Notes to Unaudited Consolidated Financial Statements (Unaudited)
(In millions, except share/unit data and per share/unit amounts, unless otherwise noted)
Note 1 - Organization and Background
Business
ZoomInfo Technologies Inc., through its operating subsidiaries provides a go-to-market intelligence and engagement platform for sales and marketing teams. The Company’s cloud-based platform provides workflow tools with integrated, accurate, and comprehensive information on organizations and professionals to help users identify target customers and decision makers, obtain continually updated predictive lead and company scoring, monitor buying signals and other attributes of target companies, craft messages, engage via automated sales tools, and track progress through the deal cycle. Unless otherwise indicated or the context otherwise requires, references to “we,” “us,” “our,” “ZoomInfo,” and the “Company” refer (1) prior to the consummation of the Reorganization Transactions, to ZoomInfo OpCo and its consolidated subsidiaries, (2) after the consummation of the Reorganization Transactions and prior to the consummation of the Holding Company Reorganization, to ZoomInfo Intermediate Inc. (formerly known as ZoomInfo Technologies Inc.) and its consolidated subsidiaries and (3) after the consummation of the Holding Company Reorganization, to ZoomInfo Technologies Inc. (formerly known as ZoomInfo NewCo Inc.) and its consolidated subsidiaries.
Organization
ZoomInfo Technologies Inc. was formed on November 14, 2019 with no operating assets or operations as a Delaware corporation for the purposes of facilitating an initial public offering (“IPO”) and other related transactions in order to carry on the business of ZoomInfo Holdings LLC (“ZoomInfo OpCo”) (formerly known as DiscoverOrg Holdings, LLC), a Delaware limited liability company. Following consummation of the Reorganization Transactions, ZoomInfo OpCo became a direct subsidiary of ZoomInfo Intermediate Holdings LLC (“ZoomInfo HoldCo”), a Delaware limited liability company and an indirect subsidiary of ZoomInfo Technologies Inc. Following the consummation of the Holding Company Reorganization, ZoomInfo OpCo became a direct subsidiary of ZoomInfo Technologies Inc. and ZoomInfo Intermediate Inc.
The Company headquarters are located in Vancouver, WA, and we have additional offices throughout the United States, and in Israel, Canada, the United Kingdom, and India.
Corporate Structure Simplification Transactions
In August 2021, the Company completed a series of reorganization transactions to simplify its corporate structure, including the distribution of shares of common stock of RKSI Acquisition Corp (“RKSI”) from ZoomInfo Holdings LLC to ZoomInfo HoldCo, the merger of RKSI with and into ZoomInfo HoldCo with ZoomInfo HoldCo surviving, and the merger of ZoomInfo HoldCo with and into the Company with the Company surviving. Prior to the consummation of the HoldCo Merger, all holders of HoldCo Units (other than the Company) exchanged their HoldCo Units and paired shares of Class B common stock of the Company for shares of Class A common stock of the Company pursuant to the terms of the limited liability company agreement of HoldCo.
Note 1 - Organization and Background (continued)
Holding Company Reorganization
In September 2021, the Board of Directors unanimously approved streamlining the Company’s corporate structure and governance by eliminating the Company’s umbrella partnership-C-corporation (“UP-C”) and multi-class voting structure. In October 2021, the Company implemented this reorganization, pursuant to which (i) a subsidiary of ZoomInfo Technologies Inc. (formerly known as ZoomInfo NewCo Inc.) (“New ZoomInfo”) merged with and into ZoomInfo Intermediate Inc. (“Old ZoomInfo”), formerly known as ZoomInfo Technologies Inc., which resulted in New ZoomInfo becoming the direct parent company of Old ZoomInfo, and (ii) immediately thereafter, another subsidiary of New ZoomInfo merged with and into ZoomInfo Holdings LLC (“ZoomInfo OpCo”), which resulted in ZoomInfo OpCo becoming a subsidiary of New ZoomInfo (the combined transaction described in (i) and (ii), the “Holding Company Reorganization”). As a result of the Holding Company Reorganization, New ZoomInfo became the successor issuer and reporting company to Old ZoomInfo pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and replaced the Predecessor Registrant as the public company trading on the Nasdaq Global Select Market (the “Nasdaq”) under the ticker symbol “ZI.”.
After the consummation of the Holding Company Reorganization, the only class of common stock of the New ZoomInfo remaining issued and outstanding was the Class A common stock and all shares of Class B common stock were cancelled, and all shares of Class C common stock were converted to Class A common stock. In May 2022, following approval by the Company’s stockholders, the Company further amended and restated its Amended and Restated Certification of Incorporation to eliminate the multiple classes of common stock and to rename the Company’s Class A common stock as “Common Stock.” All references within this document to Class A common stock for periods subsequent to May 23, 2022, and, where the context requires, references within this document to Class A common stock for periods prior to May 23, 2022, have been updated for the renaming.
Note 2 - Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) pertaining to interim financial information. Certain information in footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) has been condensed or omitted pursuant to those rules and regulations. The financial statements included in this report should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2022.
The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the operating results that may be expected for the full fiscal year ending December 31, 2023 or any future period.
The accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair statement of financial position as of March 31, 2023, and results of operations for the three months ended March 31, 2023 and 2022, and cash flows for the three months ended March 31, 2023 and 2022. Accordingly, certain footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.
Effective May 23, 2022, the Company’s Class A common stock was renamed as “Common Stock.” All references within this document to Class A common stock for periods subsequent to May 23, 2022, and, where the context requires, references within this document to Class A common stock for periods prior to May 23, 2022, have been updated for the renaming.
Note 2 - Basis of Presentation and Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make certain estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting period. We base these estimates on historical and anticipated results, trends, and other assumptions with respect to future events that we believe are reasonable and evaluate our estimates on an ongoing basis. Given that estimates and judgments are required, actual results may differ from our estimates and such differences could be material to our consolidated financial position and results of operations.
Principles of Consolidation
The consolidated financial statements include the accounts of ZoomInfo Technologies Inc. and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
Revenue Recognition
The Company derives revenue primarily from subscription services. Our subscription services consist of our SaaS applications and related access to our platform. Subscription contracts are generally based on the number of users that access our applications, the level of functionality that they can access, and the amount of data that a customer integrates with their systems. Our subscription contracts typically have a term of one to three years and are non-cancelable. We typically bill for services annually, semi-annually, or quarterly in advance of delivery.
The Company accounts for revenue contracts with customers through the following steps:
(1)identify the contract with a customer;
(2)identify the performance obligations in the contract;
(3)determine the transaction price;
(4)allocate the transaction price; and
(5)recognize revenue when or as the Company satisfies a performance obligation.
We recognize revenue for subscription contracts on a ratable basis over the contract term based on the number of calendar days in each period, beginning on the date that our service is made available to the customer. Unearned revenue results from revenue amounts billed to customers in advance or cash received from customers in advance of the satisfaction of performance obligations. Determining the transaction price often involves judgment and making estimates that can have a significant impact on the timing and amount of revenue reported. At times, the Company may adjust billing under a contract based on the addition of services or other circumstances, which are accounted for as variable consideration. The Company estimates these amounts based on historical experience and adjusts revenue recognized.
Note 2 - Basis of Presentation and Summary of Significant Accounting Policies (continued)
Cash, Cash Equivalents, and Short-term Investments
Cash equivalents consist of highly liquid marketable debt securities with remaining maturities of three months or less at the date of purchase. We classify our investments in marketable securities as “available-for-sale.” We carry these investments at fair value, based on quoted market prices or other readily available market information. Unrealized gains and losses, net of taxes, are included in accumulated other comprehensive income, which is reflected as a separate component of stockholders’ equity on our Consolidated Balance Sheets. Gains and losses are determined using the specific identification method and recognized when realized on our Consolidated Statements of Operations. If we were to determine that an other-than-temporary decline in fair value has occurred, the amount of the decline related to a credit loss will be recognized in income.
Fair Value Measurements
The Company measures assets and liabilities at fair value based on an expected exit price, which represents the amount that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. The following are the hierarchical levels of inputs to measure fair value:
Level 1 - Observable inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities
Level 2 - Other inputs that are directly or indirectly observable in the marketplace
Level 3 - Unobservable inputs that are supported by little or no market activity, including the Company’s own assumptions in determining fair value
The inputs or methodology used for valuing financial assets and liabilities are not necessarily an indication of the risk associated with investing in them.
Concentrations of Credit Risk and Significant Customers
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents, short-term investments, and accounts receivable. The Company holds cash at major financial institutions that often exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits. The Company manages its credit risk associated with cash concentrations by concentrating its cash deposits in high-quality financial institutions and by periodically evaluating the credit quality of the primary financial institutions holding such deposits. The carrying value of cash approximates fair value. Our investment portfolio is comprised of highly rated securities with a weighted-average maturity of less than 12 months in accordance with our investment policy which seeks to preserve principal and maintain a high degree of liquidity. Historically, the Company has not experienced any losses due to such cash concentrations. The Company does not have any off-balance-sheet credit exposure related to its customers. Concentrations of credit risk with respect to accounts receivable and revenue are limited due to a large, diverse customer base. We do not require collateral from clients. We maintain an allowance for credit losses based upon the expected collectability of accounts receivable. The Company performs ongoing credit evaluations of its customers and maintains allowances for possible losses, which, when realized, have been within the range of management’s expectations. No single customer accounted for 10% or more of our revenue for the three months ended March 31, 2023 and 2022, or accounted for more than 10% of accounts receivable as of March 31, 2023 and December 31, 2022. Long-lived assets located outside of the United States were immaterial as of March 31, 2023 and December 31, 2022.
Note 2 - Basis of Presentation and Summary of Significant Accounting Policies (continued)
Accounts Receivable and Contract Assets
Accounts receivable is comprised of invoices of revenue, net of allowance for credit losses, and does not bear interest. We consider receivables past due based on the contractual payment terms. Management’s evaluation of the adequacy of the allowance for credit losses considers historical collection experience, changes in customer payment profiles, the aging of receivable balances, as well as current economic conditions, all of which may impact a customer’s ability to pay. Account balances are written-off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have significant bad debt experience with customers, and therefore, the allowance for credit losses is immaterial as of March 31, 2023 and December 31, 2022.
The assessment of variable consideration to be constrained is based on estimates, and actual consideration may vary from current estimates. As adjustments to these estimates become necessary, they are reported in earnings in the periods in which they become known. Changes in variable consideration are recorded as a component of net revenue.
Contract assets represent a contractual right to consideration in the future. Contract assets are generated when contractual billing schedules differ from revenue recognition timing.
Property and Equipment, Net
Property and equipment is stated at cost, net of accumulated depreciation and amortization. All repairs and maintenance costs are expensed as incurred. Depreciation and amortization costs are expensed on a straight-line basis over the lesser of the estimated useful life of the asset or the remainder of the lease term for leasehold improvements. Qualifying internal use software costs incurred during the application development stage, which consist primarily of internal product development costs, outside services, and purchased software license costs, are capitalized and amortized over the estimated useful life of the asset. Estimated useful lives range from three years to ten years.
Deferred Commissions
Certain sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. These sales commissions for initial contracts are capitalized and included in Deferred costs and other assets, net of current portion on our Consolidated Balance Sheets. Deferred sales commissions are amortized on a straight-line basis over the estimated period of benefit from the customer relationship which we have determined to be one and three years for renewals and new clients, respectively. We determined the period of benefit by taking into consideration our customer contracts, our technology, and other factors. Amortization expense is included in Sales and marketing expense on our Consolidated Statements of Operations.
Commissions payable at March 31, 2023 were $31.1 million, of which the current portion of $27.3 million was included in Accrued expenses and other current liabilities on our Consolidated Balance Sheets, and the long-term portion of $3.8 million was included in Other long-term liabilities on our Consolidated Balance Sheets. Commissions payable at December 31, 2022 were $36.2 million, of which the current portion of $32.1 million was included in Accrued expenses and other current liabilities on our Consolidated Balance Sheets, and the long-term portion of $4.1 million was included in Other long-term liabilities on our Consolidated Balance Sheets.
Certain commissions are not capitalized as they do not represent incremental costs of obtaining a contract. Such commissions are expensed as incurred.
Advertising and Promotional Expenses
The Company expenses advertising costs as incurred. Advertising expenses of $8.5 million and $7.5 million were recorded for the three months ended March 31, 2023 and 2022 respectively. Advertising expenses are included in Sales and marketing on our Consolidated Statements of Operations.
Note 2 - Basis of Presentation and Summary of Significant Accounting Policies (continued)
Research and Development
Research and development expenses consist primarily of compensation expense for our employees, including employee benefits, certain IT program expenses, facilities and related overhead costs. We continue to focus our research and development efforts on developing new products, adding new features and services, integrating acquired technologies, and increasing functionality. Expenditures for software developed or obtained for internal use are capitalized and amortized over a four-year period on a straight-line basis.
Restructuring and Transaction-Related Expenses
The Company defines restructuring and transaction-related expenses as costs directly associated with restructuring, acquisition, or disposal activities. Such costs include employee severance and termination benefits, contract termination fees and penalties, and other exit or disposal costs. In general, the Company records involuntary employee-related exit and disposal costs when there is a substantive plan for employee severance and related costs that are probable and estimable. For one-time termination benefits for key members of management (i.e., no substantive plan) expense is recorded when the employees are entitled to receive such benefits and the amount can be reasonably estimated. Transaction related bonuses and related employee retention costs are recognized over the relevant service period. Contract termination fees and penalties and other exit and disposal costs are generally recorded when incurred.
Business Combinations
We allocate purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The purchase price is determined based on the fair value of the assets transferred, liabilities assumed and equity interests issued, after considering any transactions that are separate from the business combination. The fair value of equity issued as part of a business combination is determined based on grant date stock price of the Company. The excess of fair value of purchase consideration over the fair values of the identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets and contingent liabilities. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired customer bases, acquired technology and acquired trade names, useful lives, royalty rates, and discount rates.
The estimates are inherently uncertain and subject to revision as additional information is obtained during the measurement period for an acquisition, which may last up to one year from the acquisition date. During the measurement period, we may record adjustments to the fair value of tangible and intangible assets acquired and liabilities assumed, with a corresponding offset to goodwill. After the conclusion of the measurement period or the final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to earnings.
In addition, uncertain tax positions and tax-related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date. We reevaluate these items based upon the facts and circumstances that existed as of the acquisition date, with any revisions to our preliminary estimates being recorded to goodwill, provided that the timing is within the measurement period. Subsequent to the measurement period, changes to uncertain tax positions and tax-related valuation allowances will be recorded to earnings.
Goodwill and Acquired Intangible Assets
Goodwill is calculated as the excess of the purchase consideration paid in a business combination over the fair value of the assets acquired less liabilities assumed. Goodwill is not amortized and is tested for impairment at least annually during the fourth quarter of our fiscal year or when events and circumstances indicate that fair value of a reporting unit may be below its carrying value. The company has one reporting unit.
Note 2 - Basis of Presentation and Summary of Significant Accounting Policies (continued)
We first assess qualitative factors to evaluate whether it is more likely than not that the fair value of a reporting unit is less than the carrying amount or elect to bypass such assessment. If it is determined that it is more likely than not that the fair value of the reporting unit is less than its carrying value, or we elect to bypass the qualitative assessment, we perform a quantitative test by determining the fair value of the reporting unit. If the carrying value of the reporting unit exceeds the fair value, then an impairment loss is recognized for the difference.
Acquired technology, customer lists, trade names or brand portfolios, and other intangible assets are related to previous acquisitions (refer to Note 7 - Goodwill and Acquired Intangible Assets). Acquired intangible assets are amortized on a straight-line basis over the estimated period over which we expect to realize economic value related to the intangible asset. The amortization periods range from 2 years to 15 years. Any costs incurred to renew or extend the life of an intangible or long-lived asset are reviewed for capitalization.
Indefinite-lived intangible assets consist primarily of brand portfolios acquired from Pre-Acquisition ZI and represent costs paid to legally register phrases and graphic designs that identify and distinguish products sold by the Company. Brand portfolios are not amortized, rather potential impairment is considered on an annual basis in the fourth quarter, or more frequently upon the occurrence of a triggering event, when circumstances indicate that the book value of trademarks are greater than their fair value. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the indefinite-lived intangible asset is less than the carrying value as a basis to determine whether further impairment testing is necessary. No impairment charges relating to acquired goodwill or indefinite lived intangible assets were recorded for the three month periods ended March 31, 2023 and 2022.
Impairment of Long-lived Assets
Long-lived assets, such as property and equipment and acquired intangible assets, are reviewed for impairment whenever events or circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the undiscounted future cash flows expected to be generated by the asset or group of assets. If the carrying amount of the asset exceeds the estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the estimated future cash flows of the asset. No impairment charges were recorded for the three month periods ended March 31, 2023 and 2022.
Leases
We determine if an arrangement is or contains a lease at contract inception. For these arrangements, primarily those related to our data center arrangements, there is judgment in evaluating if the arrangement involves an identified asset that is physically distinct or whether we have the right to substantially all of the capacity of an identified asset that is not physically distinct. In arrangements that involve an identified asset, there is also judgment in evaluating if we have the right to direct the use of that asset.
We do not have any finance leases. Operating leases are recorded on our Consolidated Balance Sheets. Right-of-use assets and lease liabilities are measured at the lease commencement date based on the present value of the fixed minimum remaining lease payments over the lease term, determined using the discount rate for the lease at the commencement date. Because the rates implicit in our leases are not readily determinable, we use our incremental borrowing rate as the discount rate for each respective lease, which approximates the interest rate at which we could borrow on a collateralized basis with similar terms and payments and in similar economic environments. Some leases include options to extend or options to terminate the lease prior to the stated lease expiration. Optional periods to extend a lease, including by not exercising a termination option, are included in the lease term when it is reasonably certain that the option will be exercised (or not exercised in the case of termination options). Operating lease expense is recognized on a straight-line basis over the lease term. We account for lease and non-lease components, principally common area maintenance and related taxes for our facilities leases, as a single lease component. Short term leases, defined as leases having an original lease term less than or equal to one year, are excluded from our right-of-use assets and liabilities.
Note 2 - Basis of Presentation and Summary of Significant Accounting Policies (continued)
Unearned Revenue
Unearned revenue consists of customer payments and billings in advance of revenue being recognized from our subscription services. Unearned revenue that is anticipated to be recognized within the next 12 months is recorded as Unearned revenue, current portion and the remaining portion is included in Unearned revenue, net of current portion on our Consolidated Balance Sheets.
Debt Issuance Costs
Costs incurred in connection with the issuance of long-term debt are deferred and amortized as interest expense over the terms of the related debt using the effective interest method for term debt and on a straight-line basis for revolving debt. Debt issuance costs are generally presented on our Consolidated Balance Sheets as a direct deduction from the carrying amount of the outstanding borrowings, consistent with debt discounts. However, the Company classifies the debt issuance costs related to its first lien revolving credit facility within Deferred costs and other assets, net of current portion on our Consolidated Balance Sheets regardless of whether the Company has any outstanding borrowings on our first lien revolving credit facility. Upon a refinancing or amendment, the Company evaluates the modified debt instrument in accordance with ASC 470-50-40-10. When the present value of the cash flows under the modified debt instrument has changed by greater than 10 percent from the present value of the remaining cash flows under the terms of the original debt instrument, the Company accounts for the amendment as a debt extinguishment and all previously-capitalized debt issuance costs are expensed and included in Loss on debt modification and extinguishment. If the change in the present value of cash flows is less than 10 percent, any previously-capitalized debt issuance costs are amortized as interest expense over the term of the new debt instrument. The Company performs assessments of debt modifications at a lender-specific level for all syndicated financing arrangements.
Tax Receivable Agreements
In connection with our IPO, we entered into two Tax Receivable Agreements ("TRAs") with certain non-controlling interest owners (the “TRA Holders”). The TRAs generally provide for payment by the Company to the TRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income tax or franchise tax that the Company actually realizes or is deemed to realize in certain circumstances. The Company will retain the benefit of the remaining 15% of these net cash savings.
Amounts payable under the TRA are accrued by a charge to income when it is probable that a liability has been incurred and the amount is estimable. TRA related liabilities are classified as current or noncurrent based on the expected date of payment and are included on our Consolidated Balance Sheets under the captions Current portion of tax receivable agreements liability and Tax receivable agreements liability, net of current portion, respectively. Subsequent changes to the measurement of the TRA liability are recognized on our Consolidated Statements of Operations as a component of Other (income) expense, net. Refer to Note 15 - Tax Receivable Agreements for further details on the TRA liability.
Income Taxes
The Company recognizes deferred tax assets and liabilities based on temporary differences between the financial statement and tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax law is recognized in the condensed consolidated statement of operations in the period that includes the enactment date.
The need for valuation allowances is regularly evaluated for deferred tax assets for which future realization is uncertain. In assessing the realizability of deferred tax assets, we consider both positive and negative evidence, including scheduled reversals of deferred tax assets and liabilities, projected future taxable income, tax planning strategies and results of recent operations. If, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be realized, a valuation allowance is recorded.
Note 2 - Basis of Presentation and Summary of Significant Accounting Policies (continued)
The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon examination by the taxing authority, solely based on its technical merits. The tax benefit recognized is measured as the largest amount of benefit which is greater than 50 percent likely to be realized upon settlement with the taxing authority. The Company recognizes interest accrued and penalties related to unrecognized tax benefits within the provision for (benefit from) income taxes.
Equity-Based Compensation Expense
The Company periodically grants incentive awards to employees and non-employees, which generally vest over periods up to four years. Incentive awards may be in the form of various equity-based awards such as Restricted Stock and Restricted Stock Units, and Common Stock Options. Historically, the Company also granted awards in one of the Company’s legacy subsidiary partnerships and such awards were typically in the form of profits interests. Profits interests are an interest in the increase in the value of the entity over a participation threshold. Prior to the IPO, the participation threshold was based on the valuation determined by the Board of Managers of OpCo Units on or around the grant date. Subsequent to the IPO, the participation threshold was determined by reference to the closing price of our Class A common stock from the preceding trading day. The holders of profits interests had the right to participate in distributions of profits only in excess of the participation threshold. Previously awarded profits interests were converted into Restricted Stock awards in connection with the Holding Company Reorganization (refer to Note 1 - Organization and Background).
Compensation expense for incentive awards is measured at the estimated fair value of the incentive units and is included as compensation expense over the vesting period during which an employee provides service in exchange for the award. Compensation expense for performance-based Restricted Stock Units is measured at the estimated fair value of the units and is recognized using the accelerated attribution method over the service period when it is probable that the performance condition will be satisfied.
The Company uses a Black-Scholes option pricing model to determine the fair value of stock options and profits interests, as profits interests have certain economic similarities to options. The Black-Scholes option pricing model includes various assumptions, including the expected term of incentive units, the expected volatility and the expected risk-free interest rate. These assumptions reflect the Company’s best estimates, but they involve inherent uncertainties based on market conditions generally outside the control of the Company. As a result, if other assumptions are used, compensation cost could be materially impacted.
Compensation expense related to the Company’s Employee Stock Purchase Plan is measured at the estimated fair value using the Black-Scholes option pricing model using the estimated number of awards as of the beginning of the offering period.
The Company measures employee, non-employee, and board of director equity-based compensation on the grant date fair value basis. Equity-based compensation expense is recognized over the requisite service period of the awards. For equity awards that have a performance condition, the Company recognizes compensation expense based on its assessment of the probability that the performance condition will be achieved. The Company has elected to account for forfeitures as they occur.
The Company classifies equity-based compensation expense on our Consolidated Statements of Operations in the same manner in which the award recipient’s salary and related costs are classified or in which the award recipient’s service payments are classified.
Note 2 - Basis of Presentation and Summary of Significant Accounting Policies (continued)
Share Repurchase Program
In March 2023, the Board of Directors authorized a program to repurchase up to $100.0 million of the Company’s Common Stock (the “Share Repurchase Program”). Under the Share Repurchase Program, shares of Common Stock may be repurchased from time to time through open market transactions in compliance with applicable securities laws. The timing, manner, price and amount of any repurchases, as well as the capital resources to fund the repurchases, are determined by the Company at its discretion and depend on a variety of factors, including legal requirements, price and economic and market conditions.
During the three months ended March 31, 2023, the Company repurchased and subsequently retired 1,058,291 shares of Common Stock at an average price of $22.99, for an aggregate $24.3 million. As of March 31, 2023, $75.7 million remained available and authorized for repurchases under the Share Repurchase Program.
Note 3 - Revenue from Contracts with Customers
Revenue comprised the following service offerings:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(in millions) | 2023 | | 2022 | | | | |
Subscription | $ | 297.4 | | | $ | 239.7 | | | | | |
Usage-based | 2.4 | | | 2.0 | | | | | |
Other | 0.9 | | | — | | | | | |
Total revenue | $ | 300.7 | | | $ | 241.7 | | | | | |
Go-To-Market business intelligence tools are subscription services that allow customers access to our SaaS tools to support sales and marketing processes, which include data, analytics, and insights to provide accurate and comprehensive intelligence on organizations and professionals. Our customers use our platform to identify target customers and decision makers, obtain continually updated predictive lead and company scoring, monitor buying signals and other attributes of target companies, craft messages, engage via automated sales tools, and track progress through the deal cycle.
Usage-based revenue is comprised largely of email verification and facilitation of online advertisements, which are charged to our customers on a per unit basis based on their usage. We regularly observe that customers integrate our usage-based services into their internal workflows and use our services on an ongoing basis. We recognize usage-based revenue at the point in time the services are consumed by the customer, thereby satisfying our performance obligation.
Other revenue is comprised largely of implementation and professional services fees. We recognize other revenue as services are delivered.
Of the total revenue recognized in the three months ended March 31, 2023 and 2022, $213.3 million and $172.6 million were included in the unearned revenue balance as of December 31, 2022 and 2021, respectively. Revenue recognized from performance obligations satisfied (or partially satisfied) in previous periods was not material.
Revenues derived from customers and partners located outside the United States, as determined based on the address provided by our customers and partners, accounted for approximately 13% and 12% of our total revenues for the three months ended March 31, 2023 and 2022, respectively. Contracts denominated in currencies other than U.S. Dollar were not material for the three months ended March 31, 2023 and 2022.
Contract Assets and Unearned Revenue
The Company’s standard billing terms typically require payment at the beginning of each annual, semi-annual, or quarterly period. Subscription revenue is generally recognized ratably over the contract term starting with when our service is made available to the customer. Usage-based revenue is recognized in the period services are utilized
Note 3 - Revenue from Contracts with Customers (continued)
by our customers. The amount of revenue recognized reflects the consideration the Company expects to be entitled to receive in exchange for these services.
The Company records a contract asset when revenue recognized on a contract exceeds the billings to date for that contract. Unearned revenue results from cash received or amounts billed to customers in advance of revenue recognized upon the satisfaction of performance obligations. The unearned revenue balance is influenced by several factors, including seasonality, the compounding effects of renewals, invoice duration, invoice timing, dollar size, and new business timing within the quarter. The unearned revenue balance does not represent the total contract value of annual or multi-year, non-cancelable subscription agreements.
As of March 31, 2023 and December 31, 2022, the Company had contract assets of $5.6 million and $5.7 million, respectively, which are recorded as current assets within Prepaid expenses and other current assets on our Consolidated Balance Sheets. As of March 31, 2023 and December 31, 2022, the Company had unearned revenue of $451.4 million and $419.9 million, respectively.
ASC 606 requires the allocation of the transaction price to the remaining performance obligations of a contract. Transaction price allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes unearned revenue and unbilled amounts that will be recognized as revenue in future periods. Transaction price allocated to remaining performance obligations is influenced by several factors, including seasonality, the timing of renewals, and disparate contract terms. Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes unearned revenue and backlog. The Company's backlog represents installment billings for periods beyond the current billing cycle. The majority of the Company’s noncurrent remaining performance obligations will be recognized in the next 13 to 36 months.
The remaining performance obligations consisted of the following:
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(in millions) | Recognized within one year | | Noncurrent | | Total |
| | | | | |
As of March 31, 2023 | $ | 839.2 | | | $ | 253.3 | | | $ | 1,092.5 | |
Note 4 - Business Combinations
2022 Acquisitions
In April 2022, the Company acquired all the outstanding equity interests of Comparably, Inc. (“Comparably”) and acquired substantially all the assets and certain specified liabilities of Dogpatch Advisors, LLC (“Dogpatch”) (collectively, the “2022 Acquired Companies”) for a total purchase consideration of $150.6 million in cash and $10.0 million in convertible notes receivable. As part of the acquisitions, the Company issued 448,740 restricted stock units at a total grant date fair value of $26.8 million and could be required to issue additional equity awards up to a maximum value of $3.7 million based on the attainment of certain revenue thresholds and the continued employment of acquired employees. The acquisition of Comparably provides ZoomInfo with unique proprietary data to further build TalentOS into a best-in-class talent platform by enriching recruiter search options and providing recruiters with access to millions of quality candidates and employer brand solutions. We acquired Dogpatch Advisors to launch ZoomInfo Labs, a new go-to-market thought leadership team, driving go-to-market data analysis, product enhancements and strategy for our enterprise customers. Dogpatch is a go-to-market consultancy with expertise in scaling revenue teams and building modern sales and marketing systems. The purchase accounting for the 2022 Acquired Companies transactions has been finalized.
The Company has included the financial results of the 2022 Acquired Companies in the consolidated financial statements from each date of acquisition. Due to the integration of the 2022 Acquired Companies into the operations of ZoomInfo, the Company cannot practicably determine the contribution of the 2022 Acquired Companies to consolidated net earnings. Transaction costs associated with each acquisition were not material.
Note 4 - Business Combinations (continued)
The acquisition date fair value of the total consideration transferred was comprised of the following (in millions):
| | | | | | | | | | | | | | | | | |
| Preliminary Fair Value at Acquisition Date | | Measurement Period Adjustments | | Adjusted Fair Value at Acquisition Date |
Cash | $ | 150.5 | | | $ | 0.1 | | | $ | 150.6 | |
Conversion of Note Receivable | 10.0 | | | — | | | 10.0 | |
Total purchase consideration | $ | 160.5 | | | $ | 0.1 | | | $ | 160.6 | |
The following table summarizes the aggregate fair values of the assets acquired and liabilities assumed, as of the dates of the acquisition for the 2022 Acquired Companies (in millions):
| | | | | | | | | | | | | | | | | |
| Preliminary Fair Value at Acquisition Date | | Measurement Period Adjustments | | Adjusted Fair Value at Acquisition Date |
Cash and cash equivalents | $ | 14.8 | | | $ | — | | | $ | 14.8 | |
Accounts receivable | 2.3 | | | — | | | 2.3 | |
Prepaid expenses and other assets | 0.3 | | | 0.7 | | | 1.0 | |
Intangible assets | 34.8 | | | — | | | 34.8 | |
Accounts payable and other liabilities | (0.9) | | | (0.4) | | | (1.3) | |
Unearned revenue | (6.8) | | | — | | | (6.8) | |
Deferred tax liabilities | (6.5) | | | 2.9 | | | (3.6) | |
Total identifiable net assets acquired | 38.0 | | | 3.2 | | | 41.2 | |
Goodwill | 122.5 | | | (3.1) | | | 119.4 | |
Total consideration | 160.5 | | | 0.1 | | | 160.6 | |
Cash acquired | (14.8) | | | — | | | (14.8) | |
| | | | | |
Cash paid for acquisitions, net of cash acquired | $ | 145.7 | | | $ | 0.1 | | | $ | 145.8 | |
| | | | | |
Cash paid (refunds received) for 2021 acquisitions in 2022 (see "2021 Acquisitions") | | | | | (2.1) | |
Total cash paid for acquisitions in 2022 | | | | | $ | 143.7 | |
The excess of purchase consideration over the fair value of net tangible and intangible assets acquired was recorded as goodwill. The fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. The fair values of assets acquired and liabilities assumed in the Comparably acquisition may be subject to change as additional information is received regarding working capital balances at the acquisition date, and the values of the identifiable intangible assets.
Note 4 - Business Combinations (continued)
The following table sets forth the components of identifiable intangible assets acquired and the estimated useful lives as of the dates of acquisition (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Preliminary Fair Value at Acquisition Date | | Measurement Period Adjustments | | Adjusted Fair Value at Acquisition Date | | Weighted Average Useful Life |
Existing Technology | $ | 27.6 | | | $ | — | | | $ | 27.6 | | | 5.8 years |
Customer Relationships | 3.4 | | | — | | | 3.4 | | | 9.0 years |
Trade name / Trademarks | 3.8 | | | — | | | 3.8 | | | 8.0 years |
Total intangible assets | $ | 34.8 | | | $ | — | | | $ | 34.8 | | | |
Developed technology represents the fair value of the technology portfolios acquired. The goodwill is primarily attributed to the expanded market opportunities when integrating technology with the Company’s technology and the assembled workforce. All goodwill acquired in the twelve months ended December 31, 2022 is expected to be deductible for U.S. income tax purposes.
Pro forma information related to the acquisitions has not been presented as the impact was not material to the Company’s financial results.
Note 5 - Cash, Cash Equivalents, and Short-term Investments
Cash, cash equivalents, and short-term investments consisted of the following as of March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value |
Current Assets: | | | | | | | |
Cash | $ | 137.2 | | | $ | — | | | $ | — | | | $ | 137.2 | |
Cash equivalents | | | | | | | |
Corporate debt securities | 167.3 | | | — | | | — | | | 167.3 | |
Money market mutual funds | 169.5 | | | — | | | — | | | 169.5 | |
| | | | | | | |
Total cash equivalents | 336.8 | | | — | | | — | | | 336.8 | |
Total cash and cash equivalents | 474.0 | | | — | | | — | | | 474.0 | |
Short-term investments: | | | | | | | |
Corporate debt securities | 101.9 | | | — | | | (0.1) | | | 101.8 | |
Securities guaranteed by U.S. government | 27.7 | | | — | | | — | | | 27.7 | |
Other governmental securities | 12.3 | | | — | | | — | | | 12.3 | |
Total short-term investments | 141.9 | | | — | | | (0.1) | | | 141.8 | |
Total cash, cash equivalents, and short-term investments | $ | 615.9 | | | $ | — | | | $ | (0.1) | | | $ | 615.8 | |
Note 5 - Cash, Cash Equivalents, and Short-term Investments (continued)
Cash, cash equivalents, and short-term investments consisted of the following as of December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value |
Current Assets: | | | | | | | |
Cash | $ | 235.6 | | | $ | — | | | $ | — | | | $ | 235.6 | |
Cash equivalents | | | | | | | |
Corporate debt securities | 159.9 | | | — | | | (0.1) | | | 159.8 | |
Money market mutual funds | 18.6 | | | — | | | — | | | 18.6 | |
Securities guaranteed by U.S. government | 4.0 | | | — | | | — | | | 4.0 | |
Total cash equivalents | 182.5 | | | — | | | (0.1) | | | 182.4 | |
Total cash and cash equivalents | 418.1 | | | — | | | (0.1) | | | 418.0 | |
Short-term investments: | | | | | | | |
Corporate debt securities | 91.8 | | | — | | | (0.1) | | | 91.7 | |
Securities guaranteed by U.S. government | 25.0 | | | — | | | — | | | 25.0 | |
Other government securities | 11.0 | | | — | | | — | | | 11.0 | |
Total short-term investments | 127.8 | | | — | | | (0.1) | | | 127.7 | |
Total cash, cash equivalents, and short-term investments | $ | 545.9 | | | $ | — | | | $ | (0.2) | | | $ | 545.7 | |
Refer to Note 10 - Fair Value for further information regarding the fair value of our financial instruments.
Gross unrealized losses on our available-for sale securities were immaterial at March 31, 2023 and December 31, 2022.
The following table summarizes the cost and estimated fair value of the securities classified as short-term investments based on stated effective maturities as of March 31, 2023 and December 31, 2022:
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| | March 31, 2023 | | December 31, 2022 |
(in millions) | | Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value |
Due within one year | | $ | 141.9 | | | $ | 141.8 | | | $ | 127.8 | | | $ | 127.7 | |
Total | | $ | 141.9 | | | $ | 141.8 | | | $ | 127.8 | | | $ | 127.7 | |
Note 6 - Property and Equipment
The Company’s fixed assets consist of the following (in millions):
| | | | | | | | | | | |
| March 31, | | December 31, |
| 2023 | | 2022 |
Computer equipment | $ | 13.4 | | | $ | 13.3 | |
Furniture and fixtures | 3.8 | | | 3.8 | |
Leasehold improvements | 10.4 | | | 9.9 | |
Internal use developed software | 65.8 | | | 63.1 | |
Construction in progress | 6.4 | | | 4.0 | |
Property and equipment, gross | 99.8 | | | 94.1 | |
Less: accumulated depreciation | (46.4) | | | (42.0) | |
Property and equipment, net | $ | 53.4 | | | $ | 52.1 | |
Note 6 - Property and Equipment (continued)
Depreciation expense was $4.8 million and $3.5 million for the three months ended March 31, 2023 and 2022, respectively.
Note 7 - Goodwill and Acquired Intangible Assets
Intangible assets consisted of the following as of March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
(in millions) | Gross Carrying Amount | | Accumulated Amortization | | Net | | Weighted Average Amortization Period in Years |
Intangible assets subject to amortization: | | | | | | | |
Customer relationships | $ | 287.6 | | | $ | (97.2) | | | $ | 190.4 | | | 14.5 |
Acquired technology | 330.8 | | | (179.8) | | | 151.0 | | | 6.4 |
Brand portfolio | 11.5 | | | (6.3) | | | 5.2 | | | 7.8 |
Net intangible assets subject to amortization | $ | 629.9 | | | $ | (283.3) | | | $ | 346.6 | | | |
| | | | | | | |
Intangible assets not subject to amortization | | | | | | | |
Pre-Acquisition ZI brand portfolio | $ | 33.0 | | | $ | — | | | $ | 33.0 | | | |
Goodwill | $ | 1,692.7 | | | $ | — | | | $ | 1,692.7 | | | |
Amortization expense was $16.1 million and $16.5 million for the three months ended March 31, 2023 and 2022, respectively.
Goodwill was $1,692.7 million as of March 31, 2023. There have been no changes to goodwill amounts since December 31, 2022.
Based on the results of the Company’s impairment assessment, the Company did not recognize any impairment of goodwill during the three months ended March 31, 2023 or March 31, 2022.
Note 8 - Financing Arrangements
As of March 31, 2023 and December 31, 2022, the carrying values of the Company’s borrowings were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Carrying Value as of |
Instrument | | Date of Issuance | | Maturity Date | | Elected Interest Rate | | March 31, 2023 | | December 31, 2022 |
| | | | | | | | | | |
First Lien Term Loan | | February 1, 2019 | | February 28, 2030 | | SOFR + 2.85% | | $ | 594.4 | | | $ | 595.5 | |
First Lien Revolver | | February 1, 2019 | | February 28, 2028 | | SOFR + 2.10% | | — | | | — | |
Senior Notes | | February 2, 2021 | | February 1, 2029 | | 3.875% | | 640.6 | | | 640.2 | |
Total Carrying Value of Debt | | | | | | | | $ | 1,235.0 | | | $ | 1,235.7 | |
Less current portion | | | | | | | | (6.0) | | | — | |
Total Long Term Debt | | | | | | | | $ | 1,229.0 | | | $ | 1,235.7 | |
Note 8 - Financing Arrangements (continued)
First Lien Credit Agreement
Performance of obligations under the First Lien Credit Agreement is secured by substantially all the productive assets of the Company. The First Lien Credit Agreement contains a number of covenants that restrict, subject to certain exceptions, the Company’s ability to, among other things:
•incur additional indebtedness;
•create or incur liens;
•engage in certain fundamental changes, including mergers or consolidations;
•sell or transfer assets;
•pay dividends and distributions on our subsidiaries’ capital stock;
•make acquisitions, investments, loans or advances;
•engage in certain transactions with affiliates; and
•enter into negative pledge clauses and clauses restricting subsidiary distributions.
If the Company draws more than $87.5 million of the revolving credit loan, the revolving credit loan is subject to a springing financial covenant pursuant to which the consolidated first lien net leverage ratio must not exceed 5.00 to 1.00. The credit agreements also contain certain customary affirmative covenants and events of default, including a change of control. If an event of default occurs, the lenders under the credit agreements will be entitled to take various actions, including the acceleration of amounts due under the credit agreements and all actions permitted to be taken by a secured creditor.
On December 30, 2022, the Company amended the First Lien Credit Agreement by converting the interest rate for both the first lien term loan and the first lien revolving credit facility from LIBOR plus the applicable spread to SOFR plus a credit spread adjustment of 0.1% and the applicable spread. No other terms, including the amount of borrowing or the maturity date, were changed as a result of this amendment.
First Lien Term Loan
In February 2023, we entered into an amendment to our existing First Lien Credit Agreement (the “Fifth Amendment”), pursuant to which the Company completed a repricing of its First Lien Term Loan Facility, which provided for an extension of the maturity date to February 28, 2030. The first lien term debt has a variable interest rate whereby the Company can elect to use a Base Rate or SOFR plus an applicable rate. Pursuant to the Fifth Amendment, the applicable rate decreased for Base Rate loans from 2.00% to 1.75% and from 3.10% to 2.85% for SOFR based loans. The Company recognized an immaterial loss in connection with the repricing in the three months ended March 31, 2023 within Loss on debt modification and extinguishment on the Consolidated Statements of Operations. Under the terms of the Fifth Amendment, the Company is obligated to make principal payments in the amount of 0.25% of the aggregate outstanding amount each quarter.
The effective interest rate on the first lien debt was 7.36% and 7.38% as of March 31, 2023 and December 31, 2022, respectively.
Note 8 - Financing Arrangements (continued)
First Lien Revolving Credit Facility
Pursuant to the Fifth Amendment, the Company also extended the maturity date of $213.0 million of our $250.0 million existing commitments of the first lien revolving credit facility to February 28, 2028. With respect to the $37.0 million commitments which were not extended, the maturity date is November 2, 2025. Debt issuance costs were incurred in connection with the repricing of the revolving credit facility. These debt issuance costs are amortized into interest expense over the expected life of the arrangement. Unamortized debt issuance costs included in Deferred costs and other assets, net of current portion on our Consolidated Balance Sheets were immaterial as of March 31, 2023 and December 31, 2022.
The first lien revolving debt has a variable interest rate whereby the Company can elect to use a Base Rate or SOFR, plus an applicable rate. The applicable margin is 1.00% to 1.25% for Base Rate loans or 2.10% to 2.35% for SOFR loans, depending on the Company’s leverage.
Senior Notes
In February 2021, ZoomInfo Technologies LLC and ZoomInfo Finance Corp., indirect subsidiaries of ZoomInfo Technologies Inc. (the “Issuers”), issued $350.0 million in aggregate principal amount of 3.875% Senior Notes due February 2029 to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. Interest on the Senior Notes is payable semi-annually in arrears beginning on August 1, 2021. The Issuers may redeem all or a part of the Notes at any time prior to February 1, 2024 at a price equal to the present value of the redemption price as of February 1, 2024, defined below, plus unaccrued and unpaid interest to February 1, 2024. In addition, beginning on February 1, 2024, the Issuers may redeem all or a part of the Notes at a redemption price equal to 101.938% of the principal amount redeemed. The redemption price decreases to 100.969% and 100.000% of the principal amount redeemed on February 1, 2025 and February 1, 2026, respectively. In addition, at any time prior to February 1, 2024, the Issuers may redeem up to 40% of the Notes from the proceeds of certain equity offerings at a redemption price equal to 103.875% of the principal amount of the Senior Notes, plus accrued and unpaid interest.
In July 2021, ZoomInfo Technologies LLC and ZoomInfo Finance Corp., indirect subsidiaries of ZoomInfo Technologies Inc., issued and sold $300.0 million in aggregate principal amount of additional 3.875% senior notes due in 2029. The notes were issued under the same indenture as the Issuers’ existing $350.0 million aggregate principal amount of 3.875% senior notes due 2029 (the “Existing Notes”), which were issued in February 2021, and constitute part of the same series as the Existing Notes.
Note 9 - Derivatives and Hedging Activities
We are exposed to changes in interest rates, primarily relating to changes in interest rates on our first lien term loan. Consequently, from time to time, we may use interest rate swaps or other financial instruments to manage our exposure to interest rate movements. Our primary objective in holding derivatives is to reduce the volatility of cash flows associated with changes in interest rates. We do not enter into derivative transactions for speculative or trading purposes.
We recognize derivative instruments and hedging activities on a gross basis as either assets or liabilities on our Consolidated Balance Sheets and measure them at fair value. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the earnings effect of the hedged forecasted transactions in a cash flow hedge. For derivatives designated as cash flow hedges, the change in the estimated fair value of the derivative is recognized in Accumulated other comprehensive income (loss) on our Consolidated Balance Sheets. To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. Gains and losses resulting from valuation adjustments on dedesignated portions of our derivative contract subsequent to dedesignation of hedge accounting are recorded within Interest expense, net on our Consolidated Statements of Operations. As it is not probable the forecasted transaction will not occur, the amounts in Accumulated other comprehensive income (loss) as of the date of dedesignation will be released based on our original forecast.
Note 9 - Derivatives and Hedging Activities (continued)
In the second quarter of 2022, two interest rate swap contracts in the notional amount of $350.0 million matured. Interest rate swaps in the notional amount of $500.0 million became effective in April 2022.
In the third quarter of 2022, the Company sold $400.0 million of the notional amount of the interest rate cap contract which was not designated as an accounting hedge. We recognized a gain of $3.0 million, partially offset by the derecognition of $2.5 million of derivative assets, resulting from this sale within Interest expense, net on our Consolidated Statements of Operations.
In the fourth quarter of 2022, the Company transitioned two interest rate swap contracts and one interest cap contract from LIBOR to SOFR by terminating the original transactions and simultaneously entering into new derivatives. The terms of the new derivatives were unchanged except for the index. The Company elected optional expedients to allow for this transition without any interruptions to the hedge accounting.
As of March 31, 2023, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk ($ in millions):
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Interest Rate Derivatives (Level 2) | | Number of Instruments | | Notional Aggregate Principal Amount | | Interest Cap / Swap Rate | | Maturity Date |
Interest rate cap contract | | One | | $ | 100.0 | | | 3.500 | % | | April 30, 2024 |
Interest rate swap contracts | | Two | | $ | 500.0 | | | 0.370 | % | | January 30, 2026 |
The following table summarizes the fair value and presentation on our Consolidated Balance Sheets for derivatives as of March 31, 2023 and December 31, 2022 (in millions):
| | | | | | | | | | | | | | | | | |
| | Fair Value of Derivative Instruments |
Instrument | | March 31, 2023 | | December 31, 2022 |
| | | | | |
| | Derivative Assets | | | | Derivative Assets | |
Derivatives designated as hedging instruments | | | | | | | |
| | | | | | | |
Interest rate cap contract(1) | | $ | 1.1 | | | | | $ | 1.2 | | |
Interest rate cap contract(2) | | 0.1 | | | | | 0.3 | | |
| | | | | | | |
Interest rate swap contracts(1) | | 20.7 | | | | | 21.5 | | |
Interest rate swap contracts(2) | | 23.9 | | | | | 30.3 | | |
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Total designated derivative fair value | | $ | 45.8 | | | | | $ | 53.3 | | |
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________________
(1) Included in Prepaid expenses and other current assets on our Consolidated Balance Sheets.
(2) Included in Deferred costs and other assets, net of current portion on our Consolidated Balance Sheets.
The change in fair value of any derivative instruments was recorded, net of income tax, in Accumulated other comprehensive income (loss) on our Consolidated Balance Sheets to the extent the agreements were designated as effective hedges. In the period that the hedged item affects earnings, such as when interest payments are made on the Company’s variable-rate debt, we reclassify the related gain or loss on the interest rate swap cash flow hedges and any receipts on the cap to Interest expense, net and as operating cash flows on our Consolidated Statements of Cash Flows in the period settled in cash. Income tax effects from changes in fair value of derivative instruments are recorded on our Consolidated Statements of Operations when the derivative instruments are settled. Over the next 12 months, we expect to reclassify approximately $21.6 million into interest income from AOCI.
Refer to the Company’s Consolidated Statements of Comprehensive Income (Loss) for amounts reclassified from AOCI into earnings related to the Company’s Derivative Instruments designated as cash flow hedging instruments for each of the reporting periods.
Note 10 - Fair Value
The Company's financial instruments consist principally of cash and cash equivalents, short-term investments, prepaid expenses and other current assets, accounts receivable, and accounts payable, accrued expenses, and long-term debt. The carrying value of cash and cash equivalents, prepaid expenses and other current assets, accounts receivable, accounts payable, and accrued expenses approximate fair value, primarily due to short maturities. We classify our money market mutual funds as Level 1 within the fair value hierarchy. We classify our corporate debt securities, securities guaranteed by U.S. government, and other governmental securities as Level 2 within the fair value hierarchy. The fair value of our first term lien debt and Senior Notes as of March 31, 2023 was $597.8 million and $555.8 million, respectively, based on observable market prices in less active markets and categorized as Level 2 within the fair value measurement framework.
The Company has elected to use the income approach to value the interest rate derivatives using observable Level 2 market expectations at measurement date and standard valuation techniques to convert future amounts to a single present amount (discounted) reflecting current market expectations about those future amounts. Level 2 inputs for the derivative valuations are limited to quoted prices for similar assets or liabilities in active markets (specifically futures contracts) and inputs other than quoted prices that are observable for the asset or liability (specifically SOFR cash and swap rates, implied volatility for options, caps and floors, basis swap adjustments, overnight indexed swap (“OIS”) short term rates and OIS swap rates, when applicable, and credit risk at commonly quoted intervals). Mid-market pricing is used as a practical expedient for most fair value measurements. Key inputs, including the cash rates for very short term futures rates and swap rates beyond the derivative maturity are interpolated to provide spot rates at resets specified by each derivative (reset rates are then further adjusted by the basis swap, if necessary). Derivatives are discounted to present value at the measurement date at SOFR rates unless they are fully collateralized. Fully collateralized derivatives are discounted to present value at the measurement date at OIS rates (short term OIS rates and long term OIS swap rates).
Inputs are collected from SuperDerivatives, an independent third-party derivative pricing data provider, as of the close on the last day of the period. The valuation of the interest rate swaps also take into consideration estimates of our own, as well as our counterparty’s, risk of non-performance under the contract.
We estimate the value of other long-lived assets that are recorded at fair value on a non-recurring basis based on a market valuation approach. We use prices and other relevant information generated primarily by recent market transactions involving similar or comparable assets, as well as our historical experience in divestitures, acquisitions, and real estate transactions. Additionally, we may use a cost valuation approach to value long-lived assets when a market valuation approach is unavailable. Under this approach, we determine the cost to replace the service capacity of an asset, adjusted for physical and economic obsolescence. When available, we use valuation inputs from independent valuation experts, such as real estate appraisers and brokers, to corroborate our estimates of fair value. Real estate appraisers’ and brokers’ valuations are typically developed using one or more valuation techniques including market, income and replacement cost approaches. Because these valuations contain unobservable inputs, we classify the measurement of fair value of long-lived assets as Level 3.
Note 10 - Fair Value (continued)
The fair value (in millions) of our financial assets and (liabilities) was determined using the following inputs:
| | | | | | | | | | | | | | | | | | | | |
Fair Value at March 31, 2023 | | Level 1 | | Level 2 | | Level 3 |
Measured on a recurring basis: | | | | | | |
Assets: | | | | | | |
Cash equivalents: | | | | | | |
Corporate debt securities | | $ | — | | | $ | 167.3 | | | $ | — | |
Money market mutual funds | | $ | 169.5 | | | $ | — | | | $ | — | |
| | | | | | |
Short-term investments: | | | | | | |
Corporate debt securities | | $ | — | | | $ | 101.8 | | | $ | — | |
Securities guaranteed by U.S. government | | $ | — | | | $ | 27.7 | | | $ | — | |
Other governmental securities | | $ | — | | | $ | 12.3 | | | $ | — | |
Prepaid expenses and other current assets: | | | | | | |
Interest rate cap contract | | $ | — | | | $ | 1.1 | | | $ | — | |
Interest rate swap contracts | | $ | — | | | $ | 20.7 | | | $ | — | |
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Deferred costs and other assets, net of current portion | | | | | | |
Interest rate cap contract | | $ | — | | | $ | 0.1 | | | $ | — | |
Interest rate swap contracts | | $ | — | | | $ | 23.9 | | | $ | — | |
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Fair Value at December 31, 2022 | | Level 1 | | Level 2 | | Level 3 |
Measured on a recurring basis: | | | | | | |
Assets: | | | | | | |
Cash equivalents: | | | | | | |
Corporate debt securities | | $ | — | | | $ | 159.8 | | | $ | — | |
Money market mutual funds | | $ | 18.6 | | | $ | — | | | $ | — | |
Securities guaranteed by U.S. government | | $ | — | | | $ | 4.0 | | | $ | — | |
Short-term investments: | | | | | | |
Corporate debt securities | | $ | — | | | $ | 91.7 | | | $ | — | |
Securities guaranteed by U.S. government | | $ | — | | | $ | 25.0 | | | $ | — | |
Other governmental securities | | $ | — | | | $ | 11.0 | | | $ | — | |
Prepaid expenses and other current assets: | | | | | | |
Interest rate cap contract | | $ | — | | | $ | 1.2 | | | $ | — | |
Interest rate swap contracts | | $ | — | | | $ | 21.5 | | | $ | — | |
Deferred costs and other assets, net of current portion | | | | | | |
Interest rate cap contract | | $ | — | | | $ | 0.3 | | | $ | — | |
Interest rate swap contracts | | $ | — | | | $ | 30.3 | | | $ | — | |
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There have been no transfers between fair value measurements levels during the three months ended March 31, 2023.
Refer to Note 5 - Cash, Cash Equivalents, and Short-term Investments for further information regarding the fair value of our financial instruments. Refer to Note 9 - Derivatives and Hedging Activities for further information regarding the fair value of our derivative instruments.
Note 11 - Commitments and Contingencies
Non-cancelable purchase obligations
For information related to outstanding non-cancelable purchase obligations with a term of 12 months or longer, refer to the amount disclosed in the audited financial statements in our 2022 Form 10-K. Amounts mainly relate to third-party cloud hosting and software as a service arrangements. For information regarding financing-related obligations, refer to Note 8 - Financing Arrangements. For information regarding lease-related obligations, refer to Note 13 - Leases.
Sales and use tax
The Company has conducted an assessment of sales and use tax exposure in states where the Company has established nexus. Based on this assessment, the Company has recorded a liability for taxes owed and related penalties and interest in the amount of $3.9 million and $4.9 million at March 31, 2023 and December 31, 2022, respectively. This liability is included in Accrued expenses and other current liabilities on our Consolidated Balance Sheets.
Contingent earnout payments
In connection with the acquisition of Dogpatch, the Company could be required to issue equity awards up to $3.7 million. Refer to Note 4 - Business Combinations for additional information.
Deferred acquisition-related payments
In connection with the acquisition of Insent, the Company expects to pay an additional $3.0 million of which $1.2 million represents deferred consideration. Refer to Note 4 - Business Combinations for additional information.
Legal matters
We are subject to various legal proceedings, claims, and governmental inspections, audits, or investigations that arise in the ordinary course of our business. There are inherent uncertainties in these matters, some of which are beyond management’s control, making the ultimate outcomes difficult to predict. Moreover, management’s views and estimates related to these matters may change in the future, as new events and circumstances arise and the matters continue to develop. Based on the information known by the Company as of the date of this filing, it is not possible to provide an estimated amount of any loss or range of loss that may occur with respect to these matters, including without limitation the matters described below.
On April 15, 2021, a putative class action lawsuit was filed against ZoomInfo Technologies LLC in the United States District Court for the Northern District of Illinois (Eastern Division) alleging ZoomInfo’s use of Illinois residents’ names in public-facing web pages violates the Illinois Right of Publicity Act, and seeking statutory, compensatory and punitive damages, costs, and attorneys’ fees. The Company intends to vigorously defend against this lawsuit.
On September 30, 2021, a putative class action lawsuit was filed against ZoomInfo Technologies Inc. in the United States District Court for the Western District of Washington alleging ZoomInfo’s use of California residents’ names in public-facing web pages violates California statutory and common law regarding the right of publicity as well as misappropriation, and seeking compensatory and punitive damages, restitution, injunctive relief, declaratory relief, costs, and attorneys’ fees. The Company intends to vigorously defend against this lawsuit.
Note 11 - Commitments and Contingencies (continued)
On February 10, 2023, a putative class action lawsuit was filed against Datanyze, LLC, one of the Company’s subsidiaries, in the Circuit Court of Cook County, Illinois alleging Datanyze's use of Illinois residents’ names in a free trial violates the Illinois Right of Publicity Act, and seeking statutory, compensatory and punitive damages, costs, and attorneys’ fees. The case is now pending in the United States District Court for the Northern District of Illinois (Eastern Division). The Company intends to vigorously defend against this lawsuit.
On March 8, 2023, a putative class action lawsuit was filed against Datanyze, LLC in the United States District Court for the Northern District of Ohio alleging Datanyze's use of Ohio residents names in a free trial violates the Ohio Right of Publicity Statute, and seeking statutory damages, costs, and attorneys’ fees. The Company intends to vigorously defend against this lawsuit.
Note 12 - Earnings Per Share
As previously discussed, in May 2022, following approval by the Company’s stockholders, the Company further amended and restated its Amended and Restated Certificate of Incorporation to eliminate the multiple classes of common stock and to rename the Company’s Class A common stock to “Common Stock”.
The following tables set forth the computation of basic and diluted net income per share of Class A common stock or Common Stock, as applicable, (in millions, except share and per share amounts):
| | | | | | | |
| Three Months Ended March 31, 2023 | | |
| Common Stock | | |
| | | |
Basic net income per share attributable to common stockholders | | | |
Numerator: | | | |
Net income | $ | 44.5 | | | |
Denominator: | | | |
Weighted average number of shares of Common Stock outstanding | 403,408,487 | | | |
Basic net income per share attributable to common stockholders | $ | 0.11 | | | |
| | | |
Diluted net income per share attributable to common stockholders | | | |
Numerator: | | | |
| | | |
| | | |
| | | |
Allocation of undistributed earnings | $ | 44.5 | | | |
Denominator: | | | |
Number of shares used in basic computation | 403,408,487 | | | |
Add: weighted-average effect of dilutive securities exchangeable for Common Stock: | | | |
Restricted Stock Awards | 446,843 | | | |
| | | |
Exercise of Common Stock Options | 66,687 | | | |
Employee Stock Purchase Plan | 195,611 | | | |
Weighted average shares of Common Stock outstanding used to calculate diluted net income (loss) per share | 404,117,628 | | | |
Diluted net income per share attributable to common stockholders | $ | 0.11 | | | |
Note 12 - Earnings Per Share (continued)
| | | | | | | |
| Three Months Ended March 31, 2022 | | |
| Class A | | |
| | | |
Basic net income (loss) per share attributable to common stockholders | | | |
Numerator: | | | |
Allocation of net income (loss) attributable to ZoomInfo Technologies Inc. | $ | 6.2 | | | |
Denominator: | | | |
Weighted average number of shares of Class A common stock outstanding | 400,217,928 | | | |
Basic net income (loss) per share attributable to common stockholders | $ | 0.02 | | | |
| | | |
Diluted net income (loss) per share attributable to common stockholders | | | |
Numerator: | | | |
| | | |
| | | |
| | | |
Allocation of undistributed earnings | $ | 6.2 | | | |
Denominator: | | | |
Number of shares used in basic computation | 400,217,928 | | | |
Add: weighted-average effect of dilutive securities exchangeable for Class A common stock: | | | |
Restricted Stock Awards | 2,677,597 | | | |
| | | |
Exercise of Class A Common Stock Options | 242,963 | | | |
| | | |
Weighted average shares of Class A common stock outstanding used to calculate diluted net income (loss) per share | 403,138,488 | | | |
Diluted net income (loss) per share attributable to common stockholders | $ | 0.02 | | | |
The following weighted-average potentially dilutive securities were evaluated under the treasury stock method for potentially dilutive effects and have been excluded from diluted net loss per share in the periods presented due to their anti-dilutive effect:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Restricted Stock Units | 13,267,434 | | | 5,983,638 | | | | | |
| | | | | | | |
| | | | | | | |
Total anti-dilutive securities | 13,267,434 | | | 5,983,638 | | | | | |
Note 13 - Leases
The Company has operating leases for corporate offices under non-cancelable agreements with various expiration dates. Our leases do not have significant rent escalation, holidays, concessions, material residual value guarantees, material restrictive covenants, or contingent rent provisions. Our leases include both lease (e.g., fixed payments including rent, taxes, and insurance costs) and non-lease components (e.g., common-area or other maintenance costs) which are accounted for as a single lease component. In addition, we have elected the practical expedient to exclude short-term leases, which have an original lease term of one year or less, from our right-of-use assets and lease liabilities as well as the package of practical expedients relating to adoption of Topic 842.
The Company subleases two offices. The subleases have remaining lease terms of less than eight years. Sublease income, which is recorded as a reduction of rent expense and allocated to the appropriate financial statement line items to arrive at Income from operations on our Consolidated Statements of Operations, was immaterial for the three months ended March 31, 2023 and 2022.
Note 13 - Leases (continued)
The following are additional details related to operating leases recorded on our Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | |
| | | | March 31, | | December 31, |
| | | | 2023 | | 2022 |
(in millions) | | | | | | |
Assets | | | | | | |
Operating lease right-of-use assets, net | | | | $ | 60.6 | | | $ | 63.0 | |
| | | | | | |
Liabilities | | | | | | |
Current portion of operating lease liabilities | | | | $ | 9.7 | | | $ | 10.3 | |
Operating lease liabilities, net of current portion | | | | $ | 65.9 | | | $ | 67.9 | |
Rent expense was $4.0 million and $3.3 million for the three months ended March 31, 2023 and 2022, respectively.
Other information related to leases was as follows:
| | | | | | | | | | | | | | | |
(in millions) | Three Months Ended March 31, | | |
Supplemental Cash Flow Information | 2023 | | 2022 | | | | |
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 2.3 | | | $ | 3.2 | | | | | |
| | | | | | | |
| | | | | | | |
Lease liabilities arising from obtaining right-of-use assets | | | | | | | |
| | | | | | | |
From new and existing lease agreements and modifications | $ | — | | | $ | 0.3 | | | | | |
| | | | | | | | | | | |
| As of |
| March 31, 2023 | | December 31, 2022 |
Weighted average remaining lease term (in years) | 11.7 | | 11.7 |
Weighted average discount rate | 5.4 | % | | 5.4 | % |
Note 13 - Leases (continued)
The table below reconciles the undiscounted future minimum lease payments under non-cancelable leases to the total lease liabilities recognized as of March 31, 2023 (in millions):
| | | | | | | | |
Year Ending December 31, | | Operating Leases |
2023 (excluding three months ended March 31, 2023) | | $ | 10.5 | |
2024 | | 11.6 | |
2025 | | 10.7 | |
2026 | | 8.1 | |
2027 | | 7.2 | |
Thereafter | | 52.7 | |
Total future minimum lease payments | | 100.8 | |
Less effects of discounting | | 25.2 | |
Total lease liabilities | | $ | 75.6 | |
| | |
Reported as of March 31, 2023 | | |
Current portion of operating lease liabilities | | $ | 9.7 | |
Operating lease liabilities, net of current portion | | 65.9 | |
Total lease liabilities | | $ | 75.6 | |
The table above does not include any legally binding minimum lease payments for leases signed but not yet commenced.
Expense associated with short term leases and variable lease costs were immaterial for the three months ended March 31, 2023 and 2022. The expense related to short-term leases reasonably reflected our short-term lease commitments.
Undiscounted lease payments under all leases executed and not yet commenced are anticipated to be $340.6 million, which are not included in the tabular disclosure of undiscounted future minimum lease payments under non-cancelable leases above.
Note 14 - Equity-based Compensation
2020 Omnibus Incentive Plan - On May 26, 2020, the Board of Directors of the Company (the “Board”) adopted the ZoomInfo Technologies Inc. 2020 Omnibus Incentive Plan (the “Omnibus Plan”). The Omnibus Plan provides for potential grants of the following awards with respect to shares of the Common Stock and OpCo Units: (i) incentive stock options qualified as such under U.S. federal income tax laws; (ii) non-qualified stock options or any other form of stock options; (iii) stock appreciation rights; (iv) Restricted Stock; (v) Restricted Stock Units; (vi) OpCo Units, and (vii) other equity-based and cash-based incentive awards as determined by the compensation committee of the Board or any properly delegated subcommittee.
The maximum aggregate number of shares of Common Stock that may be issued pursuant to awards under the Omnibus Plan shall not exceed 18,650,000 shares (including OpCo Units or other securities which have been issued under the plan and were converted into awards based on shares of common stock) (the “Plan Share Reserve”). The Omnibus Plan also contains a provision that will add an additional number of shares of Common Stock to the Plan Share Reserve on the first day of each year starting with January 1, 2021, equal to the lesser of (i) the positive difference between (x) 5% of the number of shares of Common Stock outstanding on the last day of the immediately preceding year, and (y) the Plan Share Reserve on the last day of the immediately preceding year, and (ii) a lower number of shares of Common Stock as may be determined by the Board.
Note 14 - Equity-based Compensation (continued)
The Company currently has equity-based compensation awards outstanding as follows: Restricted Stock Units, Common Stock Options, and Restricted Stock. In addition, the Company recognizes equity-based compensation expense from awards granted to employees as further described below under HSKB Incentive Units.
Except where indicated otherwise, the equity-based compensation awards described below are subject to time-based service requirements. For grants issued prior to June 2020, the service vesting condition is generally over four years with 50% vesting on the two years anniversary of the grant date of the award and the remainder vesting monthly thereafter. For awards made after May 2020 to existing employees, the service vesting condition is generally four years with 25% vesting on the one year anniversary of the grant date of the award and 6.25% vesting quarterly thereafter. For performance-based Restricted Stock Units issued in Q3 2022, the service vesting condition is one year and specified company performance targets. Certain additional grants have other vesting periods approved by the Compensation Committee of the Board.
Restricted Stock Units
Restricted Stock Unit activity was as follows during the periods indicated:
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 | | Three Months Ended March 31, 2022 |
| Restricted Stock Units | | Weighted Average Grant Date Fair Value | | Restricted Stock Units |
Unvested at beginning of period | 10,377,568 | | | $ | 45.81 | | | 4,853,795 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Granted | 4,452,672 | | | $ | 23.49 | | | 1,650,785 | |
| | | | | |
Vested | (633,337) | | | $ | 53.73 | | | (187,659) | |
Forfeited | (929,469) | | | $ | 49.45 | | | (333,283) | |
Unvested at end of period | 13,267,434 | | | $ | 37.69 | | | 5,983,638 | |
Restricted Stock
During the year ended December 31, 2021, the Company issued shares of Restricted Stock in exchange for all unvested HoldCo Units, Class P Units, and LTIP Units owned directly by employees of the Company (refer to Note 1 - Organization and Background). The exchanged shares of Restricted Stock remain subject to the same service vesting requirements of the original units. Upon fulfillment of the original employment service conditions, the restrictions will be lifted, and the Restricted Stock will convert to unrestricted Common Stock.
Restricted Stock activity was as follows during the periods indicated:
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 | | Three Months Ended March 31, 2022 |
| Restricted stock | | Weighted Average Grant Date Fair Value | | Restricted stock |
Unvested at beginning of period | 858,560 | | | $ | 22.30 | | | 3,525,373 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Vested | (242,680) | | | $ | 17.02 | | | (790,054) | |
Forfeited | (6,733) | | | $ | 9.15 | | | (43,210) | |
Unvested at end of period | 609,147 | | | $ | 24.55 | | | 2,692,109 | |
Note 14 - Equity-based Compensation (continued)
Common Stock Options
Options activity was as follows during the period indicated:
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 | | Three Months Ended March 31, 2022 |
| Options | | Weighted Average Exercise Price | | Options |
Outstanding at beginning of period | 323,002 | | | $ | 21.00 | | | 417,085 | |
| | | | | |
| | | | | |
Exercised | (11,236) | | | $ | 21.00 | | | (14,790) | |
Expired | (10,095) | | | $ | 21.00 | | | (1,824) | |
Forfeited | (3,106) | | | $ | 21.00 | | | (4,968) | |
Outstanding at end of period | 298,565 | | | $ | 21.00 | | | 395,503 | |
Options have a maximum contractual term of ten years. The aggregate intrinsic value and weighted average remaining contractual terms of Options outstanding and Options exercisable were as follows as of March 31, 2023.