NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.Business, Basis of Presentation and Summary of Significant Accounting Policies
Description of business
Freshworks Inc. (Freshworks, or the Company) is a software development company that provides modern software-as-a-service (SaaS) products that are designed with the user in mind. The Company was incorporated in Delaware in 2010 and is headquartered in San Mateo, California.
In September 2021, the Company completed its initial public offering (IPO), in which it issued and sold 31,350,000 shares of its newly authorized Class A common stock at $36.00 per share. The Company received proceeds of approximately $1.1 billion from the IPO, net of underwriters’ discounts and offering expenses.
Upon completion of the IPO, certain shares of Class B common stock then outstanding (excluding shares of Class B common stock issued upon conversion and reclassification of the redeemable convertible preferred stock described below) were automatically converted to Class A common stock on a one-to-one basis, unless an option to remain as Class B common stock was elected by the holder. In addition, all shares of redeemable convertible preferred stock then outstanding were converted into 153,937,730 shares of common stock on a one-to-one basis and then reclassified into Class B common stock.
Upon the Company's IPO, the liquidity event condition was met for all restricted stock units (RSUs). RSUs that had already met the service condition at that date were entitled to one share of Class B common stock for each vested RSU.
In September 2021, the Company also completed a 10-for-one forward stock split of the Company's authorized, issued and outstanding stock. All share and per share information included in the accompanying condensed consolidated financial statements and notes thereto have been adjusted on a retrospective basis to reflect the stock split.
Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, and all intercompany balances and transactions have been eliminated in consolidation.
Unaudited Interim Consolidated Financial Statements
The accompanying condensed consolidated balance sheet as of September 30, 2022, the condensed consolidated statements of operations, of comprehensive loss, of cash flows, and of redeemable convertible preferred stock and stockholders’ equity (deficit) for the three and nine months ended September 30, 2022 and 2021, and the related notes to such condensed consolidated financial statements are unaudited. These unaudited condensed consolidated financial statements are presented in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (SEC) and do not include all disclosures normally required in annual consolidated financial statements prepared in accordance with U.S. GAAP. In management’s opinion, the unaudited condensed consolidated financial statements have been prepared on a basis consistent with the annual consolidated financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of September 30, 2022 and its results of operations and cash flows for the three and nine months ended September 30, 2022 and 2021. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the full year or any other future interim or annual period.
The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on February 23, 2022.
Use of Estimates
The preparation of the condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of income and expense during the reporting periods. Significant items subject to such estimates and assumptions include, but are not limited to, the following:
•determination of standalone selling price (SSP) for each distinct performance obligation included in customer contracts with multiple performance obligations;
•allowance for doubtful accounts;
•expected benefit period of deferred contract acquisition costs;
•capitalization of internal-use software development costs;
•fair value of acquired intangible assets and goodwill;
•useful lives of long-lived assets;
•valuation of deferred tax assets;
•valuation of employee defined benefit plan;
•fair value of share-based awards, including performance-based awards; and
•incremental borrowing rate used for operating leases.
Risk and Uncertainties
The COVID-19 pandemic has already had an adverse effect on the global economy and the ultimate societal and economic impact thereof still remains uncertain. Additionally, inflationary pressures, significant volatility in the global markets and geopolitical conflicts have also led to further economic disruption. These macroeconomic uncertainties could adversely affect demand for the Company’s products and services, lead to longer sales cycles, reduce the value or duration of subscriptions, negatively impact collections of accounts receivable, reduce expected spending from new customers, cause some of the existing customers to go out of business, not expand or grow their businesses and affect contraction or attrition rates of the Company’s customers, all of which could adversely affect the Company’s business, results of operations, and financial condition. The Company is not aware of any specific event or circumstances related to the pandemic, or other events that would require it to update estimates or judgments or adjust the carrying value of its assets or liabilities. Actual results could differ from those estimates and any such differences may be material to the consolidated financial statements.
Concentrations of Risk
Financial instruments that potentially expose the Company to significant concentration of credit risk consist primarily of cash, cash equivalents, marketable securities, and accounts receivable. The Company’s cash and cash equivalents and marketable securities are generally held with large financial institutions and are in excess of the federally insured limits provided on such deposits. In addition, the Company has cash and cash equivalents held in international bank accounts, which are denominated primarily in Euros, British Pounds, and Indian Rupees.
There were no customers that individually exceeded 10% of the Company’s revenue for the three and nine months ended September 30, 2022 and 2021 or that represented 10% or more of the Company’s consolidated accounts receivable balance as of September 30, 2022.
The Company primarily relies upon its third-party cloud infrastructure partner, Amazon Web Services, to serve customers and operate certain aspects of its services. Any disruption of this cloud infrastructure partner would impact the Company's operations and its business could be adversely impacted.
Significant Accounting Policies
The Company's significant accounting policies are described in the Annual Report on Form 10-K for the year ended December 31, 2021. There have been no significant changes to these policies that have had a material impact on the condensed consolidated financial statements and the related notes for the three and nine months ended September 30, 2022, with the exception of the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) as described below. See also Recently Adopted Accounting Pronouncements for more detail on the adoption.
Leases
The Company leases office space under operating leases with expiration dates through 2031. The Company determines whether an arrangement constitutes a lease and records lease liabilities and right-of-use (ROU) assets on its condensed consolidated balance sheets at the lease commencement date. Lease liabilities are measured based on the present value of the total lease payments not yet paid, discounted based on either the rate implicit in the lease or the Company's incremental borrowing rate (the estimated rate the Company would be required to pay for a collateralized borrowing equal to the total lease payments over the term of the lease), whichever is more readily determinable. Lease liabilities due within 12 months are included within accrued liabilities on the Company's condensed consolidated balance sheets. The incremental borrowing rate is based on an estimate of the Company's expected unsecured borrowing rate for its notes, adjusted for tenor and collateralized security features. ROU assets are measured based on the corresponding lease liability adjusted for (i) payments made to the lessor at or before the lease commencement date, (ii) initial direct costs incurred, and (iii) tenant incentives received, incurred or payable under the lease. Recognition of rent expense begins when the lessor makes the underlying asset available to the Company. The Company does not assume renewals or early terminations of its leases unless it is reasonably certain to exercise these options at commencement and does not allocate consideration between lease and non-lease components.
For short-term leases, the Company records rent expense in its condensed consolidated statements of operations on a straight-line basis over the lease term and records variable lease payments as incurred.
Recent Accounting Pronouncements
New accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) under its Accounting Standards Codification (ASC) or ASU and adopted by the Company as of the specified effective date.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on their balance sheets as ROU assets with corresponding lease liabilities and eliminates certain real estate-specific provisions. The Company adopted this standard effective January 1, 2022 on a modified retrospective basis, and as such, results in comparative periods were not restated. As a result of the adoption, the Company recognized operating ROU assets of $24.3 million and operating lease liabilities of $28.8 million in its condensed consolidated balance sheets on the adoption date. The Company has elected certain available practical expedients, which allow it to forego the reassessments of (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification of any expired or existing leases, and (iii) initial direct costs for any existing leases. The Company has also elected to combine lease and non-lease components for commercial lease arrangements. Additionally, the Company elected not to recognize operating ROU assets and the associated operating lease liabilities for leases with a term of 12 months or less from the lease commencement date.
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 requires measurement and recognition of expected credit losses for financial assets by requiring an allowance to be recorded as an offset to the amortized cost
of such assets. The standard primarily impacts the amortized cost of the Company's available-for-sale debt securities. The Company adopted this standard on January 1, 2022 using the modified retrospective approach, which did not result in a material impact on its condensed consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). The standard eliminates certain exceptions related to the approach for intraperiod tax allocation and the methodology for calculating income taxes in an interim period. The standard also simplifies aspects of accounting for franchise taxes and enacted changes in tax or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis for goodwill. The Company adopted this standard effective January 1, 2022, which did not result in a material impact on its condensed 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, which requires acquiring entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. ASU 2021-08 will become effective for the Company on January 1, 2023, to be applied prospectively to business combinations occurring on or after the effective date of the ASU, with early adoption permitted. The Company adopted this standard effective January 1, 2022, which did not result in a material impact on its condensed consolidated financial statements.
2.Revenue From Contracts with Customers
Revenue
The Company derives revenue from subscription fees and related professional services. The Company sells subscriptions for its cloud-based solutions directly to customers and indirectly through channel partners through arrangements that are non-cancelable and non-refundable. The Company’s subscription arrangements do not provide customers with the right to take possession of the software supporting the solutions and, as a result, are accounted for as service arrangements. The Company records revenue net of sales or value-added taxes.
Disaggregation of Revenue
The following table summarizes revenue by the Company’s service offerings (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Subscription services | $ | 125,508 | | | $ | 94,312 | | | $ | 355,298 | | | $ | 257,827 | |
Professional services | 3,252 | | | 2,302 | | | 9,531 | | | 7,715 | |
Total revenue | $ | 128,760 | | | $ | 96,614 | | | $ | 364,829 | | | $ | 265,542 | |
See Note 12 for revenue by geographic location.
Deferred Revenue and Remaining Performance Obligations
Deferred revenue consists of customer billings in advance of revenue being recognized from the Company’s subscription and professional services arrangements.
Revenue recognized during the three months ended September 30, 2022 and 2021 from amounts included in deferred revenue at the beginning of these periods was $86.2 million and $61.6 million, respectively. Revenue recognized during the nine months ended September 30, 2022 and 2021 from amounts included in deferred revenue at the beginning of these periods was $146.9 million and $95.6 million, respectively.
The aggregate balance of remaining performance obligations as of September 30, 2022 was $277.4 million. The Company expects to recognize $218.7 million of the balance as revenue in the next 12 months and the remainder thereafter. The aggregate balance of 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.
Deferred Contract Acquisition Costs
The change in the balance of deferred contract acquisition costs during the periods presented is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Balance at beginning of the period | $ | 33,592 | | | $ | 23,604 | | | $ | 29,647 | | | $ | 18,273 | |
Add: Contract costs capitalized during the period | 6,913 | | | 6,032 | | | 19,554 | | | 17,032 | |
Less: Amortization of contract costs during the period | (4,625) | | | (3,416) | | | (13,321) | | | (9,085) | |
Balance at end of the period | $ | 35,880 | | | $ | 26,220 | | | $ | 35,880 | | | $ | 26,220 | |
3.Cash Equivalents and Marketable Securities
Cash equivalents and available-for-sale debt securities consisted of the following as of September 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
Cash equivalents: | | | | | | | |
Money market funds | $ | 266,193 | | | $ | — | | | $ | — | | | $ | 266,193 | |
U.S. treasury securities | 44,363 | | | 4 | | | — | | | 44,367 | |
U.S. government agency securities | 80,225 | | | 14 | | | (1) | | | 80,238 | |
Corporate debt securities | 4,889 | | | — | | | — | | | 4,889 | |
Total cash equivalents | 395,670 | | | 18 | | | (1) | | | 395,687 | |
Debt securities: | | | | | | | |
U.S. treasury securities | 421,677 | | | 11 | | | (4,434) | | | 417,254 | |
U.S. government agency securities | 201,499 | | | 1 | | | (3,277) | | | 198,223 | |
Corporate debt securities | 103,358 | | | — | | | (1,108) | | | 102,250 | |
Total debt securities | 726,534 | | | 12 | | | (8,819) | | | 717,727 | |
Total cash equivalents and debt securities | $ | 1,122,204 | | | $ | 30 | | | $ | (8,820) | | | $ | 1,113,414 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
Cash equivalents: | | | | | | | |
Money market funds | $ | 684,485 | | | $ | — | | | $ | — | | | $ | 684,485 | |
U.S. treasury securities | 22,000 | | | — | | | — | | | 22,000 | |
U.S. government agency securities | 4,286 | | | — | | | (1) | | | 4,285 | |
Corporate debt securities | 15,998 | | | — | | | — | | | 15,998 | |
Total cash equivalents | 726,769 | | | — | | | (1) | | | 726,768 | |
Debt securities: | | | | | | | |
U.S. treasury securities | 442,715 | | | 2 | | | (432) | | | 442,285 | |
U.S. government agency securities | 75,725 | | | — | | | (159) | | | 75,566 | |
Corporate debt securities | 54,335 | | | 17 | | | (175) | | | 54,177 | |
Total debt securities | 572,775 | | | 19 | | | (766) | | | 572,028 | |
Total cash equivalents and debt securities | $ | 1,299,544 | | | $ | 19 | | | $ | (767) | | | $ | 1,298,796 | |
The following table presents gross unrealized losses and fair values for the securities that were in a continuous unrealized loss position as of September 30, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| Less than 12 months | | Greater than 12 months | | Total |
| Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
U.S. treasury securities | $ | 361,963 | | | $ | (4,316) | | | $ | 8,885 | | | $ | (118) | | | $ | 370,848 | | | $ | (4,434) | |
U.S. government agency securities | 196,721 | | | (3,277) | | | — | | | — | | | 196,721 | | | (3,277) | |
Corporate debt securities | 40,458 | | | (847) | | | 14,604 | | | (261) | | | 55,062 | | | (1,108) | |
Total | $ | 599,142 | | | $ | (8,440) | | | $ | 23,489 | | | $ | (379) | | | $ | 622,631 | | | $ | (8,819) | |
As of December 31, 2021, the securities in a continuous unrealized loss position for 12 months or longer were not material.
The amortized cost and fair value of the available-for-sale debt securities based on contractual maturities are as follows (in thousands): | | | | | | | | | | | |
| September 30, 2022 |
| Amortized Cost | | Fair Value |
Due within one year | $ | 542,730 | | | $ | 538,146 | |
Due after one year but within five years | 183,804 | | | 179,581 | |
Total | $ | 726,534 | | | $ | 717,727 | |
Accrued interest receivable of $1.8 million was classified in prepaid expenses and other current assets in the condensed consolidated balance sheet of as September 30, 2022.
In addition to available-for-sale debt securities, marketable securities also include term bond mutual funds, which are measured at fair value. As of September 30, 2022 and December 31, 2021, the fair value of the term bond mutual funds was $1.5 million and $3.7 million, respectively.
The change in fair value of the term bond mutual funds is recorded in interest and other income, net in the condensed consolidated statements of operations. The realized and unrealized gains recognized in the condensed
consolidated statements of operations for the term bond mutual funds were not material during the three and nine months ended September 30, 2022 and 2021.
Prior to September 2021, the Company had non-marketable equity investments in privately held entities which have no readily determinable fair values. These investments were recorded at cost, less impairment. In September 2021, the Company sold its interest in a privately held entity for proceeds totaling $24.0 million, resulting in a gain of $23.8 million, which was recorded in interest and other income, net, in the condensed consolidated statements of operations.
4.Fair Value Measurements
The Company measures its financial assets at fair value each reporting period using a fair value hierarchy that prioritizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
Level 1—Inputs are observable and reflect quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2—Inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly.
Level 3—Inputs that are unobservable.
Money market funds and U.S. treasury securities are classified within Level 1 because they are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs. Other debt securities and investments are classified within Level 2 if the investments are valued using model driven valuations which use observable inputs such as quoted market prices, benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. Available-for-sale debt securities are held by custodians who obtain investment prices from a third-party pricing provider that incorporates standard inputs in various asset price models.
The Company did not have any assets or liabilities subject to fair value remeasurement on a nonrecurring basis as of September 30, 2022 and December 31, 2021.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table represents the fair value hierarchy for the Company’s financial assets measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| Fair Value Measured Using |
| Level 1 | | Level 2 | | | | Total |
Financial assets: | |
Cash equivalents: | | | | | | | |
Money market funds | $ | 266,193 | | | $ | — | | | | | $ | 266,193 | |
U.S. treasury securities | 44,367 | | | — | | | | | 44,367 | |
U.S. government agency securities | — | | | 80,238 | | | | | 80,238 | |
Corporate debt securities | — | | | 4,889 | | | | | 4,889 | |
Marketable securities: | | | | | | | |
U.S. treasury securities | 417,254 | | | — | | | | | 417,254 | |
U.S. government agency securities | — | | | 198,223 | | | | | 198,223 | |
Corporate debt securities | — | | | 102,250 | | | | | 102,250 | |
Term bond mutual funds | — | | | 1,491 | | | | | 1,491 | |
Total financial assets | $ | 727,814 | | | $ | 387,091 | | | | | $ | 1,114,905 | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Fair Value Measured Using |
| Level 1 | | Level 2 | | | | Total |
Financial assets: | |
Cash equivalents: | | | | | | | |
Money market funds | $ | 684,485 | | | $ | — | | | | | $ | 684,485 | |
U.S. treasury securities | 22,000 | | | — | | | | | 22,000 | |
U.S. government agency securities | — | | | 4,285 | | | | | 4,285 | |
Corporate debt securities | — | | | 15,998 | | | | | 15,998 | |
Marketable securities: | | | | | | | |
U.S. treasury securities | 442,285 | | | — | | | | | 442,285 | |
U.S. government agency securities | — | | | 75,566 | | | | | 75,566 | |
Corporate debt securities | — | | | 54,177 | | | | | 54,177 | |
Term bond mutual funds | — | | | 3,651 | | | | | 3,651 | |
Total financial assets | $ | 1,148,770 | | | $ | 153,677 | | | | | $ | 1,302,447 | |
| | | | | | | |
| | | | | | | |
5.Balance Sheet Components
Property and Equipment, net
The following table summarizes property and equipment, net as of September 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Computers | $ | 15,526 | | | $ | 13,041 | |
Capitalized internal-use software | 18,552 | | | 14,178 | |
Office equipment | 3,649 | | | 3,375 | |
Furniture and fixtures | 8,769 | | | 8,395 | |
Motor vehicles | 1,171 | | | 1,421 | |
Leasehold improvements | 5,195 | | | 4,274 | |
Construction in progress | 345 | | | — | |
Total property and equipment | 53,207 | | | 44,684 | |
Less: accumulated depreciation and amortization | (29,826) | | | (23,206) | |
Property and equipment, net | $ | 23,381 | | | $ | 21,478 | |
Capitalization of costs associated with internal-use software were $1.2 million and $1.3 million for the three months ended September 30, 2022 and 2021, respectively; and $5.1 million and $3.5 million for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022 and December 31, 2021, the net carrying value of capitalized internal-use software was $10.4 million and $8.3 million, respectively.
Depreciation and amortization expense was $2.6 million and $2.3 million for the three months ended September 30, 2022 and 2021, respectively; and $7.3 million and $6.6 million for the nine months ended September 30, 2022 and 2021, respectively.
Accrued Liabilities
The following table summarizes accrued liabilities as of September 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Accrued compensation | $ | 17,540 | | | $ | 17,261 | |
| | | |
Accrued third-party cloud infrastructure expenses | 2,844 | | | 2,785 | |
Accrued reseller commissions | 6,517 | | | 5,870 | |
Accrued advertising and marketing expenses | 6,877 | | | 6,022 | |
Advanced payments from customers | 3,359 | | | 3,260 | |
Accrued taxes | 5,879 | | | 10,777 | |
Operating lease liabilities, current | 5,334 | | | — | |
Contributions withheld for employee stock purchase plan | 3,960 | | | 4,211 | |
Other accrued expenses | 5,137 | | | 5,643 | |
Total accrued liabilities | $ | 57,447 | | | $ | 55,829 | |
6.Intangible Assets, Net
Acquired intangible assets consist of developed technology and customer relationships and are amortized on a straight-line basis over their estimated useful lives. The following tables summarize acquired intangible assets as of September 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| Gross Amount | | Accumulated Amortization | | Net Carrying Value | | Weighted Average Remaining Useful Life |
| (amounts in thousands) | | (in years) |
Developed technology | $ | 10,496 | | | $ | (10,162) | | | $ | 334 | | | 0.5 |
Customer relationships | 1,600 | | | (1,355) | | | 245 | | | 0.7 |
Total | $ | 12,096 | | | $ | (11,517) | | | $ | 579 | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Gross Amount | | Accumulated Amortization | | Net Carrying Value | | Weighted Average Remaining Useful Life |
| (amounts in thousands) | | (in years) |
Developed technology | $ | 10,496 | | | $ | (9,147) | | | $ | 1,349 | | | 0.9 |
Customer relationships | 1,600 | | | (1,055) | | | 545 | | | 1.4 |
Total | $ | 12,096 | | | $ | (10,202) | | | $ | 1,894 | | | |
Amortization of acquired intangible assets is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Developed technology: | | | | | | | |
Cost of revenue | $ | 175 | | | $ | 990 | | | $ | 1,015 | | | $ | 2,939 | |
Customer relationships: | | | | | | | |
Sales and marketing | 101 | | | 101 | | | 300 | | | 299 | |
Total amortization expense | $ | 276 | | | $ | 1,091 | | | $ | 1,315 | | | $ | 3,238 | |
As of September 30, 2022, expected future amortization expense related to acquired intangible assets is as follows (in thousands):
| | | | | | | | |
Year Ending December 31, | | Amortization Expense |
2022 (remaining three months) | | 276 | |
2023 | | 303 | |
Total future amortization | | $ | 579 | |
7.Leases
The Company has operating leases primarily for office space. The leases have remaining lease terms of one to nine years, some of which include options to extend the lease for up to six years.
The following table presents various components of the lease costs (in thousands):
| | | | | | | | | | | | | | |
Operating Leases | | Three months ended September 30, 2022 | | Nine months ended September 30, 2022 |
Operating lease cost | | $ | 2,147 | | | $ | 6,026 | |
Short-term lease cost | | 250 | | | 907 | |
Variable lease cost | | 660 | | | 2,098 | |
Rent expense for operating leases recognized prior to our adoption of Topic 842 for the three and nine months ended September 30, 2021 was $2.4 million and $7.3 million, respectively.
The weighted-average remaining term of the Company's operating leases and the weighted-average discount rate used to measure the present value of the operating lease liabilities are as follows:
| | | | | | | | |
Lease Term and Discount Rate | | September 30, 2022 |
Weighted-average remaining lease term (in years) | | 5.0 |
Weighted-average discount rate | | 7.3 | % |
The following table presents supplemental information arising from lease transactions. Cash payments related to short-term leases are not included in the measurement of the operating lease liabilities, and as such, are excluded from the amounts below (in thousands):
| | | | | | | | | | | | | | |
Supplemental Cash Flow Information: | | Three months ended September 30, 2022 | | Nine months ended September 30, 2022 |
Cash payments included in the measurement of operating lease liabilities | | $ | 3,126 | | | $ | 7,400 | |
Operating ROU assets obtained in exchange for lease obligations | | 1,749 | | | 8,968 | |
As of September 30, 2022, maturities of the operating lease liabilities are as follows (in thousands):
| | | | | | | | |
Year Ending December 31: | | Operating Leases |
2022 (remaining three months) | | $ | 809 | |
2023 | | 8,799 | |
2024 | | 7,914 | |
2025 | | 6,975 | |
2026 | | 4,672 | |
Thereafter | | 8,082 | |
Total lease payments | | 37,251 | |
Less: imputed interest | | (7,287) | |
Present value of operating lease liabilities | | $ | 29,964 | |
As of September 30, 2022, there were no future payments related to signed leases that have not yet commenced.
Future minimum lease payments under non-cancelable operating leases of December 31, 2021 were as follows (in thousands):
| | | | | | | | |
Year Ending December 31: | | Operating Leases |
2022 | | $ | 6,954 | |
2023 | | 6,790 | |
2024 | | 6,642 | |
2025 | | 5,976 | |
2026 | | 3,579 | |
Thereafter | | 4,304 | |
Total minimum future payments | | $ | 34,245 | |
8.Commitments and Contingencies
Other Contractual Commitments
The Company's other contractual commitments primarily consist of third-party cloud infrastructure agreements and service subscription purchase arrangements used to support operations at the enterprise level. As of September 30, 2022, other contractual commitments totaling $113.1 million remain outstanding under these agreements though 2025.
Litigation and Loss Contingencies
From time to time, the Company may be subject to other legal proceedings, claims, investigations, and government inquiries (collectively, Legal Proceedings) in the ordinary course of business. It may receive claims from third parties asserting, among other things, infringement of their intellectual property rights, defamation, labor and employment rights, privacy, and contractual rights. There are no currently pending legal proceedings that the Company believes will have a material adverse impact on the business or condensed consolidated financial statements.
Indemnifications
In the ordinary course of business, the Company enters into contractual arrangements under which the Company agrees to provide indemnification of varying scope and terms to customers, business partners, and other parties with respect to certain matters, including losses arising out of intellectual property infringement claims made by third parties, if the Company has violated applicable laws, if the Company is negligent or commits acts of willful misconduct, and other liabilities with respect to its products and services and its business. In these circumstances, payment is typically conditional on the other party making a claim pursuant to the procedures specified in the particular contract. The Company also indemnifies certain of its officers, directors and certain key employees while they are serving in good faith in their respective capacities. To date, the Company has not incurred any material costs as a result of such indemnifications and has not accrued any liabilities related to such obligations in its condensed consolidated financial statements.
9.Stockholders' Equity and Stock-Based Compensation
Equity Compensation Plans
In August 2021, the board of directors (the Board) adopted the 2021 Equity Incentive Plan (the 2021 Plan) and the 2021 Employee Stock Purchase Plan (ESPP), effective upon the Company's initial public offering (IPO). Pursuant to the 2021 Plan, the Board may grant incentive stock options to purchase shares of the Company’s common stock, non-statutory stock options to purchase shares of the Company’s common stock, stock appreciation rights, restricted stock, RSUs, performance awards (PRSUs) and other awards. The ESPP enables eligible employees to purchase the Company's Class A common stock. Both the 2021 Plan and ESPP include an automatic increase to their shares reserve on January 1 of each year as set forth in the respective plan documents.
In August 2022, the Board adopted the 2022 Inducement Plan (the Inducement Plan) in accordance with Listing Rule 5635(c)(4) of the Nasdaq Stock Market. Under the Inducement Plan, nonstatutory stock options, stock appreciation rights, restricted stock, RSUs, PRSUs and other awards may be granted as an inducement material for eligible persons to enter into employment with the Company. Upon adoption, the Company has initially reserved 10,000,000 shares of Class A common stock for issuance under the Inducement Plan.
In September 2022, the Company hired a President, and granted him 1,732,501 RSUs under the Inducement Plan and stock options to purchase up to 1,815,980 shares of Class A common stock, of which stock options to purchase up to 1,776,780 shares of Class A common stock were granted under the Inducement Plan and the remaining under the 2021 Plan. Each award will vest over four years with 25% of the shares vesting on the first anniversary of the grant date and the remaining 75% of the shares vesting in equal quarterly installments thereafter, subject to continued employment.
Shares of common stock reserved for future issuance were as follows (in thousands):
| | | | | | | |
| September 30, 2022 | | |
2011 Stock Plan: | | | |
Options and RSUs outstanding | 25,057 | | | |
2021 Equity Incentive Plan: | | | |
Options, RSUs and PRSUs outstanding | 9,986 | | | |
Shares reserved for future award issuances | 50,477 | | | |
2022 Inducement Plan: | | | |
Options and RSUs outstanding | 3,509 | | | |
Shares reserved for future award issuances | 6,491 | | | |
2021 Employee Stock Purchase Plan | 8,698 | | | |
Total shares of common stock reserved for issuance | 104,218 | | | |
2021 Employee Stock Purchase Plan
Under the ESPP, the price at which common stock is purchased is equal to 85% of the fair market value of a share of the Company’s common stock on the first day of the offering period or the applicable purchase date, whichever is lower. The fair market value of common stock will generally be the closing sales price on the determination date. The ESPP provides an offering period of 24 months, with four purchase periods that are generally six months long and end on May 15 and November 15 of each year, except for the first purchase period, which began upon the completion of the IPO in September 2021 and ended on May 13, 2022. The Company issued 510,093 shares under the ESPP in the nine months ended September 30, 2022, net of shares withheld and retired to satisfy withholding tax requirements for certain employees in jurisdictions outside the US, with a weighted average purchase price of $13.76 and aggregate net proceeds of $7.0 million.
The ESPP also includes a reset provision for the purchase price if the fair market value of a share of the Company's common stock on the first day of any purchase period is less than or equal to the fair market value of a share of the Company's common stock on the first day of an ongoing offering. The reset provision under the ESPP was triggered on May 16, 2022, resulting in a new 24-month offering period that began on May 16, 2022. The reset is considered a modification in accordance with ASC 718, Stock Based Compensation, with the modification charge recognized on a straight-line basis over the new offering period. The modification did not have a material effect on the Company's stock-based compensation expense during the nine months ended September 30, 2022.
During the three and nine months ended September 30, 2022, the Company recognized $2.2 million and $9.4 million of stock-based compensation expense related to the ESPP, respectively.
Determination of Fair Value of the ESPP
The Company estimates the fair value of the ESPP using the Black-Scholes option-pricing model, which requires certain complex valuation assumption inputs such as expected term, expected stock price volatility, risk-free interest rate, and dividend yield. The fair value of each of the four purchase periods is estimated separately. The following table summarizes the range of valuation assumptions used in estimating the fair value of the ESPP during the period:
| | | | | | | | |
Valuation Assumption Inputs | | Nine Months Ended September 30, 2022 |
Expected term (in years) | | 0.5 - 2.0 |
Stock price volatility | | 55.8% - 84.5% |
Risk-free interest rate | | 1.54% - 2.58% |
Dividend yield | | —% |
Expected term—The expected term is estimated based on the exercise term of the ESPP, which is the length of time from the grant date to the date on which the stock is purchased by the employees.
Stock price volatility—Since the Company's common stock lacks sufficient trading history, the stock price volatility over the expected term ranging from one to two years is estimated based on the average historical volatility of comparable companies with similar characteristics to those of the Company. For the stock price volatility over the expected term of six months, the Company estimates the stock price volatility using the combination of the average historical volatility of its own common stock and those of comparable companies with similar characteristics to it.
Risk-free interest rate—The risk-free interest rate is based on the yield of the U.S. Treasury debt securities commensurate with the expected term of the ESPP.
Dividend yield—Since the Company has never paid and has no intention to pay cash dividends on its common stock, the dividend yield is zero.
Fair value of underlying stock—The fair value of the Company's common stock underlying the ESPP is determined by the closing market price of its Class A common stock on the grant date, which was May 16, 2022.
Stock Options
Stock options are generally granted with an exercise price equal to the stock’s fair market value at the date of grant, have 10-year contractual terms, and vest over a four-year period.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Share Information: | | Number of Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (1) |
Balance as of December 31, 2021 | | 1,348 | | | $ | 0.27 | | | 3.6 | | $ | 35,020 | |
Stock options granted | | 1,816 | | | $ | 13.61 | | | | | |
Stock options exercised | | (383) | | | $ | 0.27 | | | | | |
Stock options cancelled / forfeited / expired | | — | | | $ | — | | | | | |
Balance as of September 30, 2022 | | 2,781 | | | $ | 8.98 | | | 7.5 | | $ | 12,260 | |
Options vested and expected to vest as of September 30, 2022 | | 2,781 | | | $ | 8.98 | | | 7.5 | | $ | 12,260 | |
Options exercisable as of September 30, 2022 | | 965 | | | $ | 0.27 | | | 2.9 | | $ | 12,260 | |
(1)Aggregate intrinsic value for stock options represents the difference between the exercise price and the per share fair value of the Company’s common stock as of the end of the period, multiplied by the number of stock options outstanding, exercisable, or vested.
The weighted-average grant date fair value of stock options granted was $8.26 per share during the three and nine months ended September 30, 2022.
Determination of Fair Value of Stock Options
The Company estimates the fair value of stock options using the Black-Scholes option-pricing model, which requires certain complex valuation assumption inputs such as expected term, expected stock price volatility, risk-free interest rate, and dividend yield. The following table summarizes the range of valuation assumptions used in estimating the fair value of stock options during the period:
| | | | | | | | |
Valuation Assumption Inputs | | Nine Months Ended September 30, 2022 |
Expected term (in years) | | 6.1 |
Stock price volatility | | 65.0% |
Risk-free interest rate | | 3.37% |
Dividend yield | | —% |
Expected term—The expected term represents the period of time the stock options are expected to be outstanding, calculated using the simplified method which represents the average of the contractual term of the option and the weighted-average vesting period of the option. The Company considers this appropriate as there is not sufficient historical information available to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior.
Stock price volatility—Since the Company's common stock lacks sufficient trading history, the stock price volatility over the expected term is estimated based on the average historical volatility of comparable companies with similar characteristics to those of the Company.
Risk-free interest rate—The risk-free interest rate is based on the yield of the U.S. Treasury debt securities commensurate with the expected term.
Dividend yield—Since the Company has never paid and has no intention to pay cash dividends on its common stock, the dividend yield is zero.
Fair value of underlying stock—The fair value of Company's common stock is determined by the closing market price of its Class A common stock on the grant date.
Restricted Stock Units
RSUs are granted at fair market value at the date of the grant and vest over a four-year period.
RSU activity, which includes PRSUs, during the nine months ended September 30, 2022 is as follows:
| | | | | | | | | | | | | | |
Share Information: | | Number of Shares | | Weighted-Average Grant Date Fair Value Per Share |
| | (in thousands, except per share data) |
Unvested, as of December 31, 2021 | | 47,830 | | | $ | 14.47 | |
Granted | | 12,048 | | | $ | 17.19 | |
Vested | | (21,568) | | | $ | 8.88 | |
Forfeited | | (2,539) | | | $ | 16.54 | |
Unvested, as of September 30, 2022 | | 35,771 | | | $ | 18.60 | |
During the three and nine months ended September 30, 2022, total shares that vested were 2.6 million and 21.6 million, of which 1.0 million shares and 8.6 million shares were withheld for tax withholding requirements, respectively. On February 14, 2022, the final lock-up period following the IPO expired, and the Company issued an aggregate of 9.3 million shares of its common stock, net of shares withheld for taxes, as settlement of all RSUs that had met the time-based service condition. Total cash paid related to the withholding taxes on net share settlement of equity awards amounted to $13.4 million and $151.7 million during the three and nine months ended September 30, 2022, respectively.
Performance-Based Awards
In May 2019, the Board approved a grant of 166,390 shares of PRSUs to the Company’s CEO. The vesting of these PRSUs is contingent upon the satisfaction of certain milestones. The revenue-related milestone and the liquidity event condition were met prior to December 31, 2021. As of September 30, 2022, the time-based vesting was the only condition yet to be satisfied over the remaining requisite service period, and the number of shares to vest subject to this condition is insignificant.
In September 2021, the Board approved a grant of 6,000,000 PRSUs to the Company's CEO with a time-based service condition beginning January 1, 2022, and a market condition involving five separate stock price targets ranging from $70.00 to $200.00 per share for each of the five vesting tranches (CEO Performance Award). These stock price targets will be measured based on the average closing price over a consecutive 60-trading day period,
beginning on the first trading day after the expiration of the final lock-up period in February 2022. The vesting of the CEO Performance Award is contingent upon the completion of the requisite service through January 1, 2029 and the achievement of the specified stock price target in each tranche on or before January 1, 2029. The stock price targets are not required to be achieved within the service period of each tranche, and accordingly, multiple tranches can vest at the same date if the specified stock price targets are achieved after December 31, 2025. The CEO Performance Award had a total grant date fair value of $131.0 million. The fair value of the CEO Performance Award was determined at grant date by using the Monte Carlo simulation model, which requires certain complex valuation assumption inputs such as measurement period, expected stock price volatility, risk-free interest rate and dividend yield.
The Company recognized stock-based compensation expense associated with PRSUs granted to the CEO of $7.1 million and $1.4 million for the three months ended September 30, 2022 and 2021, respectively; and $21.0 million and $1.4 million for the nine months ended September 30, 2022 and 2021, respectively. These expenses were recorded in general and administrative expenses in the condensed consolidated statements of operations.
Stock-Based Compensation
Total stock-based compensation expense recorded for the three and nine months ended September 30, 2022 and 2021 was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Cost of revenue | | $ | 1,772 | | | $ | 3,983 | | | $ | 5,212 | | | $ | 3,983 | |
Research and development | | 10,318 | | | 36,823 | | | 26,446 | | | 36,823 | |
Sales and marketing | | 16,635 | | | 40,465 | | | 44,204 | | | 40,465 | |
General and administrative (1) | | 25,167 | | | 42,988 | | | 74,790 | | | 42,988 | |
Stock-based compensation, net of amounts capitalized | | 53,892 | | | 124,259 | | | 150,652 | | | 124,259 | |
Capitalized stock-based compensation | | 52 | | | 458 | | | 1,275 | | | 458 | |
Total stock-based compensation expense | | $ | 53,944 | | | $ | 124,717 | | | $ | 151,927 | | | $ | 124,717 | |
(1) General and administrative expense includes $14.1 million and $10.4 million of stock-based compensation expense associated with RSUs and PRSUs primarily granted to the CEO in September 2021 for the three months ended September 30, 2022 and 2021, respectively; and $41.8 million and $10.4 million for the nine months ended September 30, 2022 and 2021, respectively.
As of September 30, 2022, unrecognized stock-based compensation expense related to unvested stock-based awards was as follows (in thousands, except for period data):
| | | | | | | | | | | | | | |
| | September 30, 2022 |
| | Unrecognized Stock-Based Compensation | | Weighted-Average Period to Recognize Expense (in years) |
RSUs and PRSUs | | $ | 596,666 | | | 3.1 |
Stock options | | 14,702 | | | 3.9 |
ESPP | | 11,862 | | | 1.0 |
Total unrecognized stock-based compensation expense | | $ | 623,230 | | | |
10.Net Loss Per Share
Basic net loss per share attributable to common stockholders is computed by dividing the net loss by the number of weighted-average outstanding common shares. Diluted net loss per share attributable to common stockholders is
determined by giving effect to all potential common equivalents during the reporting period, unless including them yields an antidilutive result. The Company considers its redeemable convertible preferred stock, stock options and restricted stock units as potential common stock equivalents, but excluded them from the computation of diluted net loss per share attributable to common stockholders for the three and nine months ended September 30, 2022 and 2021, as their effect was antidilutive.
The rights, including the liquidation and dividend rights, of the holders of Class A and Class B common stock are identical, except with respect to voting, conversion, and transfer rights. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis to each class of common stock and the resulting basic and diluted net loss per share attributable to common stockholders, are the same for both Class A and Class B common stock on both an individual and combined basis.
The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders (in thousands, except per share data): | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | |
| 2022 | | 2021 | | 2022 | | 2021 | |
Numerator: | | | | | | | | |
Net loss | $ | (57,843) | | | $ | (107,415) | | | $ | (176,655) | | | $ | (117,259) | | |
Accretion of redeemable convertible preferred stock | — | | | (2,264,838) | | | — | | | (2,646,662) | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Net loss attributable to Class A and Class B common stockholders - basic and diluted | $ | (57,843) | | | $ | (2,372,253) | | | $ | (176,655) | | | $ | (2,763,921) | | |
| | | | | | | | |
Denominator: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Weighted-average shares used in computing net loss per share attributable to Class A and Class B common stockholders - basic and diluted | 286,697 | | | 95,930 | | | 283,258 | | | 83,860 | | |
| | | | | | | | |
| | | | | | | | |
Net loss per share attributable to Class A and Class B common stockholders - basic and diluted | $ | (0.20) | | | $ | (24.72) | | | $ | (0.62) | | | $ | (32.96) | | |
The following table summarizes the potential common equivalents that were excluded from the computation of diluted net loss per share attributable to Class A and Class B common stockholders for the periods presented (in thousands):
| | | | | | | | | | | | | | | | | | |
| | Three and Nine Months Ended September 30, | | |
| | 2022 | | 2021 | | | | |
| | | | | | | | |
RSUs and PRSUs | | 35,771 | | | 58,636 | | | | | |
Stock options | | 2,781 | | | 1,682 | | | | | |
ESPP | | 359 | | | — | | | | | |
Total | | 38,911 | | | 60,318 | | | | | |
11.Income Taxes
The Company's quarterly tax provision and estimates of its annual effective tax rate are estimates due to several factors, including changes in pre-tax income (or loss), the mix of jurisdictions to which such income relates, discrete items (such as excess tax benefits from stock-based compensation) in the period offset with our valuation allowance. The provision for (benefit from) income taxes was $1.8 million and $(9.9) million for the three months ended September 30, 2022 and 2021, respectively; and $6.5 million and $(7.7) million for the nine months ended September 30, 2022 and 2021, respectively. The increase in the provision for income taxes in the three and nine months ended September 30, 2022 resulted primarily from a tax benefit of $11.7 million mostly from stock-based
compensation expense recorded during the three and nine months ended September 30, 2021, in jurisdictions where we expect to realize a tax benefit. Additionally, the increase in the provision for income taxes is also attributable to higher tax expense from profitable foreign jurisdictions.
12.Geographic Information
The following table summarizes revenue by geographic location (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
North America | $ | 56,288 | | | $ | 41,961 | | | $ | 157,178 | | | $ | 113,668 | |
Europe, Middle East and Africa | 49,786 | | | 39,566 | | | 143,169 | | | 110,695 | |
Asia Pacific | 19,296 | | | 12,955 | | | 55,015 | | | 35,382 | |
Other | 3,390 | | | 2,132 | | | 9,467 | | | 5,797 | |
Total revenue | $ | 128,760 | | | $ | 96,614 | | | $ | 364,829 | | | $ | 265,542 | |
The following table summarizes long-lived assets by geographic information (in thousands):
| | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
North America | | $ | 21,364 | | | $ | 13,780 | |
Europe, Middle East and Africa | | 4,358 | | | 578 | |
Asia Pacific | | 26,480 | | | 9,015 | |
Total long-lived assets | | $ | 52,202 | | | $ | 23,373 | |