| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of expenses during the reporting periods. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, revenue recognition, valuation of goodwill and intangible assets, valuation of contingent consideration liabilities, stock-based compensation, and income taxes. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates as changes in circumstances, facts and experience arise. Actual results may differ from those estimates or assumptions. Risk of Concentrations of Credit and Significant Customers Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents, and accounts receivable. At times, the Company may maintain cash balances in excess of federally insured limits. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships. Significant customers are those that accounted for 10 % or more of the Company’s total revenue or accounts receivable during any period presented herein. During the years ended December 31, 2021 and 2020, no customer accounted for 10 % or more of revenue. As of December 31, 2021 and 2020, no customer accounted for 10 % or more of accounts receivable. Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be the equivalent of cash for the purpose of balance sheet and statement of cash flows presentation. Restricted Cash As of December 31, 2021 and 2020, restricted cash consisted of $ 0.3 million deposited in a separate restricted bank account as collateral required for one of the Company’s operating bank accounts. This amount is classified within other assets on the Company’s consolidated balance sheets. Accounts Receivable, Net and Unbilled Receivables Accounts receivable are presented net of an allowance for doubtful accounts, which is an estimate of amounts that may not be collectible. The allowance for doubtful accounts is the best estimate of the amount of probable credit losses in the existing accounts receivable balance. An allowance for doubtful accounts is established when it is probable a credit loss has been incurred based on historical collection information, a review of major customer accounts receivable balances, and an assessment of current economic conditions. The Company writes off accounts receivable against the allowance when it determines a balance is uncollectible and no longer actively pursues collection of the receivable. As of December 31, 2021 and 2020, the Company’s allowance for doubtful accounts was $ 0.2 million. During the years ended December 31, 2021 and 2020, the Company wrote off accounts receivable balances of $ 0.2 million and less than $ 0.1 million, respectively. Unbilled receivables represent amounts for which payment of consideration is subject only to the passage of time and are assessed for collectability at each reporting period. Fair Value Measurements Certain assets and liabilities are carried at fair value according to the provisions of ASC 820, Fair Value Measurements and Disclosures , (“ASC 820”). Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price), in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable: • Level 1: Quoted prices in active markets for identical assets or liabilities. • Level 2: Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data. • Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques. Refer to Note 6 – Fair Value Measurements for additional details. Segment Information Operating segments are defined as components of a business for which separate financial information is regularly evaluated by the chief operating decision maker (“CODM”), which is the Company’s chief executive officer ("CEO"), in deciding how to allocate resources and assess performance. The CODM views the Company's operations and manages its business through two reportable segments: Enterprise Solutions and SMB Solutions. Note 18 - Segment and Geographic Information provides financial information regarding the Company's reportable segments and geographic operations and revenue. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expense is recognized using the straight-line method over the estimated useful life of each asset as follows:
Asset Classification Estimated Useful Lives
Computer equipment and purchased software 3 years
Internal-use software 3 years
Furniture and fixtures 5 years
Leasehold improvements Shorter of useful life or remaining life of lease Costs for capital assets not yet placed into service are capitalized as construction-in-progress and depreciated once placed into service. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is reflected on the consolidated statement of operations and comprehensive loss. Expenditures for repairs and maintenance are charged to expense as incurred. Cloud Computing Arrangements The Company periodically enters into cloud computing arrangements to access and use third-party software in support of its operations. The Company assesses its cloud computing arrangements with vendors to determine whether the contract meets the definition of a service contract or software license. For cloud computing arrangements that meet the definition of a service contract, the Company capitalizes implementation costs incurred during the application development stage as a prepaid expense. The current and non-current portions of implementation costs are included within prepaid expenses and other current assets and other assets, respectively, on the Company's consolidated balance sheets. The Company amortizes the costs on a straight-line basis over the term of the contract. Costs related to data conversion, training and other maintenance activities are expensed as incurred. Business Combinations In accordance with ASC 805, Business Combinations (“ASC 805”), the Company recognizes tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. Determining these fair values requires management to make significant estimates and assumptions, especially with respect to intangible assets. The Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair value. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair value of the assets acquired and the liabilities assumed. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded in the consolidated statements of operations and comprehensive loss. Goodwill and Acquired Intangible Assets The Company records goodwill when consideration paid in a business acquisition exceeds the value of the net assets acquired. Goodwill is not amortized, but rather is tested for impairment annually at the reporting unit level, or more frequently if facts and circumstances warrant a review. The Company assesses both the existence of potential impairment and the amount of impairment loss, if any, by comparing the fair value of the reporting unit that includes goodwill with its carrying amount, including goodwill. To date, the Company has not identified any impairment to goodwill. Intangible assets are recorded at their estimated fair values at the date of acquisition. The Company amortizes acquired intangible assets over their estimated useful lives based on the pattern of consumption of the economic benefits or, if that pattern cannot be readily determined, on a straight-line basis. Valuation of Contingent Consideration Liabilities The Company’s acquisitions may provide for potential cash payments to former owners upon achievement of certain future performance targets. The Company estimates the fair value of these payments as of each respective acquisition date. The Company remeasures the fair value of the potential payments based upon the estimated achievement levels of the remaining targets at each subsequent reporting date until the liability is fully settled. Increases or decreases in the fair value of the contingent consideration liability are recorded through contingent consideration expense on the consolidated statements of operations and comprehensive loss. Impairment of Long-Lived Assets Long-lived assets consist primarily of property and equipment and intangible assets with finite lives. Long-lived assets to be held and used are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. If a long-lived asset group is tested for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset group to its carrying value. If the Company determines the long-lived asset group is not recoverable, an impairment loss is calculated as the excess of the carrying amount over the fair value. For the years ended December 31, 2021 and 2020, the Company did no t record any impairment losses on long-lived assets. Revenue The Company derives its revenue primarily from providing access to its SaaS solutions via subscription agreements and from transaction and usage-based fees for services provided through its solutions. To a lesser extent, the Company also generates revenue from the sale of implementation services, sale of on-demand learning courses and the sale of hardware. In accordance with ASU 2014-09, Revenue from Contracts with Customers: Topic 606 (“ASC 606”), the Company recognizes revenue following a five-step model, as outlined below: • Identification of the contract(s) with a customer; • Identification of the performance obligations in the contract; • Determination of the transaction price; • Allocation of the transaction price to the performance obligations in the contract; and • Recognition of revenue when (or as) performance obligations are satisfied. The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Revenue is reported net of applicable sales and use tax and is recognized when control of these services or products are transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for the contract’s performance obligations. Performance Obligations and Timing of Revenue Recognition Revenue from the Company’s subscription services as well as from its transaction and usage-based services represents a single promise to provide continuous access (i.e., a stand-ready obligation) to its software solutions in the form of a service through one of the Company’s hosted data providers. Customers do not have the right or practical ability to take possession of the software and use it on their own or another entity’s hardware. For subscription services, as each day of providing access to the software is substantially the same and the customer simultaneously receives and consumes the benefits as access is provided, the Company has determined that its subscription services arrangements include a single performance obligation comprised of a series of distinct services. Revenue from the Company’s subscription services is recognized over time on a ratable basis over the contract term beginning on the date that the Company’s service is made available to the customer. Subscription periods, while primarily monthly, range from monthly to multi-year, are billed in advance and are non-cancellable. For transaction and usage-based services, since the timing and quantity of transactions to be facilitated by the Company are not determinable, the Company views transaction processing services as an obligation to stand ready to facilitate as many transactions as the customer requests. Under a stand-ready obligation, the evaluation of the nature of a performance obligation is focused on each time increment rather than the underlying activities. As each day of providing these services is substantially the same and the client simultaneously receives and consumes the benefits as services are provided, these services are viewed as a single performance obligation comprised of a series of distinct daily services. The Company satisfies its performance obligation as these services are provided. Revenue is recognized in the month the service is completed. The majority of transaction and usage-based services arrangements are priced as a percentage of transaction value or a specified fee per transaction. Given the nature of the promise is based on unknown quantities or outcomes of services to be performed over the contract term, the total consideration is determined to be variable consideration. The variable consideration relates specifically to the Company’s effort to transfer each distinct daily service, and as such, the Company allocates the variable consideration earned to the distinct day in which those activities are performed. The Company recognizes these fees as revenue in the period earned, at the point in which the variable amount is known. In determining the amount of consideration received related to these services, the Company applied the principal-agent guidance in ASC 606 and assessed whether it controls services performed by other intermediaries. As it relates to transaction and usage-based services, the Company’s software solutions provide an interface that allows customers to integrate with a variety of payment processors to route and clear transactions through applicable payment networks. As third parties are involved in the transfer of goods or services to customers, the Company considers the nature of each specific promised good or service and applies judgment to determine whether the Company controls the good or service before it is transferred to the customer or whether the Company is acting as an agent of the third party. To determine whether or not the Company controls the good or service before it is transferred to the customer, the Company assessed indicators including whether the Company or the third party is primarily responsible for fulfillment and which party has discretion in determining pricing for the good or service, as well as other considerations. Based on this assessment, the Company determined that EngageSmart does not control the services performed by card networks, sponsor banks and credit card processors as each of these parties is the primary obligor for their portion of payment and transaction processing services performed. Therefore, transaction usage-based service revenue is recognized net of any fees owed to these intermediaries. Incremental Costs of Obtaining a Contract with a Customer The Company assesses the costs of obtaining contracts with customers according to the provisions of ASC 340-40, Other Assets and Deferred Costs—Contracts with Customers . The Company capitalizes incremental costs incurred in obtaining contracts with customers if the amortization period is greater than one year . For costs that the Company would have capitalized and amortized over one year or less, the Company has elected to apply the practical expedient and expense these contract costs as incurred. The Company’s incremental costs of obtaining a contract consist of sales commissions paid to employees for new bookings and in certain situations, upon the go-live date for a new customer. Sales commissions are not paid on contract renewals. Sales commissions (related to new bookings and go-lives) are deferred and amortized on a straight-line basis over the period of benefit, which the Company has estimated to be five years for initial contracts. The period of benefit was determined based on an average customer contract term, expected customer life, and expected useful life of its related technology. Reserve for Sales Refunds and Credits The Company maintains a reserve for sales refunds and credits to customers for which the Company estimates based upon historical experience. The reserve for sales refunds and credits is recorded as a reduction in revenue. As of December 31, 2021 and 2020, the Company’s allowance for sales refunds and credits was $ 0.3 million, included within accrued expenses and other current liabilities on the consolidated balance sheets. Deferred Financing Costs The Company capitalizes certain legal and other third-party fees that are directly associated with obtaining access to capital via credit facilities. Deferred financing costs incurred in connection with obtaining access to capital are recorded in other assets and are amortized on a straight-line basis over the term of the credit facility. Deferred financing costs related to a recognized debt liability are recorded as a reduction of the carrying amount of the debt liability and amortized to interest expense over the repayment term. Deferred Rent Payment escalations, rent holidays and other lease incentives that may be included in lease agreements are accrued or deferred as appropriate such that rent expense for each lease is recognized on a straight-line basis over the respective lease term. Adjustments for such items are recorded as deferred rent and amortized over the respective lease terms. The short-term portion of the deferred rent is included within accrued expenses and other current liabilities and the long-term portion is included within other long-term liabilities on the accompanying consolidated balance sheets. Research and Development Research and development expenses consist primarily of personnel-related expenses, third-party consulting costs, and costs for software tools for product management and software development. Research and development costs are expensed as incurred, except for certain costs which are capitalized in connection with the development of the Company’s internal-use software and websites. The Company accounts for its software and website development costs in accordance with the guidance in ASC 350-40, Internal-Use Software and ASC 350-50, Website Development Costs . The costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the application is substantially complete and ready for its intended use, at which point such costs are amortized over the estimated useful life of three years . Capitalized software costs are included within property and equipment, net on the Company's consolidated balance sheets. Advertising Costs The Company expenses advertising costs as incurred and such costs are included in selling and marketing expense in the statements of operations and comprehensive loss. During the years ended December 31, 2021 and 2020, advertising expense totaled $ 9.7 million and $ 6.7 million, respectively. Costs Associated with Exit Activities The Company records costs associated with exit activities in accordance with ASC 420 , Exit of Disposal Cost Obligations (“ASC 420”). Costs associated with exit activities include contract termination costs, including costs related to leased facilities to be abandoned or subleased, which are expensed in accordance with ASC 420 and are included in restructuring (reversal) charges on the consolidated statements of operations and comprehensive loss. Restructuring liabilities are recorded on the Company’s consolidated balance sheets within accrued expenses and other current liabilities and other long-term liabilities. Stock/Equity-Based Compensation The Company measures stock/equity-based compensation costs for awards with service-based vesting or performance-based vesting granted to employees, non-employees, and directors, on the grant date, based on the calculated fair value of the award, in accordance with ASC 718, Compensation - Stock Compensation ("ASC 718"). Compensation expense for the awards is recognized over the requisite service period for employees and directors and as services are delivered for non-employees, both of which are generally the vesting period of the respective award. The Company uses the straight-line method to record the expense of awards with only service-based vesting conditions. The Company uses the graded-vesting method to record the expense of awards with both service-based and performance-based vesting conditions, commencing once achievement of the performance condition becomes probable. The Company accounts for forfeitures of stock/equity-based awards as they occur. The Company classifies stock/equity-based compensation expense in its consolidated statements of operations and comprehensive loss in the same manner in which the award recipient’s payroll costs are classified or in which the award recipient’s service payments are classified. Net Loss Per Share Basic net loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is calculated by dividing net loss by the sum of the weighted average number of common shares and potentially dilutive securities outstanding during the period using the treasury stock method. For periods in which the Company reports a net loss, diluted net loss per common share is the same as basic net loss per common share, since potentially dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. Income Taxes The Company is treated as a corporation for federal income tax purposes and is subject to taxation in the United States. In each reporting period, the Company’s tax provision includes the effects of consolidating the results of the operations of its subsidiaries. The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the consolidated financial statements or in the Company’s tax returns. Deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded within benefit from income taxes on the consolidated statements of operations and comprehensive loss. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies. The Company accounts for uncertainty in income taxes recognized in the consolidated financial statements by applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the consolidated financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50 % likelihood of being realized upon ultimate settlement. Benefit from income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties. Recently Issued Accounting Pronouncements In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires lessees to recognize most leases on their balance sheet as a right of use asset and a lease liability. In general, lease arrangements exceeding a twelve-month term must be recognized as assets and liabilities on the balance sheet. Under ASU 2016-02, a right of use asset and lease obligation is recorded for all leases, whether operating or financing, while the income statement reflects lease expense for operating leases and amortization/interest expense for financing leases. The FASB also issued ASU 2018-10, Codification Improvements to Topic 842 Leases , and ASU 2018-11, Targeted Improvements to Topic 842 Leases , which allows the new lease standard to be applied as of the adoption date with a cumulative-effect adjustment to the opening balance of retained earnings rather than retroactive restatement of all periods presented. In June 2020, the FASB issued ASU No. 2020-05, which grants a one-year effective-date delay for nonpublic entities to annual reporting periods beginning after December 15, 2021 and to interim periods within fiscal years beginning after December 15, 2022. Early adoption continues to be permitted. The Company will adopt the new standard effective January 1, 2022 on a modified retrospective basis and will not restate comparative periods. The Company is currently evaluating the effect of the standard on its consolidated financial statements and expects that upon adoption a material lease liability and right of use asset will be recognized on its consolidated balance sheets. The Company's leases primarily relate to office space. In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes may result in earlier recognition of credit losses. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses , which narrowed the scope and changed the effective date for non-public entities for ASU 2016-13. The FASB subsequently issued supplemental guidance within ASU 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief (“ASU 2019-05”). ASU 2019-05 provides an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For public entities that are Securities and Exchange Commission filers, excluding entities eligible to be smaller reporting companies, ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. For all other entities, ASU 2016-13 is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company plans to adopt the new standard effective January 1, 2022. The Company does not believe the adoption of ASU 2016-13 will have a material impact on its consolidated financial statements. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 simplifies the accounting for income taxes by adding guidance to reduce complexity in some areas while removing some exemptions to others, such as year-to-date loss limitations when interim-period losses exceed anticipated losses for the full year and requiring the reflection of enacted changes in tax laws in the annual effective tax rate in the interim period of the enactment date, among other changes. The Company plans to adopt the new standard effective January 1, 2022. The Company does not believe the adoption of ASU 2019-12 will have a material impact on its consolidated financial statements. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which intends to address accounting consequences that could result from the global markets’ anticipated transition away from the use of the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. The amendments within ASU 2020-04 provide operational expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions to affected by reference rate reform if certain criteria are met. The amendments within ASU 2020-04 apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of the reference rate reform. The amendments in ASC 2020-04 are effective immediately and may be applied through December 31, 2022. As there are no current borrowings under the 2021 Revolving Credit Facility, as defined below, there is currently no impact related to the adoption of ASU 2020-04. If the Company draws down upon the 2021 Revolving Credit Facility, the Company will assess the impact of the adoption of this guidance on its consolidated financial statements. In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers ("ASU 2021-08"). The amendments require contract assets and contract liabilities acquired in a business combination to be recognized in accordance with ASC 606 as if the acquirer had originated the contracts. The amendments in this updated are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the timing of adoption and impact of this new standard on its consolidated financial statements and related disclosures. |
