of our technologies, branding or business methods, including technologies and intellectual property we have licensed from third parties. Companies in the technology industry and other patent, copyright and trademark holders seeking to profit from royalties in connection with grants of licenses own large numbers of patents, copyrights, trademarks, service marks and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. We have in the past, and may again in the future, receive claims from third parties alleging that we have infringed, misappropriated or misused intellectual property rights. In the past, we have resolved infringement litigation brought against us; however, we cannot assure you that we will be able to resolve any future claims or, if we are able to resolve any such claims, that the resolution will be on terms favorable to us. Our broad range of technology and our heightened visibility as a publicly traded company may increase the likelihood that third parties will claim that we, or our end customers, partners and/or carriers, infringe their intellectual property rights.

Any such intellectual property claim against us, regardless of merit, could be time-consuming and expensive to settle or litigate and could divert the attention of our technical and management personnel. An adverse determination also could prevent us from offering our solutions to our end customers and partners and may require that we procure or develop substitute solutions. For any intellectual property rights claim against us or our end customers or partners, we may also have to pay ongoing royalties or damages, indemnify our end customers and partners against damages or stop using technology or intellectual property found to be in violation of a third party’s rights. We may be unable to replace those technologies with technologies that have the same features or functionality and that are of equal quality and performance standards on commercially reasonable terms, or at all. Licensing replacement technologies and intellectual property may significantly increase our operating expenses or may require us to restrict our business activities in one or more respects. We may also be required to develop alternative technology and intellectual property, which could require significant effort, time and expense, and ultimately may not be an alternative that functions as well as the original or is accepted in the marketplace. Any third-party intellectual property claims against us could significantly increase our expenses and could have a significant and negative impact on our business, financial condition and results of operations.

In addition, although we have licensed proprietary technology from third parties such as Microsoft and VMware, we cannot be certain that the owners’ rights in such technology will not be challenged, invalidated or circumvented. Furthermore, certain of our end customer and partner agreements require us to indemnify them for third-party intellectual property infringement claims, which could increase our costs as a result of defending such claims and may require that we pay damages or ongoing royalties if there were an adverse ruling related to any such claims. These types of claims could harm our relationships with our end customers and partners, may deter future end customers and partners from purchasing our solutions or could expose us to litigation for these claims. Even if we are not a party to any litigation between an end customer or partner and a third party, an adverse outcome in any such litigation could make it more difficult for us to defend our intellectual property in any subsequent litigation in which we are a named party.

 

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Our use of open source software in our solutions could negatively affect our ability to sell our solutions and subject us to possible litigation.

Our solutions utilize software modules licensed by third-party authors under open source licenses, including as incorporated into our own software and into commercial software we may receive from third-party vendors. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide support, updates, warranties or other contractual protections regarding infringement claims or the quality of the code. We cannot ensure that the authors of such open source software will implement or push updates to address security risks or will not abandon further development and maintenance. Some open source licenses contain requirements that we make available source code for modifications or derivative works we create based upon the type of open source software that we use. If we combine our proprietary software with open source software in a certain manner, we could, under certain open source licenses, be required to release portions of the source code of our proprietary software to the public. This could allow our competitors to create similar products with lower development effort and time, and ultimately could result in a loss of product sales for us.

As a result of our use of open source software, our products may be subject to conditions we do not intend. Furthermore, the terms of many open source licenses have not been interpreted by U.S. courts, and these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our solutions. Moreover, our efforts to monitor our use of open source software in our business may not be entirely effective. If we are held to have breached or otherwise failed to comply with the terms of an open source software license, we could be enjoined from the sale of solutions that contain the open source components and/or required to pay damages, to seek licenses from third parties to continue offering such solutions, to re-engineer such solutions, to discontinue the sale of such solutions if re-engineering could not be accomplished on a timely basis, or to make generally available, in source code form, our proprietary code, any of which could adversely affect our business and operating results. Many of the risks associated with the use of open source software, such as the lack of warranties or assurances of title or performance, cannot be eliminated, and could, if not properly addressed, negatively affect our business. Any of these risks could be difficult to eliminate or manage and, if not addressed, could have an adverse effect on our business, financial condition and results of operations.

Failures in Internet infrastructure or interference with broadband access could cause current or potential end users to believe that our services are unreliable, possibly leading our end customers to switch to our competitors or to avoid using our solutions.

Unlike traditional communications services, our solutions depend on our end customers’ high-speed broadband access to the Internet. In addition, end users who access our solutions through mobile devices, such as smartphones and tablets, must have a high-speed connection, such as LTE, 5G or Wi-Fi, to use our services and applications effectively. If end users do not have adequate Internet bandwidth to support our communications services, or if their Internet access service providers have outages or deteriorations in their quality of service, end users may experience inconsistent or degraded performance of our solutions, leading them to conclude incorrectly that our solutions are deficient and potentially causing them to terminate their use of our solutions.

Similarly, as we experience an increase in the number of end users of our services and in the bandwidth requirements necessary to operate our solutions, these changes may degrade the performance of our solutions and applications due to capacity constraints and other Internet infrastructure limitations within our network. As our end customer base grows and their usage of our solutions increases, we will be required to make additional investments in network capacity to maintain adequate data transmission speeds, the availability of which may be limited, or the cost of which may be on terms unacceptable to us. If adequate capacity is not available to us as usage of our solutions increases, our network may be unable to achieve or maintain sufficiently high reliability or performance. In addition, if our Internet access service providers have outages or deteriorations in their quality of service, our end customers will not have access to our solutions or may experience a decrease in the quality of

 

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our solutions. Frequent or persistent interruptions could cause current or potential end users to believe that our solutions are unreliable, leading them to switch to our competitors or to avoid our solutions, and could permanently harm our reputation and brands.

Currently, Internet access is provided by companies that have significant and increasing market power in the broadband and Internet access marketplace, including incumbent phone companies, cable companies and wireless companies. Some of these providers offer solutions and subscriptions that directly compete with our own solutions, which can potentially give them a competitive advantage. Also, because there is limited federal regulation of broadband Internet access providers, these providers could take measures that degrade, disrupt or increase the cost of end user access to third-party services, including our solutions, by restricting or prohibiting the use of their infrastructure to support or facilitate third-party services or by charging increased fees to third parties or the users of third-party services, any of which would make our solutions less attractive to end users, and reduce our revenues.

If our applications do not interoperate with our end customers’ devices, their technology infrastructure or their other applications, or if we take longer to integrate third-party products with our platform, our solutions may become less competitive and our operating results could be harmed.

We offer our solutions across a variety of operating systems and through the Internet. We are dependent on the interoperability of our platform with third-party mobile devices (including smart devices and tablets), desktop and mobile operating systems, and web browsers that we do not control. Any changes in such devices, operating systems or web browsers that degrade the functionality of our solutions or give preferential treatment to competitive services could adversely affect usage of our solutions. A substantial number of our end users access our solutions through mobile devices, so a failure of our solutions to interoperate with mobile devices and operating systems would significantly harm our business. We may not be successful in developing or maintaining relationships with key providers of desktop and mobile operating systems and devices and web browsers, such as those of Apple Inc. or Alphabet Inc. (the parent company of Google) or in developing solutions that operate effectively with these operating systems, networks, devices, web browsers and standards. Apple, Google or other operators of app marketplaces regularly make changes to their marketplaces, and those changes may make access to our solutions more difficult. If we are unable to develop robust applications that operate on mobile devices, desktop and mobile operating systems and web browsers that our end customers use, it may be difficult for our end users to access and use our solutions, and our end user growth may be harmed and our business and operating results could be adversely affected.

We may expand through acquisitions of, investments in, or strategic partnerships or other strategic transactions with other companies, each of which may divert our management’s attention, result in additional dilution to our stockholders, increase expenses, disrupt our operations, fail to deliver the expected benefits and harm our results of operations.

Our business strategy may, from time to time, include acquiring or investing in complementary services, technologies or businesses, strategic investments and partnerships, or other strategic transactions, such as our acquisitions of Telax Voice Solutions (provider of a CCaaS solution) and AnyMeeting (provider of a cloud-based web and video conferencing and webinar software solution), and our strategic partnership with NEC. We cannot assure you that we will successfully identify suitable acquisition candidates or transaction counterparties, securely or effectively integrate or manage disparate technologies, lines of business, personnel and corporate cultures, realize our business strategy or the expected return on our investment, manage a company with operations in new geographical markets or successfully achieve the desired results of any strategic transaction into which we may enter. Any such acquisition, investment, strategic partnership or other strategic transaction could materially and adversely affect our results of operations. The process of negotiating, effecting and realizing the benefits from acquisitions, investments, strategic partnerships and strategic transactions is complex, expensive and time-consuming, and may cause an interruption of, or loss of momentum in, development and sales activities and operations of both companies, and we may incur substantial cost and expense, as well as

 

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divert the attention of management. We may issue equity securities which could dilute current stockholders’ ownership, incur debt, assume contingent or other liabilities and expend cash in acquisitions, investments, strategic partnerships, and other strategic transactions which could negatively impact our financial position, stockholder equity, and stock price.

Acquisitions, investments, strategic partnerships, and other strategic transactions involve significant risks and uncertainties, including:

 

   

the potential failure to achieve the expected benefits of the acquisition, investment, strategic partnership or other strategic transaction;

 

   

unanticipated costs and liabilities;

 

   

difficulties in integrating new personnel, solutions and subscriptions, software, businesses, operations, and technology infrastructure in an efficient and effective manner;

 

   

difficulties in maintaining customer relations;

 

   

the potential loss of key employees of any acquired businesses;

 

   

the diversion of the attention of our senior management from the operation of our daily business;

 

   

the potential adverse effect on our cash position to the extent that we use cash for the transaction consideration;

 

   

the potential significant increase of our interest expense, leverage and debt service requirements if we incur additional debt to pay for an acquisition, investment, strategic partnership or other strategic transaction;

 

   

the potential issuance of securities that would dilute our stockholders’ percentage ownership;

 

   

the potential to incur large and immediate write-offs and restructuring and other related expenses;

 

   

the potential liability or expenses associated with new types of data stored or otherwise processed, existing privacy, data protection or data security obligations or liabilities, unknown weaknesses in our solutions, insufficient security measures in place, and compromise of our networks or systems via access to our systems from assets not previously under our control; and

 

   

the inability to maintain uniform standards, controls, policies, and procedures.

Adverse general and industry-specific economic and market conditions and reductions in IT spending may reduce demand for our products, particularly by SMBs, which drive a significant portion of our revenue today.

Our revenue, results of operations and cash flows depend on the overall demand for our solutions. Concerns about the systemic impact of a potential widespread recession (in the United States or internationally), geopolitical issues or the availability and cost of credit could lead to increased market volatility, decreased consumer confidence and diminished growth expectations in the U.S. economy and abroad, which in turn could result in reductions in IT spending by our existing and prospective end customers. Although we have both SMB and enterprise customers, a significant portion of our revenue today come from SMBs. These end customers may be materially and adversely affected by economic downturns to a greater extent than larger, more established businesses. SMBs typically have more limited financial resources, including capital-borrowing capacity, than larger entities. Prolonged economic slowdowns may result in end customers delaying or canceling IT projects, seeking to lower their costs by requesting us to renegotiate existing contracts on less advantageous terms, defaulting on payments due on existing contracts or not renewing at the end of existing contract terms.

Our end customers may merge with other entities who use alternatives to our solutions and, during weak economic times, there is an increased risk that one or more of our end customers will file for bankruptcy protection, either of which may harm our revenue, profitability and results of operations. We also face risk from

 

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international end customers that file for bankruptcy protection in foreign jurisdictions, particularly given that the application of foreign bankruptcy laws may be more difficult to predict. In addition, we may determine that the cost of pursuing any claim may outweigh the recovery potential of such claim. As a result, broadening or protracted extension of an economic downturn could harm our business, revenue, results of operations and cash flows.

In addition, as the majority of our end customers pay for our subscriptions through credit and debit cards, weakness in certain segments of the credit markets and in the U.S. and global economies has resulted in and may in the future result in increased numbers of rejected credit and debit card payments, which could materially affect our business by increasing customer cancellations and impacting our ability to engage new SMB end customers. If our end customers, whether SMBs or otherwise, experience financial hardship as a result of a weak economy, industry consolidation or for any other reason, the overall demand for our subscriptions could be materially and adversely affected.

If we experience excessive fraudulent activity or cannot meet evolving credit card association merchant standards, we could incur substantial costs and lose the right to accept credit cards for payment, which could cause our customer base to decline significantly.

Most of our end customers and partners authorize us to bill their credit card accounts directly for service fees that we charge. If end customers or partners pay for our solutions with stolen credit cards, we could incur substantial third-party vendor costs for which we may not be reimbursed. Further, our end customers and partners provide us with credit card billing information online or over the phone, and we do not review the physical credit cards used in these transactions, which increases our risk of exposure to fraudulent activity. We also incur charges, which are referred to in the industry as chargebacks, from the credit card companies from claims that an end customer did not authorize the specific credit card transaction to purchase our solutions. If the number of chargebacks becomes excessive, we could be assessed substantial fines or be charged higher transaction fees, and we could lose the right to accept credit cards for payment. In addition, credit card issuers may change merchant and/or service provider standards, including data protection standards, required to utilize their services from time to time. We have established and implemented measures intended to comply with the Payment Card Industry Data Security Standard (PCI DSS). If we fail to maintain compliance with such standards or fail to meet new standards, the credit card associations could fine us or terminate their agreements with us, and we would be unable to accept credit cards as payment for our subscriptions. If we fail to maintain compliance with service provider standards, such as the PCI DSS, or fail to meet new standards, end customers may choose not to use our solutions for certain types of communication they have with their customers. If such a failure to comply with relevant standards occurs, we may also face legal liability if we are found to not comply with applicable laws that incorporate, by reference or by adoption of substantially similar provisions, merchant or service provider standards, including the PCI DSS. Our solutions may also be subject to fraudulent usage, including but not limited to domestic traffic pumping, fraudulent international calling, subscription fraud, premium text message scams, and other fraudulent schemes. This usage can result in, among other things, substantial bills from our vendors, for which we would be responsible, for terminating fraudulent call traffic. In addition, third parties may have attempted in the past, and may attempt in the future, to induce employees, sub-contractors or consultants into disclosing customer credentials and other account information, which can result in unauthorized access to customer accounts and customer data, unauthorized use of customers’ services, charges to end customers for fraudulent usage and costs that we must pay to carriers. Although we implement multiple fraud prevention and detection controls, we have suffered losses due to fraud from these and other causes, and we cannot assure you that these controls will be adequate to protect against fraud in the future. Substantial losses due to fraud or our inability to accept credit card payments could cause our paid customer base to significantly decrease, which would have a material adverse effect on our results of operations, financial condition, and ability to grow our business.

 

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Potential problems with our information systems could interfere with our business and operations.

We rely on our information systems and those of third parties for processing customer orders, distribution of our solutions, billing our end customers, processing credit card transactions, customer relationship management, supporting financial planning and analysis, accounting functions and financial statement preparation, and otherwise running our business. Information systems may experience interruptions, including interruptions of related services from third-party providers, which may be beyond our control. Such business interruptions could cause us to fail to meet customer requirements. All information systems, both internal and external, are potentially vulnerable to damage or interruption from a variety of sources, including without limitation, computer viruses, security breaches and other incidents, energy blackouts, natural disasters, terrorism, war, telecommunication failures, employee or other theft, and third-party provider failures. In addition, since telecommunications billing is inherently complex and requires highly sophisticated information systems to administer, our internally developed billing system, which is currently being used, may experience errors or we may improperly operate the system, which could result in the system incorrectly calculating the fees owed by our end customers for our subscriptions or related taxes and administrative fees. Any such errors in our end customer billing could harm our reputation and cause us to overpay or underpay taxes and administrative fees or violate truth in billing laws and regulations. Any errors or disruption in our information systems and those of the third parties upon which we rely could have a significant impact on our business. In addition, we may implement further and enhanced information systems in the future to meet the demands resulting from our growth and to provide additional capabilities and functionality. The implementation of new systems and enhancements is frequently disruptive to the underlying business of an enterprise, and can be time-consuming and expensive, increase management responsibilities, and divert management attention.

If we or our partners were to increase sales to large organizations, our sales cycles could lengthen, and we could experience greater deployment challenges.

As we continue to grow, we or our partners may begin investing more resources into sales to large organizations. Large organizations typically undertake a significant evaluation and negotiation process due to their leverage, size, organizational structure and approval requirements, all of which can lengthen our sales cycle. We may also face unexpected deployment challenges with large organizations or more complicated deployment of our solutions. Large organizations may demand additional features, support services, regulatory certifications and pricing concessions, or require additional security management or control features. We may spend substantial time, effort and money on sales, development and certification efforts to better meet the needs and demands of large organizations without any assurance that our efforts will produce any sales or that these end customers will adopt our solutions at a rate sufficient to justify our substantial up-front investment. As a result, we anticipate that increased sales to large organizations would likely lead to higher up-front sales costs and greater unpredictability in our business, results of operations and financial condition.

Our BCA solutions depend upon end customers using email, and a significant shift of those messages to other communication channels could impair our growth prospects and negatively affect our business, financial condition and financial results.

Our end customers deploy and use our BCA solutions to easily, securely and confidentially send and receive electronic messages, by way of Internet communications channels including email. Our BCA solutions revenue substantially depends on our current and potential end customers using email to exchange information electronically. New technologies, products or business models that could support migration to alternative means of secure communications could be disruptive to our business. If prospective or current end customers were to send and receive sensitive information using technology or communication channels other than email and, as a result, significantly reduce or discontinue their need for email services, our growth prospects and our business, financial condition and financial results could be materially adversely affected.

 

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We may be subject to, or assist law enforcement with enforcement of, a variety of U.S. and international laws that could result in claims, increase the cost of operations or otherwise harm our business due to changes in the laws, changes in the interpretations of the laws, greater enforcement of the laws, or investigations into compliance with the laws.

We may be subject to, or assist law enforcement with enforcement of, various laws, including those covering copyright, indecent content, child protection, consumer protection, telecommunications services, taxation, and similar matters. It may be difficult, expensive and disruptive for us to address law enforcement requests, subpoenas and other legal process, and laws in various jurisdictions may conflict and hamper our ability to satisfy or comply with such requests, subpoenas and other legal process. While to date we have not been subject to material legal or administrative actions as a result of improper or illegal content, the laws in this area are currently in a state of flux and vary widely between jurisdictions. Accordingly, it may be possible that in the future we and our competitors may be subject to legal actions along with the end users who shared such content. In addition, regardless of any legal liability we may face, our reputation could be harmed should there be an incident generating extensive negative publicity about the content shared on our platform. Such publicity would harm our business.

We are also subject to consumer protection laws that may affect our sales and marketing efforts, including laws related to subscriptions, billing, and auto-renewal. These laws, as well as any changes in these laws, could adversely affect our self-serve model and make it more difficult for us to retain and upgrade end customers and attract new end customers and hosts. Additionally, we have in the past, are currently, and may from time to time in the future become the subject of inquiries and other actions by regulatory authorities as a result of our business practices, including our subscription, billing, and auto-renewal policies. Consumer protection laws may be interpreted or applied by regulatory authorities in a manner that could require us to make changes to our operations or incur fines, penalties or settlement expenses, which may result in harm to our business. Our platform depends on the ability of our end customers, hosts, and end users to access the internet, and our platform has been blocked or restricted in some countries for various reasons. If we fail to anticipate developments in the law, or fail for any reason to comply with relevant law, our platform could be further blocked or restricted, and we could be exposed to significant liability that could harm our business.

We process, store, and use personal information and other data, which subjects us and our end customers to a variety of evolving international statutes, governmental regulation, industry standards and self-regulatory schemes, contractual obligations, and other legal obligations related to privacy, data protection and data security, which may increase our costs, decrease adoption and use of our solutions and subscriptions, and expose us to liability.

In the course of providing our solutions, we collect, store, and process many types of data, including personal data. Moreover, our end customers can use our solutions to store communications (including emails, voicemails, chats and other forms), files, videoconference and webinar recordings, contact lists, and many other forms of data that may contain contact and other personal or identifying information, and to process, transmit, receive, store, and retrieve a variety of communications and messages, including information about their own customers and other contacts, that may contain personal or identifying information or otherwise be proprietary or sensitive. End customers are able, and may be authorized under certain circumstances, to use our solutions to transmit, receive, and/or store personal information.

There are a number of federal, state, local, and foreign laws and regulations, as well as contractual obligations and industry standards, that provide for certain obligations and restrictions with respect to privacy, data protection and data security, and the collection, storage, retention, protection, use, processing, transmission, sharing, disclosure, and protection of personal information and other customer data. The scope of these obligations and restrictions is changing, subject to differing interpretations, and may be inconsistent among jurisdictions or conflict with other laws, regulations, obligations and standards, and their status remains uncertain. Failure to comply with obligations and restrictions related to privacy, data protection or data security

 

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in any jurisdiction in which we operate could subject us to claims, lawsuits, fines, criminal penalties, statutory damages, regulatory investigations and other proceedings, consent decrees, injunctions, adverse publicity, and other losses that could harm our business, results of operations and financial condition.

For example, the European Union General Data Protection Regulation (GDPR), which came into force in May 2018, strengthened the existing data protection regulations in the EU. The GDPR enhances data protection obligations for businesses and requires service providers processing personal data on behalf of customers to cooperate with European data protection authorities, implement security measures and keep records of personal data processing activities. Its provisions include increasing the maximum level of fines that EU regulators may impose for the most serious of breaches to the greater of €20 million or 4% of worldwide annual turnover. Such fines would be in addition to (i) the rights of individuals to sue for damages in respect of any data privacy breach which causes them to suffer harm and (ii) the right of individual member states to impose additional sanctions over and above the administrative fines specified in the GDPR.

Until recently, we relied on the EU-U.S. Privacy Shield framework to address certain data exports between the European Economic Area (EEA) and the U.S. On July 16, 2020, the Court of Justice of the European Union invalidated the EU-U.S. Privacy Shield as a mechanism to transfer EU personal data to the U.S. We are putting in place alternative data transfer mechanisms, such as EU Standard Contractual Clauses (Model Clauses), where we previously relied on the EU-U.S. Privacy Shield. Data protection authorities may require supplemental measures be put in place in addition to Model Clauses for these data transfers, with the European Data Protection Board adopting a final version of its recommendations on certain supplementary measures in June 2021. We may, in addition to other impacts, experience additional costs associated with increased compliance burdens following this decision, and we and our end customers face the potential for regulators in the EEA to apply different standards to the transfer of personal data from the EEA to the U.S., and to block, or require ad hoc verification of measures taken with respect to, certain data flows from the EEA to the U.S. We also may be required to engage in new contract negotiations with third parties that aid in processing data on our behalf.

Additionally, the U.K.’s vote in favor of exiting the EU, generally referred to as Brexit, resulted in the U.K. exiting the EU on January 31, 2020. The U.K. enacted a Data Protection Act in May 2018 that substantially implemented the GDPR and implemented statutory amendments to the Data Protection Act in 2019 that further aligned it with the GDPR, but the future of cross-border data flows following the U.K.’s exit from the EU is uncertain. After the transition period expires, it may become necessary for us to implement additional data export solutions like the Model Clauses to enable the continued flow of personal data to our U.K. operations from our EU end customers and affiliates. These solutions may take time and be challenging to put in place and, if not implemented promptly before or immediately following the Brexit transition period, our business may be disrupted, and we may be exposed to potential regulatory investigations and other proceedings, fines and civil claims.

Further legal challenges relating to the Model Clauses or other means we may undertake with respect to cross-border activities may result in a ruling that our measures are insufficient. Additionally, the Model Clauses were recently revised by the European Data Protection Board in June 2021, requiring the implementation of additional privacy measures and new privacy documentation with vendors, partners and customers. We will need to take any necessary and additional measures to ensure compliance with EU law with respect to our transfers of personal data from the EEA and the UK to the U.S. and other non-EEA countries. If we are unable to take such measures, then we may be at risk of experiencing reluctance or refusal of European or multi-national end customers to use our solutions and incurring regulatory penalties, which may have an adverse effect on our business.

Additionally, other jurisdictions outside the United States are considering or have passed legislation implementing data protection requirements or requiring local storage and processing of data, or similar requirements, which could increase the cost and complexity of delivering our solutions. In addition to government activity, privacy advocacy groups and certain industries have imposed or are considering various

 

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new, additional or different industry standards that may place additional burdens on us, and we may be contractually obligated to comply with these standards or otherwise considered subject to them. We also are subject to other contractual obligations relating to privacy, data protection and data security.

In the United States, numerous federal and state laws govern the privacy and security of personal information. In particular, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) establishes privacy and security standards that limit the use and disclosure of individually identifiable health information and requires the implementation of administrative, physical, and technical safeguards to protect the privacy of protected health information and ensure the confidentiality, integrity, and availability of electronic protected health information by certain institutions. We act as a “Business Associate” through our relationships with certain end customers and partners and are thus directly subject to certain provisions of HIPAA. In addition, if we are unable to protect the privacy and security of protected health information, we could be found to have breached our contracts with end customers and partners with whom we have a Business Associate relationship and may also face regulatory liability. Additionally, we are subject to FCC regulations imposing obligations related to our use and disclosure of certain data related our toll free and interconnected VoIP services. If we experience a data security incident, we may be required by state law or FCC or other regulations to notify our end customers and/or law enforcement. We may also be subject to Federal Trade Commission (FTC) enforcement actions if the FTC has reason to believe we have engaged in unfair or deceptive privacy or data security practices.

Noncompliance with laws and regulations relating to privacy and security of personal information, including HIPAA, or with contractual obligations, including those under any Business Associate agreement, may lead to claims, litigation, regulatory investigations and other proceedings, significant fines, civil and criminal penalties or liabilities. The U.S. Department of Health and Human Services (HHS) is responsible for enforcing HIPAA privacy and security standards. HHS enforcement activity has become more significant over the last few years, and HHS has signaled its intent to continue this trend. Violation of the FCC’s privacy rules can result in large monetary forfeitures and injunctive relief. In addition, the FTC has broad authority to seek monetary redress for affected consumers and injunctive relief. In addition to federal regulators, state attorneys general (and, in some states, individual residents) are authorized to bring civil actions seeking either injunctions or damages to the extent violations implicate the privacy of state residents. Class action lawsuits are common in the event of a data breach affecting financial or other forms of sensitive information.

Additionally, California has enacted the California Consumer Privacy Act (CCPA), which came into effect on January 1, 2020. Pursuant to the CCPA, we are required, among other things, to make certain enhanced disclosures related to California residents regarding our use or disclosure of their personal information, allow California residents to opt-out of certain uses and disclosures of their personal information without penalty, provide Californians with other choices related to personal data in our possession, and obtain opt-in consent before engaging in certain uses of personal information relating to Californians under the age of 16. The California Attorney General may seek substantial monetary penalties and injunctive relief in the event of our non-compliance with the CCPA. The CCPA also allows for private lawsuits from Californians in the event of certain data breaches. Aspects of the CCPA remain uncertain, and we may be required to make modifications to our policies or practices in order to comply. Moreover, a new privacy law, the California Privacy Rights Act (CPRA), was approved by California voters on November 3, 2020. The CPRA, most of which takes effect on January 1, 2023, clarifies and expands certain definitions under the CCPA, restricts the sharing of information for certain types of advertising, grants new protections and rights to consumers, expands the law’s application to any information sharing (not just sale), revises which businesses are subject to its provisions, expands businesses’ notification obligations, and implements stricter contractual requirements for contractors and service providers. The adoption of the CPRA may result in further uncertainty and require us to incur additional costs and expenses in an effort to comply.

As Internet commerce and communication technologies continue to evolve, thereby increasing online service providers’ and network users’ capacity to collect, store, retain, protect, use, process, and transmit large volumes of personal information, increasingly restrictive regulation by federal, state or foreign agencies becomes more likely.

 

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While we endeavor to comply with applicable data protection laws and regulations, binding standards and codes of conduct, as well as our own posted privacy policies and contractual commitments, any actual or alleged failure by us to comply with any laws, regulations, standards or codes of conduct, or our policies or contractual commitments, or otherwise to protect our end users’ privacy and data, including as a result of our systems or those of our third-party vendors being compromised by hacking or other malicious or surreptitious activity, could, in addition to resulting in claims, litigation, regulatory investigations and other proceedings and other liability, result in a loss of end user confidence in our solutions and ultimately in a loss of end users, which could materially and adversely affect our business.

Regulation of privacy, data protection and data security is evolving, and new laws, regulations, codes of conduct, standards and other obligations could further impact how we handle information relating to individuals or could require us to incur additional compliance costs, either of which could have an adverse impact on our operations. Further, our actual compliance, the perception of our compliance by end customers and others, costs of compliance with such laws, regulations, codes of conduct, standards and other obligations and customer concerns regarding their own compliance obligations (whether factual or in error) may limit the use and adoption of our solutions and reduce overall demand. Privacy-related concerns may cause end customers to resist providing the personal data necessary to allow them to use our solutions effectively. Even the perception of privacy-related concerns, whether or not valid, may inhibit market adoption of our solutions in certain geographies and/or industries.

Further, depending on the nature of the information compromised, in the event of a data breach or other unauthorized access to our member data, we may also have obligations to notify members about the incident. We may also need to provide some form of remedy, such as a subscription to a credit monitoring service, for the individuals affected by the incident. A growing number of legislative and regulatory bodies have adopted consumer notification requirements in the event of unauthorized access to or acquisition of certain types of personal information. For example, laws in all 50 states require businesses to provide notice to customers whose personally identifiable information has been disclosed as a result of a data breach. Such breach notification laws continue to evolve and may be inconsistent from one jurisdiction to another. Complying with these obligations could cause us to incur substantial costs and could increase negative publicity surrounding any incident that compromises member data. Furthermore, we may be required to disclose personal data pursuant to demands from individuals, privacy advocates, regulators, government agencies, and law enforcement agencies in various jurisdictions with conflicting privacy and security laws. This disclosure, or refusal to disclose personal data, may result in a breach of privacy and data protection policies, notices, laws, rules, court orders, and regulations and could result in proceedings or actions against us in the same or other jurisdictions, damage to our reputation and brand, and inability to provide our products and services to consumers in certain jurisdictions.

Additionally, due to the nature of our solution, we are unable to maintain complete control over data security or the implementation of measures that reduce the risk of a data security incident. For example, our end customers may accidentally disclose their passwords or store them on a mobile device that is lost or stolen, creating the perception that our systems are not secure against third-party access, potentially leading to allegations that we have suffered a data security breach or other data security incident. Additionally, our third- party vendors and service providers may have access to customer data. If our third-party vendors violate applicable laws or our policies, such violations may also put our end customers’ information at risk, result in claims, litigation, regulatory investigations and other proceedings and other liability, and could in turn have a material and adverse effect on our business.

 

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Certain of our solutions are subject to U.S. federal, state and international regulation, and other solutions we may introduce in the future may also be subject to U.S. federal, state or international laws, rules and regulations. Any failure to comply with such laws, rules and regulations could harm our business and expose us to liability.

Federal Regulation

Certain of our solutions are regulated by the FCC as an interconnected voice over internet protocol (VoIP) service. As a result, those services are subject to existing or potential FCC regulations, including, but not limited to, regulations relating to privacy, disability access, outage reporting, porting of numbers, call authentication and call spoofing, certain Federal Universal Service Fund contributions and other regulatory assessments and fees, emergency calling/Enhanced 911 (E-911) and law enforcement access. Congress or the FCC may expand the scope of our regulatory obligations at any time. In addition, FCC classification of our solutions as a common carrier or telecommunications service could result in additional federal and state regulatory obligations. We are also subject to U.S. federal export controls, anti-bribery/anti-corruption, consumer protection, privacy, data protection and other laws. Any enforcement action by the U.S. federal government, which may be a public process, would hurt our reputation, possibly impair our ability to sell our solutions to our partners and end customers, and harm our business.

State Regulation

State telecommunications regulation of our solutions is generally preempted by the FCC. However, states are allowed to assess state certain contributions, fees, and surcharges. We and our partners generally pass these fees and surcharges through to our end customers where we are permitted to do so, which may result in our solutions becoming more expensive. We expect that state public utility commissions will continue their attempts to apply state telecommunications regulations to services like ours.

Our toll-free services are subject to regulation by the public utility regulatory authority agency in those states where we provide those services. This regulation may include the requirement to obtain and retain a certificate of public convenience and necessity or other similar licenses. We may also be required to file tariffs that describe our toll-free services and provide rates for those services. We are also required to comply with regulations that vary by state concerning service quality, disconnection and billing requirements.

We are also subject to state consumer protection, privacy and data protection laws, as well as state or municipal sales, use, excise, 911, value added, gross receipts, utility user and ad valorem taxes, fees or surcharges.

International Regulation

As we expand internationally, we are subject to telecommunications, consumer protection, privacy, data protection, anti-bribery/anti-corruption and other laws and regulations in the foreign countries where we offer our solutions. Regulation of our VoIP services as telecommunications services may require us to obtain authorizations or licenses to operate in foreign jurisdictions and comply with legal requirements applicable to traditional telephony providers, which could impose substantial compliance costs on us. Local consumer protection laws may require changes to our contracting, invoicing, marketing or other standard business processes, and our solutions must comply with the data sovereignty, privacy and protection requirements of each jurisdiction in which we offer our solutions. Compliance with these laws and regulations may require us to incur significant development and capital investment to modify our solutions, infrastructure or business processes. Furthermore, the laws of different jurisdictions may conflict with one another, making it more challenging for us to comply with each jurisdiction’s laws.

If we do not comply with any current or future federal, state or international regulations that apply to our business, we could be subject to substantial fines and penalties, we may have to restructure our solutions, exit certain markets or raise the price of our solutions, any of which could harm our business and results of operations.

 

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Litigation, regulatory or judicial proceedings or investigations could result in significant settlements, fines or penalties and harm our business.

We have been the subject of litigation in the past and could be the subject of litigation, including class actions and regulatory or judicial proceedings or investigations, in the future. If a plaintiff in a litigation matter brought against us were to prevail on any of their claims, it could have an impact on our financial position, results of operations or cash flows. We could, for example, be required to pay substantial damages. During the course of litigation, we may provide periodic announcements regarding the results of hearings and motions and other interim developments related to the litigation. If securities analysts or investors regard these announcements as negative, the market price of our common stock may decline.

The outcomes of litigation and regulatory or judicial proceedings or investigations are difficult to predict. Plaintiffs or regulatory agencies in these matters may seek recovery of very large amounts or seek to have aspects of our business suspended or modified. The monetary and other impact of these actions may remain unknown for substantial periods of time. The cost to defend, settle or otherwise resolve these matters may be significant.

If regulatory or judicial proceedings or investigations were to be initiated against us by private or governmental entities, our business, financial condition and operating results could be adversely affected. Adverse publicity that may be associated with regulatory or judicial proceedings or investigations could negatively impact our relationships with our end customers and partners and decrease acceptance and use of our solutions.

We have a history of losses, we may not become profitable and, if we do, we may not be able to maintain profitability.

We have had net losses historically, including a net loss of $24.4 million in the year ended December 31, 2021, and we may not be able to achieve or maintain profitability in the future or on a consistent basis. We have incurred substantial expenses and expended significant resources to grow our business, including through the incurrence of debt, a significant increase in headcount, recent acquisitions and expansion of our internal infrastructure and operations to support our growing business, and we expect to continue to invest for future growth. In addition, as a public company, we expect to incur significant accounting, legal and other expenses that we have not incurred to date as a private company.

If we are unable to sustain market recognition of and loyalty to our brand among our current and potential partners, or if our reputation were to be harmed, we could lose partners or fail to increase the number of our partners, which could harm our business, financial condition and operating results.

We believe that continuing to strengthen our current brand will help us achieve widespread acceptance of our solutions. Given our partner-focused go-to-market approach, maintaining and enhancing the “Intermedia” brand among partners, as opposed to end customers, is critical to our success. We believe that the importance of brand recognition and loyalty among partners will increase in light of increasing competition in our markets. The demand for and cost of online and traditional advertising have been increasing and may continue to increase. Accordingly, we may need to increase our investment in, and devote greater resources to, advertising, marketing and other efforts to create and maintain brand loyalty among end customers and partners. We plan to continue investing to promote our brand, both domestically and internationally, but there is no guarantee that our brand development strategies will enhance the recognition of our brand. Some of our existing and potential competitors have well-established brands with greater general recognition than we have. If our efforts to promote and maintain our brand are not successful, our operating results and our ability to attract and retain partners may be adversely affected. In addition, even if our brand recognition and loyalty increase, this may not result in increased use of our solutions or higher revenue.

Our solutions, as well as those of our competitors, are regularly reviewed in computer and business publications. Negative reviews, or reviews in which our competitors’ solutions and services are rated more

 

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highly than our solutions, could negatively affect our brand and reputation in the view of partners and end customers. Complaints or negative publicity about our solutions or other aspects of our business could adversely impact our business, financial condition, operating results and ability to attract and retain partners and end customers.

A ratings downgrade or other negative action by a ratings organization could adversely affect our cost of capital.

Credit rating agencies continually revise their ratings for companies they follow. The condition of the financial and credit markets and prevailing interest rates have been, and will continue to be, subject to fluctuation. In addition, any adverse developments in our business and operations could lead to a ratings downgrade for us and/or our subsidiaries. Any such fluctuation in our credit rating may impact our ability to access debt markets in the future or increase our cost of future debt which could have a material adverse effect on our operating results and financial condition, which in return may adversely affect the trading price of shares of our common stock.

Our business could suffer if we cannot obtain or retain telephone numbers or are prohibited from obtaining local or toll-free numbers or if we are limited to distributing local or toll-free numbers to only certain end customers.

Our future success depends on our ability to procure large quantities of local and toll-free direct inward dialing numbers (DIDs) in the U.S. and foreign countries in desirable locations at a reasonable cost and without restrictions. Our ability to procure and distribute DIDs depends on factors outside of our control, such as applicable regulations, the practices of the communications carriers that provide DIDs, the cost of these DIDs, and the level of demand for new DIDs. Due to their limited availability, there are certain popular area code prefixes that we generally cannot obtain. Our inability to acquire DIDs for our operations would make our solution less attractive to potential end customers in the affected local geographic areas. In addition, future growth in our customer base, together with growth in the customer bases of other providers of cloud-based business communications, has increased, which increases our dependence on needing sufficiently large quantities of DIDs.

We currently depend on third-party phone device suppliers and fulfillment agents to configure and deliver the phones that we sell, and any delay or interruption in manufacturing, configuring or delivering by these third parties would result in delayed or reduced shipments to our end customers and may harm our business.

To enable end users to take advantage of our full set of features and functions of our UCaaS solutions, an end customer’s phones must be configured to interoperate with our back-end servers and systems, which contain complex specifications and utilize multiple protocol standards and software applications. We rely on three suppliers to provide phones that we offer for sale to our end customers that use our solutions, and we rely on internal employees and two fulfillment agents to configure and deliver the phones that we or our partners sell to end customers. Accordingly, we could be adversely affected if any such third parties fail to maintain competitive phones or configuration services or fail to continue to make them available on attractive terms, or at all. Furthermore, if any of these providers changes the operation of their phones, we will be required to undertake development and testing efforts to ensure that the new phones interoperate with our system, which efforts may be expensive and may not be effective. In addition, we must be successful in integrating our solutions with third- party phones in order to market and sell our solutions. These efforts may require significant capital and employee resources, and we may not accomplish these development efforts quickly or cost-effectively, if at all. These suppliers may be adversely impacted by the COVID-19 pandemic, which could affect their ability to perform satisfactorily or at all.

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market, the reliability of our solutions and our relationships with end customers or our overall reputation in the marketplace could suffer, which could cause us to lose revenue. We expect that it could take several months to effectively transition to new third-party manufacturers or fulfillment agents.

If we are unable to effectively process local number and toll-free number portability provisioning in a timely manner, our growth may be negatively affected.

We support local number and toll-free number portability, which allows end customers to transfer to us and thereby retain their existing phone numbers when subscribing to our solutions. Transferring numbers is a manual process that can take up to 15 business days or longer to complete. A new end customer of our solutions must maintain both our solution and the end customer’s existing phone service during the number transferring process. Delays in transferring these numbers often result from the fact that we depend on third-party carriers to transfer these numbers, a process that we do not control, and these third-party carriers may refuse or substantially delay the transfer of these numbers to us. Local number portability is considered an important feature by many potential end customers, and if we fail to avoid any related delays, we may experience increased difficulty in acquiring new end customers. Moreover, the Federal Communications Commission (FCC) requires communications providers to comply with specified number porting timeframes when end customers leave our solution for the services of another provider. Several international jurisdictions have imposed similar number portability requirements on solution providers like us. If we or our third-party carriers are unable to process number portability requests within the requisite timeframes, we could be subject to fines and penalties. Additionally, in the U.S., both customers and carriers may seek relief from the relevant state public utility commission, the FCC or in state or federal court for violation of number portability requirements.

Our emergency and E-911 calling services may expose us to significant liability.

The FCC requires Internet voice communications providers, such as our company, to provide E-911 service in all geographic areas covered by the traditional wire-line E-911 network. Under the FCC’s rules, Internet voice communications providers must transmit the caller’s phone number and registered location information to the appropriate public safety answering point (PSAP) for the caller’s registered location. We are also subject to similar requirements internationally.

In connection with the regulatory requirements that we provide access to emergency services dialing to our interconnected VoIP customers, we must obtain from each end customer, prior to the initiation of or changes to service, the physical locations at which the service will first be used for each VoIP line. For subscriptions that can be utilized from more than one physical location, we must provide end customers one or more methods of updating their physical location. Because we are not able to confirm that the service is used at the physical addresses provided by our end customers, and because end customers may provide an incorrect location or fail to provide updated location information, it is possible that emergency services calls may get routed to the wrong PSAP. If emergency services calls are not routed to the correct PSAP, and if the delay results in serious injury or death, we could be sued and the damages could be substantial. We are evaluating measures to attempt to verify and update the addresses for locations where our solutions are used.

In August 2019, the FCC adopted an order that will require providers of non-fixed interconnected VoIP service (service that is capable of being used from more than one location) to automatically provide with each 911 call, when technically feasible, more specific address information that can be used to adequately identify the location of the caller (such as a room or floor number). The requirement was scheduled to take effect on January 6, 2022. The implementation of this requirement may increase our costs and make our solutions more expensive, which could adversely affect our results of operations.

We could be subject to enforcement action by the FCC or international regulators if we are unable to provide access to emergency services in accordance with regulatory requirements. Such an enforcement action could result in significant monetary penalties and restrictions on our ability to offer non-compliant subscriptions.

 

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In addition, end customers may attempt to hold us responsible for any loss, damage, personal injury or death suffered as a result of delayed, misrouted or uncompleted emergency service calls or text messages, subject to any limitations on a provider’s liability provided by applicable laws, regulations and our customer agreements.

Efforts to address robocalling and caller ID spoofing could cause us competitive harm.

In June 2019, the FCC ruled that providers of voice services may by default (subject to opt-out by subscribers) block voice traffic based on reasonable analytics designed to identify unwanted and illegal calls. In March 2020, the FCC required that all voice service providers implement the STIR/SHAKEN caller ID authentication framework in the Internet protocol portions of their networks by June 30, 2021. In September 2020, the FCC required all providers of voice services to file certifications with the FCC regarding their efforts to stem the origination of illegal robocalls on their networks; that is, that their traffic is either signed with STIR/ SHAKEN or subject to a robocall mitigation program. Voice service providers must also commit to cooperating with the FCC, law enforcement and the industry traceback consortium in investigating and stopping any illegal robocallers that are using their service to originate calls. While we have taken the steps to date that we believe are necessary to enable us to comply with the STIR/SHAKEN requirements in the U.S. and Canada, the two countries that have formally adopted a STIR/SHAKEN framework, there remains some uncertainty regarding how STIR/SHAKEN will work in practice. The STIR/SHAKEN framework may eventually be used throughout the world. It is likely that the standards to obtain STIR/SHAKEN signing authority in other countries will differ from the U.S. requirements and similar to the U.S., there are no accepted standards yet for how voice service providers that do not have direct STIR/SHAKEN signing authority will be able to authenticate calls originated by their customers. In addition, foreign regulators have allowed terminating voice service providers to block voice traffic to address robocalling or other unwanted calls. If we do not have a solution in place for STIR/SHAKEN when STIR/SHAKEN becomes widely adopted, we would be unable to authenticate originating calls from our end customers. Our inability to authenticate our end customers’ calls could make our solutions less desirable and harm our business, as call recipients would be less likely to answer non-authenticated calls and terminating voice service providers may block calls that are not authenticated. Further, if we do not have STIR/SHAKEN caller ID authentication in place when required, we could be subject to regulatory enforcement action, which could result in fines or limitations on our ability to expand our business. Any of these outcomes could limit our ability to compete, which would have a material adverse effect on our results of operations.

We have indemnity provisions under our contracts with our end customers, partners and other third parties, which could have a material adverse effect on our business.

In our agreements with end customers, partners and other third parties, we typically agree to indemnify them for losses related to claims by third parties of intellectual property infringement, misappropriation or other violation. Additionally, from time to time, end customers and partners require us to indemnify them for breach of confidentiality, violation of applicable law and breaches of security, among other things. Although we normally seek to contractually limit our liability with respect to such obligations, some of these agreements provide for potentially significant, or even uncapped, liability, and the existence of any dispute may have adverse effects on our end customer and partner relationships and reputation, and we may incur substantial liability related to them. In addition, provisions regarding limitation of liability in our agreements with end customers, partners or other third parties may not be enforceable in some circumstances or jurisdictions or may not protect us from claims and related liabilities and costs. We maintain insurance to protect against certain types of claims associated with the use of our solutions, but our insurance may not adequately cover any such claims and may not continue to be available to us on acceptable terms or at all. If any such indemnification obligations are triggered, we could face substantial liabilities or be forced to make changes to our products, enter into license agreements, which may not be available on commercially reasonable terms or at all, or terminate our agreements with end customers, partners and other third parties and provide refunds. In addition, even claims that ultimately are unsuccessful could result in expenditures of management’s time and other resources. Furthermore, any legal claims from end customers and partners could result in reputational harm and the delay or loss of market acceptance of our solutions.

 

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If we fail to meet the minimum service level commitments offered to our end customers and partners, we could be obligated to issue credits for future solutions or pay penalties, which could significantly harm our revenue.

Our end customer and partner agreements generally provide minimum service level commitments addressing uptime, functionality or performance for most of our solutions. If we are unable to meet the stated service level commitments for these end customers or partners, including if our solutions suffer extended periods of unavailability, we may be contractually obligated to provide our end customers and partners with credits for future solutions or pay other penalties. Our revenue could be significantly impacted if we are unable to meet our service level commitments and are required to issue significant payments or service credits or pay other penalties. We have not historically incurred any significant liabilities for minimum service level commitments, and we do not currently have any reserves on our balance sheet for these commitments.

We may be subject to liabilities on past sales for taxes, surcharges, and fees and our operating results may be harmed if we are required to collect such amounts in jurisdictions where we have not historically done so.

We believe we collect state and local sales tax and use, excise, 911, value added, gross receipts, utility user, and ad valorem taxes, fees or surcharges in all relevant jurisdictions in which we generate sales, based on our understanding of the applicable laws in those jurisdictions. Such tax, fees and surcharge laws and rates vary greatly by jurisdiction, and the application of such taxes to e-commerce businesses, such as ours, is a complex and evolving area. There is uncertainty as to what constitutes sufficient “in state presence” for a state to levy taxes, fees and surcharges for sales made over the Internet, and after the U.S. Supreme Court’s ruling in South Dakota v. Wayfair, certain U.S. states that have not historically required online retailers with no in-state property or personnel to collect and remit sales tax on sales to the state’s residents may now begin to require such collection and remittance. This may lead to broader enforcement of sales tax collection requirements in new jurisdictions. The application of existing or future laws relating to indirect taxes to our business, or the audit of our business and operations with respect to such taxes or challenges of our positions by taxing authorities, all could result in increased tax liabilities for us or our partners and end customers that could materially and adversely affect our results of operations and our relationships with our partners and end customers.

Changes in effective tax rates, or adverse outcomes resulting from other tax increases or examination of our income or other tax returns, could adversely affect our results of operations and financial condition.

Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:

 

   

changes in the valuation of our deferred tax assets and liabilities;

 

   

expansion into new jurisdictions;

 

   

expiration of, or lapses in, the research and development tax credit laws;

 

   

expiration or non-utilization of net operating loss carryforwards;

 

   

tax effects of share-based compensation;

 

   

potential challenges to and costs related to implementation and ongoing operation of our intercompany arrangements;

 

   

changes in tax laws and regulations and accounting principles, or interpretations or applications thereof; and

 

   

certain non-deductible expenses as a result of acquisitions.

In addition, an increase in the taxes or fees applicable to our solutions, such as Universal Service Fund contributions or other regulatory assessments, could negatively impact our business if we are unable to recover those amounts from our partners and customers or if such amounts make the pricing of our solutions less

 

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competitive relative to offerings of other providers that do not comply with such regulatory frameworks. Similarly, an adverse outcome arising from an examination of our income or other tax returns could result in higher tax exposure, penalties, interest or other liabilities that could impair our financial condition.

Any changes in our tax rates or tax liabilities could adversely affect our results of operations and financial condition.

Changes in U.S. and foreign tax laws could have a material adverse effect on our business, cash flow, results of operations or financial condition.

We are subject to tax laws, regulations, and policies of the U.S. federal, state, and local governments and of comparable taxing authorities in foreign jurisdictions. Changes in tax laws, as well as other factors, could cause us to experience fluctuations in our tax obligations and otherwise adversely affect our tax positions and/or our tax liabilities. For example, the U.S. federal tax legislation commonly referred to as the Tax Cuts and Jobs Act, or the TCJA, enacted in December 2017, resulted in fundamental changes to the Internal Revenue Code of 1986, as amended, or the Code, including, among many other things, a reduction to the federal corporate income tax rate, a partial limitation on the deductibility of business interest expense, a limitation on the deductibility of certain director and officer compensation expense, limitations on net operating loss carrybacks and carryovers and changes relating to the scope and timing of U.S. taxation on earnings from international business operations. Subsequent legislation, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act enacted on March 27, 2020, relaxed certain of the limitations imposed by the TCJA for certain taxable years, including the limitation on the use and carryback of net operating losses and the limitation on the deductibility of business interest expense. The exact impact of the TCJA and the CARES Act for future years is difficult to quantify, but these changes could materially affect us. In addition, other changes could be enacted in the future to increase the corporate tax rate, limit further the deductibility of interest, subject carried interests to more onerous taxation or effect other changes that could have a material adverse effect on our business, results of operations and financial condition. Such changes could also include increases in state taxes and other changes to state tax laws to replenish state and local government finances depleted by costs attributable to the COVID-19 pandemic and the reduction in tax revenues due to the accompanying economic downturn. Furthermore, the Organisation for Economic Co-operation and Development (OECD) has published proposals covering various international tax-related issues, including country-by-country reporting, permanent establishment rules, transfer pricing, tax treaties and taxation of the digital economy. Certain countries, including the United Kingdom, have recently enacted a digital services tax, which is generally a percentage of gross revenue derived from customers in such countries. Future tax reform resulting from this development may result in changes to long-standing tax principles, which could adversely affect our effective tax rate or result in higher tax liabilities in those countries or change the manner in which we operate our business. There can be no assurance that our tax payments, tax credits or incentives will not be adversely affected by these or other initiatives.

We depend largely on the continued services of our senior management and other highly-skilled employees, and if we are unable to hire, retain, manage and motivate our employees, we may not be able to grow effectively and our business, results of operations and financial condition could be adversely affected.

Our future performance depends on the continued services and contributions of our senior management and other key employees to execute on our business plan, and to identify and pursue opportunities and services innovations. The loss of services of senior management or other key employees could significantly delay or prevent the achievement of our development and strategic objectives. In particular, we depend to a considerable degree on the vision, skills, experience, and effort of our President and Chief Executive Officer, Michael J. Gold. None of our executive officers or other senior management personnel is bound by a written employment agreement that obligates them to remain employed with us for a defined period of time and any of them may therefore terminate employment with us at any time with no advance notice. The replacement of any of these senior management personnel would likely involve significant time and costs, and such loss could significantly delay or prevent the achievement of our business objectives. The loss of the services of our senior management or other key employees for any reason could adversely affect our business, financial condition or results of operations.

 

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Our future success also depends on our ability to continue to attract and retain highly skilled personnel. We believe that there is, and will continue to be, intense competition for highly skilled technical and other personnel with experience in our industry in the Silicon Valley area, where our headquarters office is located. In addition, changes to immigration policies, particularly to the U.S. H-1B and other visa programs, and restrictions on travel (including but not limited to current travel restrictions due to the COVID-19 pandemic) could restrain the flow of technical and professional talent into the U.S. and other countries in which we operate, and may inhibit our ability to hire qualified personnel. We must provide competitive compensation packages and a high-quality work environment to hire, retain, and motivate employees. If we are unable to retain and motivate our existing employees and attract qualified personnel to fill key positions, we may be unable to manage our business effectively, including the development, marketing, and sale of existing and new subscriptions, which could have a material adverse effect on our business, financial condition, and results of operations. To the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or divulged proprietary or other confidential information. Volatility in, or lack of performance of, our stock price may also affect our ability to attract and retain key personnel.

Our management team has limited experience managing a public company.

Many members of our management team have limited experience managing a publicly traded company, interacting with public company investors and complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage us as a public company that is subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could adversely affect our business, results of operations and financial condition.

Failure to comply with anti-bribery, anti-corruption, and anti-money laundering laws could subject us to penalties and other adverse consequences.

We are subject to the Foreign Corrupt Practices Act (FCPA), the U.K. Bribery Act and other anti-corruption, anti-bribery and anti-money laundering laws in various jurisdictions both domestic and abroad. In addition to our own sales force, we also leverage partners and other third parties to sell our solutions and conduct our business abroad. We and our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and may be held liable for the corrupt or other illegal activities of these third-party business partners and intermediaries, our employees, representatives, contractors, partners, and agents, even if we do not explicitly authorize such activities. While we have policies and procedures to address compliance with such laws, we cannot assure you that our partners, employees and agents will not take actions in violation of our policies or applicable law, for which we may be ultimately held responsible. Any violation of the FCPA or other applicable anti-bribery, anti-corruption, and anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions or suspension or debarment from U.S. government contracts, all of which may have an adverse effect on our reputation, business, operating results and prospects.

We are subject to governmental export and import controls that could impair our ability to compete in international markets due to licensing requirements and subject us to liability if we are not in compliance with applicable laws.

Our solutions and business activities are subject to various restrictions under U.S. export control and sanctions laws and regulations, including various economic and trade sanctions regulations administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) and, with respect to our products, including those that incorporate encryption technology, the U.S. Department of Commerce’s Export Administration Regulations (EAR). The U.S. export control laws and U.S. economic sanctions laws include

 

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restrictions or prohibitions on the sale or supply of certain products and services to U.S.-embargoed or U.S.-sanctioned countries, governments, persons, and entities, and also require authorization for the export of certain technology, commodities and software, including encryption items. In addition, various countries regulate the import of certain encryption technology, including through import permitting and licensing requirements and have enacted or could enact laws that could limit our ability to distribute our solutions or could limit our end customers’ ability to implement our solutions in those countries.

Changes in our solutions, or changes in export, sanctions, and import laws, may delay the introduction and sale of subscriptions to our solutions in international markets; restrict our partners’ ability to market and sell our solutions; prevent our end customers with international operations from using our solutions; or, in some cases, prevent the access or use of our platform to and from certain countries, governments, persons or entities altogether. Further, any change in export or import regulations, economic sanctions or related laws, shift in the enforcement or scope of existing regulations or change in the countries, governments, persons or technologies targeted by such regulations could result in decreased use of our solutions or in our decreased ability to export or sell our solutions to existing or potential end customers with international operations. Any decreased use of our platform or limitation on our ability to export or sell our solutions would likely harm our business.

While we have taken steps to verify that we and our partners comply with the export, sanctions and import laws, we cannot assure you that our policies and procedures relating to export control and sanctions compliance will prevent violations. If we are found to be in violation of U.S. sanctions or export control regulations, it can result in significant fines or penalties and possible incarceration for responsible employees and managers, as well as reputational harm and loss of business. Also, if we fail to obtain appropriate import, export or re-export licenses or permits, we may also be adversely affected through reputational harm, as well as other negative consequences, including government investigations and penalties.

Natural disasters, war, terrorist attacks, global pandemics or malicious conduct, among other unforeseen events, could adversely impact our operations, could degrade or impede our ability to offer our solutions, and may negatively impact our financial condition, revenues and costs going forward.

Our cloud communications solutions rely on uninterrupted connection to the Internet through data centers and networks. Any interruption or disruption to our network, or the third parties on which we rely, could adversely impact our ability to provide our solutions. Our network could be disrupted by circumstances outside of our control including natural disasters, acts of war, terrorist attacks, global pandemics or malicious acts, among other unforeseen events, including, but not limited to, cyber-attacks. For example, our headquarters are located in the Silicon Valley Area, a region known for seismic activity. Also, global pandemics, such as the one caused by the COVID-19 pandemic, may restrict travel by personnel, reduce the availability of materials required to maintain data centers that support our cloud communication solutions, and could require us or our partner data centers and Internet service providers to curtail operations in certain geographic regions. Such an event may also impede our end customers’ connections to our network, since these connections also occur over the Internet, and would be perceived by our end customers as an interruption of the delivery of our solutions, even though such interruption would be beyond our control. In addition, as a result of the COVID-19 pandemic, we have been experiencing changes to our normal business practices due to most of our employees working from home in many of our office locations. As we implement modifications to employee travel and employee work locations in response, among other business modifications, these changes could, in the future, negatively impact our normal provision of services, particularly in the areas of sales and marketing to new and prospective end customers. Any of these events could have a material adverse impact on our business causing us to incur significant expenses, lose substantial amounts of revenue, suffer damage to our reputation, and lose end customers.

 

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As a result of becoming a public company, we will be obligated to develop and maintain proper and effective internal control over financial reporting in order to comply with Section 404 of the Sarbanes-Oxley Act. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in us and, as a result, the value of our common stock. Additionally, material weaknesses in our internal control over financial reporting or our failure to remediate such material weaknesses could result in a material misstatement in our financial statements, and could affect investor confidence in the accuracy and completeness of our financial statements, as well as our common stock price.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles in the United States (GAAP). We are in the very early stages of the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404 of the Sarbanes-Oxley Act. We may not be able to complete our evaluation, testing and any required remediation prior to becoming a public company or in a timely manner thereafter. If we are unable to assert that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline, and we may be subject to investigation or sanctions by the SEC.

We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting as of the end of the fiscal year that coincides with the filing of our second annual report on Form 10-K. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. We will also be required to disclose changes made in our internal control and procedures on a quarterly basis. However, our independent registered public accounting firm will not be required to report on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until the later of the year following our first annual report required to be filed with the SEC, or the date we are no longer an “emerging growth company” as defined in the JOBS Act if we take advantage of the exemptions contained in the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating.

Prior to the completion of this offering, we have operated with limited accounting personnel to adequately execute our accounting processes at the level of a public company. In November 2021, we identified a material weakness in our internal control over financial reporting. The material weakness resulted from the lack of adequately designed and implemented controls over the financial close, reporting and disclosure process. Our remediation efforts associated with the identified material weakness are currently ongoing and remain subject to ongoing review by our management.

While we aim to work diligently to ensure a robust internal control environment that is devoid of significant deficiencies and material weaknesses, given the complexity of the accounting rules, we may, in the future, identify significant deficiencies or material weaknesses in our disclosure controls and procedures and internal control over financial reporting. The existence of any material weakness or significant deficiency may require management to devote significant time and incur significant expense to remediate any such material weaknesses or significant deficiencies and management may not be able to remediate any such material weaknesses or significant deficiencies in a timely manner. The existence of any material weakness in our internal control over financial reporting could also result in errors in our financial statements that could require us to restate our financial statements, cause us to fail to meet our reporting obligations and cause shareholders to lose confidence in our reported financial information, all of which could materially and adversely affect our business and stock price. To comply with the requirements of being a public company, we may need to undertake various costly and time-consuming actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff, which may adversely affect our business, financial condition and results of operations.

 

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If our goodwill or intangible assets become impaired, we may be required to record a significant charge to earnings.

At December 31, 2021, we had $93.3 million of intangible assets, net and $256.6 million of goodwill on our Consolidated Balance Sheet. The intangible assets are principally composed of purchased technology, customer relationships, trade names and covenants not to compete. Goodwill is tested for impairment on an annual basis and also when events or changes in circumstances indicate that impairment may have occurred. Intangible assets are tested for impairment only when events or changes in circumstances indicate that an impairment may have occurred. Determining whether an impairment exists can be difficult and requires management to make significant estimates and judgments. To the extent that business conditions deteriorate, or if changes in key assumptions and estimates differ significantly from management’s expectations, it may be necessary to record impairment charges in the future. See Note 3, “Goodwill and Intangible Assets,” to our consolidated financial statements included in this prospectus for additional information.

If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could fall below expectations of securities analysts and investors.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.

Additionally, we base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenue and expenses that are not readily apparent from other sources. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, stock-based compensation, allowance for doubtful accounts, useful lives and recoverability of our long-lived assets, recoverability of our goodwill, business combinations and income taxes.

Changes in accounting principles and guidance, or their interpretation, could result in unfavorable accounting charges or effects, including changes to our previously issued financial statements, which could cause our stock price to decline.

A change in accounting standards or practices could harm our operating results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may harm our operating results or the way we conduct our business.

Risks Related to Our Indebtedness

Our existing indebtedness could adversely affect our business and growth prospects.

As of December 31, 2021, we had a term loan balance of $266.0 million outstanding under our Term Loan Facility and $12.0 million outstanding under our revolving loan facility (our Revolving Credit Facility, and together with the Term Loan Facility, our Credit Facilities). In addition, as of December 31, 2021, we had $40.0 million of additional borrowing capacity under our Revolving Credit Facility. All obligations under the Credit Agreement are secured by first-priority perfected security interests in substantially all of our assets and the assets of our domestic subsidiaries, subject to permitted liens and other exceptions. On February 3, 2022 and April 4, 2022, we withdrew $10.0 million and $5.0 million, respectively, on our Revolving Credit Facility, with

 

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$25.0 million remaining available under the Revolving Credit Facility after giving effect to such withdrawals. On March 28, 2022, we entered into an amendment to the documentation for our Credit Facilities to extend the maturity date of the existing Revolving Credit Facility from the original maturity date of July 19, 2023 to October 18, 2024 and convert all LIBOR referenced rates to rates tied to the secured overnight financing rate. The borrowing capacity under our Credit Facilities remains the same, and incremental borrowing costs have been deferred and will be amortized straight line over the updated term. On April 14, 2022, we entered into an agreement with the BMO Harris Bank N.A. (“BMO”) for a line of credit (“ BMO LOC”) with a borrowing capacity of up to $30.0 million. Advances under the BMO LOC are guaranteed by certain MDP investment funds. We drew $25.0 million on the BMO LOC and used the proceeds, along with cash on hand, to pay down the outstanding balance on the Revolving Credit Facility.

Our indebtedness, or any additional indebtedness we may incur, could require us to divert funds identified for other purposes for debt service and impair our liquidity position. If we cannot generate sufficient cash flow from operations to service our debt, we may need to refinance our debt, dispose of assets or issue equity to obtain necessary funds. We do not know whether we will be able to take any of these actions on a timely basis, on terms satisfactory to us or at all.

Our indebtedness, the cash flow needed to satisfy our debt and the covenants contained in our Credit Facilities have important consequences, including:

 

   

limiting funds otherwise available for financing our capital expenditures by requiring us to dedicate a portion of our cash flows from operations to the repayment of debt and the interest on this debt;

 

   

limiting our ability to incur additional indebtedness;

 

   

limiting our ability to capitalize on significant business opportunities;

 

   

making us more vulnerable to rising interest rates; and

 

   

making us more vulnerable in the event of a downturn in our business.

Our level of indebtedness may place us at a competitive disadvantage to our competitors that are not as highly leveraged. Fluctuations in interest rates can increase borrowing costs. Increases in interest rates may directly impact the amount of interest we are required to pay and reduce earnings accordingly. In addition, developments in tax policy, such as the disallowance of tax deductions for interest paid on outstanding indebtedness, could have an adverse effect on our liquidity and our business, financial conditions and results of operations. Further, our Credit Facilities contain customary affirmative and negative covenants and certain restrictions on operations that could impose operating and financial limitations and restrictions on us, including restrictions on our ability to enter into particular transactions and to engage in other actions that we may believe are advisable or necessary for our business. Our Term Loan Facility is also subject to mandatory prepayments in certain circumstances, including a requirement to make a prepayment with a certain percentage of our excess cash flow. This excess cash flow payment, and other future required prepayments, will reduce our cash available for investment in our business.

We expect to use cash flow from operations to meet current and future financial obligations, including funding our operations, debt service requirements and capital expenditures. The ability to make these payments depends on our financial and operating performance, which is subject to prevailing economic, industry and competitive conditions and to certain financial, business, economic and other factors beyond our control.

The financing documents governing our Credit Facilities permit us to incur certain additional indebtedness, including liabilities that do not constitute indebtedness as defined in the financing documents. We may also consider investments in joint ventures or acquisitions, which may increase our indebtedness. In addition, financing documents governing our Credit Facilities do not restrict our Sponsor from creating new holding companies that may be able to incur indebtedness without regard to the restrictions set forth in the financing documents governing our Credit Facilities. If new debt is added to our currently anticipated indebtedness levels, the related risks that we face could intensify.

 

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We may not be able to generate sufficient cash flow to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under such indebtedness, which may not be successful.

Our ability to make scheduled payments or to refinance outstanding debt obligations depends on our financial and operating performance, which will be affected by prevailing economic, industry and competitive conditions and by the COVID-19 pandemic as well as financial, business and other factors beyond our control. We may not be able to maintain a sufficient level of cash flow from operating activities to permit us to pay the principal, premium, if any, and interest on our indebtedness. Any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which would also harm our ability to incur additional indebtedness.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or seek to restructure or refinance our indebtedness. Any refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such cash flows and resources, we could face substantial liquidity problems and might be required to sell material assets or operations to attempt to meet our debt service obligations. The financing documents governing our Credit Facilities include certain restrictions on our ability to conduct asset sales and/or use the proceeds from asset sales for general corporate purposes. We may not be able to consummate these asset sales to raise capital or sell assets at prices and on terms that we believe are fair and any proceeds that we do receive may not be adequate to meet any debt service obligations then due. If we cannot meet our debt service obligations, the holders of our indebtedness may accelerate such indebtedness and, to the extent such indebtedness is secured, foreclose on our assets. In such an event, we may not have sufficient assets to repay all of our indebtedness.

The terms of the financing documents governing our Credit Facilities restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.

The financing documents governing our Credit Facilities contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interests, including restrictions on our ability to:

 

   

incur additional indebtedness;

 

   

pay dividends on or make distributions in respect of capital stock or repurchase or redeem capital stock;

 

   

prepay, redeem or repurchase certain indebtedness;

 

   

make loans and investments;

 

   

sell or otherwise dispose of assets, including capital stock of restricted subsidiaries;

 

   

incur liens;

 

   

enter into transactions with affiliates;

 

   

enter into agreements restricting the ability of our subsidiaries to pay dividends; and

 

   

consolidate, merge or sell all or substantially all of our assets.

You should read the discussion under the heading “Description of Certain Indebtedness” for further information about these covenants.

The restrictive covenants in the financing documents governing our Credit Facilities require us to maintain specified financial ratios and satisfy other financial condition tests to the extent applicable. Our ability to meet those financial ratios and tests can be affected by events beyond our control.

 

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A breach of the covenants or restrictions under the financing documents governing our Credit Facilities could result in an event of default under such documents. Such a default may allow the creditors to accelerate the related debt, which may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In the event the holders of our indebtedness accelerate the repayment, we may not have sufficient assets to repay that indebtedness or be able to borrow sufficient funds to refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable terms or on terms acceptable to us. These restrictions, along with restrictions that may be contained in agreements evidencing or governing other future indebtedness, may affect our ability to grow in accordance with our growth strategy.

We may be unable to refinance our indebtedness.

We may need to refinance all or a portion of our indebtedness before maturity. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. There can be no assurance that we will be able to obtain sufficient funds to enable us to repay or refinance our debt obligations on commercially reasonable terms, or at all.

Our failure to raise additional capital, generate the capital necessary to expand our operations and invest in new solutions, or comply with the covenants in our current or future credit facilities could reduce our ability to compete and could harm our business.

We intend to continue to make expenditures and investments to support the growth of our business and may require additional capital to pursue our business objectives and respond to business opportunities, challenges or unforeseen circumstances, including to enhance our platform and develop new solutions or enhance our existing solutions, enhance our infrastructure and acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. However, additional funds may not be available when we need them on terms that are acceptable to us, or at all. If we are unable to raise additional funds, we may not be able to pursue our growth strategy and our business could suffer. Additionally, any debt financing that we secure in the future could involve further restrictive covenants, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock.

Our existing credit facility, for which TD Securities (USA) LLC serves as administrative agent, contains certain operating and financial restrictions and covenants, including, among others, restrictions on the payment of dividends, the incurrence of certain indebtedness and liens, the making of certain investments, the consummation of certain merger and consolidation transactions and the disposition of assets as well as covenants requiring us, under certain circumstances, to maintain a minimum consolidated first lien net leverage ratio, a minimum total net leverage ratio and a minimum consolidated senior subordinated leverage ratio. In addition, we are required to make mandatory prepayments on our outstanding term loan under certain circumstances, including when excess cash flow is generated during any calendar year or in connection with the receipt of proceeds from certain equity issuances. Further, we have pledged substantially all of our assets as collateral to secure our obligations under our credit facility. Our current and future domestic subsidiaries must guaranty our obligations under our credit facility and grant liens on substantially all of their respective assets.

We cannot assure you that we will be able to comply with the covenants in our existing facility or as required by any future credit facility documentation. In the event that we are unable to comply with these covenants or mandatory prepayment obligations in the future, we would seek an amendment or waiver of the covenants. We also cannot assure you that any such waiver or amendment would be granted if we failed to comply with the terms of our existing credit facility or any future credit facility. In such event, failure by us to comply with the covenants contained in the instruments governing our indebtedness could result in an event of default under the facility, which could adversely affect our ability to respond to changes in our business and manage our operations.

 

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In the event of any default under our credit facility, the lenders will not be required to lend any additional amounts to us. Our lenders also could elect to declare all amounts outstanding to be due and payable, require us to apply all of our available cash to repay these amounts and foreclose on the collateral granted to them as security for the credit facility. If our indebtedness were to be accelerated, our assets may not be sufficient to repay this indebtedness in full, and we cannot assure you that we will be able to obtain alternative funding arrangements on commercially reasonable terms, or at all.

In addition, volatility in the credit markets may have an adverse effect on our ability to obtain debt financing in the future. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to pursue our business objectives and to respond to business opportunities, challenges or unforeseen circumstances could be significantly limited, and our business, financial condition, operating results and prospects could be harmed.

Despite our current level of indebtedness, we may be able to incur substantially more debt and enter into other transactions, which could further exacerbate the risks to our financial condition described above.

We may be able to incur significant additional indebtedness in the future. Although the credit agreement governing our existing Credit Facilities contains restrictions on the incurrence of additional indebtedness and entering into certain types of other transactions, additional indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also do not prevent us from incurring obligations, such as trade payables, that do not constitute indebtedness as defined under our debt instruments. In addition, the existing credit facility permits us, upon notice to the administrative agent, to request existing or new lenders to increase the Term Loan Facility and the Revolving Credit Facility, subject to certain terms and conditions. To the extent new debt is added to our current debt levels, the substantial leverage risks described elsewhere in these “Risk Factors” would increase.

Risks Related to Ownership of our Common Stock

MDP controls us, and its interests may conflict with ours or yours in the future.

Immediately following this offering and the concurrent private placement, the MDP Funds will beneficially own, through their control of Ivy Parent Holdings, LLC, approximately     % of our common stock, or     % if the underwriters exercise in full their option to purchase additional shares from the Selling Shareholder, which means that, based on their percentage voting power held after the offering, the MDP Funds will control the vote of all matters submitted to a vote of our Board or shareholders, which will enable it to control the election of the members of the Board and all other corporate decisions. In addition, our bylaws will provide that the MDP Funds will have the right to designate the Chairman of the Board for so long as the MDP Funds beneficially own at least 15% or more of the voting power of the then outstanding shares of our capital stock then entitled to vote generally in the election of directors. Even when the MDP Funds cease to own shares of our stock representing a majority of the total voting power, for so long as the MDP Funds continue to own a significant portion of our stock, the MDP Funds will still be able to significantly influence the composition of our Board, including the right to designate the Chairman of our Board, and the approval of actions requiring shareholder approval. Accordingly, for such period of time, the MDP Funds will have significant influence with respect to our management, business plans and policies, including the appointment and removal of our officers, decisions on whether to raise future capital and amending our charter and bylaws, which govern the rights attached to our common stock. In particular, for so long as the MDP Funds continue to own a significant percentage of our stock, the MDP Funds will be able to cause or prevent a change of control of us or a change in the composition of our Board, including the selection of the Chairman of our Board, and could preclude any unsolicited acquisition of us. The concentration of ownership could deprive you of an opportunity to receive a premium for your shares of common stock as part of a sale of us and ultimately might affect the market price of our common stock.

 

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In addition, in connection with this offering, we will enter into a Director Nomination Agreement with the MDP Funds that provides such MDP Funds the right to designate: (i) all of the nominees for election to our Board for so long as the MDP Funds beneficially own 40% or more of the total number of shares of our common stock they own as of immediately prior to the consummation of this offering and the concurrent private placement; (ii) a number of directors (rounded up to the nearest whole number) equal to 40% of the total directors for so long as the MDP Funds beneficially own at least 30% and less than 40% of the total number of shares of our common stock they own as of immediately prior to the consummation of this offering and the concurrent private placement; (iii) a number of directors (rounded up to the nearest whole number) equal to 30% of the total directors for so long as the MDP Funds beneficially own at least 20% and less than 30% of the total number of shares of our common stock they own as of immediately prior to the consummation of this offering and the concurrent private placement; (iv) a number of directors (rounded up to the nearest whole number) equal to 20% of the total directors for so long as the MDP Funds beneficially own at least 10% and less than 20% of the total number of shares of our common stock they own as of immediately prior to the consummation of this offering and the concurrent private placement; and (v) one director for so long as the MDP Funds beneficially own at least 5% and less than 10% of the total number of shares of our common stock they own as of immediately prior to the consummation of this offering and the concurrent private placement. The Director Nomination Agreement will also provide that the MDP Funds may assign such right to a MDP affiliate. See “Certain Relationships and Related Party Transactions—Related Party Transactions—Director Nomination Agreement” for more details with respect to the Director Nomination Agreement.

MDP and its affiliates engage in a broad spectrum of activities, including investments in the information and business services industry generally. In the ordinary course of their business activities, MDP and its affiliates may engage in activities where their interests conflict with our interests or those of our other shareholders, such as investing in or advising businesses that directly or indirectly compete with certain portions of our business or are suppliers or customers of ours. Our certificate of incorporation to be effective in connection with the closing of this offering will provide that none of MDP, any of its affiliates or any director who is not employed by us (including any non-employee director who serves as one of our officers in both his director and officer capacities) or its affiliates will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. MDP and its affiliates also may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. In addition, MDP and its affiliates may have an interest in pursuing acquisitions, divestitures and other transactions that, in its judgment, could enhance its investment, even though such transactions might involve risks to you.

Upon listing of our shares on Nasdaq, we will be a “controlled company” within the meaning of the rules of Nasdaq and, as a result, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections as those afforded to stockholders of companies that are subject to such governance requirements.

After completion of this offering and the concurrent private placement, the MDP Funds will continue to control a majority of the voting power of our outstanding common stock. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of Nasdaq. Under these rules, a company of which more than 50% of the voting power for the election of directors is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:

 

   

the requirement that a majority of our Board consist of independent directors;

 

   

the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

   

the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

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the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees.

Following this offering, we intend to utilize these exemptions. As a result, we may not have a majority of independent directors on our Board, our Compensation and Nominating Committee may not consist entirely of independent directors and our Compensation and Nominating Committee may not be subject to annual performance evaluations. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of Nasdaq.

An active, liquid trading market for our common stock may not develop, which may limit your ability to sell your shares.

Prior to this offering, there was no public market for our common stock. Although we anticipate approval to list our common stock on Nasdaq under the symbol “INTM,” an active trading market for our shares may never develop or be sustained following this offering. The initial public offering price will be determined by negotiations between us and the underwriters and may not be indicative of market prices of our common stock that will prevail in the open market after the offering. A public trading market having the desirable characteristics of depth, liquidity and orderliness depends upon the existence of willing buyers and sellers at any given time, such existence being dependent upon the individual decisions of buyers and sellers over which neither we nor any market maker has control. The failure of an active and liquid trading market to develop and continue would likely have a material adverse effect on the value of our common stock. The market price of our common stock may decline below the initial public offering price, and you may not be able to sell your shares of our common stock at or above the price you paid in this offering, or at all. An inactive market may also impair our ability to raise capital to continue to fund operations by issuing shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

We are an “emerging growth company” and we expect to elect to comply with reduced public company reporting requirements, which could make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we are eligible for certain exemptions from various public company reporting requirements. These exemptions include, but are not limited to, (i) not being required to comply with the auditor attestation requirements of Section 404 of Sarbanes-Oxley, (ii) reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements, (iii) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved and (iv) not being required to provide audited financial statements for the year ended December 31, 2019, or five years of selected consolidated financial data, in this prospectus. We could be an emerging growth company for up to five years after the first sale of our common stock pursuant to an effective registration statement under the Securities Act, which fifth anniversary will occur in 2027. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenue exceeds $1.07 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we would cease to be an emerging growth company prior to the end of such five-year period. We have made certain elections with regard to the reduced disclosure obligations regarding executive compensation in this prospectus and may elect to take advantage of other reduced disclosure obligations in future filings. As a result, the information that we provide to holders of our common stock may be different than you might receive from other public reporting companies in which you hold equity interests. We cannot predict if investors will find our common stock less attractive as a result of our reliance on these exemptions. If some investors find our common stock less attractive as a result of any choice we make to reduce disclosure, there may be a less active trading market for our common stock and the market price for our common stock may be more volatile.

Under the JOBS Act, emerging growth companies may also elect to delay adoption of new or revised accounting standards until such time as those standards apply to private companies. We have elected to “opt-in”

 

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to this extended transition period for complying with new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that comply with such new or revised accounting standards on a non-delayed basis. As a result, our financial statements may not be comparable to companies that comply with public company effective dates, and thus investors may have difficulty evaluating or comparing our business, performance or prospects to that of other public companies, which may have a negative impact on the value and liquidity of our common stock.

The requirements of being a public company may strain our resources and distract our management, which could make it difficult to manage our business, particularly after we are no longer an “emerging growth company.”

As a public company, we will incur legal, accounting and other expenses that we did not previously incur. We will become subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act) and the Sarbanes-Oxley Act, the listing requirements of Nasdaq and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires that we file annual, quarterly and current reports with respect to our business, financial condition and results of operations. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting. Furthermore, the need to establish the corporate infrastructure demanded of a public company may divert our management’s attention from implementing our growth strategy, which could prevent us from improving our business, financial condition and results of operations. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. In addition, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time- consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain the same or similar coverage. These additional obligations could have a material adverse effect on our business, financial condition and results of operations.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of our management’s time and attention from sales-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and could have a material adversely effect on our business, financial condition and results of operations.

Provisions of our corporate governance documents could make an acquisition of us more difficult and may prevent attempts by our shareholders to replace or remove our current management, even if beneficial to our shareholders.

In addition to the MDP’s Funds’ beneficial ownership of    % of our common stock after this offering and the concurrent private placement (or %, if the underwriters exercise in full their option to purchase additional shares from the Selling Shareholder), our certificate of incorporation and bylaws to be effective in connection

 

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with the closing of this offering and the Delaware General Corporation Law (DGCL) contain provisions that could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our shareholders. Among other things:

 

   

these provisions allow us to authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without shareholder approval, and which may include supermajority voting, special approval, dividend or other rights or preferences superior to the rights of shareholders;

 

   

these provisions provide for a classified board of directors with staggered three-year terms;

 

   

these provisions provide that, at any time when the MDP Funds beneficially own, in the aggregate, less than 40% in voting power of our stock entitled to vote generally in the election of directors, directors may only be removed for cause, and only by the affirmative vote of holders of at least 6623% in voting power of all the then-outstanding shares of our stock entitled to vote thereon, voting together as a single class;

 

   

these provisions prohibit shareholder action by written consent from and after the date on which the MDP Funds beneficially own, in the aggregate, less than 35% in voting power of our stock entitled to vote generally in the election of directors;

 

   

these provisions provide that for as long as the MDP Funds beneficially own, in the aggregate, at least 50% in voting power of our stock entitled to vote generally in the election of directors, any amendment, alteration, rescission or repeal of our bylaws by our shareholders will require the affirmative vote of a majority in voting power of the outstanding shares of our stock and at any time when the MDP Funds beneficially own, in the aggregate, less than 50% in voting power of all outstanding shares of our stock entitled to vote generally in the election of directors, any amendment, alteration, rescission or repeal of our bylaws by our shareholders will require the affirmative vote of the holders of at least 6623% in voting power of all the then-outstanding shares of our stock entitled to vote thereon, voting together as a single class; and

 

   

these provisions establish advance notice requirements for nominations for elections to our Board or for proposing matters that can be acted upon by shareholders at shareholder meetings; provided, however, such advance notice procedure will not apply to the MDP Funds.

Our certificate of incorporation to be effective in connection with the closing of this offering will contain a provision that provides us with protections similar to Section 203 of the DGCL, and will prevent us from engaging in a business combination with a person (excluding MDP and any of its direct or indirect transferees and any group as to which such persons are a party) who acquires at least 15% of our common stock for a period of three years from the date such person acquired such common stock, unless board or shareholder approval is obtained prior to the acquisition. See “Description of Capital Stock—Anti-Takeover Effects of Our Certificate of Incorporation and Our Bylaws.” These provisions could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors of your choosing and cause us to take other corporate actions you desire, including actions that you may deem advantageous, or negatively affect the trading price of our common stock. In addition, because our Board is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our shareholders to replace current members of our management team.

These and other provisions in our certificate of incorporation, bylaws and Delaware law could make it more difficult for shareholders or potential acquirers to obtain control of our Board or initiate actions that are opposed by our then-current Board, including delay or impede a merger, tender offer or proxy contest involving our company. The existence of these provisions could negatively affect the price of our common stock and limit opportunities for you to realize value in a corporate transaction.

For information regarding these and other provisions, see “Description of Capital Stock.”

 

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Our certificate of incorporation will designate the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our shareholders and the federal district courts of the United States as the exclusive forum for litigation arising under the Securities Act, which could limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us.

Pursuant to our certificate of incorporation to be effective in connection with the closing of this offering, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of fiduciary duty owed by, or other wrong doing by, any of our directors, officers or other employees or agents to us or our shareholders, or a claim of aiding and abetting any such breach of fiduciary duty, (3) any action asserting a claim against us or any director, officer, employee or agent of the Company arising pursuant to any provision of the DGCL, our certificate of incorporation or our bylaws, (4) any action to interpret, apply, enforce or determine the validity of our certificate of incorporation or bylaws, (5) any action asserting a claim against us or any director, officer, employee or agent governed by the internal affairs doctrine or (6) any action asserting an “internal corporate claim” as that term is defined in Section 115 of the DGCL; provided that for the avoidance of doubt, the forum selection provision that identifies the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation, including any “derivative action,” will not apply to suits to enforce a duty or liability created by Securities Act, the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. Our certificate of incorporation will also provide that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. Our certificate of incorporation will further provide that any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have notice of and consented to the provisions of our certificate of incorporation described above. See “Description of Capital Stock—Exclusive Forum.” The forum selection clause in our certificate of incorporation may have the effect of discouraging lawsuits against us or our directors and officers and may limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us. If the enforceability of our forum selection provisions were to be challenged, we may incur additional costs associated with resolving such challenge. While we currently have no basis to expect any such challenge would be successful, if a court were to find our forum selection provisions to be inapplicable or unenforceable with respect to one or more of these specified types of actions or proceedings, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business, financial condition and results of operations and result in a diversion of the time and resources of our employees, management and board of directors.

If you purchase shares of common stock in this offering, you will suffer immediate and substantial dilution of your investment.

The initial public offering price of our common stock is substantially higher than the pro forma net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our pro forma net tangible book value per share after this offering. You will experience immediate dilution of $            per share, representing the difference between our pro forma net tangible book value per share after giving effect to this offering and the initial public offering price. In addition, purchasers of common stock in this offering will have contributed     % of the aggregate price paid by all purchasers of our common stock but will own only approximately     % of our common stock outstanding after this offering and the concurrent private placement. See “Dilution” for more detail.

Our management will have significant flexibility in using the net proceeds of this offering and the net proceeds of the concurrent private placement, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately.

We intend to use the net proceeds of this offering and the net proceeds of the concurrent private placement to repay $            million of outstanding borrowings under our Term Loan Facility and pay any associated

 

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prepayment penalties and accrued and unpaid interest to the date of repayment and the remainder for general corporate purposes, including working capital or, potentially, for future additional repayment of our outstanding borrowings. We may also use a portion of the net proceeds to acquire or invest in businesses, products and technologies that we believe will complement our business. However, depending on future developments and circumstances, we may use some of the proceeds for other purposes. We do not have more specific plans for the net proceeds from this offering and the net proceeds of the concurrent private placement other than the repayment of outstanding borrowings under our Term Loan Facility as described above. Therefore, our management will have significant flexibility in applying most of the net proceeds we receive from this offering and the concurrent private placement. The net proceeds could be applied in ways that do not improve our operating results. The actual amounts and timing of these expenditures will vary significantly depending on a number of factors, including the amount of cash used in or generated by our operations. See “Use of Proceeds.” In addition, as further described in “Certain Relationships and Related Party Transactions—Related Party Transactions—Registration Rights Agreement,” we will enter into a registration rights agreement with Ivy Parent in connection with this offering, which requires us to effect the registration of Ivy Parent’s shares in certain circumstances following the expiration of the 180-day lock-up period. If Ivy Parent exercises its rights under this agreement to resell a significant amount of its shares of our common stock, we will not receive any proceeds from these offerings.

Our operating results and stock price may be volatile, and the market price of our common stock after this offering may drop below the price you pay.

Our quarterly operating results are likely to fluctuate in the future. In addition, securities markets worldwide have experienced, and are likely to continue to experience, significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could subject the market price of our shares to wide price fluctuations regardless of our operating performance. Our operating results and the trading price of our shares may fluctuate in response to various factors, including:

 

   

market conditions in our industry or the broader stock market;

 

   

actual or anticipated fluctuations in our quarterly financial and operating results;

 

   

introduction of new solutions by us or our competitors;

 

   

issuance of new or changed securities analysts’ reports or recommendations;

 

   

sales, or anticipated sales, of large blocks of our stock;

 

   

additions or departures of key personnel;

 

   

regulatory or political developments;

 

   

litigation and governmental investigations;

 

   

service outages and actual or perceived security breaches;

 

   

changing economic conditions, including impacts from the COVID-19 pandemic;

 

   

investors’ perception of us;

 

   

events beyond our control such as weather and war, including the conflict between Russia and Ukraine; and

 

   

any default on our indebtedness.

These and other factors, many of which are beyond our control, may cause our operating results and the market price and demand for our shares to fluctuate substantially. Fluctuations in our quarterly operating results could limit or prevent investors from readily selling their shares and may otherwise negatively affect the market price and liquidity of our shares. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued

 

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the stock. If any of our shareholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business, which could significantly harm our profitability and reputation.

A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering and the concurrent private placement, we will have outstanding shares of common stock based on the number of shares outstanding as of December 31, 2021. This includes the shares that we are selling in this offering, which may be resold in the public market immediately, and the sale by us of an additional            shares of common stock in the concurrent private placement to NEC Corporation. Following the consummation of this offering, substantially all shares that are not being sold in this offering (including the shares to be sold to NEC Corporation in the concurrent private placement) will be subject to a 180-day lock-up period provided under lock-up agreements executed in connection with this offering and the concurrent private placement described in “Underwriting” and restricted from immediate resale under the federal securities laws as described in “Shares Eligible for Future Sale”. All of such shares will, however, be able to be resold after the expiration of the lock-up period, as well as pursuant to customary exceptions thereto or upon the waiver of the lock- up agreement by Morgan Stanley & Co. LLC and J.P. Morgan Securities LLC on behalf of the underwriters. We also intend to register shares of common stock that we may issue under our equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements. As restrictions on resale end, the market price of our stock could decline if the holders of currently restricted shares sell them or are perceived by the market as intending to sell them. A decline in the market price of our stock may impair our ability to raise capital to continue to fund operations by issuing shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

Because we have no current plans to pay regular cash dividends on our common stock following this offering, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

We do not anticipate paying any regular cash dividends on our common stock following this offering. Any decision to declare and pay dividends in the future will be made at the discretion of our Board and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our Board may deem relevant. In addition, our ability to pay dividends is, and may be, limited by covenants of existing and any future outstanding indebtedness we or our subsidiaries incur, including under our Credit Facilities. Therefore, any return on investment in our common stock is solely dependent upon the appreciation of the price of our common stock on the open market, which may not occur. See “Dividend Policy” for more detail.

If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our shares or if our results of operations do not meet their expectations, our stock price and trading volume could decline.

The trading market for our shares will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock, or if our results of operations do not meet their expectations, our stock price could decline.

 

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We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our common stock, which could depress the price of our common stock.

Our certificate of incorporation will authorize us to issue one or more series of preferred stock. Our Board will have the authority to determine the preferences, limitations and relative rights of the shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our shareholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. The potential issuance of preferred stock may delay or prevent a change in control of us, discouraging bids for our common stock at a premium to the market price, and materially adversely affect the market price and the voting and other rights of the holders of our common stock.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this prospectus are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected costs, expenditures, cash flows, growth rates and financial results or our plans and objectives for future operations, growth initiatives, or strategies are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:

 

   

intense competition in our market, especially from larger, well-established companies;

 

   

our ability to increase our sales to existing partners and end customers or attract new partners and end customers to purchase our solutions on a cost-effective basis;

 

   

our ability to successfully execute our strategic partnerships with NEC and others;

 

   

our reliance on our partners for a significant portion of the sales of our solutions;

 

   

the risk that our end customers and partners fail to renew their subscriptions with us;

 

   

the impact of the COVID-19 pandemic;

 

   

fluctuations in our operating results;

 

   

our reliance on licenses from third parties for certain of the applications or features of our solutions, particularly with Microsoft;

 

   

cyber-attacks, information security breaches or denial of service events;

 

   

interruptions in our services caused by undetected errors, failures or bugs in our solutions, our third- party providers’ solutions or our network infrastructure;

 

   

interruptions or delays in service from our third-party data center hosting facilities and co-location facilities;

 

   

our ability to respond to rapid technological changes, extend our platform and develop new features;

 

   

risks associated with a significant number of our development, operations and support employees being located in Russia;

 

   

our ability to manage any future growth, particularly of our UCaaS solutions and internationally;

 

   

our dependence on continuing relationships with strategic vendors that we rely on for our infrastructure, network connectivity, provisioning and compliance services;

 

   

our reliance on third parties, including those outside the U.S., for some of our customer support and software development;

 

   

risks associated with our international operations;

 

   

our ability to protect our intellectual property rights;

 

   

potential claims from others that we infringe their proprietary technology;

 

   

risks related to our use of open source software;

 

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failures in Internet infrastructure or interference with broadband access;

 

   

the ability of our applications to interoperate with our end customers’ devices, their technology infrastructure or their other applications;

 

   

our ability to successfully expand through acquisitions or other strategic transactions;

 

   

risks related to adverse general and industry-specific economic and market conditions and reductions in IT spending;

 

   

the potential for fraudulent activity and our ability to meet evolving credit card association merchant standards;

 

   

potential problems with our information systems;

 

   

risks associated with increasing sales to large organizations;

 

   

the dependence of our BCA solutions on end customers using email;

 

   

risks associated with being subject to a variety of U.S. and international laws;

 

   

risks associated with the process, storage and use of personal information and other data;

 

   

risks associated with U.S. federal, state and international regulation of our solutions;

 

   

the potential for litigation, regulatory or judicial proceedings or investigations;

 

   

our history of losses, and any potential inability to become or remain profitable;

 

   

our ability to sustain market recognition of and loyalty to our brand among current and potential partners;

 

   

a ratings downgrade or other negative action by a ratings organization;

 

   

adverse impacts on our business if we cannot obtain or retain telephone numbers;

 

   

our dependence on third-party phone device suppliers and fulfillment agents to configure and deliver the phones that we sell;

 

   

our ability to effectively process local number and toll-free number portability provisioning;

 

   

risks associated with our emergency and E-911 calling services;

 

   

risks associated with efforts to address robocalling and caller ID spoofing;

 

   

the indemnity provisions we have in our contracts with our end customers, partners and other third parties;

 

   

our ability to meet the minimum service level commitments offered to our end customers and partners;

 

   

potential liabilities for taxes, surcharges and fees on past sales;

 

   

the impact of changes in effective tax rates or in U.S. and foreign tax laws or examinations of our income or other tax returns;

 

   

our dependence on the continued services of our senior management and other highly-skilled employees;

 

   

our management team’s limited experience managing a public company;

 

   

any failure to comply with anti-bribery, anti-corruption and anti-money laundering laws;

 

   

the impact of governmental export and import controls;

 

   

impacts from natural disasters, war, terrorist attacks, global pandemics or malicious conduct;

 

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our ability to develop and maintain proper and effective internal control over financial reporting;

 

   

any impairments of our goodwill or intangible assets;

 

   

the risk that our estimates or judgments relating to our critical accounting policies are incorrect;

 

   

risks associated with changes in accounting principles and guidance or their interpretation;

 

   

risks related to our indebtedness; and

 

   

other factors disclosed in the section entitled “Risk Factors” and elsewhere in this prospectus.

We derive many of our forward-looking statements from our operating budgets and forecasts, which are based on many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements made in this prospectus in the context of these risks and uncertainties.

We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this prospectus are made only as of the date hereof. We undertake no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

 

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MARKET AND INDUSTRY DATA

Unless otherwise indicated, information in this prospectus concerning economic conditions, our industry, our markets and our competitive position is based on a variety of sources, including information from independent industry analysts and publications, as well as our own estimates and research. This prospectus also includes data and statistical information provided by Gartner, Inc. (Gartner), in “Forecast—Unified Communications Worldwide, 2019-2026, 1Q22 Update” (March 2022) (the Gartner Report).

The Gartner Report represents research opinions or viewpoints that are published, as part of a syndicated subscription service, by Gartner and are not representations of fact. The Gartner Report speaks as of its original publication date (and not as of the date of this prospectus), and the opinions expressed in the Gartner Report are subject to change without notice. The Gartner estimates, and in particular, forecasts, may involve numerous assumptions and are subject to risks and uncertainties, as well as changes based on various factors, that could cause results to differ materially from those expressed in the data presented.

Certain information in the text of this prospectus is contained in other independent industry publications. The sources of these independent industry publications are provided below:

 

   

CompTIA, IT Industry Outlook 2021, November 2020.

 

   

IDC, Semiannual Telecom Services Tracker – Connectivity Forecast 2021H1, November 2021.

 

   

IDC, Market Analysis Perspective: Worldwide Collaborative Applications, September 2021.

 

   

IDC, Worldwide Content Inspection Forecast, 2020-2024: Traditional Threat Vectors Surge During Crisis, October 2020.

 

   

IDC, Worldwide Unified Communications and Collaboration Forecast, 2021-2025, May 2021.

 

   

IDC, Worldwide Contact Center Applications Software Forecast, 2021-2025, June 2021.

 

   

The Radicati Group, Inc., Cloud Business Email Market 2020-2024, April 2020.

 

   

The Radicati Group, Inc., Secure Email Gateway – Market Quadrant 2020, November 2020.

 

   

U.S. Small Business Administration Office of Advocacy, 2019 Small Business Profile, April 2019.

 

   

Forrester, New Technologies Create The Need To Design For New Categories of Information Workers, September 27, 2019.

 

   

Omdia – Global Contact Center Market Forecast: 2018-24, February 2021.

 

   

MarketsandMarkets, Enterprise File Synchronization and Sharing Market with Covid-19 Impact by Component, Deployment Mode, Cloud Type, End User, Vertical, Region – Global Forecast to 2026, August 2021.

 

   

MarketsandMarkets, Enterprise Information Archiving Market by Type, Deployment Mode, Enterprise Size, and Region – Global Forecast to 2025, March 2020.

 

   

A 2019 market study that we commissioned.

 

   

Synergy Research Group, Microsoft and Zoom Help to Drive Increased UCaaS Market Growth Rate, December 16, 2020.

 

   

Synergy Research Group, As On-Premise PBX Market Moves to the Cloud, Microsoft Jumps to #2 in UCaaS, https://www.srgresearch.com/articles/as-on-premise-pbx-market-moves-to-the-cloud- microsoft-jumps-to-2-in-ucaas, June 9, 2021.

This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. Industry publications and other reports we have obtained from independent parties generally state that the data contained in these publications or other reports have been obtained in good faith or

 

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from sources considered to be reliable, but they do not guarantee the accuracy or completeness of such data. While we believe the information presented in this prospectus is generally reliable, forecasts, assumptions, expectations, beliefs, estimates and projections involve risk and uncertainties and are subject to change based on various factors, including those described under “Forward-Looking Statements” and “Risk Factors”. These and other factors could cause results to differ materially from those expressed in these publications and reports.

This prospectus includes references to our NPS. NPS is a metric used for measuring customer satisfaction and loyalty. We calculate our NPS by asking customers the following question, based on the type of customer interaction: (a) For customers using our technical support services, “Based on your most recent support contact, on a scale from 0- 10, how likely are you to recommend Intermedia to a friend or colleague?”; and (b) For customers using our onboarding services, “Based on your recent interaction with our cloud concierge team, on a scale from 0-10, how likely are you to recommend Intermedia to a friend or colleague?” Customers are then given a scale from 0 (labeled as “Not at all likely”) to 10 (labeled as “Extremely Likely”). Customers rating us 6 or below are considered “Detractors,” 7 or 8 are considered “Passives,” and 9 or 10 are considered “Promoters.” To calculate our NPS, we subtract the total percentage of Detractors from the total percentage of Promoters. For example, if 50% of overall respondents were Promoters and 10% were Detractors, our NPS would be 40. The NPS gives no weight to customers who decline to answer the survey question. We believe this method is substantially consistent with how businesses in our industry typically calculate their NPS. We calculate an NPS for our onboarding team and an NPS for our technical support team, and then we take an average of those two scores to calculate our NPS.

For the twelve months ended December 31, 2021, the average monthly NPS for our onboarding and technical support was 83. We use our NPS results to anticipate and provide more attention to customers who may be in the Detractor category and, for those in the Promoter category, as a predictive indicator of a customer’s satisfaction with our support services and desire to remain a customer for the long-term.

 

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USE OF PROCEEDS

We estimate that our net proceeds from this offering will be approximately $            million, assuming an initial public offering price of $            per share, which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus, after deducting the underwriting discount and estimated offering expenses payable by us. We also expect to receive net proceeds of $            million from the sale of shares of our common stock to NEC Corporation in the concurrent private placement, after deducting estimated placement agent fees payable by us, for aggregate net proceeds to be raised by us in this offering and the concurrent private placement of $            million. We will receive no proceeds from the sale of shares of common stock by the Selling Shareholder.

The principal purposes of this offering and the concurrent private placement are to increase our capitalization and financial flexibility, create a public market for our common stock and enable access to the public equity markets for us and our shareholders. We expect to use approximately $            million of the net proceeds of this offering and the concurrent private placement to repay outstanding borrowings under our Term Loan Facility and the remainder of such net proceeds will be used for general corporate purposes or, potentially, for future additional repayment of our outstanding borrowings. At this time, other than the repayment of indebtedness under our Term Loan Facility, we have not specifically identified a large single use for which we intend to use the net proceeds and, accordingly, we are not able to allocate the net proceeds among any of these potential uses in light of the variety of factors that will impact how such net proceeds are ultimately utilized by us. As of December 31, 2021, the interest rate on our Term Loan Facility was 7.00% and the maturity date is July 19, 2025. Pending use of the proceeds from this offering and the net proceeds from the concurrent private placement, we intend to invest the proceeds in a variety of capital preservation investments, including short-term, investment-grade and interest-bearing instruments.

We may also use a portion of our net proceeds to acquire or invest in complementary businesses, products, services or technologies. However, we do not have agreements or commitments for any acquisitions or investments at this time.

Each $1.00 increase or decrease in the assumed initial public offering price of $             per share, which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus, would increase or decrease the net proceeds to us from this offering by approximately $            million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discount and estimated offering expenses payable by us, and giving effect to the concurrent private placement, the proceeds of which would be unaffected by such decrease, and deduction of estimated placement agent fees.

Each 1,000,000 increase or decrease in the number of shares offered would increase or decrease the net proceeds to us from this offering and the concurrent private placement by approximately $            million, assuming that the assumed initial public offering price per share for the offering remains at $             , which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us, and giving effect to the concurrent private placement and deduction of estimated placement agent fees.

 

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DIVIDEND POLICY

We currently intend to retain all available funds and any future earnings to fund the development and growth of our business and to repay indebtedness and, therefore, we do not anticipate paying any cash dividends in the foreseeable future. Additionally, because we are a holding company, our ability to pay dividends on our common stock may be limited by the ability of our subsidiaries to pay dividends or make distributions to us. Any future determination to pay dividends will be at the discretion of our Board, subject to compliance with covenants in current and future agreements governing our and our subsidiaries’ indebtedness, and will depend on our results of operations, financial condition, capital requirements and other factors that our Board may deem relevant.

 

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CAPITALIZATION

The following table describes our cash and cash equivalents and capitalization as of December 31, 2021, as follows:

 

   

on an actual basis; and

 

   

on a pro forma basis, after giving effect to (i) the sale of              shares of common stock in this offering and the application of the net proceeds from this offering as set forth under “Use of Proceeds,” assuming an initial public offering price of $        per share, which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us and (ii) our issuance and sale of $40.0 million in shares of our common stock at a price per share equal to the initial public offering price (or             shares based on the assumed initial public offering price of $        per share) in the anticipated concurrent private placement to NEC Corporation after deducting estimated placement agent fees payable by us.

The pro forma information set forth in the table below is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering and the concurrent private placement determined at pricing. You should read this table in conjunction with our consolidated financial statements and the related notes, “Use of Proceeds” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

     As of December 31, 2021  
     Actual      Pro Forma  
     (in thousands, except share
and per share data)
 

Cash and cash equivalents

   $ 10,030      $                    
  

 

 

    

 

 

 

Total debt

   $ 273,843      $                    

Stockholders’ equity:

     

Preferred stock: $0.01 par value per share, 10,000 shares authorized, no shares issued or outstanding, actual; $0.001 par value per share, 50,000,000 shares authorized, no shares issued or outstanding, pro forma

     —       

Common stock: $0.01 par value per share, 50,000,000 shares of Class A common stock authorized, 3,750,000 shares of Class B common stock authorized, 47,789,265 shares of Class A common stock issued and outstanding, 17,404 shares of Class B common stock issued and outstanding, actual; $0.001 par value per share, 500,000,000 shares of common stock authorized              shares of common stock issued and outstanding, pro forma

     478     

Additional paid-in capital

     180,375     

Accumulated deficit

     (67,208   

Accumulated other comprehensive loss

     (4,306   
  

 

 

    

 

 

 

Total stockholders’ equity

     109,339     
  

 

 

    

 

 

 

Total capitalization

   $ 383,182      $                    
  

 

 

    

 

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization on a pro forma basis by approximately $        million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discount and estimated offering

 

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expenses payable by us, and giving effect to the anticipated concurrent private placement, the proceeds of which would be unaffected by such decrease, and deduction of estimated placement agent fees.

Similarly, each 1,000,000 increase or decrease in the number of shares of common stock offered in this offering would increase or decrease each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization on a pro forma basis by approximately $        million, based on an assumed initial public offering price of $        per share, which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus, and after deducting the underwriting discount, estimated placement agent fees and estimated offering expenses payable by us.

Except as otherwise indicated, the above discussion and table are based on 47,806,669 shares of our common stock outstanding as of December 31, 2021 and exclude:

 

   

up to 860,132 shares of common stock issuable upon the exercise of options outstanding under the 2017 Stock Option Plan as of December 31, 2021, with a weighted-average exercise price of $4.72 per share;

 

   

up to 1,981,511 shares of common stock issuable upon the vesting and settlement of restricted stock units outstanding under the 2021 Plan as of December 31, 2021, subject to a service-based vesting condition as well as a performance-based vesting condition that will be satisfied in connection with this offering;

 

   

up to 283,000 shares of common stock issuable upon the exercise of options outstanding under the 2021 Plan as of December 31, 2021, with a weighted-average exercise price of $13.42 per share;

 

   

up to 200,000 shares of common stock issuable upon the exercise of warrants outstanding as of December 31, 2021, with a weighted-average exercise price of $5.76 per share;

 

   

147,464 shares of common stock reserved for future issuance under the 2017 Stock Option Plan;

 

   

             shares of common stock reserved for future issuance under the ESPP, which will be adopted in connection with this offering;

 

   

             shares of common stock (assuming an initial public offering price of $        per share, which is the midpoint of the estimated public offering price range set forth on the cover of this prospectus) underlying the grants of restricted stock units to be issued upon the closing of this offering to certain of our employees and members of our board of directors under the 2021 Plan;

 

   

             shares of common stock (assuming an initial public offering price of $        per share, which is the midpoint of the estimated public offering price range set forth on the cover of this prospectus) underlying the grants of stock options to be issued upon the closing of this offering to certain of our employees under the 2021 Plan, with an exercise price equal to the initial public offering price;

 

   

292,192 shares of common stock reserved for future issuance under the 2021 Plan; and

 

   

any shares of common stock that may become issuable under the warrant issued to NEC, as further described in “Certain Relationships and Related Party Transactions—Related Party Transactions— Warrants Issued by Ivy Parent.”

 

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DILUTION

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock in this offering and the pro forma net tangible book value per share of our common stock immediately after this offering and the anticipated concurrent private placement to NEC Corporation.

As of December 31, 2021, we had a net tangible book value of $            million, or $         per share of common stock. Net tangible book value per share is equal to our total tangible assets, less total liabilities, divided by the number of outstanding shares of our common stock.

After giving effect to the sale of shares of common stock in this offering and the anticipated concurrent private placement, after deducting the underwriting discount, estimated placement agent fees and estimated offering expenses payable by us, and the application of the net proceeds of this offering and the net proceeds of the anticipated concurrent private placement to repay $            million of outstanding borrowings under our Term Loan Facility as set forth under “Use of Proceeds,” at an assumed initial public offering price of $         per share, which is the midpoint of the estimated public offering price range set forth on the cover of this prospectus, our pro forma net tangible book value as of December 31, 2021 would have been $             million, or $         per share of common stock. This represents an immediate increase in net tangible book value of $         per share to our existing shareholders and an immediate dilution in net tangible book value of $         per share to investors participating in this offering at the assumed initial public offering price. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

      $                

Historical net tangible book value per share as of December 31, 2021

   $       

Increase in net tangible book value per share attributable to the investors in this offering and the anticipated concurrent private placement

   $                   
  

 

 

    

Pro forma net tangible book value per share after giving effect to this offering and the anticipated concurrent private placement

     
     

 

 

 

Dilution in net tangible book value per share to the investors in this offering and the anticipated concurrent private placement

      $                
     

 

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $        per share, which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus, would increase or decrease our pro forma net tangible book value per share after this offering and the anticipated concurrent private placement by $        , and would increase or decrease the dilution per share to the investors in this offering by $        , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discount and estimated offering expenses payable by us, and giving effect to the anticipated concurrent private placement, the proceeds of which would be unaffected by such decrease, and deduction of estimated placement agent fees. Similarly, each 1,000,000 increase or decrease in the number of shares of common stock offered by us would increase or decrease our pro forma net tangible book value per share after this offering and the anticipated concurrent private placement by $        and would increase or decrease dilution per share to investors in this offering by $        assuming the assumed initial public offering price, which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount and estimated offering expenses payable by us.

The following table presents, on a pro forma basis as described above, as of December 31, 2021, the differences between our existing shareholders and the investors purchasing shares of our common stock in this offering and the anticipated concurrent private placement, with respect to the number of shares purchased, the

 

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total consideration paid to us, and the average price per share paid by our existing shareholders or to be paid to us by investors purchasing shares in this offering and the anticipated concurrent private placement at an assumed public offering price of $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting the underwriting discount and estimated offering expenses payable by us.

 

     Shares Purchased     Total Consideration     Average
Price Per

Share
 
     Number      Percentage     Amount      Percentage  
     (in thousands)  

Existing Shareholders

               $                             $                

New Investors

            

Total

          $                 $    

A $1.00 increase or decrease in the assumed initial public offering price of $        per share, which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus, would increase or decrease the total consideration paid by new investors by $        million and increase or decrease the percent of total consideration paid by new investors by     %, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and before deducting the underwriting discount and estimated public offering expenses payable by us.

Similarly, each 1,000,000 increase or decrease in the number of shares offered would increase or decrease the net proceeds to us from this offering and the anticipated concurrent private placement by approximately $         million, assuming that the assumed initial public offering price per share for the offering remains at $        , which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us.

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional shares from the Selling Shareholder. After giving effect to sales of shares in this offering and the anticipated concurrent private placement, assuming the underwriters’ option to purchase additional shares from the Selling Shareholder is exercised in full, our existing shareholders would own     % and our new investors would own     % of the total number of shares of our common stock outstanding after this offering and the anticipated concurrent private placement.

In addition, to the extent we issue any additional stock options or any stock options are exercised, or we issue any other securities or convertible debt in the future, investors participating in this offering may experience further dilution.

Except as otherwise indicated, the above discussion and tables are based on 47,806,669 shares of our common stock outstanding as of December 31, 2021 and exclude:

 

   

up to 860,132 shares of common stock issuable upon the exercise of options outstanding under the 2017 Stock Option Plan as of December 31, 2021, with a weighted-average exercise price of $4.72 per share;

 

   

up to 1,981,511 shares of common stock issuable upon the vesting and settlement of restricted stock units outstanding under the 2021 Plan as of December 31, 2021, subject to a service-based vesting condition as well as a performance-based vesting condition that will be satisfied in connection with this offering;

 

   

up to 283,000 shares of common stock issuable upon the exercise of options outstanding under the 2021 Plan as of December 31, 2021, with a weighted-average exercise price of $13.42 per share;

 

   

up to 200,000 shares of common stock issuable upon the exercise of warrants outstanding as of December 31, 2021, with a weighted-average exercise price of $5.76 per share;

 

   

147,464 shares of common stock reserved for future issuance under the 2017 Stock Option Plan;

 

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            shares of common stock reserved for future issuance under the ESPP, which will be adopted in connection with this offering;

 

   

            shares of common stock (assuming an initial public offering price of $         per share, which is the midpoint of the estimated public offering price range set forth on the cover of this prospectus) underlying the grants of restricted stock units to be issued upon the closing of this offering to certain of our employees and members of our board of directors under our 2021 Plan;

 

   

            shares of common stock (assuming an initial public offering price of $         per share, which is the midpoint of the estimated public offering price range set forth on the cover of this prospectus) underlying the grants of stock options to be issued upon the closing of this offering to certain of our employees under the 2021 Plan, with an exercise price equal to the initial public offering price;

 

   

292,192 shares of common stock reserved for future issuance under the 2021 Plan; and

 

   

any shares of common stock that may become issuable under the warrant issued to NEC, as further described in “Certain Relationships and Related Party Transactions—Related Party Transactions— Warrants Issued by Ivy Parent.”

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following tables present our selected consolidated financial data. The selected consolidated statement of income data and selected consolidated statement of cash flow data for the years ended December 31, 2020 and 2021 and the selected consolidated balance sheet data as of December 31, 2020 and 2021 are derived from our audited consolidated financial statements that are included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. You should read the selected historical financial data below in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this prospectus.

 

     Year Ended December 31  
     2020     2021  
Consolidated Statement of Income Data:    (in thousands, except share and
per share data)
 

Revenue:

    

Subscription

   $ 244,626     $ 264,938  

Product

     6,969       8,286  
  

 

 

   

 

 

 

Total revenue

     251,595       273,224  
  

 

 

   

 

 

 

Cost of revenue:

    

Cost of subscription revenue(1)

     127,075       141,659  

Cost of product revenue

     10,659       16,033  
  

 

 

   

 

 

 

Total cost of revenue

     137,734       157,692  
  

 

 

   

 

 

 

Gross profit

     113,861       115,532  
  

 

 

   

 

 

 

Operating expenses:

    

Sales and marketing(1)

     46,754       56,003  

Research and development(1)

     18,651       20,612  

General and administrative(1)

     29,761       37,047  

Depreciation and amortization

     15,576       14,412  
  

 

 

   

 

 

 

Total operating expenses

     110,742       128,074  
  

 

 

   

 

 

 

Interest expense

     (24,010     (24,887

Interest income

     69       127  

Other income (expense), net

     (5,215     5,083  
  

 

 

   

 

 

 

Total other expense

     (29,156     (19,677
  

 

 

   

 

 

 

Loss before income taxes

     (26,037     (32,219

Income tax benefit

     4,292       7,790  
  

 

 

   

 

 

 

Net loss

   $ (21,745   $ (24,429
  

 

 

   

 

 

 

Per share data:(2)

    

Net loss per share attributable to common stockholders, basic and diluted

   $ (0.46   $ (0.51
  

 

 

   

 

 

 

Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted

     47,789,265       47,796,949  
  

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(3)

     $ (0.51
    

 

 

 

Pro forma weighted average common stock outstanding, basic and diluted (unaudited)(3)

       47,796,949  
    

 

 

 

 

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     Year Ended
December 31
 
     2020     2021  
     (in thousands)  

Consolidated Statement of Cash Flow Data:

    

Net cash provided by operating activities

   $ 16,979     $ 865  

Net cash used in investing activities

     (19,302     (20,833

Net cash provided by financing activities

     4,652       6,377  

 

     As of December 31  
     2020      2021  
     (in thousands)  

Consolidated Balance Sheet Data:

     

Cash and cash equivalents

   $ 23,625      $ 10,030  

Working capital (deficit)(4)

     1,509        (16,532

Total assets

     488,818        473,784  

Total debt(5)

     263,833        273,843  

Total liabilities

     361,522        364,445  

Total stockholders’ equity

     127,296        109,339  

 

(1)

Includes stock-based compensation, unit-based compensation and warrant expense as follows:

 

     Year Ended
December 31
 
     2020      2021  
     (in thousands)  

Cost of subscription revenue

   $ 174      $ 360  

Sales and marketing

     2,256        1,442  

Research and development

     815        479  

General and administrative

     1,464        884  
  

 

 

    

 

 

 

Total

   $ 4,709      $ 3,165  
  

 

 

    

 

 

 

 

(2)

See Note 14 to our consolidated financial statements appearing elsewhere in this prospectus for an explanation of the method used to calculate our basic and diluted net loss per share and the weighted-average number of shares used in the computation of the per share amounts.

(3)

The unaudited pro forma net loss per share attributable to common stockholders was computed using the weighted-average number of shares of common stock outstanding, no pro-forma adjustments were recorded.

(4)

We define working capital (deficit) as current assets less current liabilities.

(5)

Net of debt issuance costs of $5.5 million and $4.1 million as of December 31, 2020 and 2021, respectively.

 

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Selected Quarterly Results of Operations

The following tables set forth selected unaudited quarterly consolidated statements of operations data for each of the quarters in the years ended December 31, 2020 and 2021. The information for each of these quarters has been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and on the same basis as our audited financial statements included elsewhere in this prospectus and, in the opinion of management, reflect all adjustments, which include only normal and recurring adjustments, necessary for the fair presentation of our results of operations. This data should be read in conjunction with our financial statements and related notes included elsewhere in this prospectus. These historical unaudited quarterly operating results are not necessarily indicative of our operating results for any future period.

 

     Three Months Ended (unaudited)  
     March 31,
2020
    June 30,
2020
    September 30,
2020
    December 31,
2020
 
     (in thousands, except share and per share amounts)  

Revenue:

        

Subscription

   $ 59,484     $ 59,015     $ 62,496     $ 63,631  

Product

     2,216       1,315       1,637       1,801  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     61,700       60,330       64,133       65,432  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

        

Cost of subscription revenue

     30,424       30,426       32,444       33,781  

Cost of product revenue

     2,166       2,227       2,968       3,298  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     32,590       32,653       35,412       37,079  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     29,110       27,677       28,721       28,353  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Sales and marketing

     10,496       10,670       11,687       13,901  

Research and development

     4,471       4,608       4,627       4,945  

General and administrative

     6,769       6,947       7,116       8,929  

Depreciation and amortization

     3,856       3,881       3,914       3,925  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     25,592       26,106       27,344       31,700  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

     (5,694     (5,824     (6,175     (6,317

Interest income

     29       16       12       12  

Other income (expense), net

     238       (1,945     (1,071     (2,437
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     (5,427     (7,753     (7,234     (8,742
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (1,909     (6,182     (5,857     (12,089

Income tax benefit

     375       1,215       1,149       1,554  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (1,534   $ (4,967   $ (4,708   $ (10,535
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share data:

        

Net loss per share attributable to common stockholders, basic and diluted

   $ (0.03   $ (0.10   $ (0.10   $ (0.22
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted

     47,789,265       47,789,265       47,789,265       47,789,265  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1)

Includes stock-based compensation, unit-based compensation and warrant expense as follows:

 

     Three Months Ended (unaudited)  
     March 31,
2020
     June 30,
2020
     September 30,
2020
     December 31,
2020
 
     (in thousands)  

Cost of subscription revenue

   $ (262    $ 72      $ 196      $ 168  

Sales and marketing

     299        173        206        1,578  

Research and development

     94        205        262        254  

General and administrative

     309        342        416        397  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 440      $ 792      $ 1,080      $ 2,397  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Three Months Ended (unaudited)  
     March 31,
2021
    June 30,
2021
    September 30,
2021
    December 31,
2021
 

.

  

(in thousands, except share and per share amounts)

 

Revenue:

        

Subscription

   $ 64,756     $ 65,238     $ 67,018     $ 67,926  

Product

     1,860       1,915       2,212       2,299  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     66,616       67,153       69,230       70,225  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

        

Cost of subscription revenue(1)

     33,842       34,281       36,186       37,350  

Cost of product revenue

     3,674       3,904       4,049       4,406  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     37,516       38,185       40,235       41,756  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     29,100       28,968       28,995       28,469  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Sales and marketing(1)

     13,007       13,843       13,662       15,491  

Research and development(1)

     6,018       5,116       4,447       5,031  

General and administrative(1)

     8,615       12,093       7,619       8,720  

Depreciation and amortization

     3,623       3,606       3,574       3,609  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     31,263       34,658       29,302       32,851  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

     (6,095     (6,187     (6,294     (6,311

Interest income

     15       24       37       51  

Other income, net

     1,481       632       849       2,121  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     (4,599     (5,531     (5,408     (4,139
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (6,762     (11,221     (5,715     (8,521

Income tax benefit

     2,212       2,062       1,195       2,321  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (4,550   $ (9,159   $ (4,520   $ (6,200
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share data:

        

Net loss per share attributable to common stockholders, basic and diluted

   $ (0.10   $ (0.19   $ (0.09   $ (0.13
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted

     47,789,265       47,795,494       47,799,251       47,803,604  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1)

Includes stock-based compensation, unit-based compensation and warrant expense as follows:

 

     Three Months Ended (unaudited)  
     March 31,
2021
     June 30,
2021
     September 30,
2021
     December 31,
2021
 
    

(in thousands)

 

Cost of subscription revenue

   $ 74      $ 109      $ 106      $ 71  

Sales and marketing

     338        361        459        284  

Research and development

     180        104        102        93  

General and administrative

     211        355        162        156  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 803      $ 929      $ 829      $ 604  
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-GAAP Financial Measures

Adjusted EBITDA and Adjusted EBITDA Margin

We define Adjusted EBITDA for a particular period as net income (loss) before interest and other expense, net, income tax benefit, depreciation and amortization, stock-based and unit-based compensation, Class B common stock warrants, transaction related expenses and restructuring and other expenses. We define Adjusted EBITDA margin as Adjusted EBITDA divided by revenue for the same period.

Adjusted EBITDA and Adjusted EBITDA margin are key measures we use to assess our financial performance and are also used for internal planning and forecasting purposes. We believe Adjusted EBITDA and Adjusted EBITDA margin are helpful to investors, analysts, and other interested parties because they can assist in providing a more consistent and comparable overview of our operations across our historical financial periods. We use Adjusted EBITDA and Adjusted EBITDA margin in conjunction with GAAP measures as part of our overall assessment of our performance, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies, and to communicate with our Board concerning our financial performance.

Adjusted EBITDA and Adjusted EBITDA margin are Non-GAAP financial measures and are presented for supplemental informational purposes only and should not be considered as alternatives or substitutes to financial information presented in accordance with GAAP. These measures have certain limitations in that they do not include the impact of certain expenses that are reflected in our consolidated statement of income that are necessary to run our business. Our definitions may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Thus, our Adjusted EBITDA and Adjusted EBITDA margin should be considered in addition to, not as substitutes for, or in isolation from, measures prepared in accordance with GAAP.

 

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The following table provides our Adjusted EBITDA and Adjusted EBITDA margin for the years ended December 31, 2020 and 2021 and a reconciliation of net loss to Adjusted EBITDA and net loss margin to Adjusted EBITDA margin:

 

(Dollar amounts in thousands)    Year Ended
December 31,

2020
    Year Ended
December 31,

2021
 

Net loss

   $ (21,745   $ (24,429

Adjusted as follows:

    

Interest and other expense, net(1)

     29,156       19,677  

Income tax benefit

     (4,292     (7,790

Depreciation and amortization(2)

     36,826       36,607  

Stock-based and unit-based compensation

     3,334       2,557  

Class B common stock warrants

     1,375       607  

Transaction related expenses(3)

     1,680       6,415  

Restructuring and other expenses(4)

     373       264  
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 46,707     $ 33,908  
  

 

 

   

 

 

 

Net loss margin

     (8.6 )%      (8.9 )% 

Adjusted as follows:

    

Interest and other expense, net(1)

     11.6     7.2

Income tax benefit

     (1.7 )%      (2.9 )% 

Depreciation and amortization(2)

     14.6     13.4

Stock-based and unit-based compensation

     1.3     0.9

Class B common stock warrants

     0.5     0.2

Transaction related expenses(3)

     0.7     2.3

Restructuring and other expenses(4)

     0.1     0.1
  

 

 

   

 

 

 

Adjusted EBITDA margin

     18.6     12.4
  

 

 

   

 

 

 

 

(1)

Interest and other expense, net includes interest expense, net, changes in fair value of warrant liability and foreign currency gains and losses.

(2)

Depreciation and amortization includes $15,576 and $14,412 of costs in operating expenses and $21,250 and $22,195 included in cost of subscription revenue for the years ended December 31, 2020 and 2021, respectively.

(3)

Transaction related expenses relate to costs incurred to support our public company readiness and costs related to acquisitions or disposal activities.

(4)

Restructuring and other expenses relate to costs incurred in connection with corporate office rationalization activities undertaken in 2020 and 2021 and non-recurring strategic consulting expenses.

Non-GAAP Subscription Gross Margin and Non-GAAP Product Gross Margin

We define Non-GAAP subscription gross profit as subscription gross profit before stock-based and unit-based compensation, depreciation and amortization. We define Non-GAAP product gross profit as GAAP product gross profit. We define Non-GAAP subscription gross margin as Non-GAAP subscription gross profit divided by GAAP subscription revenue. We define Non-GAAP product gross margin as Non-GAAP product gross profit divided by GAAP product revenue. Non-GAAP cost of revenue is defined as GAAP cost of revenue minus (or excluding) stock-based compensation, depreciation and amortization and acquisition-related expense.

Non-GAAP subscription gross profit, Non-GAAP product gross profit, Non-GAAP subscription gross margin and Non-GAAP product gross margin are key measures used by us to understand and evaluate our operating performance and trends, to prepare and approve our annual budget, and to develop short and long-term operational plans. In particular, the exclusion of certain expenses in calculating Non-GAAP subscription gross

 

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profit, Non-GAAP product gross profit, Non-GAAP subscription gross margin and Non- GAAP product gross margin provide useful measures for period-to-period comparisons of our business.

Although Non-GAAP subscription gross profit, Non-GAAP product gross profit, Non-GAAP subscription gross margin and Non-GAAP product gross margin are frequently used by investors in their evaluations of companies, these non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. Because of these limitations, these non-GAAP financial measures should be considered alongside other financial performance measures.

The following table provides our reconciliation of Non-GAAP subscription gross profit, Non-GAAP product gross profit, Non- GAAP subscription gross margin and Non-GAAP Product gross margin for the years ended December 31, 2020 and 2021:

 

(Dollar amounts in thousands)    Year Ended
December 31,
2020
    Year Ended
December 31,
2021
 

Revenue:

    

Subscription

   $ 244,626     $ 264,938  

Product

     6,969       8,286  
  

 

 

   

 

 

 

Total revenue

     251,595       273,224  
  

 

 

   

 

 

 

Cost of revenue reconciliation:

    

GAAP subscription cost of revenue

     127,075       141,659  

Stock-based and unit-based compensation

     (174     (360

Depreciation and amortization

     (21,250     (22,195
  

 

 

   

 

 

 

Non-GAAP subscription cost of revenue

     105,651       119,104  
  

 

 

   

 

 

 

GAAP and Non-GAAP product cost of revenue

     10,659       16,033  
  

 

 

   

 

 

 

Gross profit and gross margin reconciliation:

    

GAAP Subscription gross profit

     117,551       123,279  

Stock-based and unit-based compensation

     174       360  

Depreciation and amortization

     21,250       22,195  
  

 

 

   

 

 

 

Non-GAAP Subscription gross profit

     138,975       145,834  
  

 

 

   

 

 

 

Non-GAAP Product gross profit

     (3,690     (7,747

GAAP Gross profit

     113,861       115,532  

Stock-based and unit-based compensation

     174       360  

Depreciation and amortization

     21,250       22,195  
  

 

 

   

 

 

 

Non-GAAP Gross profit

   $ 135,285     $ 138,087  
  

 

 

   

 

 

 

GAAP Subscription gross margin

     48.1     46.5

Stock-based and unit-based compensation

     0.1     0.1

Depreciation and amortization

     8.7     8.4
  

 

 

   

 

 

 

Non-GAAP Subscription gross margin

     56.8     55.0
  

 

 

   

 

 

 

Non-GAAP Product gross margin

     (52.9 )%      (93.5 )% 

GAAP Gross margin

     45.3     42.3

Stock-based and unit-based compensation

     0.1     0.1

Depreciation and amortization

     8.4     8.1
  

 

 

   

 

 

 

Non-GAAP Gross margin

     53.8     50.5
  

 

 

   

 

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of our company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this prospectus. The discussion contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly in the sections entitled “Risk Factors” and “Forward-Looking Statements.”

Overview

We provide a leading, proprietary cloud-based communications and collaboration platform, purpose-built for our extensive and expanding network of more than 7,200 channel partners and used by a growing base of over 126,000 business customers as of December 31, 2021. Through our platform, our partners provide their customers our comprehensive portfolio of enterprise-grade, seamlessly integrated Unified Communications-as-a-Service (UCaaS) solutions, including our flagship product Intermedia Unite®, as well as a suite of Business Cloud Applications (BCA) that includes cloud-based email, security and productivity applications. Our UCaaS solutions address benefit from strong growth, with UCaaS annualized recurring revenue (ARR) growing at 31.9% over the 12- month period ending December 31, 2021, as our partners enable businesses to modernize their legacy communications architectures. Our broad solution portfolio is popular among our partners, with partners selling both UCaas and BCA solutions (Combo Partners) generating 78% of our Partner UCaaS ARR as of December 31, 2021. Our BCA solutions are synergistic to the growth of our UCaaS solutions, especially in light of our partner-focused go-to-market model, as we continue to migrate our large base of BCA partners to start selling UCaaS solutions and as our partners cross-sell UCaaS solutions to their BCA customers. To incentivize and empower our partners to grow their businesses on our platform, we offer them a highly differentiated Customer Ownership Reseller model, branded CORE. This model enables them to resell, package and manage our solutions as if they were their own, at highly attractive economic terms while maintaining ownership of their customer relationships. We further differentiate from our competition by providing our partners world-class customer support, J.D. Power-certified six years in a row and with an average monthly NPS of 83 for the year ended December 31, 2021, and HostPilot®, a comprehensive and intuitive management interface, which allows our partners and end customers to manage our full suite of solutions across users and devices from a single control panel. Our recently expanded ten-year exclusive strategic partnership with NEC Platforms Ltd. and its consolidated organizations, which began in April 2020, provides a foundation to significantly accelerate our partner-led growth strategy. Pursuant to the partnership, NEC and its partner network offer our UCaaS solutions for resale on a private label basis to an estimated installed base of approximately 80 million on-premise NEC business phone users, which makes NEC the global market share leader within the SMB segment. In October 2021, we and NEC agreed (i) to extend the initial term of our partnership from five to ten years and (ii) to designate NEC as our exclusive reseller in Japan for the duration of that initial term. Additionally, NEC Corporation has indicated its intent to purchase $40 million of our common stock at the initial public offering price per share in a private placement that would be expected to close concurrently with, and would be conditioned upon consummation of, this offering, as further described below. We believe this signifies the strength of our NEC partnership and the positive momentum we have built together.

We employ a channel-first strategy whereby we distribute our solutions predominantly through our MSP and VAR partners. This broadens our sales reach considerably to customers of all sizes, especially in our primary target market of small and medium-sized businesses (SMBs), which rely heavily on channel partners to address their IT needs and are not the primary focus of many of our competitors. We establish long-term, strategic and mutually beneficial relationships with our partners, providing them with the tools, capabilities and support to

 

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effectively sell our solutions, serve their customers and achieve sustainable growth. We believe our approach is significantly more partner-friendly than our competitors’ primary go-to-market approach, which is centered on our competitors owning the end customer relationship themselves, either through direct sales or by limiting their partners to commission- based sales agent roles.

The most popular model among our partners is our CORE model, which enables our partners to sell our solutions using their own brand or on a co-branded basis, with their own pricing structure, and potentially as part of a broader solutions package they have assembled. This model allows our partners to retain direct sales, support and billing relationships with their customers. While we believe the commissions we pay our sales agents are competitive, CORE partners can earn up to five times higher revenue and up to two times higher profit than our sales agents. In addition, we benefit from significant financial and operational leverage as our partners are responsible for the majority of the customer-facing activities including sales, marketing, onboarding, support, billing and collections. Based on a 2019 market study that we commissioned (the 2019 Market Study), 95% of MSPs and VARs prefer a reseller model over a sales agent model. We believe our differentiated CORE reseller model results in high loyalty among our partners, incentivizes them to grow their businesses on our platform and helps us recruit new partners to our platform.

We are party to a recently expanded, exclusive strategic partnership with NEC with an initial term of ten years through April 2030, whereby NEC offers our UCaaS solutions for resale on a private label basis, directly and through its own partner network, to its global customer base. NEC’s on-premise business phone installed base, estimated at approximately 80 million global users, is the largest installed base within the SMB segment and third largest across all customer segments, globally. The NEC partnership provides us with a significant long-term growth opportunity and a platform to expand internationally while also underscoring the strong appeal of our differentiated partnership strategy. As of December 31, 2021, 837 NEC partners across 8 countries including the US, Canada and Japan had accepted NEC’s partner agreement to sell our UCaaS solutions under the NEC brand. We expect the number of NEC partners to grow significantly as we continue to strengthen our relationship with NEC and expand our presence globally.

Since Intermedia’s founding, we have focused on developing cloud-based, innovative and essential solutions primarily for SMBs but have expanded our solutions to serve enterprise customers as well. Our goal is to deliver these solutions at scale and securely with best-in-class uptime and reliability and high-quality customer support. Before our acquisition by Oak Hill Capital Partners (Oak Hill) in 2011, our primary business was offering a cloud-based Microsoft Exchange email solution and other value- added services to our customers. Following our acquisition by Oak Hill, we have gone through two distinct, but complementary, phases of growth and development, underpinned by the following key milestones:

2011-2016: Expansion of solutions portfolio through a combination of internal product development and acquisitions

 

   

2011: Acquired by Oak Hill

 

   

2012: Released Cloud PBX business phone service

 

   

2013: Released SecuriSync file syncing, sharing and backup application

 

   

2013: Acquired Telanetix (dba AccessLine) and SaaSID

 

   

2014: Released AppID single-sign on application; launched Office 365

 

   

2016: Awarded J.D. Power-certification for customer support, the first distinction among cloud providers

2017-2021: Focus on UCaaS and channel-driven go-to-market strategy to drive growth

 

   

2017: Acquired by our management team and funds affiliated with Madison Dearborn Partners

 

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2017: Acquired AnyMeeting, a cloud-based web and video conferencing and webinar software platform

 

   

2017: Released Intermedia Email Protection

 

   

2018: Launched Intermedia Unite, a UCaaS platform

 

   

2019: Acquired Telax, a Contact Center as a Service (CCaaS) platform

 

   

2019: Launched Omni-Channel Contact Center solution

 

   

2020: Announced an exclusive strategic partnership with NEC

 

   

2021: Expanded exclusive partnership with NEC

 

   

2021: Awarded J.D. Power-certification for customer support for the sixth consecutive year

While we operate as a single operating segment and offer integrated solutions on our platform that, depending on customers’ needs, can encompass products across our entire portfolio, we track our revenue across two product groups – Unified Communications-as-a-Service (UCaaS) solutions and Business Cloud Applications (BCA) solutions:

 

   

Solutions in our UCaaS solutions product group include video, voice, contact center, chat, fax, and file backup and collaboration.

 

   

Solutions in our BCA solutions product group include hosted Microsoft Exchange email and various complementary value added services such as email protection, archiving and encryption, identity and access management, secure file syncing and sharing services, the Microsoft 365 suite, as well as other services including SIP trunking.

Our revenue was $251.6 million and $273.2 million in the years ended December 31, 2020 and 2021, respectively. Our fast-growing UCaaS Solutions product group, which includes video, voice, chat, contact center, and file backup and collaboration solutions delivered 31.9% ARR growth over the 12-month period ended December 31, 2021, and contributed 35.4%, and 42.6% of our total ARR as of December 31, 2020 and December 31, 2021, respectively. ARR from our BCA product group, which includes cloud-based email solutions, email protection, archiving and encryption services, file backup and collaboration solutions, productivity services and other services including SIP trunking, declined 2.5% over the 12 month period ended December 31, 2021, and contributed 64.6%, and 57.4% of our total ARR as of December 31, 2020 and December 31, 2021, respectively. In the year ended December 31, 2020, our net loss was $21.7 million, representing a net loss margin of 8.6%, and our Adjusted EBITDA was $46.7 million, representing an Adjusted EBITDA margin of 18.6%. In the year ended December 31, 2021, our net loss was $24.4 million, representing a net loss margin of 9.8%, and our Adjusted EBITDA was $33.9 million, representing an Adjusted EBITDA margin of 12.4%. See “Selected Consolidated Financial Data—Non-GAAP Financial Measures—Adjusted EBITDA and Adjusted EBITDA Margin” for a definition of Adjusted EBITDA and Adjusted EBITDA margin and a reconciliation to the most directly comparable GAAP financial measure.

Our Business Model

We primarily target small and medium-sized businesses (SMBs) with our solutions. We have built our business around a channel-first strategy whereby we distribute our solutions predominantly through our growing partner network, allowing us to efficiently expand and accelerate our sales reach and better address our large but fragmented target market of SMBs. Our strategy is to grow alongside our partners as they add new customers, upgrade solution packages for our existing end customers and increase the penetration of our solutions across their existing customer bases. As our partner network grows, we gain access to a larger base of potential end customers, providing an expanding pipeline that drives the growth of our business. Our highly attractive CORE

 

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model allows our partners to retain direct sales, support and billing relationships with their customers. While we believe the commissions we pay our sales agents are competitive, CORE partners can earn up to five times higher revenue and up to two times higher profit than our sales agents. In addition, we benefit from significant financial and operational leverage as our partners are responsible for the majority of the customer-facing activities including sales, marketing, onboarding, support, billing and collections.

We generate substantially all of our revenue from the indirect and direct sale of subscriptions for our solutions. With the exception of our CORE model, we enter into contracts with and bill the end customers directly. Under our CORE model, we bill our partner for the solutions to which the end customer subscribes, while the partner is responsible for billing the end customer based on the price and other terms agreed between the partner and the end customer. Nearly all of our solutions are invoiced based on monthly subscription rates, varying based on the specific products subscribed to and the number of end users. Our contracts with CORE partners and our end customers are either month-to-month or, less frequently, have an annual term, while our partners will typically enter into annual or multi-year contracts with their customers. Regardless of the term of the agreement, our end customers and partners are billed monthly. Generally, our agreements automatically renew unless terminated by us, our partner or our end customer.

Our sales cycles vary depending on the type of end customer and the breadth of the solutions they seek. Our end customers are primarily SMBs and our sales cycles, irrespective of whether the solution is sold directly by us or by our partners, are typically less than 45 days once a new sales opportunity has been identified. With some of our larger enterprise customers, our sales cycle can be longer due to increased due diligence requirements or more rigorous procurement processes.

Substantially all of our revenue is recurring subscription revenue, which represented 97.2% and 97.0% of our total revenue in the years ended December 31, 2020 and 2021, respectively. Product revenue, which consists of revenue from the sale and shipment of pre-configured IP phones and related equipment, represented 2.8%, and 3.0% of our total revenue in the years ended December 31, 2020 and 2021. Sales through our partners generated $192.9 million of our total ARR, or 73.6% and $216.4 million of our total ARR, or 75.3% as of December 31, 2020 and 2021, respectively. For additional information regarding ARR, see “—Key Business Metrics” below.

The unit economics of our UCaaS product group are strong, measured by a Customer Lifetime Value (CLTV) / Customer Acquisition Cost (CAC) ratio of 6.8x for our entire UCaaS product group and 7.7x for our UCaaS solutions sold under the CORE model, both for the six-month period ended December 31, 2021. We calculate CLTV as (i) the average revenue per user multiplied by (ii) the average gross margin percentage over the lifetime of the customer relationship multiplied by (iii) the average users per customer multiplied by (iv) the average customer lifetime, while CAC for a given period represents average sales and marketing spend per new customer added in a given period. The strong unit economics of our UCaaS product group are driven by the mission critical nature of our solutions and high satisfaction and loyalty among our customer base, resulting in low average monthly churn of 0.8% and 0.8% for the twelve months ended December 31, 2020 and 2021, respectively; the proprietary nature of our UCaaS platform, for which we own the underlying technology; and our partner-centric go-to-market model, which provides us leverage to grow our UCaaS customer base in a capital efficient manner.

We anticipate that our operating expenses will increase in the future as we continue to invest in our infrastructure, product development, platform operations and technology to enhance our solution offerings and drive long-term growth. We also anticipate making additional investments in sales and marketing to acquire new partners and end customers and expand our presence in international markets.

 

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Our Go-to-Market Model

Our go-to-market strategy includes two distinct models: sales through our partners and direct sales. The partner model, which is our primary go-to-market model, allows us to efficiently expand and accelerate our sales reach and better address the large but fragmented SMB market while also enabling us to reduce sales and marketing costs as we provide our partners with the necessary tools and support to mobilize their sales forces to sell our solutions. While we primarily target SMBs, we also serve enterprise customers through our partner network. Our partner model contributed 75% of our total ARR as of December 31, 2021. Our direct sales model, which contributed 25% of our total ARR as of December 31, 2021, provides us with direct insight into the buying behaviors and preferences of our end customers, which in turn informs our product development roadmap and enables us to share direct sales and marketing best practices with our partners to enhance their sales and marketing efforts.

 

 

LOGO

Our partners sell our solutions to customers through various arrangements:

 

   

Customer Ownership Reseller Partners. Our CORE partners typically offer a range of IT solutions and services to their customers. They sell our solutions to their customers using their own brand or on a co-branded basis, and we offer them significant flexibility to run their business on their own terms, including the ability to bundle our solutions with their own or other third-party services and determine the price they will charge to their customers. Our CORE partners enter into agreements with their customers and are responsible for onboarding, providing first level customer support, and billing and collecting from their customers. Our subscriptions with CORE partners are primarily month-to-month contracts that we bill directly to CORE partners based on the services provided to their customers, while our partners typically enter into annual or multi-year contracts with their customers. Given that in this model the contract to deliver our solutions is between our partner and the end customer, our partners are able to recognize the entirety of the amounts paid by the customers as revenue. While we believe the commissions we pay our sales agents are competitive, CORE partners can earn up to five times higher revenue and up to two times higher profit than our sales agents. We charge our CORE partners a wholesale price that provides them with an attractive margin that they can use to finance their sales and marketing, customer support and administrative costs. Our sales through CORE partners provide us with significant financial and operational leverage as our partners are responsible for the majority of the customer-facing activities including sales, marketing, onboarding, support and billing and collections, enabling us to efficiently address the large but fragmented SMB market. Our CORE model is highly differentiating because it aligns our mutual incentives with those of our partners, creates a motivated and engaged sales channel and enables us to become an integral component of our CORE partners’ businesses.

 

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Agent Partners. Our agent partners, whom we also refer to as advisors, are independent IT consultants and telecom-related agents. These partners act as sales agents on behalf of their customers. Under this structure, we enter into agreements with the end customer, determine pricing for our solutions, and are responsible for onboarding, customer support and billing and collecting from the end customer. Under these arrangements, we pay a referral commission on the monthly revenue generated by the end customer and may also pay an upfront incentive payment, which are recorded as sales and marketing expenses.

 

   

Distributor Partners. Our distributor partners support a network of CORE and agent partners that sell our solutions directly to their customers. This two-tier distribution model offers us an additional, efficient way to find, recruit and onboard large groups of additional partners.

The success of our partner-centric go-to-market strategy can be measured by momentum in partner gross sales ARR. Our partner gross sales ARR was $12.1 million over the three months ended December 31, 2021, which represents 35.6% growth over the prior year comparative period and contributed 80.7% of our gross sales ARR over that period. For additional information regarding partner gross sales ARR, see “—Key Business Metrics” below.

Our direct sales approach is structured such that our direct sales representatives receive and close leads while our customer account managers actively sell additional solutions to our existing end customers. We pay our direct salespeople a one-time commission at the time of sale. Consistent with our partner-focused strategy, in the limited instances where we become aware of a conflict related to a sales opportunity that is concurrently being pursued by our direct sales team and one of our partners, we generally cease our direct sales efforts and shift our sales resources towards helping our partner win and close the deal.

Impact of COVID-19

In December 2019, an outbreak of the COVID-19 disease was first identified and began to spread across the globe. In March 2020, the World Health Organization declared COVID-19 a pandemic, impacting many countries around the world. Many governments have instituted lockdowns or other similar measures to slow infection rates in response. Many organizations have resorted to mandating employees to work from home, which has resulted in an acceleration of organizations’ efforts to seek out communications and collaboration solutions like ours to support an increasingly mobile and dispersed workforce and keep employees as productive as possible, regardless of their location.

We have experienced an increase in new bookings following the COVID-19 outbreak as more businesses have taken advantage of our solutions in the current work-from-anywhere environment. Our revenue retention has improved during this period, which we believe is a testament to the mission critical nature of our solutions to our end customers. In the first half of 2020, as the pandemic was unfolding, the aforementioned benefit was partially offset by our end customers slowing the addition of new users for existing services and in some cases contracting their employee bases. We believe the reduction was a precautionary measure by our end customers to account for the uncertain economic environment. We believe that the favorable impact on demand for our solutions caused by the COVID-19 pandemic will continue after the pandemic subsides, and the fundamental shifts toward work being conducted away from the office will continue to drive businesses to adopt communications and collaboration solutions such as ours that can seamlessly connect workers across locations and support a multitude of devices including desktops, tablets and smartphones.

Key Factors Affecting Our Performance

Product innovation, technology leadership and expansion of our platform to drive UCaaS growth

Our continued growth is dependent upon our ability to sustain product innovation and technology leadership in order to maintain a competitive advantage. We are an innovative software development company at our core, and as

 

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of December 31, 2021, 457 FTEs, or almost 39% of our global workforce, were employed in intellectual property development-related roles. We continually improve our existing solutions and create new solutions to anticipate the evolving demands of our partners and their customers. We have a highly efficient software development process, through which our team completed over 1,107 product features for the 12-month period ended December 31, 2021. In addition, we intend to continue evaluating strategic investments in businesses and technologies to drive product and market expansion. For example, in August 2019, we acquired Telax Voice Solutions Inc., a Toronto, Canada based provider of a CCaaS software solution tailored to communications service providers and reseller partners, which we have subsequently integrated as part of our Intermedia Unite solution.

As a result of our UCaaS focused growth strategy and investments, ARR for our UCaaS product group grew from $56.3 million as of March 31, 2019 to $122.4 million as of December 31, 2021, representing a compound annual growth rate of 32.6%. Further, UCaaS gross sales ARR, which is defined as the ARR generated by selling our UCaaS solutions to new end customers and by selling additional solutions to our existing end customers, offset by ARR lost as a result of end customers that had been customers for less than six months canceling their subscription to our solutions, grew from $27.7 million for the twelve months ended December 31, 2020 to $36.7 million for the twelve months ended December 31, 2021, representing 32.4% growth.

 

 

LOGO

Sales expansion within our existing partner base

Our ability to expand sales within our existing partner base will depend on a number of factors, including their satisfaction with our solutions, the offerings of our competitors, the financial incentives our partnership strategy offers and the support our platform provides to allow our partners to grow their sales on our platform sustainably and profitably. Our large base of partners represents a significant opportunity for further sales expansion. Once we have onboarded a partner, we aim to grow alongside them as they add new customers, upgrade solution packages for our existing end customers and increase the penetration of our solutions across their existing customer base.

We have been successful in expanding sales within our existing partner base, as demonstrated by our UCaaS Partner Dollar-Based Net Expansion Rate. We consider UCaaS Partner Dollar-Based Net Expansion Rate to be an indicator of our ability to retain and expand revenue from our existing partners over time. Our UCaaS Partner Dollar-Based Net Expansion Rate was 132% as of December 31, 2021. Further, our UCaaS Partner Dollar-Based Net Expansion Rate for CORE partners was 157% as of December 31, 2021. We calculate our UCaaS Partner Dollar-Based Net Expansion Rate as (i) UCaaS ARR as of the last day of the current reporting period from partners with associated UCaaS ARR as of the last day of the prior year comparative reporting period divided by (ii) UCaaS ARR as of the last day of the prior year comparative reporting period from those partners.

 

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We are party to a recently expanded, exclusive strategic partnership with NEC whereby NEC offers our UCaaS solutions for resale on a private label basis, directly and through its own partner network, to its global customer base. Our ability to grow our revenue from our strategic partnership with NEC will depend upon our ability to train NEC’s internal sales teams to articulate the benefits of our UCaaS solutions to their partners and customers, and on NEC’s partners embracing the opportunity to sell our cloud-based UCaaS solutions instead of, or in combination with, the on-premise NEC phone systems that NEC’s partners have primarily sold to date. Our partnership with NEC has an initial term of ten years through April 2030 and automatically renews for two-year extensions thereafter until terminated by either party. As of December 31, 2021, we had 837 NEC partners across 8 countries including the US, Canada and Japan had accepted NEC’s partner agreement to sell our UCaaS solutions under the NEC brand. We expect the number of NEC partners to grow significantly as we continue to strengthen our relationship with NEC and expand our presence globally.

Cross-selling of our UCaaS and BCA solutions

Our ability to cross-sell UCaaS and BCA solutions will depend primarily on our ability to continue to engage our partner network to sell both sets of solutions and, to a lesser extent, our ability to enhance our existing solutions, add new solutions to our platform and differentiate our solutions from those offered by our competitors. As of December 31, 2021, approximately 2,100 of our more than 7,200 partners had customers who subscribed to offerings from both UCaaS and BCA product groups while contributing approximately 69% of partner ARR, implying a significant upside opportunity from continued cross-selling. We intend to continue to increase the penetration of cross-selling partners in our base by emphasizing the opportunity to our partners through various programs, incentives and promotions. Our partners are incentivized to cross-sell our solutions to their customers due to the incremental revenue they generate while not incurring commensurate increases in costs given the reduced sales and marketing costs associated with gaining a new customer and the partner’s ability to manage all solutions centrally from our HostPilot management platform. Beyond the benefit from incremental revenue from cross-selling, we also benefit from stronger customer retention among end customers that subscribe to multiple products. This is illustrated by the fact that our partners that are selling both UCaaS and BCA solutions (Combo Partners) represented 28% of our total partner base while contributing approximately 69% of partner ARR and 78% of our Partner UCaaS ARR as of December 31, 2021. Furthermore, the penetration of UCaaS solutions among the BCA customer base of our Combo Partners has more than doubled from 8.5% as of December 31, 2018 to 18.3% as of December 31, 2021, which is a testament to our partners’ success in cross-selling. We intend to continue to increase the penetration of Combo Partners in our base by emphasizing the opportunity to our partners through various programs, incentives and promotions. In particular, the approximately 3,800 partners that are currently only selling our BCA solutions provide us with a low-cost opportunity to source new partners to sell our UCaaS solutions and drive growth of our UCaaS solutions product group. Our success in migrating BCA partners to start selling UCaaS solutions is underscored by the fact that 72% of our current Combo Partners started the partnership with us by selling BCA solutions.

Addition of new partners

Our ability to attract new partners will depend on a number of factors, including the competitiveness of our solutions and their pricing, the offerings of our competitors and the go-to-market options they offer to their channel network, the effectiveness of our partner recruiting efforts and the growth of the IT channel and its various market participants including MSPs, VARs, managed print providers, IT consultants and sales agents. We believe a substantial opportunity exists for us to increase our penetration within the IT channel. Our partnership strategy and our solutions that are purpose-built to meet the needs of our partners differentiate us in the marketplace. In particular, we expect the adoption of our highly attractive CORE model to increase within the IT channel ecosystem. We intend to drive new partner acquisition by continuing to invest significantly in sales and marketing to identify and engage prospective partners, and to extend the awareness of our brand as a trusted partner to the IT channel and the reseller community. Our distributor partners have access to thousands of partners and play an important role in this effort. We intend to continue to grow the number of inside sales representatives tasked with identifying, qualifying and closing new partner opportunities. In addition, we plan to

 

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grow the number of internal personnel dedicated to new partner onboarding, certification and enablement. As of December 31, 2021, we had a network of over 7,200 partners.

International expansion

We believe a significant opportunity exists for us to grow internationally. In the twelve months ended December 31, 2021, 5.2% of our revenue came from end customers located outside of the United States. Our existing partners that maintain an international presence provide us with a natural path to expand to the markets where they have a presence. In addition, our strategic partnership with NEC is a catalyst to accelerate our international expansion, particularly in Europe and Asia Pacific. We plan to continue investing in international markets, engage in strategic relationships with international partners and, to a lesser extent, establish a physical presence in selected international markets. Our continued expansion internationally may increase our costs relative to our revenue growth, which would adversely impact our operating results in certain periods, but we believe such expansion will ultimately contribute to our long-term growth and profitability.

Key Business Metrics

In addition to our GAAP financial information, we review several operating and financial metrics, including the following key business metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions.

 

     Year Ended December 31  
     2020     2021  
     (in thousands except
partners and percentages)
 

Annual Recurring Revenue

    

Total ARR

   $ 262,185     $ 287,492  

UCaaS ARR

   $ 92,847     $ 122,449  

UCaaS ARR YoY Growth

     28     32

Partner Metrics

    

Partner ARR

   $ 192,935     $ 216,429  

Partner Gross Sales ARR

   $ 42,698     $ 43,943  

Number of Partners

     7,017       7,243  

Annual Recurring Revenue

We define annual recurring revenue (ARR) as the annualized value of all customer recurring charges as of the end of a period. Our monthly recurring revenue equals the monthly value of all customer recurring charges at the end of a given month. We calculate ARR by multiplying the monthly recurring revenue for the last month of a period by 12. ARR only includes the annualized value of subscription contracts and recurring usage revenue and excludes any one-time revenue for devices or professional services. ARR does not have any standardized meaning and is therefore unlikely to be comparable to similarly titled measures presented by other companies. ARR should be viewed independently of revenue and deferred revenue and is not intended to be combined with or to replace either item. ARR is not a forecast and the active contracts at the date used in calculating ARR may or may not be extended or renewed by our partners and direct end customers.

Our total ARR was $287.5 million as of December 31, 2021, representing 9.7% growth over the prior year period. Given the strong growth of our UCaaS solutions product group, we separately track and monitor ARR from that product group, or UCaaS ARR, which was $122.4 million as of December 31, 2021, representing 32.6% growth over the prior year and contributing 42.6% of our total ARR.

 

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Partner Metrics

Given our channel-first strategy whereby we distribute our solutions predominantly through our growing partner network, we track a number of metrics that provide insight into our progress in growing our business through our partners. The metrics we track include partner ARR, partner gross sales ARR and number of partners.

Partner ARR: Partner ARR measures the ARR contributed by our partners. The metric provides insight into the execution of our channel-first strategy by tracking the size of our partner business as well as the relative contribution of our partner business to our total business. Our partner ARR was $216.4 million as of December 31, 2021, representing 12.2% growth over the prior year and contributing 75.3% of our total ARR.

Partner Gross Sales ARR: Partner gross sales ARR measures the ARR generated during a given period by our existing and newly signed partners by selling our solutions to new end customers and by selling additional solutions to our existing end customers, offset by ARR lost as a result of end customers that had been customers for less than six months canceling their subscription to our solutions. The metric provides insight into the execution of our channel-first strategy by quantifying the new sales activity generated by our partner channel, and the relative contribution of our partner channel to our total company new sales activity. Our partner gross sales ARR was $12.1 million over the three months ended December 31, 2021, which represents 35.6% growth over the prior year comparative period and contributed 80.7% of our gross sales ARR over that period.

Number of partners: The metric represents the number of partners with active subscriptions as of the end of the period. We use this metric to assess our ability to attract and retain partners and thereby provide a solid foundation for continued growth of our business. As of December 31, 2021, we had more than 7,200 partners, representing a 3.2% growth rate over the prior year.

Components of Results of Operations

Revenue

Our revenue for the years presented consisted of subscription and hardware revenue. Our subscription revenue includes all fees billed in connection with subscriptions to our solution offerings. These fees include recurring fixed plan subscription fees, variable usage-based fees for usage in excess of plan limits, recurring administrative cost recovery fees, one-time fees and other recurring fees related to our subscriptions. We provide our subscriptions to our customers primarily pursuant to “click through” online contractual arrangements that are typically one month in duration. We offer our subscriptions based on the functionalities and services selected by a customer, and, generally, our subscription arrangements automatically renew for additional periods at the end of the initial subscription term. We believe that this flexibility in contract duration is important to meet the specific needs of our customers.

We primarily generate revenue through sales of our subscriptions and products by CORE partners and agent partners who refer business directly. When we control the performance of the contractual obligations, we record revenue on a gross basis and amounts retained by our Agent partners are recorded as sales and marketing expenses. Our assumption of such control is evidenced when, among other things, we take responsibility for delivery of the service or products, establish pricing of the arrangement, and assume inventory risk. When a partner assumes the majority of these factors, as is typically the case with CORE partners, we record the associated revenue at the net amount remitted to us by the partner.

We generally bill our subscription fees in advance and usage in arrears for our direct customers. We recognize subscription revenue over the term of the agreement. Amounts billed in excess of revenue recognized for the period are reported as deferred revenue on our consolidated balance sheets.

Product revenue includes revenue from the sale and shipment of pre-configured IP phones and related equipment. Product revenue is recognized when the product has been shipped to the customer.

 

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Cost of Revenue

Our cost of subscription revenue primarily consists of data center co-location and connectivity costs, third-party vendor software licenses and subscription licenses, telecom carrier minutes and related costs, hardware maintenance and data center related costs, depreciation of servers and equipment, amortization of developed technology and capitalized software development costs, personnel costs for customer support, system administration and internal security, and credit card payment processing fees.

Our cost of product revenue related to IP phone sales consists of the cost of purchased phones, including shipping and related costs for shipping and handling. Cost of product revenue related to phone sales is recognized upon shipment.

Operating Expenses

We classify our operating expenses as sales and marketing, research and development, and general and administrative expenses.

Sales and marketing expenses consist primarily of personnel costs for employees and contractors directly associated with our sales and marketing activities including stock-based compensation expense from stock options and incentive units, commissions paid to employees, agents and distributor partners and other third parties, amortization of capitalized sales commissions, lead generation, online placement and optimization services, advertising and media planning, marketing and promotional activities, software tools, public relations, tradeshows, web design and production, travel expenses and allocated costs of facilities. We expect our sales and marketing expenses to continue to increase in absolute dollars for the foreseeable future as we expand our sales and marketing efforts domestically and internationally and continue to build our brand, although these expenses may fluctuate as a percentage of our total revenue from period to period depending on the timing of these expenses.

Our research and development efforts are focused on developing new and expanded features for our solutions, enhancements to our HostPilot cloud management platform, new partner facing tools and platform capabilities, integrations with other software platforms, and improvements to our backend architecture. Research and development expenses consist primarily of personnel costs for employees and contractors, including stock-based compensation expense from stock options and incentive units and allocated costs of facilities, and software tools. We expense research and development costs as incurred, except for certain internal-use software development costs that we capitalize. We believe that continued investment in our products is important for our future growth, and we expect our research and development expenses to continue to increase in absolute dollars for the foreseeable future, although these expenses may fluctuate as a percentage of our total revenue from period to period depending on the timing of these expenses.

General and administrative expenses consist primarily of personnel costs, including stock-based and unit-based compensation expense from stock options and incentive units, respectively, for employees and contractors engaged in infrastructure and administrative activities to support the day-to-day operations of our business. Other significant components of general and administrative expenses include compliance costs, professional service fees, software tools and information technology maintenance contracts, allocated costs of facilities, the costs of legal matters, business acquisition costs, and commercial insurance costs. We expect our general and administrative expenses to continue to increase in absolute dollars for the foreseeable future, although these expenses may fluctuate as a percentage of our total revenue from period to period, depending on the timing of these expenses.

Depreciation and amortization expenses primarily consist of depreciation on servers and equipment and amortization of customer relationships and tradenames.

 

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Interest expense

Interest expense consists primarily of interest incurred on our outstanding debt and lines of credit, including accretion of debt discount.

Interest income

Interest income includes interest earned on our cash and cash equivalents.

Other expense, net

Other expense, net includes change in fair value of warrant liability and foreign exchange loss which consists primarily of remeasurement of transactions and monetary assets and liabilities denominated in currencies other than the functional currency at the end of the period.

Income Taxes

Our income tax provision is based on our taxable income generated in both the U.S. and foreign jurisdictions. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest and penalties.

Results of Operations

Comparison of Years Ended December 31, 2020 and 2021

The following table summarizes our consolidated statements of operations data for the periods presented:

 

    Year Ended
December 31,
2020
    Year Ended
December 31,
2020
    Year Ended
December 31,
2021
    Year Ended
December 31,
2021
 
    (in thousands)     (as a percentage
of total revenue)
    (in thousands)     (as a percentage
of total revenue)
 

Revenue:

       

Subscription

  $ 244,626       97   $ 264,938       97

Product

    6,969       3       8,286       3  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    251,595       100       273,224       100  
 

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

       

Cost of subscription revenue

    127,075       51       141,659       52  

Cost of product revenue

    10,659       4       16,033       6  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    137,734       55       157,692       58  
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    113,861       45       115,532       42  
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

       

Sales and marketing

    46,754       19       56,003       20  

Research and development

    18,651       7       20,612       8  

General and administrative

    29,761       12       37,047       14  

Depreciation and amortization

    15,576       6       14,412       5  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    110,742       44       128,074       47  
 

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

    (24,010     (10     (24,887     (9

Interest income

    69       —         127       —    

Other income (expense), net

    (5,215     (2     5,083       2  
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (26,037     (10     (32,219     (12

Income tax benefit

    4,292       2       7,790       3  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (21,745     (9 )%    $ (24,429     (9 )% 
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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Revenue

 

(in thousands)

  Year Ended
December 31,
2020
    Year Ended
December 31,
2021
    2020 to 2021
$ Change
    2020 to 2021
% Change
 

Subscription revenue

  $ 244,626     $ 264,938     $ 20,312       8

Product revenue

    6,969       8,286       1,317       19
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

  $ 251,595     $ 273,224     $ 21,629       9
 

 

 

   

 

 

   

 

 

   

 

 

 

Our revenue is primarily derived from the licensing of our software-as-a-service solutions and selling of IP phone hardware used in the operation of certain of our unified communications solutions. Subscription revenue for the year ended December 31, 2021 increased by $20.3 million, or 8%, compared to the year ended December 31, 2020 primarily due to an increase in UCaaS subscription revenue of $24.2 million, which was partially offset by a reduction in BCA subscription revenue of $3.9 million. Product revenue for the year ended December 31, 2021 increased by $1.3 million, or 19%, compared to the year ended December 31, 2020 primarily due to an increase in the volume of phones sold attributable to increased demand for our business phone solutions.

Cost of Revenue

 

(in thousands)

  Year Ended
December 31,
2020
    Year Ended
December 31,
2021
    2020 to 2021
$ Change
    2020 to 2021
% Change
 

Cost of subscription revenue

  $ 127,075     $ 141,659     $ 14,584       11

Cost of product revenue

    10,659       16,033       5,374       50
 

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

  $ 137,734     $ 157,692     $ 19,958       14
 

 

 

   

 

 

   

 

 

   

 

 

 

Cost of subscription revenue for the year ended December 31, 2021 increased by $14.6 million, or 11%, compared to the year ended December 31, 2020. For the year ended December 31, 2021, our software licensing costs, substantially all of which are attributable to our BCA products which are a primary component of our cost of subscription revenue, increased by $6.3 million compared to the year ended December 31, 2020, rising from $43.4 million to $49.7 million. The increase in cost of subscription revenue was primarily due to the increase in software licensing costs described in the preceding sentence, as well as an increase of $1.8 million in personnel-related expenses including salaries, bonuses, benefits, and unit-based and stock-based compensation expense mainly driven by increased headcount, an increase of $3.3 million in customer implementation and support expenses, and an increase of $1.0 million in depreciation and amortization expenses.

Cost of product revenue for the year ended December 31, 2021 increased by $5.4 million, or 50%, compared to the year ended December 31, 2020. The increase in cost of product revenue was primarily due to an increase of $3.0 million in the cost of phone hardware shipped to our UCaaS customers.

Sales and Marketing

 

(in thousands)

  Year Ended
December 31,
2020
    Year Ended
December 31,
2021
    2020 to 2021
$ Change
    2020 to 2021
% Change
 

Sales and marketing

  $ 46,754     $ 56,003     $ 9,249       20

Sales and marketing expense for the year ended December 31, 2021 increased by $9.2 million, or 20%, compared to the year ended December 31, 2020. The increase in sales and marketing expense was primarily due

 

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to an increase of $3.0 million in personnel-related expenses including stock-based and unit-based compensation expense, mainly driven by increased headcount to support the growth in sales, and an increase of $3.4 million in commission related expenses, $1.0 million increase in related to Common Stock warrants issued to a vendor, and $1.0 million increase in expenses to support sales growth.

Research and Development

 

(in thousands)

  Year Ended
December 31,
2020
    Year Ended
December 31,
2021
    2020 to 2021%
$ Change
    2020 to 2021
Change
 

Research and development

  $ 18,651     $ 20,612     $ 1,961       11

Research and development expense for the year ended December 31, 2021 increased by $2.0 million, or 11%, compared to the year ended December 31, 2020. The increase was primarily due to an increase of $4.4 million in personnel-related expenses, including stock-based compensation expense, mainly driven by increased headcount and an increase of $0.7 million in contractor expenses, partially offset by a $2.6 million increase in software capitalization and $0.4 million in favorable foreign exchange hedging.

 

General and Administrative

 

(in thousands)

  Year Ended
December 31,

2020
    Year Ended
December 31,

2021
    2020 to 2021
$ Change
    2020 to 2021
% Change
 

General and administrative

  $ 29,761     $ 37,047     $ 7,286       24

General and administrative expense for the year ended December 31, 2021 increased by $7.3 million, or 24%, compared to the year ended December 31, 2020. The increase in general and administrative expense was primarily due to $4.5 million in IPO readiness related costs and an increase in personnel-related expenses of $2.0 million, mainly driven by increased headcount.

Depreciation and Amortization (Operating Expenses)

 

(in thousands)

  Year Ended
December 31,

2020
    Year Ended
December 31,

2021
    2020 to 2021
$ Change
    2020 to 2021
% Change
 

Depreciation and amortization

  $ 15,576     $ 14,412     $ (1,164     -7

Depreciation and amortization expense not attributable to cost of revenue for the year ended December 31, 2021 decreased by $1.2 million, or 7%, compared to the year ended December 31, 2020. The decrease is primarily related to a decrease in amortization of certain intangible assets recognized on an accelerated basis.

Interest Expense

 

(in thousands)

  Year Ended
December 31,
2020
    Year Ended
December 31,
2021
    2020 to 2021
$ Change
    2020 to 2021
% Change
 

Interest expense

  $ 24,010     $ 24,887     $ 877       4

Interest expense for the year ended December 31, 2021 and 2020 was relatively constant.

 

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Interest Income

 

(in thousands)

  Year Ended
December 31,
2020
    Year Ended
December 31,
2021
    2020 to 2021
$ Change
    2020 to 2021
% Change
 

Interest income

  $ 69     $ 127     $ 58       NM  

Interest income for the year ended December 31, 2021 and 2020 was relatively constant and not material.

Other income (expense), net

 

(in thousands)

  Year Ended
December 31,

2020
    Year Ended
December 31,

2021
    2020 to 2021
$ Change
    2020 to 2021
% Change
 

Other income (expense), net

  $ (5,215   $ 5,083     $ 10,298       NM  

Other income (expense), net for the year ended December 31, 2021 increased by $10.3 million from expense to income compared to the year ended December 31, 2020, primarily due to $2.3 million in foreign exchange related impacts and $7.0 million in changes in the fair value of the Class A unit warrants issued to NEC, as well as a $0.5 million decrease in the earnout related to our Telax acquisition.

Income Tax Benefit

 

(in thousands)

  Year Ended
December 31,
2020
    Year Ended
December 31,
2021
    2020 to 2021
$ Change
    2020 to 2021
% Change
 

Income tax benefit

  $ 4,292     $ 7,790     $ 3,498       82

Income tax benefit for the year ended December 31, 2021 increased by $3.5 million, or 82%, compared to the year ended December 31, 2020, primarily due to tax benefits from increased pre-tax operating losses during the year. Our effective tax rate was 24.2% for the year ended December 31, 2021 compared to 16.7% for the year ended December 31, 2020. The increased effective tax rate is due to an increase in non-deductible stock-based compensation expenses, GILTI, and other permanent items.

Liquidity and Capital Resources

General

As of December 31, 2021 and 2020 our principal sources of liquidity were cash and cash equivalents totaling $10.0 million and $23.6 million, respectively, which were held for working capital purposes, as well as the available balance of our Revolving Credit Facility, described further below. Our cash equivalents, when held, are comprised of money market funds. During the years ended December 31, 2021 and 2020, our positive cash flows from operations enabled us to make continued investments in supporting the growth of our business. Following the completion of this offering and the concurrent private placement, we expect that our operating cash flows, in addition to our cash and cash equivalents, will enable us to continue to make such investments in the future. We expect our operating cash flows to further improve as we increase our operational efficiency and experience economies of scale.

We have financed our operations primarily through cash received from operations and debt financing. We believe our sources of funding will be sufficient to satisfy our currently anticipated cash requirements including capital expenditures, working capital requirements, potential acquisitions, and other liquidity requirements

through at least the next 12 months. Our future capital requirements will depend on many factors including our obligation to repay any remaining balance under our Term Loan Facility, sales expansion within our existing