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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2022
OR
☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from               to               
Commission File Number 001-39502               
Sumo Logic, Inc.
(Exact name of registrant as specified in its charter)
Delaware
27-2234444
(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)
305 Main Street
Redwood City, California
94063
(Address of principal executive offices) (Zip Code)
(650) 810-8700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, par value $0.0001 per share SUMO Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒   No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).  Yes ☐   No ☒
As of May 23, 2022, the number of outstanding shares of the registrant's common stock was 115,732,441 shares of common stock.


Table of Contents
Page
2
3
5
Condensed Consolidated Balance Sheets as of April 30, 2022 and January 31, 2022
5
6
7
8
Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 30, 2022 and 2021
9
PART II. OTHER INFORMATION
1

Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions.
Forward-looking statements contained in this Form 10-Q include, but are not limited to, statements about our expectations regarding:
our future financial performance, including our expectations regarding our revenue, cost of revenue, operating expenses, including changes in sales and marketing, research and development, and general and administrative expenses, and key business metrics, and our ability to achieve and maintain future profitability;
the impact of the COVID-19 pandemic, including the emergence of new variants of the virus, and any associated economic downturn on our business and results of operations;
our business model and our ability to effectively manage our growth and associated investments;
our beliefs about and objectives for future operations;
market acceptance of our platform;
our ability to maintain and expand our customer base, including by attracting new customers;
our ability to retain customers and expand their adoption of our platform, particularly our largest customers;
the effects of increased competition in our markets and our ability to compete effectively;
our ability to maintain the security and availability of our platform;
our ability to develop new platform features and functionality, or enhancements to our existing platform features and functionality, and bring them to market in a timely manner;
anticipated trends, growth rates, and challenges in our business and in the markets in which we operate;
our relationships with third parties, including channel and technology partners;
our ability to successfully expand in our existing markets and into new markets, including internationally;
our ability to comply with laws and regulations that currently apply or become applicable to our business both in the United States and internationally, including with respect to privacy and data protection;
our expectations regarding our ability to obtain, maintain, enforce, defend, and enhance our intellectual property rights;
our ability to successfully defend litigation brought against us;
the sufficiency of our cash and cash equivalents to meet our liquidity needs;
our ability to attract and retain employees and key personnel;
future acquisitions or investments; and
economic and industry trends or trend analysis.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q. You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors, including those described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should
2

not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
Risk Factors Summary
Our business is subject to significant risks and uncertainties that make an investment in us speculative and risky. Below we summarize what we believe are the principal risk factors but these risks are not the only ones we face, and you should carefully review and consider the full discussion of our risk factors in the section titled “Risk Factors,” together with the other information in this Quarterly Report on Form 10-Q. If any of the following risks actually occurs (or if any of those listed elsewhere in this Quarterly Report on Form 10-Q occur), our business, reputation, financial condition, results of operations, revenue, and future prospects could be seriously harmed. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business.
Our revenue growth rate and financial performance in recent periods may not be indicative of future performance;
We have a history of net losses and we may not be able to achieve or maintain profitability in the future;
We face intense competition and could face pricing pressure from, and lose market share to, our competitors, which would adversely affect our business, financial condition, and results of operations;
The markets for our offerings are evolving, and our future success depends on the growth of these markets and our ability to adapt, keep pace, and respond effectively to evolving markets;
We may fail to cost-effectively acquire new customers or obtain renewals, upgrades, or expansions from our existing customers, which would adversely affect our business, financial condition, and results of operations;
Changes to our packaging and licensing models could adversely affect our ability to attract or retain customers;
Our results of operations vary and are unpredictable from period to period, which could cause the market price of our common stock to decline;
The global COVID-19 pandemic has harmed and could continue to harm our business and results of operations;
Our sales cycle can be long and unpredictable, and our sales efforts require considerable time and expense;
The loss of, or a significant reduction in use of our platform by, our largest customers would result in lower revenue and harm our results of operations;
We depend on our sales force, and we may fail to attract, retain, motivate, or train our sales force, which could adversely affect our business, financial condition, and results of operations;
We utilize free trials and other go-to-market strategies, and we may not be able to realize the benefits of these strategies;
If our website fails to rank prominently in unpaid search results, traffic to our website could decline and our business, financial condition, and results of operations could be adversely affected;
We may be unable to build and maintain successful relationships with our channel partners or such channel partners may fail to perform, which could adversely affect our business, financial condition, results of operations, and growth prospects;
Our ability to increase sales depends, in part, on the quality of our customer support, and our failure to offer high quality support would harm our reputation and adversely affect our business and results of operations;
Our international operations and continued international expansion subject us to additional costs and risks, which could adversely affect our business, financial condition, and results of operations;
We may fail to effectively manage our growth, which would adversely affect our business, financial condition, and results of operations;
We depend on our management team and other highly skilled personnel, and we may fail to attract, retain, motivate, or integrate highly skilled personnel, which could adversely affect our business, financial condition, and results of operations;
We may be unable to make acquisitions and investments, successfully integrate acquired companies into our business, or our acquisitions and investments may not meet our expectations, any of which could adversely affect our business, financial condition, and results of operations;
Our reputation and brand are important to our success, and we may not be able to maintain and enhance our reputation and brand, which would adversely affect our business, financial condition, and results of operations;
We provide service level commitments under our customer contracts. If we fail to meet these contractual commitments, we could be obligated to provide credits for future service, or face contract termination with refunds of prepaid amounts related to unused subscriptions, which could harm our business, financial condition, and results of operations;
A portion of our revenue is generated by sales to government entities, which subject us to a number of challenges and risks;
Our business could be adversely affected by economic downturns;
Our business and results of operations are subject to the effects of a rising rate of inflation;
Our business could be adversely affected by unexpected events such as pandemics, natural disasters, political crises, or social instability;
We use certain third-party services to manage and operate our business, and any failure or interruption in the services provided by these third parties could adversely affect our business, financial condition, and results of operations;
We believe our long-term value as a company will be greater if we focus on growth, which may negatively impact our results of operations in the near term;
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Any actual or perceived security or privacy breach could interrupt our operations, harm our reputation and brand, result in financial exposure, and lead to loss of user confidence in us or decreased use of our platform, any of which could adversely affect our business, financial condition, and results of operations;
Real or perceived defects, errors, or vulnerabilities in our platform could harm our reputation and adversely affect our business, financial condition, and results of operations;
We rely on Amazon Web Services (“AWS”) to deliver our platform to our customers, and any disruption of, or interference with, our use of AWS could adversely affect our business, financial condition, and results of operations;
Any failure to obtain, maintain, protect, or enforce our intellectual property and proprietary rights could harm our business, financial condition, and results of operations;
Claims by others that we infringed their proprietary technology or other intellectual property rights would harm our business;
Our platform contains third-party open source software components, and failure to comply with the terms of the underlying open source software licenses could restrict our ability to deliver our platform or subject us to litigation or other actions;
We license certain editions of our offerings under an open source licensing model, which may limit our ability to monetize certain of our offerings and present other challenges;
The rapidly evolving framework of privacy, data protection, data transfers, or other laws or regulations worldwide may limit the use and adoption of our services and adversely affect our business;
We incorporate technology from third parties into our platform, and our inability to maintain rights to such technology would harm our business and results of operations;
Our platform may not interoperate with our customers’ infrastructure or with third-party offerings, which would adversely affect our business and results of operations;
We may be subject to claims that we have wrongfully hired an employee from a competitor, or that our employees, consultants, or independent contractors have wrongfully used or disclosed confidential information of third parties or that our employees have wrongfully used or disclosed alleged trade secrets of their former employers;
Remaining performance obligations and calculated billings may not be accurate indicators of business activity within a period;
We recognize substantially all of our revenue ratably over the term of the relevant subscription period, and as a result, downturns or upturns in sales may not be immediately reflected in our results of operations;
Our metrics and estimates used to evaluate our performance are subject to inherent challenges in measurement, and real or perceived inaccuracies in those estimates may harm our reputation and negatively affect our business;
Our loan and security agreement provides our lender with a first-priority lien against substantially all of our assets and contains restrictive covenants which could limit our operational flexibility and otherwise adversely affect our financial condition; and
Our executive officers, directors, and holders of 5% or more of our common stock continue to have substantial control over us, which will limit your ability to influence the outcome of important transactions, including a change in control.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Sumo Logic, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
April 30,
2022
January 31,
2022
Assets
Current assets:
Cash and cash equivalents $ 79,737  $ 79,986 
Marketable securities, current 228,406  210,645 
Accounts receivable, net 48,690  49,451 
Prepaid expenses 9,823  9,792 
Deferred sales commissions, current 17,524  17,110 
Other current assets 2,837  2,865 
Total current assets 387,017  369,849 
Marketable securities, noncurrent 50,777  65,866 
Property and equipment, net 4,944  4,960 
Operating lease right-of-use assets 5,041  6,110 
Goodwill 93,603  94,967 
Acquired intangible assets, net 21,881  26,221 
Deferred sales commissions, noncurrent 31,579  32,689 
Other assets 1,106  1,469 
Total assets $ 595,948  $ 602,131 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable $ 9,920  $ 7,755 
Accrued expenses and other current liabilities 24,966  25,425 
Operating lease liabilities, current 4,614  4,619 
Deferred revenue, current 142,583  131,329 
Total current liabilities 182,083  169,128 
Operating lease liabilities, noncurrent 1,157  2,346 
Deferred revenue, noncurrent 6,141  5,944 
Other liabilities 5,570  5,744 
Total liabilities 194,951  183,162 
Commitments and contingencies (Note 7)
Stockholders’ equity:
Common stock 12  11 
Additional paid-in-capital 964,761  944,447 
Accumulated other comprehensive loss (7,870) (4,333)
Accumulated deficit (555,906) (521,156)
Total stockholders’ equity 400,997  418,969 
Total liabilities and stockholders’ equity $ 595,948  $ 602,131 
See Notes to Condensed Consolidated Financial Statements
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Sumo Logic, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except for per share data)
(unaudited)
Three Months Ended April 30,
2022 2021
Revenue $ 67,855  $ 54,219 
Cost of revenue 24,145  15,395 
Gross profit 43,710  38,824 
Operating expenses:
Research and development 26,253  20,443 
Sales and marketing 35,290  30,278 
General and administrative 16,996  14,573 
Total operating expenses 78,539  65,294 
Loss from operations (34,829) (26,470)
Interest and other income (expense), net 631  (16)
Interest expense (29) (86)
Loss before provision for income taxes (34,227) (26,572)
Provision for income taxes 523  342 
Net loss $ (34,750) $ (26,914)
Net loss per share, basic and diluted $ (0.30) $ (0.26)
Weighted-average shares used to compute net loss per share, basic and diluted 114,324  104,033 
See Notes to Condensed Consolidated Financial Statements
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Sumo Logic, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(unaudited)
Three Months Ended April 30,
2022 2021
Net loss $ (34,750) $ (26,914)
Other comprehensive (loss) income:
Foreign currency translation adjustments (2,322)
Unrealized loss on available-for-sale marketable securities (1,215) (48)
Total comprehensive loss $ (38,287) $ (26,959)
See Notes to Condensed Consolidated Financial Statements
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Sumo Logic, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands)
(unaudited)
Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity
Shares Amount
Balance at January 31, 2022 113,813  $ 11  $ 944,447  $ (4,333) $ (521,156) $ 418,969 
Issuance of common stock upon exercise of stock options 1,341  6,953  —  —  6,954 
Vesting of restricted stock units 492  —  —  —  —  — 
Vesting of early exercised stock options —  —  33  —  —  33 
Stock-based compensation —  —  13,328  —  —  13,328 
Other comprehensive loss —  —  —  (3,537) —  (3,537)
Net loss —  —  —  —  (34,750) (34,750)
Balance at April 30, 2022 115,646  $ 12  $ 964,761  $ (7,870) $ (555,906) $ 400,997 
Balance at January 31, 2021 102,484  $ 10  $ 829,238  $ (45) $ (397,791) $ 431,412 
Issuance of common stock upon exercise of stock options 2,848  8,018  —  —  8,019 
Exercise of common stock warrants 18  —  —  —  —  — 
Vesting of restricted stock units 842  —  —  —  —  — 
Vesting of early exercised stock options —  —  49  —  —  49 
Stock-based compensation —  —  12,133  —  —  12,133 
Other comprehensive loss —  —  —  (45) —  (45)
Net loss —  —  —  —  (26,914) (26,914)
Balance at April 30, 2021 106,192  $ 11  $ 849,438  $ (90) $ (424,705) $ 424,654 
See Notes to Condensed Consolidated Financial Statements
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Sumo Logic, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three Months Ended April 30,
2022 2021
Cash flows from operating activities
Net loss $ (34,750) $ (26,914)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 4,283  2,044 
Amortization of deferred sales commissions 4,631  3,401 
Amortization (accretion) of marketable securities purchased at a premium (discount) 790  566 
Stock-based compensation, net of amounts capitalized 13,277  12,133 
Non-cash operating lease cost 1,055  1,062 
Other (162) 23 
Changes in operating assets and liabilities
Accounts receivable 757  837 
Prepaid expenses (37) 592 
Other assets 180  1,144 
Deferred sales commissions (3,934) (5,658)
Accounts payable 2,181  1,383 
Accrued expenses and other current liabilities (164) (1,295)
Deferred revenue 11,451  9,177 
Operating lease liabilities (1,156) (1,134)
Other liabilities 166  (80)
Net cash used in operating activities (1,432) (2,719)
Cash flows from investing activities
Purchases of marketable securities (51,683) (267,548)
Maturities of marketable securities 41,022  1,558 
Sales of marketable securities 5,920  — 
Purchases of property and equipment (371) (247)
Capitalized internal-use software costs (187) — 
Net cash used in investing activities (5,299) (266,237)
Cash flows from financing activities
Payments of deferred offering costs —  (93)
Proceeds from exercise of common stock options 6,954  8,019 
Net cash provided by financing activities 6,954  7,926 
Effect of exchange rate changes on cash and cash equivalents (472) (9)
Change in cash and cash equivalents and restricted cash (249) (261,039)
Cash and cash equivalents and restricted cash:
Beginning of period 80,286  404,440 
End of period $ 80,037  $ 143,401 
Supplemental disclosures of cash flow information
Cash paid for income taxes $ 728  $ 272 
Cash paid for interest 21  21 
Supplemental non-cash investing and financing information
Vesting of early exercised options 31  49 
Unpaid cash consideration for acquisitions 456  — 
Stock-based compensation capitalized as internal-use software costs 51  — 
Property and equipment accrued but not yet paid —  575 
Reconciliation of cash, cash equivalents, and restricted cash to consolidated balance sheets
Cash and cash equivalents $ 79,737  $ 143,101 
Restricted cash included in other current assets 300  300 
Total cash, cash equivalents, and restricted cash $ 80,037  $ 143,401 
See Notes to Condensed Consolidated Financial Statements
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Sumo Logic, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)



1. Description of Business and Basis of Presentation
Organization and Nature of Operations
Sumo Logic, Inc. (the “Company”) was incorporated in Delaware in March 2010. The Company provides, on a cloud-native software-as-a-service (“SaaS”) delivery model, a software analytics platform for reliable and secure cloud-native applications to address the challenges and opportunities presented by digital transformation, modern applications, and cloud computing. The platform helps customers ensure application reliability, secure and protect against modern security threats, and gain insights into their cloud infrastructure.
Basis of Presentation and Principles of Consolidation
The Company’s condensed consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission, (“SEC”), regarding interim financial reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP have been condensed or omitted, and accordingly the balance sheet as of January 31, 2022, and related disclosures, have been derived from the audited consolidated financial statements at that date but do not include all of the information required by GAAP for complete consolidated financial statements.
The accompanying interim unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes contained in the Company’s Annual Report on Form 10-K for the year ended January 31, 2022, as filed with the SEC on March 14, 2022.
The Company’s condensed consolidated financial statements and accompanying notes include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
These unaudited condensed consolidated financial statements have been prepared on the same basis as the Company’s annual consolidated financial statements and, in the opinion of management, reflect all normal recurring adjustments that are necessary for the fair statement of the Company’s condensed consolidated financial information. The results of operations for the three months ended April 30, 2022 are not necessarily indicative of the results to be expected for the year ending January 31, 2023 or for any other interim period or for any other future year.
Fiscal Year
The Company’s fiscal year ends on January 31. Unless otherwise stated, references to year in these condensed consolidated financial statements relate to the above described fiscal year rather than calendar year.
2. Summary of Significant Accounting Policies
Use of Estimates and Judgments
The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, as of the date of the financial statements, and the reported amounts of income and expenses during the reporting period. These estimates are based on information available as of the date of the financial statements and may involve subjective or significant judgment by the Company; therefore, actual results could differ from the Company’s estimates. The Company’s accounting policies that involve judgment include revenue recognition, period of benefit for deferred sales commissions, useful lives of acquired intangible assets and property and equipment, stock-based compensation expense including the assumptions used for estimating the fair value of common stock (prior to the closing of the Company’s initial public offering (“IPO”)), capitalization of internal-use software costs, fair value of assets acquired and liabilities assumed from business combinations, incremental borrowing rate for operating leases, estimate of credit losses for accounts receivable and marketable securities, and valuation allowances associated with income taxes.
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COVID-19
While the duration and extent of the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the duration and spread of the outbreak, the emergence of variants of the virus, the extent and effectiveness of containment actions, and the effectiveness of vaccination efforts, it has already had an adverse effect on the global economy and the ultimate societal and economic impact of the COVID-19 pandemic remains unknown. The Company may experience customer losses, including due to bankruptcy or customers ceasing operations, which may result in delays in collections or an inability to collect accounts receivable from these customers. The extent to which the COVID-19 pandemic, including the emergence of variants of the virus, may continue to impact the Company’s financial condition, results of operations, or liquidity continues to remain uncertain, and as of the date of issuance of these financial statements, the Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or an adjustment to the carrying value of the Company’s assets or liabilities. These estimates may change, as new events occur and additional information is obtained, which will be recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from those estimates, and any such differences may be material to the Company’s financial statements.
Significant Accounting Policies
There have been no changes to the Company’s significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended January 31, 2022, that have had a material impact on its condensed consolidated financial statements and related notes.
Related Party Transactions
Certain members of the Company’s board of directors serve as directors of, or are executive officers of, and in some cases are investors in, companies that are customers or vendors of the Company. Related party transactions were not material as of April 30, 2022 or January 31, 2022, or for the three months ended April 30, 2022 or 2021.
Recently Adopted Accounting Pronouncements
The Company assesses the adoption impacts of recently issued accounting pronouncements by the Financial Accounting Standards Board (“FASB”) on its condensed consolidated financial statements. The section below describes the impact from newly adopted pronouncements.
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 that an entity recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 as if it had originated the contracts. The adoption of the standard will impact future business combinations. The Company has elected to early adopt this guidance as of February 1, 2022. The adoption of this guidance did not have an impact on the Company’s condensed consolidated financial statements for the three months ended April 30, 2022 as no business combination activities occurred during this period.
3. Fair Value Measurements
The Company measures its financial assets and liabilities 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. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value, as follows:
Level 1    Observable inputs, such as quoted prices in active markets for identical assets or liabilities.
Level 2    Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3    Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company uses the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
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The carrying amounts of the Company’s financial instruments, which include cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value because of the short maturity of those instruments.
The following tables present the fair value of the Company’s financial assets measured at fair value on a recurring basis, based on the three-tier fair value hierarchy (in thousands):
As of April 30, 2022
Level 1 Level 2 Level 3 Total
Cash equivalents:
Money market funds $ 69,842  $ —  $ —  $ 69,842 
Corporate debt securities —  427  —  427 
Marketable securities:
U.S. Treasury securities —  66,498  —  66,498 
Corporate debt securities —  168,886  —  168,886 
Commercial paper —  24,906  —  24,906 
Foreign government obligations —  7,534  —  7,534 
Supranational securities —  8,915  —  8,915 
Certificates of deposit —  2,444  —  2,444 
Total financial assets $ 69,842  $ 279,610  $ —  $ 349,452 
As of January 31, 2022
Level 1 Level 2 Level 3 Total
Cash equivalents:
Money market funds $ 70,742  $ —  $ —  $ 70,742 
Marketable securities:
U.S. Treasury securities —  67,476  —  67,476 
Corporate debt securities —  167,160  —  167,160 
Commercial paper —  19,033  —  19,033 
Foreign government obligations —  7,607  —  7,607 
Supranational securities —  12,922  —  12,922 
Certificates of deposit —  2,313  —  2,313 
Total financial assets $ 70,742  $ 276,511  $ —  $ 347,253 
The Company had $0.3 million of restricted cash invested in money market funds that is not included in the tables above as of April 30, 2022 and January 31, 2022, respectively.
In connection with the Loan and Security agreement, discussed in Note 6, the Company issued 32,276 warrants to purchase shares of the Company’s redeemable convertible preferred stock. The Company used a Black-Scholes option valuation model to value its redeemable convertible preferred stock warrant liability at inception and on subsequent valuation dates. Changes in the fair values of the redeemable convertible preferred stock warrant liability were recorded as interest and other income (expense), net in the Company’s condensed consolidated statements of operations. All 32,276 warrants to purchase shares of redeemable convertible preferred stock converted into warrants to purchase common stock upon the closing of the Company’s IPO and the related liability was reclassified to additional-paid in capital in the Company’s condensed consolidated balance sheet. During the three months ended April 30, 2022, no warrants were exercised. During the three months ended April 30, 2021, 21,746 warrants were exercised. There were no transfers between levels of the fair value hierarchy during the three months ended April 30, 2022 and 2021, respectively.
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The following is a summary of available-for sale marketable securities, excluding those securities classified within cash and cash equivalents on the condensed consolidated balance sheet as of April 30, 2022 and January 31, 2022, respectively (in thousands):
As of April 30, 2022
Amortized Cost Unrealized Gain Unrealized Loss Fair Value
U.S. Treasury securities $ 67,108  $ —  $ (610) $ 66,498 
Corporate debt securities 170,192  (1,309) 168,886 
Commercial paper 25,002  —  (96) 24,906 
Foreign government obligations 7,607  —  (73) 7,534 
Supranational securities 8,915  —  —  8,915 
Certificates of deposit 2,460  —  (16) 2,444 
Total marketable securities $ 281,284  $ $ (2,104) $ 279,183 
As of January 31, 2022
Amortized Cost Unrealized Gain Unrealized Loss Fair Value
U.S. Treasury securities $ 67,770  $ —  $ (294) $ 67,476 
Corporate debt securities 167,693  (536) 167,160 
Commercial paper 19,052  —  (19) 19,033 
Foreign government obligations 7,640  —  (33) 7,607 
Supranational securities 12,923  —  (1) 12,922 
Certificates of deposit 2,319  —  (6) 2,313 
Total marketable securities $ 277,397  $ $ (889) $ 276,511 
The Company does not believe that any unrealized losses are attributable to credit-related factors based on its evaluation of available evidence. To determine whether a decline in value is related to credit loss, the Company evaluates, among other factors: the extent to which the fair value is less than the amortized cost basis, changes to the rating of the security by a rating agency, and any adverse conditions specifically related to an issuer of a security or its industry. No impairment loss has been recorded on the securities included in the table above, as the Company believes that the decrease in fair value of these securities is temporary.
The following table presents the contractual maturities of the Company’s marketable securities (in thousands):
April 30,
2022
Due in one year or less $ 228,406 
Due after one year and within five years 50,777 
Total marketable securities $ 279,183 
4. Acquisitions, Intangible Assets, and Goodwill
Sensu, Inc.
On June 10, 2021, the Company completed the acquisition of Sensu, Inc. (“Sensu”) a privately-held software company that is a leader in open source monitoring. The addition of Sensu is expected to accelerate the Company's observability strategy by providing customers with an affordable and scalable end-to-end solution for infrastructure and application monitoring.
The aggregate amount recorded as purchase consideration was $32.7 million, of which $8.6 million was paid or to be paid in cash, and $24.1 million was comprised of 1,123,697 shares of the Company’s common stock. The value of consideration assigned to such shares of common stock was based on the closing price of the Company’s common stock on the date of acquisition, or $21.49 per share.
Additionally, 71,644 shares of common stock were issued with a fair value of $21.49 per share at the time of grant and will be recorded as stock-based compensation expense. These shares are subject to risk of forfeiture which lapse in full 1.5 years after the acquisition date. The Company recorded stock-based compensation expense related to the vesting of the restricted common stock of
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$0.3 million during the three months ended April 30, 2022. As of April 30, 2022, the remaining unrecognized stock-based compensation expense was $0.6 million, and will be recognized over the remaining vesting period.
A portion of the consideration otherwise payable was held back by the Company as partial security for certain indemnification obligations. The consideration held back will be released 12 months after the acquisition date, subject to reduction for any indemnification claims.
Certain stock options held by Sensu employees were assumed by the Company with a total fair value of $0.6 million and will be recognized as stock-based compensation expense over the remaining service period. See Note 9 for more details on the Sensu options assumed.
The acquisition was accounted for as a business combination and the total purchase consideration was allocated to the net tangible and intangible assets and liabilities based on their fair values on the acquisition date and the excess was recorded as goodwill. The values assigned to the assets acquired and liabilities assumed are based on preliminary estimates of fair value available as of the issuance date of these condensed consolidated financial statements and may be adjusted during the measurement period of up to 12 months from the date of acquisition as further information becomes available. Any changes in the fair values of the assets acquired and liabilities assumed during the measurement period may result in adjustments to goodwill. As of April 30, 2022, the primary area that remains preliminary relates to the valuation of certain tax-related items.
The following table presents the preliminary purchase consideration allocation recorded in the Company’s condensed consolidated balance sheet as of the acquisition date (in thousands):
Amount
Cash and cash equivalents
$ 2,270 
Accounts receivable
409 
Other current assets 50 
Acquired intangible assets
11,800 
Goodwill
19,889 
Accounts payable
(49)
Deferred revenue, current
(658)
Accrued expenses and other current liabilities
(143)
Deferred revenue, noncurrent
(99)
Other liabilities
(747)
Total acquisition consideration
$ 32,722 
The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (in thousands):
Total Useful Life
(in years)
Developed technology $ 8,800  3
Customer relationships 3,000  5
Intangible assets $ 11,800 
Goodwill represents the future economic benefits arising from other assets that could not be individually identified and separately recognized, such as the acquired assembled workforce and synergies expected to be achieved from the integration of Sensu. In addition, goodwill represents the future benefits as a result of the acquisition that management expects to enhance the Company’s product available to both new and existing customers and increase the Company’s market position. Goodwill is not deductible for tax purposes.
The results of operations of Sensu from the date of acquisition have been included in the Company’s condensed consolidated financial statements. Pro forma revenue and results of operations have not been presented because the historical results of Sensu are not material to the Company’s condensed consolidated financial statements in any period presented.
14

DF Labs S.p.A.
On May 24, 2021, the Company completed the acquisition of DF Labs S.p.A. (“DFLabs”), a privately-held Italian corporation and a leader in security orchestration, automation and response (“SOAR”) technology. The combination of the Company’s Cloud SIEM and DFLabs' solution will provide customers with comprehensive cloud-native security intelligence solutions.
The aggregate amount recorded as purchase consideration was $41.7 million, of which $35.3 million was paid in cash, and $6.4 million was comprised of 334,815 shares of the Company’s common stock. The value of consideration assigned to such shares of common stock was based on the closing price of the Company’s common stock on the date of acquisition, or $18.97 per share.
Additionally, 143,492 shares of common stock were issued with a fair value of $18.97 per share at the time of grant and will be recorded as stock-based compensation. These shares are subject to risk of forfeiture, which lapse in full 2.0 years after the acquisition date. The Company recorded stock-based compensation expense related to the vesting of the restricted common stock of $0.3 million during the three months ended April 30, 2022. As of April 30, 2022, the remaining unrecognized stock-based compensation expense was $1.5 million and will be recognized over the remaining vesting period.
A portion of the consideration otherwise payable was placed into escrow as partial security for certain indemnification obligations. The escrow fund will be released 12 months after the acquisition date, subject to reduction for any indemnification claims.
The acquisition was accounted for as a business combination and the total purchase consideration was allocated to the net tangible and intangible assets and liabilities based on their fair values on the acquisition date and the excess was recorded as goodwill. The values assigned to the assets acquired and liabilities assumed are based on preliminary estimates of fair value available as of the issuance date of these condensed consolidated financial statements and may be adjusted during the measurement period of up to 12 months from the date of acquisition as further information becomes available. Any changes in the fair values of the assets acquired and liabilities assumed during the measurement period may result in adjustments to goodwill. As of April 30, 2022, the primary area that remains preliminary relates to the valuation of certain tax-related items.
The following table presents the preliminary purchase consideration allocation recorded in the Company’s condensed consolidated balance sheet as of the acquisition date (in thousands):
Amount
Cash and cash equivalents
$ 782 
Accounts receivable
430 
Other current assets
111 
Property and equipment
435 
Acquired intangible assets
17,200 
Goodwill
26,623 
Other assets
178 
Accounts payable
(262)
Deferred revenue, current
(340)
Accrued expenses and other current liabilities
(788)
Deferred revenue, noncurrent
(38)
Other liabilities
(2,654)
Total acquisition consideration
$ 41,677 
Acquired intangible assets consist of developed technology with an estimated useful life of 3 years.
Goodwill represents the future economic benefits arising from other assets that could not be individually identified and separately recognized, such as the acquired assembled workforce of DFLabs and synergies expected to be achieved from the integration of DFLabs. In addition, goodwill represents the future benefits as a result of the acquisition that management expects to enhance the Company’s product available to both new and existing customers and increase the Company’s market position. Goodwill is not deductible for tax purposes.
The results of operations of DFLabs from the date of acquisition have been included in the Company’s condensed consolidated financial statements. Pro forma revenue and results of operations have not been presented because the historical results of DFLabs are not material to the Company’s condensed consolidated financial statements in any period presented.
15

Acquisition-Related Expenses
The Company incurred acquisition-related expenses primarily for professional services of $3.8 million during the year ended January 31, 2022, which were recorded as general and administrative expenses in the consolidated statement of operations.
Acquired Intangible Assets
Acquired intangible assets, net consisted of the following (in thousands):
April 30, 2022
Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted Average Remaining Useful Life
(in years)
Developed technology $ 42,769  $ (23,355) $ 19,414  1.9
Customer relationships 3,000  (533) 2,467  4.2
Total $ 45,769  $ (23,888) $ 21,881 
January 31, 2022
Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted Average Remaining Useful Life
(in years)
Developed technology $ 43,650  $ (20,046) $ 23,604  2.1
Customer relationships 3,000  (383) 2,617  4.4
Total $ 46,650  $ (20,429) $ 26,221 
The Company recorded amortization expense of $3.7 million and $1.5 million during the three months ended April 30, 2022 and 2021, respectively. There was no impairment of intangible assets recorded for the three months ended April 30, 2022 or 2021. There was no fully amortized intangible assets written off during the three months ended April 30, 2022. Fully amortized intangible assets were written off in the amount of $1.0 million during the year ended January 31, 2022.
As of April 30, 2022, future amortization expense related to acquired intangible assets was as follows (in thousands):
Amortization Expense
Remainder of fiscal 2023 $ 9,344 
2024 8,495 
2025 3,225 
2026 600 
2027 217 
Total amortization expense $ 21,881 
As of January 31, 2022, future amortization expense related to acquired intangible assets was as follows (in thousands):
Amortization Expense
2023 13,298 
2024 8,789 
2025 3,317 
2026 600 
2027 217 
Total amortization expense $ 26,221 
16

Goodwill
Changes in the carrying amount of goodwill for the three months ended April 30, 2022 was as follows (in thousands):
Amounts
Balance as of January 31, 2022
$ 94,967 
Foreign currency translation (1,364)
Balance as of April 30, 2022
$ 93,603 
There was no impairment of goodwill recorded for the three months ended April 30, 2022 or 2021.
5. Leases
The Company leases office space globally under non-cancelable operating lease agreements that expire at various dates through fiscal 2026. The leases require monthly lease payments that may be subject to annual increases throughout the lease term. Certain of these leases include (i) renewal options at the election of the Company to renew or extend the lease for an additional 5 years, and/or (ii) options to terminate the lease early, subject to certain termination penalties and fees. These optional renewal and terminations periods have not been considered in the determination of the right-of-use assets (“RoU”) and lease liabilities associated with these leases, as the Company did not consider it reasonably certain it would exercise the options.
The Company evaluated its contracts and determined each of its identified leases are classified as operating leases. The Company has no lease agreements that are classified as finance leases as of April 30, 2022.
The following table presents the components of operating lease expense (in thousands):
Three Months Ended April 30,
2022 2021
Operating lease expense $ 1,104  $ 1,144 
Variable lease expense 135  149 
Short-term lease expense 38  11 
Sublease income 65  21 
As of April 30, 2022, the weighted average remaining lease term was 1.5 years and the weighted average discount rate used to determine the net present value of the lease liability was 3.1%.
Supplemental cash flow information and non-cash activity related to the Company’s operating leases were as follows (in thousands):
Three Months Ended April 30,
2022 2021
Cash paid for amounts included in the measurement of lease liabilities $ 1,204  $ 1,200 
As of April 30, 2022, remaining maturities of lease liabilities are as follows (in thousands):
Amount
Remainder of fiscal 2023 $ 3,543 
2024 1,969 
2025 346 
2026 55 
Total lease payments $ 5,913 
Less: imputed interest (142)
Present value of lease liabilities $ 5,771 
17

6. Debt
In February 2021, the Company entered into an Amended and Restated Loan and Security Agreement with Silicon Valley Bank (“SVB Agreement”) which provides for a revolving line of credit facility. The SVB Agreement amends and restates the Loan and Security Agreement dated January 31, 2016. Under the SVB Agreement, the Company can borrow up to $50 million. Interest on any drawdown accrues at the prime rate minus a spread rate ranging from 0.25% to 0.75%, as determined by the Company’s adjusted quick ratio, subject to either a 3.00% or 2.50% floor depending on the adjusted quick ratio. The SVB Agreement is secured by substantially all of the Company’s assets and includes restrictive covenants, in each case subject to certain exceptions, that limit the Company’s ability to, among other things: incur debt, grant liens, make acquisitions, undergo a change in control, make investments, make certain dividends or distributions, repurchase or redeem stock, dispose of or transfer assets, and enter into transactions with affiliates. Pursuant to the SVB Agreement, the Company is required to maintain a minimum adjusted quick ratio of 1.25 to 1.00. The SVB Agreement also contains customary events of default, upon which Silicon Valley Bank may declare all or a portion of the Company’s outstanding obligations payable to be immediately due and payable. As of April 30, 2022 and January 31, 2022, the Company did not have any debt balance outstanding. The Company was in compliance with the financial covenants associated with the amended Agreement as of April 30, 2022.
7. Commitments and Contingencies
Non-Cancellable Purchase Commitments
During the three months ended April 30, 2022, there were no material changes, outside the ordinary course of business, to the Company’s contractual obligations and commitments reported in the Company’s Annual Report on Form 10-K for the year ended January 31, 2022.
Other Obligations
Litigation and Other Matters
From time to time, the Company may be a party to various legal matters, threatened claims, or proceedings in the normal course of business. Legal fees and other costs associated with such actions are expensed as incurred. The Company assesses, in conjunction with its legal counsel, the need to record a liability for litigation and contingencies. Legal accruals are recorded when and if it is determined that a loss related to a certain matter is both probable and reasonably estimable.
Attorneys representing a purported class of current and former employees in various sales roles alleged potential claims of employee misclassification and related federal and state law claims, which the Company disputed. In response, the Company mediated the dispute, and in August 2020, the Company entered into a settlement agreement with the purported class counsel to resolve the dispute, which was handled in arbitration and resulted in the Company paying $4.5 million to resolve the class-wide claims during the three months ended April 30, 2021.
The Company is not always able to reasonably estimate the amount or range of possible losses in excess of any amounts accrued. In management’s opinion, resolution of all current matters, including employment matters, is not expected to have a material adverse impact on the Company’s business, financial position, results of operations, or cash flows as of April 30, 2022 or January 31, 2022.
8. Revenue
Disaggregation of Revenue
The following table presents the Company’s revenue by geographic region, based on the billing address of the customer, for the periods indicated (in thousands):
Three Months Ended April 30,
2022 2021
United States $ 53,750  $ 45,396 
International 14,105  8,823 
Total revenue $ 67,855  $ 54,219 
No individual foreign country contributed 10% or more of revenue for the three months ended April 30, 2022 and 2021.
18

No customer individually accounted for 10% or more of the Company’s revenue for the three months ended April 30, 2022 or 2021.
Deferred Revenue and Remaining Performance Obligations
The Company recognized revenue of $55.5 million and $42.4 million during the three months ended April 30, 2022 and 2021, respectively, that was included in the deferred revenue balance at the beginning of the respective periods.
As of April 30, 2022, future estimated revenue related to performance obligations from non-cancelable contracts that were unsatisfied or partially unsatisfied was $349.9 million and the Company expects to recognize approximately 92% as revenue for these remaining performance obligations over the next twenty-four months, with the remaining balance recognized thereafter.
Accounts Receivable, Net and Contract Assets
Accounts receivable are recorded at the invoiced amount, net of allowance for credit losses. The allowance is based upon historical loss patterns, the age of each past due invoice, and expectations of forward-looking loss estimates to determine whether the allowance is appropriate. Accounts receivable deemed uncollectible are charged against the allowance for credit losses when identified. The Company performs ongoing credit evaluations of its customers. The allowance for credit losses was $0.3 million as of April 30, 2022 and January 31, 2022, respectively.
As of April 30, 2022, two customers accounted for 14% and 11% of total accounts receivable, respectively. As of January 31, 2022, no customer accounted for 10% or more of total accounts receivable.
Unbilled receivables are recorded when revenue recognized on a contract exceeds the billings to date for that contract and the right to consideration is unconditional when only passage of time is required before payment of that consideration is due. Unbilled receivables totaled $1.5 million and $1.9 million as of April 30, 2022 and January 31, 2022, respectively, and were recorded within accounts receivable, net on the condensed consolidated balance sheets.
Contract assets are recorded when revenue recognized on a contract exceeds the billings to date for that contract and the right to consideration is conditional. There are no contract assets on the condensed consolidated balance sheet as of April 30, 2022 and January 31, 2022, respectively.
Deferred Sales Commissions
The Company capitalized sales commission of $3.9 million and $5.7 million during the three months ended April 30, 2022 and 2021, respectively. Amortized costs were $4.6 million and $3.4 million for the three months ended April 30, 2022 and 2021, respectively. There was no impairment loss in relation to deferred sales commissions for the three months ended April 30, 2022 or 2021.
9. Stockholders’ Equity and Equity Incentive Plans
Common Stock
The Company’s Amended and Restated Certificate of Incorporation authorized the Company to issue 1.0 billion shares of common stock at a par value of $0.0001 as of April 30, 2022 and January 31, 2022. As of April 30, 2022 and January 31, 2022, approximately 115.6 million and 113.8 million shares of common stock were issued and outstanding, respectively.
Each share of common stock is entitled to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when and if declared by the board of directors, subject to the prior rights of holders of all classes of stock outstanding. As of April 30, 2022 and January 31, 2022, no dividends had been declared.
Stock Plans
The Company has two equity incentive plans: the 2010 Stock Plan (the “2010 Plan”) and the 2020 Equity Incentive Plan (the “2020 Plan”). In connection with the Company’s IPO in September 2020, the 2010 Plan was terminated and replaced by the 2020 Plan and all shares that remained available for issuance under the 2010 Plan at that time were reserved for issuance under the 2020 Plan. The number of shares of common stock available for issuance under the 2020 Plan will be increased by any shares of common stock subject to awards outstanding under the 2010 Plan that expire or otherwise terminate without having been exercised or issued in full, are tendered to or withheld by the Company for payment of an exercise price or for satisfying tax withholding obligations, or are forfeited to or repurchased by the Company due to failure to vest.
19

The Company has issued stock options and restricted stock units (“RSUs”) to employees, directors, consultants, and advisors pursuant to both the 2010 Plan and 2020 Plan.
Employee stock options are granted with an exercise price no less than the fair value of the underlying common stock on the grant date, in general vest based on continuous service over four years, and expire 10 years from the date of grant. The value of RSUs is measured based on the grant date fair value of the awards and in general vest based on satisfying a service-based condition based on continuous service over four years.
As of April 30, 2022, there were 14.2 million shares available for grant under the 2020 Plan. The 2020 Plan provides that the number of shares reserved will automatically increase on the first day of each fiscal year, beginning on February 1, 2021, by an amount equal to the least of (i) 12,500,000 shares, (ii) 5% of the outstanding shares of the Company’s common stock on the last day of the immediately preceding fiscal year, or (iii) such other amount as the administrator of the 2020 Plan may determine.
Stock Options
The following table is a summary of option activity during the three months ended April 30, 2022:
Number of
Shares
Weighted Average
Exercise Price
Weighted Average Remaining Contractual Term Aggregate
Intrinsic Value
(in thousands) (years) (in thousands)
Balance at January 31, 2022
15,928  $ 4.20  5.9 $ 123,382 
Options granted —  $ — 
Options exercised (1,326) $ 5.16 
Options cancelled (438) $ 7.89 
Balance at April 30, 2022
14,164  $ 4.00  5.5 $ 79,254 
Options exercisable at April 30, 2022
12,541  $ 3.45  5.3 $ 74,378 
No stock options were granted during the three months ended April 30, 2022 and 2021, respectively. The aggregate intrinsic value of options exercised during the three months ended April 30, 2022 and 2021 was $8.2 million and $51.4 million, respectively.
No income tax benefits have been recognized for stock-based compensation arrangements. As of April 30, 2022, there was $8.7 million of total unrecognized compensation expense related to unvested stock options that is expected to be recognized over a weighted-average period of 1.3 years.
Early Exercise of Employee Options
As of April 30, 2022, early exercised options were fully vested. As of January 31, 2022, the Company had a liability of less than $0.1 million for 10,750 shares of common stock that were unvested and early exercised by employees.
20

Restricted Stock Units
The following table is a summary of RSU activity for the three months ended April 30, 2022:
Number of
Shares
Weighted Average Grant Date Fair Value per Share
(in thousands)
Balance at January 31, 2022
9,502  $ 17.20 
Granted(a)
5,173  $ 10.10 
Released (492) $ 17.71 
Forfeited (1,150) $ 16.92 
Balance at April 30, 2022
13,033  $ 14.39 
RSUs expected to vest at April 30, 2022
13,033  $ 14.39 
______________
(a)During the three months ended April 30, 2022, of the 5.2 million RSUs granted, 0.8 million awards were subject to both service-based and performance-based vesting conditions based on a 100% attainment rate.
As of April 30, 2022, there was $163.5 million of total unrecognized compensation expense related to unvested employee and director RSUs, of which $8.2 million is for the RSUs subject to certain other performance metrics. Total unrecognized compensation expense related to unvested RSUs is expected to be recognized over a weighted-average period of 3.0 years.
Sensu Plans
In connection with the acquisition of Sensu, the Company assumed 33,267 options to purchase shares of common stock, granted under the Sensu, Inc. Amended and Restated 2017 Equity Incentive Plan, at a weighted-average exercise price of $4.88 per share and weighted-average fair value of $17.19 per share, of which 21,560 and 29,771 remained outstanding as of April 30, 2022 and January 31, 2022, respectively. As of April 30, 2022, 8,153 options were vested and exercisable with a weighted-average exercise price of $4.76, and the total unrecognized compensation expense related to these awards was $0.2 million. During the three months ended April 30, 2022, 8,211 options were exercised.
Jask Labs’ Plans
In connection with the acquisition of Jask Labs, the Company assumed 265,075 options to purchase shares of common stock, granted under the Jask Labs 2015 Stock Option and Grant Plan and the Jask Labs 2018 Equity Incentive Plan (together, the “Jask Plans”), at a weighted-average exercise price of $9.86 per share and weighted-average fair value of $6.39 per share, of which 51,535 and 64,622 remained outstanding as of April 30, 2022 and January 31, 2022, respectively. As of April 30, 2022, 45,176 options were vested and exercisable with a weighted-average exercise price of $9.68, and the total unrecognized compensation expense related to these awards was less than $0.1 million. During the three months ended April 30, 2022, 6,885 options were exercised.
Employee Stock Purchase Plan
In September 2020, the board of directors adopted and the stockholders of the Company approved the 2020 Employee Stock Purchase Plan (“ESPP”), which became effective on September 17, 2020. The ESPP was amended in September 2021. The ESPP initially reserved and authorized the issuance of up to a total of 2,000,000 shares of common stock to participating employees. The number of shares reserved under the ESPP will automatically increase on the first day of each fiscal year, starting on February 1, 2021, in an amount equal to the least of (i) 2,500,000 shares, (ii) 1% of the outstanding shares of the Company’s common stock on the last day of the immediately preceding fiscal year, or (iii) such other amount as the administrator of the ESPP may determine. The ESPP generally provides for 24-month offering periods beginning June 15 and December 15 of each year, with each offering period consisting of four six-month purchase periods. On each purchase date, eligible employees will purchase the shares at a price per share equal to 85% of the lesser of (1) the fair market value of the Company’s common stock as of the beginning of the offering period or (2) the fair market value of the Company’s common stock on the purchase date, as defined in the ESPP. Under the reset provision currently authorized, if the closing stock price on the offering date of a new offering falls below the closing stock price on the offering date of an ongoing offering, the ongoing offering would terminate immediately following the purchase of ESPP shares on the purchase date immediately preceding the new offering and participants in the terminated ongoing offering would automatically be enrolled in the new offering (“ESPP reset”), resulting in a modification charge to be recognized over the new offering period.
21

The Company recognized stock-based compensation expense related to the ESPP of $0.4 million and $0.8 million during the three months ended April 30, 2022 and 2021, respectively. As of April 30, 2022 and January 31, 2022, $2.8 million and $1.3 million has been withheld on behalf of employees for a future purchase under the ESPP due to the timing of payroll deductions, respectively. As of April 30, 2022, there was $6.1 million of unrecognized stock-based compensation expense related to the ESPP that is expected to be recognized over an average vesting period of 0.9 years.
Stock-Based Compensation Expense
The following table presents total stock-based compensation expense included in the condensed consolidated statements of operations (in thousands):
Three Months Ended April 30,
2022 2021
Cost of revenue $ 314  $ 173 
Research and development(a)
6,441  4,547 
Sales and marketing 2,841  3,472 
General and administrative 3,681  3,941 
Total stock-based compensation expense $ 13,277  $ 12,133 
________________
(a)During the three months ended April 30, 2022, the Company capitalized stock-based compensation of $0.1 million related to internal-use software development costs. During the three months ended April 30, 2021, the Company did not capitalize any stock-based compensation related to internal-use software development costs. The research and development stock-based compensation amounts are presented net of the capitalized costs.
In connection with the acquisition of Jask Labs, the Company granted 130,180 shares of restricted common stock, with a fair value of $12.11683 per share at the time of grant, that vest over a period of two years. The Company recorded $0.2 million in stock-based compensation expense related to the vesting of the restricted common stock during the three months ended April 30, 2021. The awards were fully vested as of October 31, 2021.
During the three months ended April 30, 2022 and 2021, the Company granted 0.8 million and 0.1 million awards, respectively, to certain executives that were subject to both service-based vesting conditions and performance-based vesting conditions. For awards granted during the three months ended April 30, 2022, the total number of shares earned will be based on the Company’s performance against a specific metric for fiscal year 2023, unless such period is otherwise truncated per the terms of the award agreement. The number of shares earned and eligible for service-based vesting can range between 0% to 167% of target for our chief executive officer and between 0% and 125% for our other executives. For awards granted during the three months ended April 30, 2022, stock-based compensation expense of $0.5 million was recognized. No stock-based compensation expense has been recognized on the awards that were granted during the three months ended April 30, 2021 as the performance-based vesting conditions were not met.
10. Income Taxes
Accounting for income taxes for interim periods generally requires the provision for income taxes to be determined by applying an estimate of the annual effective tax rate for the full fiscal year to income or loss before income taxes, adjusted for discrete items, if any, for the reporting period. The Company updates its estimate of the annual effective tax rate each quarter and records a cumulative adjustment in such period.
The Company recorded income tax expense $0.5 million and $0.3 million for the three months ended April 30, 2022 and 2021, respectively. Income tax expense consists primarily of income taxes in foreign jurisdictions in which the Company conducts business. Due to the Company’s history of losses in the United States, a full valuation allowance on substantially all of the Company’s deferred tax assets, including net operating loss carryforwards, research and development tax credits, capitalized research and development, and other book versus tax differences was maintained.
11. Net Loss per Share
Basic net loss per share attributable to the Company’s common stockholders is computed by dividing the net loss attributable to the Company’s common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is the same as basic net loss per share for all years presented because the effects of potentially dilutive items were anti-dilutive given the Company’s net loss position in each period presented.
22

The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):
Three Months Ended April 30,
2022 2021
Net loss
$ (34,750) $ (26,914)
Weighted-average shares outstanding, basic and diluted
114,324  104,033 
Net loss per share, basic and diluted
$ (0.30) $ (0.26)
The following potential common shares were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for the periods presented (in thousands):
Three Months Ended April 30,
2022 2021
Stock options
14,164  21,468 
RSUs
13,380  5,356 
ESPP 345  246 
Warrants
11  11 
Shares subject to repurchase
215  124 
Assumed options for acquisitions
74  127 
Issuable shares for acquisitions
194  — 
Total anti-dilutive securities
28,383  27,332 
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended January 31, 2022, filed with the SEC on March 14, 2022. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. The last day of our fiscal year is January 31. Our fiscal quarters end on April 30, July 31, October 31, and January 31. Our fiscal year ending January 31, 2023 is referred to herein as fiscal 2023. Our fiscal years ended January 31, 2022 and 2021 are referred to herein as fiscal 2022 and fiscal 2021, respectively.
Overview
Sumo Logic empowers the people who power modern, digital businesses. Our mission is to be the leading software-as-a-service analytics platform for reliable and secure cloud-native applications. With our platform, we help our customers ensure application reliability, secure and protect against modern security threats, and gain insights into their cloud infrastructure. Our multi-tenant, cloud-native platform – which we refer to as our Continuous Intelligence Platform – provides powerful, real-time, machine data analytics and insights across observability and security solutions.
We generate revenue through the sale of subscriptions to customers that enable them to access our cloud-native platform. We recognize subscription revenue ratably over the term of the subscription, which is generally one to two years, but can be three years or longer. We offer multi-tiered paid subscription packages for access to our platform, the pricing for which differs based on a variety of factors, including volume of data to be ingested, duration of data retention, and breadth of access to platform features and functionalities. Our subscription packages encourage customers to expand their adoption of our platform by providing them with the flexibility to ingest and analyze large volumes of data and the ability to access a broad suite of platform features and functionalities without incurring overage fees, as well as insights into their usage patterns. We also deliver basic customer support with each of our paid subscription packages, and customers have the ability to purchase subscriptions to our premium support service. We recognize revenue from premium support service ratably over the term of the subscription.
Our go-to-market strategy consists of self-service adoption through our website, an inside sales team, a field sales team, and a partner channel. We offer free trials that enable potential customers to experience the benefits of our platform, and we see significant conversion from our trial users to paid customers, with approximately one-third of our new customers in fiscal 2022 having been free trial users who converted into paying customers. We leverage our user community to proactively identify trends, gather global insights, and create new use cases, thereby empowering us to deliver out-of-the-box value to our customers. We employ a land-and-expand business model centered around our platform offerings, which have a rapid time to value for our customers and are easily extensible to multiple use cases across a business. We utilize the analytical capabilities of our platform and our customer success team to understand how our customers use, and how they would benefit from expanding their use of our platform. This understanding helps us successfully upsell and cross sell to our existing customers.
The power of our platform, and the benefits that it delivers to customers, has driven rapid growth in our revenue. For the three months ended April 30, 2022 and 2021, our revenue was $67.9 million and $54.2 million, respectively, representing a period over period growth rate of 25%. For the three months ended April 30, 2022 and 2021, our annualized recurring revenue (“ARR”) was $273.3 million and $215.6 million, respectively, representing a period over period growth rate of 27%. We generated GAAP operating losses of $34.8 millions and $26.5 million for the three months ended April 30, 2022 and 2021, respectively. We define non-GAAP operating loss as loss from operations excluding stock-based compensation expense and related employer payroll taxes, amortization of acquired intangible assets, acquisition-related expenses, and expenses related to a cooperation agreement. We generated non-GAAP operating losses of $15.4 million and $10.8 million for the three months ended April 30, 2022 and 2021, respectively. See “Key Factors Affecting Our Performance” for a definition of ARR. See “Non-GAAP Financial Measures” for the reconciliation of GAAP operating loss to non-GAAP operating loss.
Impact of COVID-19
As a result of the COVID-19 pandemic, we have temporarily closed or reduced capacity at our offices, continue to require many of our employees and contractors to work remotely, and have reduced business travel, all of which represent a significant disruption in how we operate our business. Additionally, in May 2020, as part of our efforts to respond to the COVID-19 pandemic and ensure longer-term financial stability, we initiated cost reduction measures, including a headcount reduction. The operations of our partners and customers have likewise been disrupted, and we believe this has caused delays in renewal decisions for some of our
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existing customers, caused customers to request concessions such as extended payment terms or better pricing, and affected contraction or churn rates for our customers. While the duration and extent of the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the duration and spread of the outbreak, the emergence of variants of the virus, the extent and effectiveness of containment actions, and the effectiveness of vaccination efforts, it has already had an adverse effect on the global economy and the ultimate societal and economic impact of the COVID-19 pandemic remains unknown. Since the fourth quarter of fiscal 2022, the Omicron variant of COVID-19 became the dominant strain in numerous countries around the world, including the United States, and it is more contagious than other previously identified COVID-19 strains. However, we believe that the COVID-19 pandemic will continue to accelerate customer transformation into digital businesses, which we anticipate could generate additional opportunities for us in the future. Due to our subscription-based business model, the effect of the COVID-19 pandemic may not be fully reflected in our revenue until future periods. See “Risk Factors — The global COVID-19 pandemic has harmed and could continue to harm our business and results of operations” for further discussion of the challenges and risks we have encountered and could encounter related to the COVID-19 pandemic.
Key Factors Affecting Our Performance
New Customer Acquisition
Our business depends, in part, on our ability to add new customers. We believe the continued trend of digital transformation and increase in digital services and cloud applications across all organizations will continue to drive demand for our platform and broaden our customer base. Since our platform has offerings for organizations of all sizes and across industries, including organizations of all stages of cloud maturity, we believe these market changes present a significant opportunity for growth. As of April 30, 2022, we had over 2,400 customers worldwide, spanning organizations of a broad range of sizes and industries. However, we anticipate that continued economic uncertainty, including as a result of the COVID-19 pandemic and expectations that the macroeconomic environment may become more challenging in the future, may adversely affect our ability to add new customers in the future. We will continue to focus on new customer acquisition by investing in sales and marketing to build brand awareness, expanding our community, and driving adoption of our platform as we further capture the opportunity in our addressable market.
We define a customer as a separate legal entity, such as a company or an educational or government institution, that is under a paid contract with us or with which we are negotiating a renewal contract at the end of a given period. Given our historical experience of customer renewals, if we are in active discussions for a renewal or upgrade, we continue to include customers with expired contracts in our customer count until the customer either renews its contract or negotiations terminate without renewal. In situations where an organization has multiple subsidiaries or divisions that separately contract with us, we typically treat only the parent entity as the customer instead of treating each subsidiary or division as a separate customer. However, we count each purchaser of our self-service offering as a unique customer, regardless of other subscriptions such organization may have.
Expanding within our Existing Customer Base
Our business depends, in part, on the degree to which our land-and-expand strategy is successful. Our customers often initially adopt our platform for a specific use case and subsequently increase their adoption as they realize the benefits and flexibility of our platform. We have been successful in expanding our existing customers’ adoption of our platform as demonstrated by our dollar-based net retention rate, which we consider an indicator of our ability to retain and expand revenue from existing customers over time. Our dollar-based net retention rate as of April 30, 2022 and 2021, was 115% and 104%, respectively. Due to the realignment of our sales force, which will likely result in a relatively higher focus on new customer acquisitions, we expect it will take several quarters before we start to see a sustained improvement in our dollar-based net retention rate.
Our efficient land-and-expand model has helped us accelerate adoption within our largest customers, as evidenced by our customers with over $100,000 of ARR, which was 469 as of April 30, 2022 and 376 as of April 30, 2021.
We define ARR as the annualized recurring revenue run-rate from all customers that are under contract with us at the end of the period or with which we are negotiating a renewal contract. Given our historical experience of customer renewals, if we are in active discussions for a renewal, we continue to include customers with expired contracts in our ARR until the customer either renews its contract or negotiations terminate without renewal. For certain customers whose revenue may fluctuate from month to month based upon their specific contractual arrangements, we calculate ARR using the annualized monthly recurring revenue, or MRR, run-rate (MRR multiplied by 12). This enables us to calculate our anticipated recurring revenue for all customers based on our packaging and licensing models, which we believe provides a more accurate view of our anticipated recurring revenue.
Our dollar-based net retention rate is calculated as of a period end by starting with the ARR from all subscription customers as of 12 months prior to such period end, or Prior Period ARR. We then calculate the ARR from these same subscription customers as of the current period end, or Current Period ARR. Current Period ARR includes any expansion and is net of contraction or churn over the
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trailing 12 months but excludes ARR from new subscription customers in the current period. We then divide the Current Period ARR by the Prior Period ARR to arrive at our dollar-based net retention rate.
Continued Investment in Technology Leadership and Innovation
We intend to extend our leadership position by continuing to innovate, bringing new technologies to market, honing best practices, and driving thought leadership. Our success depends, in part, on our ability to sustain innovation and technology leadership in order to maintain a competitive advantage. We expect to continue to invest in research and development to increase our revenue and achieve long-term profitability, and we intend to continue extending the applicability of our platform as well as improving the value of our offerings for our customers. We believe that our platform is highly differentiated and has broad applicability to a wide variety of observability and security use cases, and we will continue to invest in developing and enhancing platform features and functionality to further extend the adoption of our platform. Additionally, we will continue to evaluate opportunities to acquire or invest in businesses, offerings, technologies, or talent that we believe could complement or expand our platform, enhance our technical capabilities, or otherwise offer growth opportunities. Once we complete acquisitions, we must successfully integrate and manage these acquisitions to realize their benefits.
International Expansion
We intend to continue to invest in our international operations to grow our business outside of the United States. We generated 21% and 16% of our revenue outside the United States during the three months ended April 30, 2022 and 2021, respectively. We believe that global demand for observability and security analytics will continue to increase as international businesses undergo digital transformations and adopt cloud-based technologies. We currently have a sales presence throughout Asia-Pacific-Japan, and Europe, with sales offices in Sydney, Australia, Noida, India, Tokyo, Japan, and London, United Kingdom, and we further increase our global reach with our international channel partners. International expansion over the long term represents a significant opportunity and we plan to continue to invest in growing our presence internationally, both through expanding our sales and marketing efforts and leveraging channel and other ecosystem partners.
Acquisition of Sensu, Inc.
On June 10, 2021, we completed the acquisition of Sensu, Inc. (“Sensu”), a privately-held software company that is a leader in open source monitoring. The addition of Sensu is expected to accelerate our observability strategy by providing customers with an affordable and scalable end-to-end solution for infrastructure and application monitoring. The aggregate amount recorded as purchase consideration was $32.7 million, of which $8.6 million was paid or to be paid in cash, and $24.1 million was comprised of 1,123,697 shares of common stock. Additionally, 71,644 shares of common stock were issued and will be recorded as stock-based compensation over the requisite service period, and we assumed 33,267 options to purchase shares of common stock granted under Sensu’s equity plan. See Note 4 to our condensed consolidated financial statements.
Acquisition of DF Labs S.p.A.
On May 24, 2021, we completed the acquisition of DF Labs S.p.A. (“DFLabs”), a privately-held Italian corporation and a leader in security orchestration, automation and response (“SOAR”) technology. The combination of our Cloud SIEM and DFLabs' solution will provide customers with comprehensive cloud-native security intelligence solutions. The aggregate amount recorded as purchase consideration was $41.7 million, of which $35.3 million was paid in cash, and $6.4 million was comprised of 334,815 shares of common stock. Additionally, 143,492 shares of common stock were issued and will be recorded as stock-based compensation over the requisite service period. See Note 4 to our condensed consolidated financial statements.
Components of Results of Operations
Revenue
We generate subscription revenue through the sale of subscriptions to customers that enable them to access our cloud-native platform. Subscription terms are generally one to two years, but can be three years or longer, and a substantial majority of our contracts are non-cancelable. Subscription revenue is driven by sales of our multi-tiered paid subscriptions, the pricing for which differs based on a variety of factors, including volume of data expected to be ingested, duration of data retention, and breadth of access to our platform features and functionalities. We deliver basic customer support with each of our paid subscription packages, and customers have the ability to purchase subscriptions to our premium support service. Due to the ease of using our platform, professional services revenue from configuration, implementation, and training services constituted approximately 1% of our total revenue for the three months ended April 30, 2022 and 2021.
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Cost of Revenue
Cost of revenue includes all direct costs to deliver and support our platform, including personnel and related costs, third-party hosting fees related to our cloud platform, amortization of internal-use software and acquired developed technology, as well as allocated facilities and IT costs.
As new customers purchase access to our platform and our existing customer base expands their utilization of our platform, we will incur greater cloud hosting costs related to the increased volume of data being hosted. We will continue to invest additional resources in our platform infrastructure and customer support organizations to expand the capabilities of our platform features and ensure that our customers are realizing the full benefit of our platform. The level and timing of investment in these areas could affect our cost of revenue in the future.
Gross Profit and Gross Margin
Gross profit represents revenue less cost of revenue, and gross margin is gross profit expressed as a percentage of revenue. Our gross margin may fluctuate from period to period as our revenue fluctuates, and has been and will continue to be affected by various factors, including the timing and amount of investments to maintain or expand our cloud hosting capability, the continued growth of our platform and customer support teams, increased compensation expenses, as well as amortization of costs associated with capitalized internal-use software and acquired intangible assets. We expect our gross profit to increase and our gross margin to remain consistent over the near term due to the continued growth in the use of our platform, but increase modestly over the longer term with cost efficiencies related to our cloud hosting services, although our gross margins could fluctuate from period to period depending on the interplay between the factors described above.
Operating Expenses
Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Personnel and related expenses are the most significant component of operating expenses and consist of salaries, employee benefit costs, payroll taxes, bonuses, sales commissions, travel-related expenses, and stock-based compensation expense, as well as the allocated portion of overhead costs for facilities and IT. Operating expenses also include cloud infrastructure fees and other services related to staging and development efforts for our platform.
Research and Development
Research and development expenses consist primarily of costs related to research, design, maintenance, and minor enhancements of our platform that are expensed as incurred. These costs consist primarily of personnel and related expenses, including allocated overhead costs, contractor and consulting fees related to the design, development, testing, and enhancement of our platform, and software, hardware, and cloud infrastructure fees for staging and development related to research and development activities necessary to support growth in our employee base and in the adoption of our platform. We expect that our research and development expenses will increase in dollar value as we continue to increase our investments in our platform. However, we anticipate research and development expenses will decrease as a percentage of our revenue over the long term, although they may fluctuate as a percentage of our revenue from period to period depending on the timing of expenses.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel and related expenses including allocated overhead costs and commissions, costs of general marketing and promotional activities, including free trials of our platform, fees for professional services related to marketing, and software and hardware to support growth in our employee base. Sales commissions earned by our sales force that are considered incremental costs of obtaining a subscription with a customer are deferred and amortized on a straight-line basis over the expected period of benefit, which we have determined to be five years. We expect that our sales and marketing expenses will increase in dollar value over the long term, though the dollar value of such expenses may fluctuate in the near term. We believe that sales and marketing expenses will continue to be our largest operating expense for the foreseeable future as we expand our sales and marketing efforts. We expect that our sales and marketing expenses will increase as a percentage of our revenue over the near term, but decrease over the long term, although they may fluctuate as a percentage of revenue from period to period depending on the timing of expenses.
General and Administrative
General and administrative expenses consist primarily of personnel and related expenses associated with our executive, finance, legal, human resources, information technology and security, and other administrative personnel. In addition, general and administrative expenses include non-personnel costs, such as fees for professional services such as external legal, accounting, and
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other consulting services, hardware and software costs, certain taxes other than income taxes, and overhead costs not allocated to other departments.
We expect that our general and administrative expenses will increase in dollar value as our business grows. However, we expect that our general and administrative expenses will decrease as a percentage of our revenue as our revenue grows over the long term, although they may fluctuate as a percentage of revenue from period to period depending on the timing of expenses.
Interest and Other Income (Expense), Net
Interest and other income (expense), net primarily consists of interest earned from our cash, cash equivalents, and marketable securities, and foreign currency transaction gains (losses).
Interest Expense
Interest expense primarily consists of interest incurred in connection with our previous borrowings under our revolving line of credit facility.
Provision for Income Taxes
Provision for income taxes consists primarily of income taxes in certain foreign jurisdictions in which we conduct business. We maintain a full valuation allowance on our federal and state net deferred tax assets as we have concluded that it is not more likely than not that the deferred tax assets will be realized.
Results of Operations
The following table sets forth our condensed consolidated statements of operations data for the periods indicated:
Three Months Ended April 30,
2022 2021
(in thousands)
Revenue $ 67,855  $ 54,219 
Cost of revenue(1)(2)(3)
24,145  15,395 
Gross profit 43,710  38,824 
Operating expenses:
Research and development(1)(3)
26,253  20,443 
Sales and marketing(1)(2)(3)
35,290  30,278 
General and administrative(1)(3)(4)
16,996  14,573 
Total operating expenses 78,539  65,294 
Loss from operations (34,829) (26,470)
Interest and other income (expense), net 631  (16)
Interest expense (29) (86)
Loss before provision for income taxes (34,227) (26,572)
Provision for income taxes 523  342 
Net loss $ (34,750) $ (26,914)
____________
(1)Includes stock-based compensation expense and related employer payroll taxes as follows:
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Three Months Ended April 30,
2022 2021
(in thousands)
Cost of revenue $ 316  $ 173 
Research and development(a)
6,554  4,858 
Sales and marketing 2,917  3,722 
General and administrative 3,759  4,188 
Total stock-based compensation expense and related employer payroll taxes $ 13,546  $ 12,941 
(a)See Note 9 to our condensed consolidated financial statements for the capitalized stock-based compensation expense related to internal-use software development costs.
(2)Includes amortization of acquired intangible assets as follows:
Three Months Ended April 30,
2022 2021
(in thousands)
Cost of revenue $ 3,559  $ 1,537 
Sales and marketing 150  — 
Total amortization of acquired intangible assets $ 3,709  $ 1,537 
(3)Includes acquisition-related expenses as follows:
Three Months Ended April 30,
2022 2021
(in thousands)
Cost of revenue $ 81  $ — 
Research and development 292  — 
Sales and marketing 101  — 
General and administrative —  1,216 
Total acquisition-related expenses $ 474  $ 1,216 

(4)Includes third-party advisory and professional services expenses associated with a cooperation agreement as follows:
Three Months Ended April 30,
2022 2021
(in thousands)
General and administrative $ 1,720  $ — 
Total expenses related to a cooperation agreement $ 1,720  $ — 
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The following table sets forth our condensed consolidated statements of operations data expressed as a percentage of revenue:
Three Months Ended April 30,
2022 2021
Revenue 100  % 100  %
Cost of revenue 36  28 
Gross profit 64  % 72  %
Operating expenses:
Research and development 39  38 
Sales and marketing 52  56 
General and administrative 25  27 
Total operating expenses 116  % 120  %
Loss from operations (51) (49)
Interest and other income (expense), net — 
Interest expense —  — 
Loss before provision for income taxes (50) (49)
Provision for income taxes
Net loss (51) % (50) %
____________
Note: Certain figures may not sum due to rounding.
Comparison of Three Months Ended April 30, 2022 and 2021
Revenue
Three Months Ended April 30,
2022 2021 Change % Change
(dollars in thousands)
Revenue $ 67,855  $ 54,219  $ 13,636  25  %
Revenue increased by $13.6 million, or 25%, during the three months ended April 30, 2022 compared to the three months ended April 30, 2021. We estimated that over 95% of the increase in revenue was attributable to growth from existing customers, and the remaining less than 5% was attributable to growth from new customers. The number of customers with greater than $100,000 of ARR increased to 469 as of April 30, 2022 from 376 as of April 30, 2021.
Cost of Revenue, Gross Profit, and Gross Margin
Three Months Ended April 30,
2022 2021 Change % Change
(dollars in thousands)
Cost of revenue $ 24,145  $ 15,395  $ 8,750  57  %
Gross profit 43,710  38,824  4,886  13  %
Gross margin 64  % 72  %
Cost of revenue increased by $8.8 million, or 57%, during the three months ended April 30, 2022 compared to the three months ended April 30, 2021. The increase in cost of revenue was primarily due to a $6.9 million increase in third-party hosting fees and personnel costs related to providing access to and supporting our platform and an increase in amortization of acquired developed technology of $2.0 million as a result of our acquisitions of Sensu and DFLabs in the second quarter of fiscal 2022. Gross profit increased $4.9 million while gross margin decreased 7% primarily as a result of increased third-party hosting fees and increased amortization of acquired developed technology.
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Research and Development
Three Months Ended April 30,
2022 2021 Change % Change
(dollars in thousands)
Research and development $ 26,253  $ 20,443  $ 5,810  28  %
Percentage of revenue 39  % 38  %
Research and development expenses increased by $5.8 million, or 28%, during the three months ended April 30, 2022 compared to the three months ended April 30, 2021. The increase in research and development expenses was primarily driven by a $5.4 million increase in personnel and related expenses directly associated with an increase in average headcount as well as an increase in the average cost per head as we continued to hire and increase resources to develop and expand the functionality of our software offerings, of which $1.7 million was related to stock-based compensation expense and related employer payroll taxes. In addition, software, hardware, and cloud infrastructure fees for staging and development increased $0.7 million.
Sales and Marketing
Three Months Ended April 30,
2022 2021 Change % Change
(dollars in thousands)
Sales and marketing $ 35,290  $ 30,278  $ 5,012  17  %
Percentage of revenue 52  % 56  %
Sales and marketing expenses increased by $5.0 million, or 17%, during the three months ended April 30, 2022 compared to the three months ended April 30, 2021. The increase in sales and marketing expenses was primarily driven by a $3.0 million increase in personnel and related expenses associated with an increase in average headcount as we continue to invest in our go-to-market coverage, capacity, and expansion into new markets. In addition, advertising and promotional costs, and third-party public relations and marketing services increased by $1.1 million and amortization of referral fees increased by $0.5 million as we continue our efforts to execute our market expansion strategy.
General and Administrative
Three Months Ended April 30,
2022 2021 Change % Change
(dollars in thousands)
General and administrative $ 16,996  $ 14,573  $ 2,423  17  %
Percentage of revenue 25  % 27  %
General and administrative expenses increased by $2.4 million, or 17%, during the three months ended April 30, 2022 compared to the three months ended April 30, 2021. The increase in general and administrative expenses was primarily driven by a $1.0 increase in personnel and related expenses associated with an increase in average headcount, a $2.8 million increase in professional services, including $1.7 million in third-party fees related to a cooperation agreement, partially offset by the absence of $1.2 million in acquisition-related expenses during the three months ended April 30, 2022.
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Interest and Other Income (Expense), Net
Three Months Ended April 30,
2022 2021 Change % Change
(dollars in thousands)
Interest and other income (expense), net $ 631  $ (16) $ 647  (4,044) %
Interest and other income (expense), net increased by $0.6 million, or 4,044%, during the three months ended April 30, 2022 compared to the three months ended April 30, 2021. The increase in interest and other income (expense), net was primarily driven by an increase in interest income due to higher yield on invested funds.
Interest Expense
Three Months Ended April 30,
2022 2021 Change % Change
(dollars in thousands)
Interest expense $ (29) $ (86) $ 57  (66) %
Interest expense decreased by $0.1 million, or 66%, during the three months ended April 30, 2022 compared to the three months ended April 30, 2021. The decrease in interest expense was driven by lower amortization of costs related to our line of credit facility.
Non-GAAP Financial Measures
In addition to our financial information presented in accordance with GAAP and the key business metrics presented above, we believe the following non-GAAP financial measures are useful to investors in evaluating our operating performance. We use the following non-GAAP financial measures, collectively, to evaluate our ongoing operations and for internal planning and forecasting purposes, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies, and to communicate with our board of directors concerning our financial performance. We believe that non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, may be helpful to investors because they provide consistency and comparability with past financial performance and meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our business, results of operations, or outlook. The non-GAAP financial measures are presented for supplemental informational purposes only, have limitations as analytical tools, and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP and may be different from similarly-titled non-GAAP financial measures used by other companies. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures, and not to rely on any single financial measure to evaluate our business.
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Non-GAAP Gross Profit and Non-GAAP Gross Margin
We define non-GAAP gross profit and non-GAAP gross margin as gross profit and gross margin, respectively, excluding stock-based compensation expense and related employer payroll taxes, amortization of acquired intangible assets, and acquisition-related expenses.
Three Months Ended April 30,
2022 2021
(dollars in thousands)
Gross profit $ 43,710  $ 38,824 
Add: Stock-based compensation expense and related employer payroll taxes 316  173 
Add: Amortization of acquired intangible assets 3,559  1,537 
Add: Acquisition-related expenses 81  — 
Non-GAAP gross profit $ 47,666  $ 40,534 
Gross margin 64  % 72  %
Non-GAAP gross margin 70  % 75  %
Non-GAAP Operating Loss and Non-GAAP Operating Margin
We define non-GAAP operating loss and non-GAAP operating margin as loss from operations and operating margin, respectively, excluding stock-based compensation expense and related employer payroll taxes, amortization of acquired intangible assets, acquisition-related expenses, and expenses related to a cooperation agreement.
Three Months Ended April 30,
2022 2021
(dollars in thousands)
Loss from operations $ (34,829) $ (26,470)
Add: Stock-based compensation expense and related employer payroll taxes 13,546  12,941 
Add: Amortization of acquired intangible assets 3,709  1,537 
Add: Acquisition-related expenses 474  1,216 
Add: Expenses related to a cooperation agreement 1,720  — 
Non-GAAP operating loss $ (15,380) $ (10,776)
Operating margin (51) % (49) %
Non-GAAP operating margin (23) % (20) %
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Non-GAAP Net Loss
We define non-GAAP net loss as loss from operations, excluding stock-based compensation expense and related employer payroll taxes, amortization of acquired intangible assets, acquisition-related expenses, and expenses related to a cooperation agreement.
Three Months Ended April 30,
2022 2021
(in thousands)
Net loss $ (34,750) $ (26,914)
Add: Stock-based compensation expense and related employer payroll taxes 13,546  12,941 
Add: Amortization of acquired intangible assets 3,709  1,537 
Add: Acquisition-related expenses 474  1,216 
Add: Expenses related to a cooperation agreement 1,720  — 
Non-GAAP net loss $ (15,301) $ (11,220)
Free Cash Flow
We define free cash flow as cash used in operating activities less purchases of property and equipment and capitalized internal-use software costs. We believe free cash flow is a useful indicator of liquidity that provides our management, board of directors, and investors with information about our future ability to generate or use cash to enhance the strength of our balance sheet and further invest in our business and pursue potential strategic initiatives.
Three Months Ended April 30,
2022 2021
(in thousands)
Cash used in operating activities $ (1,432) $ (2,719)
Less: Purchases of property and equipment (371) (247)
Less: Capitalized internal-use software costs (187) — 
Free cash flow $ (1,990) $ (2,966)
Cash used in investing activities $ (5,299) $ (266,237)
Cash provided by financing activities $ 6,954  $ 7,926 
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through subscription revenue from customers accessing our cloud-native platform and the net proceeds of issuances of equity securities. We have incurred losses and generated negative cash flows from operations, as reflected in our accumulated deficit of $555.9 million as of April 30, 2022. As of April 30, 2022, we had $79.7 million in cash and cash equivalents and $279.2 million in marketable securities.
We believe our existing cash and cash equivalents, marketable securities, and cash provided by sales of access to our platform will be sufficient to meet our projected operating requirements for at least the next 12 months, despite the uncertainty in the changing market and economic conditions as a result of the COVID-19 pandemic, which may have an impact on our available cash due to customer requests for extended payment terms or better pricing. As a result of our revenue growth plans, both domestically and internationally, we expect that losses and negative cash flows from operations may continue in the foreseeable future. Our future capital requirements will depend on many factors, including our subscription growth rate, subscription renewals, billing timing and frequency, pricing changes, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced platform features and functionality, the continued market adoption of our platform, and the impact of the COVID-19 pandemic on our business and results of operations, the business of our customers, and the economy. We may in the future pursue acquisitions of businesses, technologies, assets, and talent.
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In February 2021, we entered into an Amended and Restated Loan and Security Agreement with Silicon Valley Bank, or the SVB Agreement, which provides for a revolving line of credit. The SVB Agreement amends and restates the Loan and Security Agreement dated as of January 31, 2016. Under the SVB Agreement, we can borrow up to $50 million. Interest on any drawdown accrues at the prime rate minus a spread rate ranging from 0.25% to 0.75%, as determined by our adjusted quick ratio, subject to either a 3.00% or 2.50% floor depending on the adjusted quick ratio. The SVB agreement is secured by substantially all of our assets and includes restrictive covenants, in each case subject to certain exceptions, that limit our ability to, among other things: incur debt, grant liens, make acquisitions, undergo a change in control, make investments, make certain dividends or distributions, repurchase or redeem stock, dispose of or transfer assets, and enter into transactions with affiliates. Pursuant to the SVB Agreement, we are also required to maintain a minimum adjusted quick ratio of 1.25 to 1.00. The SVB Agreement also contains customary events of default, upon which Silicon Valley Bank may declare all or a portion of our outstanding obligations payable to be immediately due and payable. As of April 30, 2022, we did not have any debt outstanding.
We typically invoice our subscription customers annually in advance, and in certain cases, we invoice upfront for multi-year contracts. Therefore, a substantial source of our cash is from such prepayments, which are included on our condensed consolidated balance sheets as deferred revenue. Deferred revenue consists of billed fees for our subscriptions and to a lesser extent, premium support services, prior to satisfying the criteria for revenue recognition, which are subsequently recognized as revenue in accordance with our revenue recognition policy. As of April 30, 2022, future estimated revenue related to performance obligations from non-cancelable contracts that were unsatisfied or partially unsatisfied was $349.9 million, of which we expect to recognize approximately 92% as revenue over the next 24 months, with the remaining balance recognized thereafter. As of April 30, 2022, we had deferred revenue of $148.7 million, of which $142.6 million was recorded as a current liability and is expected to be recognized as revenue within the next 12 months, subject to applicable revenue recognition criteria.
Cash Flows
The following table shows a summary of our cash flows for the periods presented:
Three Months Ended April 30,
2022 2021
(in thousands)
Net cash provided by (used in):
Operating activities
$ (1,432) $ (2,719)
Investing activities
$ (5,299) $ (266,237)
Financing activities
$ 6,954  $ 7,926 
Operating Activities
Our largest source of operating cash is cash collections from sales of subscriptions to our customers. Our primary uses of cash from operating activities are for personnel and related expenses, marketing expenses, and third-party hosting and software costs. In the last several years, we have generated negative cash flows from operating activities and have supplemented working capital requirements through net proceeds from equity financings.
Cash used in operating activities for the three months ended April 30, 2022 of $1.4 million consisted of our net loss of $34.8 million, adjusted for non-cash charges of $23.9 million and net cash inflows of $9.4 million provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation of $13.3 million, amortization of deferred sales commissions of $4.6 million, depreciation and amortization of $4.3 million, and $1.1 million of non-cash operating lease costs. Net cash inflows from changes in operating assets and liabilities were primarily the result of a $11.5 million increase in deferred revenue resulting from increased billings for subscriptions, a $2.0 million increase in accounts payable and accrued expenses due to timing of payments to vendors, a $0.8 million decrease in accounts receivable due to collections being greater than billings during the period, and a $0.1 million decrease in prepaid expenses and other assets related to the timing of payments to vendors and amortization of prior amounts paid. Net cash inflows were partially offset by cash outflows resulting from a $3.9 million increase in deferred sales commissions due to commissions paid on new bookings and a $1.2 million decrease in lease liabilities due to monthly rental payments for our operating leases.
Cash used in operating activities for the three months ended April 30, 2021 of $2.7 million consisted of our net loss of $26.9 million, adjusted for non-cash charges of $19.2 million and net cash inflows of $5.0 million provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation of $12.1 million, amortization of deferred sales commissions of $3.4 million, depreciation and amortization of $2.0 million, and $1.1 million of non-cash operating lease costs. Changes in operating assets and liabilities primarily reflected a $9.2 million increase in deferred revenue resulting from increased
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billings for subscriptions, a $1.7 million decrease in prepaid expenses and other assets related to the timing of payments to vendors and amortization of prior amounts paid, and a $0.8 million decrease in accounts receivable due to collections being greater than billings during the period. These changes were partially offset by a $5.7 million increase in deferred sales commissions due to commissions paid on new bookings and a $1.1 million decrease in lease liabilities due to monthly rental payments for our operating leases.
Investing Activities
Cash used in investing activities for the three months ended April 30, 2022 of $5.3 million primarily consisted of purchases of marketable securities of $51.7 million and $0.6 million in purchases of property and equipment primarily related to purchases of computers for new employees as well as additions of capitalized internal-use software development costs partially offset by $46.9 million of maturities and sales of marketable securities.
Cash used in investing activities for the three months ended April 30, 2021 of $266.2 million primarily consisted of purchases of marketable securities of $267.5 million, partially offset by $1.6 million of maturities.
Financing Activities
Cash provided by financing activities for the three months ended April 30, 2022 of $7.0 million consisted of proceeds from common stock option exercises.
Cash provided by financing activities for the three months ended April 30, 2021 of $7.9 million primarily consisted of proceeds from common stock option exercises of $8.0 million.
Contractual Obligations and Commitments
The Company enters into contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum, or variable price provisions, and the approximate timing of the actions under the contracts. The Company’s material contractual obligations consist of data hosting and lease arrangements with its corporate facilities. Refer to Notes 5 and 7 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
There has been no material change in our contractual obligations and commitments other than in the ordinary course of business since our fiscal year ended January 31, 2022. See the Annual Report on Form 10-K for the fiscal year ended January 31, 2022 for additional information regarding the Company’s contractual obligations.
Indemnification Agreements
In the ordinary course of business, we enter into agreements of varying scope and terms pursuant to which we agree to indemnify customers, vendors, lessors, business partners, and other parties with respect to certain matters. Some of these indemnification provisions do not provide for a maximum potential amount of future payments we could be obligated to make. No demands have been made upon us to provide indemnification under such agreements, and there are no claims that we are aware of that could have a material effect on our condensed consolidated balance sheets, condensed consolidated statements of operations and condensed consolidated statements of comprehensive loss, or condensed consolidated statements of cash flows.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
We prepared our condensed consolidated financial statements and the related notes thereto, included elsewhere in this Quarterly Report on Form 10-Q, in accordance with GAAP. In preparation of these condensed consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, as of the date of the financial statements, and the reported amounts of income and expenses during the reporting period. These estimates are based on information available as of the date of the financial statements and may involve subjective or
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significant judgment by management; therefore, actual results could differ from the estimates made by management. We refer to accounting estimates of this type as critical accounting policies and estimates.
Our significant accounting policies are described in the section titled "Summary of Significant Accounting Policies in Note 2 in our Annual Report on Form 10-K for the year ended January 31, 2022. There have been no significant changes to these policies for the three months ended April 30, 2022.
Recent Accounting Pronouncements
See Note 2 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information about the impact of certain recent accounting pronouncements on our condensed consolidated financial statements.
Item 3. Qualitative and Quantitative Disclosures about Market Risk
We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates and foreign currency exchange rates.
Interest Rate Risk
As of April 30, 2022, we had $69.8 million of cash equivalents invested in money market funds and $0.3 million of restricted cash primarily related to outstanding letters of credit established in connection with lease agreements for our facilities. In addition, we had $279.2 million in marketable securities, which consisted of U.S. Treasury securities, corporate debt securities, commercial paper, foreign government obligations, supranational securities, and certificates of deposits. Our cash and cash equivalents are held for working capital purposes. We do not enter into investments for trading or speculative purposes.
A hypothetical 10% relative change in interest rates during any of the periods presented would not have had a material impact on our results of operations.
Foreign Currency Exchange Risk
Our reporting currency is the U.S. dollar, and the functional currency of our foreign subsidiaries is the respective local currency. The assets and liabilities of each of our foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at each balance sheet date. Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are recorded as a separate component on the condensed consolidated statements of comprehensive loss. Equity transactions are translated using historical exchange rates. Expenses are translated using the average exchange rate during the year. Gains or losses due to transactions in foreign currencies are included in interest and other income (expense), net in our condensed consolidated statements of operations.
The volatility of exchange rates depends on many factors that we cannot forecast with reliable accuracy. We have experienced and will continue to experience fluctuations in foreign exchange gains and losses related to changes in foreign currency exchange rates. In the event our foreign currency denominated assets, liabilities, revenue, or expenses increase, our results of operations may be more greatly affected by fluctuations in the exchange rates of the currencies in which we do business. We have not engaged in the hedging of foreign currency transactions to date, although we may choose to do so in the future.
A hypothetical 10% change in the relative value of the U.S. dollar to other currencies during any of the periods presented would not have had a material effect on our results of operations.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation and supervision of our chief executive officer and our chief financial officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
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Based on the Company’s evaluation, our chief executive officer and chief financial officer concluded that, as of April 30, 2022, our disclosure controls and procedures were effective at the reasonableness assurance level.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended April 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitation on the Effectiveness of Controls
Our management, including our chief executive officer and chief financial officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed and operated to be effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may be subject to legal proceedings and claims that arise in the ordinary course of business, as well as governmental and other regulatory investigations and proceedings. In addition, third parties may from time to time assert claims against us in the form of letters and other communications. For example, in September 2019, attorneys representing a purported class of current and former employees in various sales roles alleged potential claims of employee misclassification and related federal and state law claims, which we disputed. In response, we mediated the dispute, and in August 2020, we entered into a settlement agreement with the purported class counsel to resolve the dispute, which was handled in arbitration resulted in us paying approximately $4.5 million in the first quarter of fiscal 2022 to resolve the class-wide claims, which included claims for employee misclassification and related federal and state claims, civil penalties under California’s Private Attorneys General Act of 2004, as well as claims for failure to pay overtime, provide meal and rest breaks, pay timely wages, and provide accurate wage statements, and claims for alleged unlawful business practices.
We are not currently a party to any legal proceedings that, if determined adversely to us, would, in our opinion, have a material adverse effect on our business, results of operations, financial condition or cash flows. Future litigation may be necessary to defend ourselves, our partners, and our customers by determining the scope, enforceability, and validity of third-party proprietary rights, or to establish our proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.
Item 1A. Risk Factors
You should carefully consider the risks and uncertainties described below, together with all of the other information in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and related notes and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our business, financial condition, results of operations, or prospects could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material. If any of the risks actually occur, our business, financial condition, results of operations, and prospects could be adversely affected. In that event, the market price of our common stock could decline, and you could lose part or all of your investment.
Risks Related to Our Industry and Business
Our revenue growth rate and financial performance in recent periods may not be indicative of future performance.
We have experienced significant revenue growth in recent periods. For example, our revenue was $155.1 million, $202.6 million, and $242.1 million for the years ended January 31, 2020, 2021 and 2022, and was $67.9 million and $54.2 million for the three months ended April 30, 2021 and 2022, respectively. You should not rely on our revenue for any previous quarterly or annual period as any indication of our revenue or revenue growth in future periods. As we continue to grow our business, our revenue growth rates may decline due to a number of reasons, which may include more challenging comparisons to prior periods as our revenue grows, slowing demand for our platform, increasing competition, a decrease in our renewal rates, a decrease in the growth of our overall market or market saturation, and our failure to capitalize on growth opportunities. In addition, our growth rates may experience increased volatility due to global societal and economic disruption as a result of the COVID-19 pandemic.
We have a history of net losses and we may not be able to achieve or maintain profitability in the future.
We have incurred net losses since our inception, and we expect to continue to incur net losses in the near future. We incurred net losses of $92.1 million, $80.3 million, and $123.4 million for the years ended January 31, 2020, 2021 and 2022, and $26.9 million and $34.8 million for the three months ended April 30, 2021 and 2022, respectively. As of April 30, 2022, we had an accumulated deficit of $555.9 million. Because the market for our platform is rapidly evolving, it is difficult for us to predict our future results of operations. We expect our operating expenses to increase significantly over the next several years, as we continue to hire additional personnel, particularly in sales and marketing and research and development, expand our operations and infrastructure, both domestically and internationally, and continue to develop our platform features. These efforts may be more costly than we expect and may not result in increased revenue or growth in our business. In addition to the expected costs to grow our business, we have incurred and will continue to incur significant additional legal, accounting, and other expenses as a newly public company. If we fail to increase our revenue to sufficiently offset the increases in our operating expenses, we will not be able to achieve or maintain profitability in the future.
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We face intense competition and could face pricing pressure from, and lose market share to, our competitors, which would adversely affect our business, financial condition, and results of operations.
The markets in which we operate are competitive and characterized by rapid changes in technology, customer requirements, and industry standards, and frequent introductions of improvements to existing offerings. Our business model of delivering an analytics platform for reliable and secure cloud-native applications through the cloud is still relatively new and has only recently gained market traction. Moreover, many established businesses are aggressively competing against us and have offerings that have functionalities similar to those of our platform. We expect competition to increase as other established and emerging companies enter this market, as customer requirements evolve, and as new offerings and technologies are introduced. If we are unable to anticipate or effectively react to these competitive challenges, our competitive position would weaken, and our business, financial condition, and results of operations would be adversely affected.
Our competitors and potential competitors include providers of tools such as analytics, enterprise and open source search, SIEM, SOAR, observability, monitoring, and other software offerings that customers may perceive as substitutes for our platform. Our primary competitors include Splunk and Elastic. Other competitors include Datadog and New Relic, cloud infrastructure providers such as AWS, Azure, and GCP, and various private companies.
Many of our existing competitors have, and some of our potential competitors could have, substantial competitive advantages, such as:
greater name recognition, longer operating histories, and larger customer bases;
larger sales and marketing budgets and resources;
broader distribution and established relationships with channel partners and customers;
greater customer support resources;
greater resources to make acquisitions and enter into strategic partnerships;
lower labor and research and development costs;
larger and more mature intellectual property rights portfolios; and
substantially greater financial, technical, and other resources.
Conditions in our market could change rapidly and significantly as a result of technological advancements, the emergence of new entrants into the market, partnering or acquisitions by our competitors, or continuing market consolidation. New start-up companies that innovate and competitors that are making significant investments in research and development may invent similar or superior offerings and technologies that compete with our offerings. Potential customers may also believe that substitute technologies which have similar functionality or features as our platform are sufficient, or they may believe that point solutions that address narrower segments overall are nonetheless adequate for their needs. Some of our current or potential competitors have made or could make acquisitions of businesses or establish cooperative relationships that may allow them to offer more directly competitive and comprehensive offerings than were previously offered and adapt more quickly to new technologies and customer needs.
Additionally, competition continues to increase in the markets in which we operate, and we expect competition to further increase in the future, including from new and emerging companies, which could lead to increased pricing pressures. Our competitors vary in size, and some may have substantially broader and more diverse offerings, which may allow them to leverage their relationships based on other offerings or incorporate functionality into existing offerings to gain business in a manner that discourages users from purchasing access to our platform, including through selling at zero or negative margins, offering concessions, bundling offerings, or maintaining closed technology platforms. In addition, certain customer segments and industries have been more severely impacted by the ongoing effects of the COVID-19 pandemic, such as small and mid-market businesses and certain industries including manufacturing, transportation, travel, and retail, which may lead to increased pricing pressure, increased customer churn, or a reduced ability or willingness to replace a competitor’s offering with our platform. Any decrease in the subscriptions prices for our platform, without a corresponding decrease in costs or increase in volume, would adversely impact our gross profit. Gross profit could also be adversely affected by a shift towards lower-tiered subscription packages. If we are unable to maintain our pricing or market share due to competitive pressures or other factors, our business, financial condition, and results of operations would be adversely affected.
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The markets for our offerings are evolving, and our future success depends on the growth of these markets and our ability to adapt, keep pace, and respond effectively to evolving markets.
The markets for our offerings are in a relatively early stage of development, and it is uncertain whether these markets will grow, and even if they do grow, how rapidly they will grow, how much they will grow, or whether our platform will be widely adopted. As such, any predictions or forecasts about our future growth, revenue, and expenses may not be as accurate as they would be if we had a longer operating history or operated in more predictable markets. Any expansion in our markets depends on a number of factors, including the cost, performance, and perceived value associated with our platform and the offerings of our competitors.
Our success will depend, in part, on market acceptance and the widespread adoption of our cloud-native platform as an alternative to on-premise offerings, and selection of our platform over competing cloud offerings that may have similar functionality. Cloud technologies are still evolving and we cannot predict marketplace acceptance of our platform or the development of offerings based on entirely new technologies. Many organizations have invested substantial resources into on-premise systems and may be reluctant or unwilling to migrate to our cloud-native platform. Our market is subject to rapid technological change, evolving industry standards, and changing regulations, as well as changing customer needs, requirements, and preferences. Demand for our offering is affected by a number of factors beyond our control, including the timing of development and release of new offerings by our competitors, technological change, and growth or contraction in our market generally.
We expect the proliferation of data to lead to an increase in the data analysis demands of our customers, and our platform may not be able to meet those demands or may not be chosen by users for those needs. We have in the past experienced delays in launching additional platform features or enhanced functionality because of the swiftly changing technological landscape and evolving customer demands. Particularly as a result of the broadly applicable nature of our platform, innovation across the IT infrastructure, architecture, stack components, or IT environment can all impact the adoption rates for our platform. Our success will depend, in part, on our ability to enhance our platform, including timely developing and introducing new platform features that keep pace with technological and competitive developments, expand the use cases for our platform, and respond to changing customer needs, requirements, and preferences. It is difficult to predict customer demand for our platform or for cloud security and observability offerings generally, the size and growth rate of this market, the success of competitive offerings, or shifts in customer preferences. If the market for cloud security and observability does not grow, or if we are unable to adapt, keep pace, and respond effectively to the evolution of these markets, our business, financial condition, and results of operations would be adversely affected.
We may fail to cost-effectively acquire new customers or obtain renewals, upgrades, or expansions from our existing customers, which would adversely affect our business, financial condition, and results of operations.
Our continued growth depends, in part, on our ability to cost-effectively acquire new customers. Numerous factors, however, may impede our ability to add new customers, including our inability to convert new organizations into paying customers, our inability to negotiate terms favorable to us, our failure to attract, effectively train, retain, and motivate sales and marketing personnel, our failure to develop or expand relationships with channel or technology partners, our inability to convert initial adoption into ongoing utilization of our platform, and our failure to successfully deliver our platform and provide quality customer support once delivered.
Our success also depends, in part, on our customers renewing their subscriptions when existing contract terms expire, and our ability to expand our relationships with our existing customers. Our customers have no obligation to renew or upgrade their subscriptions, and in the normal course of business, some customers have elected not to renew. In addition, our customers may decide not to renew their subscriptions with a similar contract period or at the same prices or terms, or may decide to downgrade their subscriptions. For example, the impact of the COVID-19 pandemic on the current economic environment has caused, and may in the future cause, such customers to request concessions including extended payments terms or better pricing. We believe that the COVID-19 pandemic has also caused delays in renewal decisions for some of our existing customers, has reduced effectiveness of our sales and marketing efforts, has lengthened our sales cycle with some of our potential customers, and has reduced the duration of subscriptions. In addition, the COVID-19 pandemic could result in increased customer churn, or reduced contract value with prospective or existing customers. Our customer retention or our customers’ use of our platform may decline or fluctuate as a result of a number of factors, including our customers’ satisfaction with our platform and our customer support, our packaging and licensing models, the prices, features, or perceived value of competing offerings, changes to our offerings, or general economic conditions. In addition, some customers may not renew in the event such customer is acquired by another entity. We will need to continue to maintain or improve our dollar-based net retention rate to support our growth, and our ability to expand our relationships with customers may require more sophisticated and costly sales efforts. If our customers’ renewals or expansions fall below expectations, and as a result our dollar-based net retention rate decreases, our business, financial condition, and results of operations would be adversely affected.
In addition, our ability to expand our relationship with our customers depends in large part on our ability to enhance and improve our platform, introduce compelling new features, and address additional use cases. The success of any new or enhanced platform features depends on several factors, including market demand for the enhanced features, timely completion and delivery,
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adequate quality testing, integration of our platform with existing technologies and applications, and competitive pricing. If we are unable to successfully develop new platform features, enhance our existing platform features to meet customer requirements, or otherwise gain market acceptance, our business, financial condition, and results of operations would be adversely affected. If our customers do not renew, upgrade, or expand their subscriptions, renew their subscriptions on less favorable terms, or fail to increase adoption of our platform, including tiered or premium features, our business, financial condition, and results of operations would be adversely affected.
Changes to our packaging and licensing models could adversely affect our ability to attract or retain customers.
We offer flexible, multi-tiered packaging and licensing models for our platform, including subscriptions and premium add-ons. We are continuing to iterate on our packaging and licensing models as we evaluate customer preferences, needs, and use of our platform, and expect that our packaging and licensing models will continue to evolve. Many factors could significantly affect our pricing strategies, including operating costs, our competitors’ pricing and marketing strategies, customer use patterns, and general economic conditions. We may face downward pressure from our customers regarding our pricing and competitors with different pricing models may attract customers that are uncomfortable with our multi-tiered packaging and licensing models, which would cause us to lose business or modify our packaging and licensing models, both of which could adversely affect our business, financial condition, and results of operations. Changes to our packaging and licensing models may also affect our revenue recognition and other accounting policies, which may adversely affect our results of operations in any given fiscal period.
Certain of our competitors or potential competitors offer, or may in the future offer, lower-priced point solutions or a broader range of platform features. Similarly, certain competitors may use marketing strategies that enable them to attract or retain new customers at a lower cost than us. Moreover, our customers may demand substantial price discounts as part of the negotiation of subscription contracts. There can be no assurance that we will not be forced to reduce the pricing for our platform or to increase our sales and marketing and other expenses to attract and retain customers in response to competitive pressures. We have launched, and may in the future launch, new pricing strategies and initiatives, or modify existing packaging and licensing models, any of which may not ultimately be successful in attracting and retaining customers. In addition, if the features on our platform change, then we may need to revise our packaging and licensing methodologies. Any such changes to our packaging and licensing models or our ability to efficiently price our platform could adversely affect our business, financial condition, and results of operations.
Our results of operations vary and are unpredictable from period to period, which could cause the market price of our common stock to decline.
Our results of operations may fluctuate from period to period as a result of a number of factors, many of which are outside of our control and may be difficult to predict. Some of the factors that may cause our results of operations to fluctuate from period to period include:
market acceptance and the level of demand for our platform;
the quality and level of our execution of our business strategy and operating plan;
the effectiveness of our sales and marketing programs;
the length of our sales cycle, including the timing of renewals;
our ability to attract new customers and convert our pipeline into paying customers, particularly large enterprises;
our ability to retain customers and expand their adoption of our platform, particularly our largest customers;
our ability to successfully expand internationally and penetrate key markets;
technological changes and the timing and success of new or enhanced platform features by us or our competitors or any other change in the competitive landscape of our market;
changes in deferred revenue and remaining performance obligations due to seasonality, the timing of renewals, average contract term, or the timing of software revenue recognition, all of which may impact implied growth rates;
changes to our packaging and licensing models, which may impact the timing and amount of revenue recognized;
increases in and the timing of operating expenses that we may incur to grow our operations and to remain competitive;
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pricing pressure as a result of competition or otherwise;
seasonal buying patterns;
delays in our sales cycle, decreases in sales to new customers, and reductions in upselling and cross-selling to existing customers due to the impact on global business and IT spending as a result of the COVID-19 pandemic;
the implementation of cost-saving activities as a result of the COVID-19 pandemic, including the effect of a hiring pause or headcount reductions;
the impact and costs, including those with respect to integration, related to the acquisition of businesses, talent, technologies, or intellectual property rights;
changes in the legislative or regulatory environment;
adverse litigation judgments, settlements, or other litigation-related costs; and
general economic conditions in either domestic or international markets, including as a result of geopolitical uncertainty and instability such as the recent conflict in Ukraine.
Any one or more of the factors above may result in significant fluctuations in our results of operations. We also intend to continue to invest significantly to grow our business in the near future rather than optimizing for profitability or cash flows. In addition, we generally experience seasonality in terms of when we enter into agreements with customers, and our quarterly results of operations generally fluctuate from quarter to quarter depending on customer buying habits. This seasonality is reflected to a much lesser extent, and sometimes is not immediately apparent, in revenue, due to the fact that we recognize subscription revenue ratably over the term of the subscription, which is generally one to two years, but can be three years or longer. We expect that seasonality will continue to affect our results of operations in the future and may reduce our ability to predict cash flow and optimize the timing of our operating expenses.
The variability of our results of operations or other operating estimates could result in our failure to meet our expectations or those of securities analysts or investors. If we fail to meet or exceed such expectations for these or any other reasons, the market price of our common stock could decline, and we could face costly lawsuits, including securities class action suits.
The global COVID-19 pandemic has harmed and could continue to harm our business and results of operations.
The COVID-19 pandemic and efforts to control its spread have significantly curtailed the movement of people, goods, and services worldwide, including in the geographic areas in which we conduct our business operations and from which we generate our revenue. It has also caused extreme societal, economic, and financial market volatility, resulting in business shutdowns and potentially leading to a global economic downturn. The magnitude and duration of the resulting decline in business activity cannot currently be estimated with any degree of certainty and has had several effects on our business and results of operations, including, among other things:
negatively impacting global IT spending, which has adversely affected demand and may continue to adversely affect demand for our platform, caused potential customers to delay or forgo purchases of subscriptions to our platform, lengthening our sales cycle, and caused some existing customers to fail to renew subscriptions, reduce their usage, or fail to expand their usage of our platform within their organizations; and
restricting our sales operations and marketing efforts, including limiting the ability of our sales force to travel to existing customers and potential customers, and reducing the effectiveness of such efforts in some cases.
The COVID-19 pandemic may cause us to continue to experience the foregoing challenges in our business in the future and could have other effects on our business, including increasing customer churn, delaying collections or resulting in an inability to collect accounts receivable as a result of extended payment terms, concessions, or customer inability to pay, causing some of our customers to go out of business, and disrupting our ability to develop new offerings and enhance existing offerings, market and sell our platform, and conduct business activities generally.
In light of the uncertain and rapidly evolving situation relating to the spread of COVID-19, we have taken precautionary measures intended to reduce the risk of the virus spreading to our employees, our customers, and the communities in which we operate, and we may take further actions as required by government entities or that we determine are in the best interests of our employees, customers, partners, and suppliers. In particular, governmental authorities have in the past instituted shelter-in-place
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policies or other restrictions in many jurisdictions in which we operate, including in the San Francisco Bay Area where our headquarters are located. Even once shelter-in-place policies or other governmental restrictions have been lifted, we have taken a measured and careful approach to have employees returning to offices and travel for business. These precautionary measures and policies could negatively impact employee recruiting, productivity, training and development, and collaboration, or otherwise disrupt our business operations. The extent and duration of working remotely may also affect our ability to attract and retain employees, manage employee expectations regarding returning to offices, and expose us to increased risks of security breaches or incidents. We may need to enhance the security of our platform, our data, and our internal IT infrastructure, which may require additional resources and may not be successful. Furthermore, in the first half of fiscal 2021, we took a number of proactive actions to manage our operating expenses in light of the uncertainty caused by the COVID-19 pandemic, including effecting a hiring pause, implementing a reduction in executive salaries, and implementing headcount reductions across our company, and we may be required to take similar actions in the future.
In addition, COVID-19 has disrupted and may continue to disrupt the operations of our customers and channel partners. Other disruptions or potential disruptions include restrictions on our personnel and the personnel of our partners to travel and access customers for training, delays in product development efforts, and additional government requirements or other incremental mitigation efforts that may further impact our business and results of operations. The extent to which the COVID-19 pandemic continues to impact our business and results of operations will also depend on future developments that are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the disease, the duration and spread of the outbreak, the emergence of variants of the virus, the scope of travel restrictions imposed in geographic areas in which we operate, mandatory or voluntary business closures, the impact on businesses and financial and capital markets, and the extent and effectiveness of actions taken throughout the world to contain the virus or treat its impact. An extended period of global supply chain and economic disruption as a result of the COVID-19 pandemic could have a material negative impact on our business, results of operations, and financial condition, though the full extent and duration is uncertain. Since the fourth quarter of fiscal 2022, the Omicron variant of COVID-19 became the dominant strain in numerous countries around the world, including the United States, and it is more contagious than other previously identified COVID-19 strains. To the extent the COVID-19 pandemic continues to adversely affect our business and financial results, it is likely to also have the effect of heightening many of the other risks described in this “Risk Factors” section.
Our sales cycle can be long and unpredictable, and our sales efforts require considerable time and expense.
Our quarterly results of operations fluctuate, in part, because of the resource intensive nature of our sales efforts and the length and variability of our sales cycle. The length of our sales cycle, from initial contact with our sales team to a contractual commitment from a customer, can vary substantially from customer to customer based on customer size, deal complexity, as well as whether a sale is made directly by us or through a channel partner. We recently expanded our packaging and licensing model. Our limited experience marketing and selling under this packaging and licensing model may affect the length of our sales cycle and our ability to predict the length of our sales cycle or the anticipated size of potential subscriptions. Our sales cycle can vary considerably, and may be lengthened and made more uncertain by regional or global events, such as the COVID-19 pandemic. Such events have resulted in and may continue to cause a general reduction in IT spending by our customers, which will further affect our ability to estimate not only the length of the sales cycle, but also the anticipated size of potential subscriptions. Further, our sales cycle has lengthened as we continue to focus our sales efforts on large enterprises. In addition, our results of operations depend, in part, on subscription renewals from customers and increasing sales to our existing customers, which may also be reduced as a result of regional or global events. If a customer does not renew on time or as expected, it can negatively affect our revenue for a given period. It is difficult to predict exactly whether or when we will make a sale to a potential customer or if we can increase sales to our existing customers. As a result, initial sales or renewals have, in some cases, occurred in quarters subsequent to what we anticipated, or have not occurred at all. The loss or delay of one or more transactions in a quarter could impact our results of operations for that quarter and any future quarters for which revenue from that transaction is delayed.
The loss of, or a significant reduction in use of our platform by, our largest customers would result in lower revenue and harm our results of operations.
Our future success depends, in part, on establishing and maintaining successful relationships with a diverse set of customers. Our largest customers come from a variety of industries, including industries that are subject to significant fluctuations in their business, which may result in fluctuations in their use of our platform and the revenue we generate from them. Certain larger customers can also have greater variability in the revenue we generate from them because of the nature of their specific contractual arrangements or use cases with us, which could impact our results of operations, as well as ARR, dollar-based net retention rate, and other business metrics. For example, our current largest revenue customer is in the digital entertainment industry, which is characterized by significant revenue volatility and intense competition, and its business is affected by the timing of its feature releases, consumer preferences and actions by and disputes with other parties in its ecosystem. As a result, we have in the past and may in the future experience revenue variability and unpredictability from this customer from period to period as its business fluctuates. Further, certain customer industries have been more severely impacted by the ongoing effects of the COVID-19 pandemic, such as manufacturing, transportation, travel, and retail, leading to increased fluctuations in their business and their adoption of our platform.
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The loss of one or more large customers or a reduction in usage by any such customers would reduce our revenue and negatively impact forecasts of future growth, ARR, dollar-based net retention rate, and other business metrics. The portion of our revenue attributable to individual customers may increase in the future, which would increase our dependency on a limited number of customers for a larger portion of our revenue. If we fail to maintain relationships with existing large customers or develop relationships with new customers that generate significant revenue for us, our business, financial condition, and results of operations would be harmed.
We depend on our sales force, and we may fail to attract, retain, motivate, or train our sales force, which could adversely affect our business, financial condition, and results of operations.
We depend on our sales force to obtain new customers and to drive additional sales to existing customers by selling them new subscriptions and expanding the value of their existing subscriptions. We believe that there is significant competition for sales personnel, including sales representatives, sales managers, and sales engineers, with the skills and technical knowledge that we require. Our ability to achieve revenue growth will depend, in part, on our decision to hire and success in recruiting, training, and retaining sufficient numbers of sales personnel to support our growth. Our hiring, training, and retention efforts have been, and may further be, hindered by the constraints placed on our business as a result of the COVID-19 pandemic, including measures that we take proactively and those that are imposed upon us by government authorities. New hires require significant training and may take significant time before they achieve full productivity, and our remote and online onboarding and training processes may be less effective and take longer. Further, hiring sales personnel in new countries requires additional set up and upfront costs that we may not recover if the sales personnel fail to achieve full productivity. If we are unable to attract, retain, motivate, and train sufficient numbers of effective sales personnel, our sales personnel do not reach significant levels of productivity in a timely manner, or our sales personnel are not successful in bringing potential customers into the pipeline, converting them into new customers, or increasing sales to our existing customer base, our business, financial condition, and results of operations would be adversely affected.
We utilize free trials and other go-to-market strategies, and we may not be able to realize the benefits of these strategies.
We utilize lead generation and other go-to-market strategies, including offering free trials of our platform, to encourage awareness, usage, familiarity with, and adoption of our platform. We spend a substantial amount of time and resources on our sales efforts without any assurance that our efforts will produce a sale. We also rely on our sales and marketing teams to promote and market our platform. These strategies may not be successful in continuing to generate sufficient sales opportunities necessary to increase our revenue. Many users of free trials of our platform never become paying customers. To the extent that users do not become, or we are unable to successfully attract, paying customers, we will not realize the intended benefits of these marketing strategies and our ability to grow our revenue will be adversely affected.
If our website fails to rank prominently in unpaid search results, traffic to our website could decline and our business, financial condition, and results of operations could be adversely affected.
Our success depends, in part, on our ability to attract users through unpaid Internet search results. The number of potential customers that we attract to our website from search engines is due in large part to how and where our website ranks in unpaid search results. These rankings can be affected by a number of factors, many of which are not in our direct control, and they may change frequently. For example, a search engine may change its ranking algorithms, methodologies, or design layouts. As a result, links to our website may not be prominent enough to drive traffic to our website, and we may not know how or otherwise be in a position to influence the results. Any reduction in the number of users directed to our website could negatively impact our ability to attract new customers or require us to increase our customer acquisition expenditures, which could adversely affect our business, financial condition, and results of operations.
We may be unable to build and maintain successful relationships with our channel partners or such channel partners may fail to perform, which could adversely affect our business, financial condition, results of operations, and growth prospects.
We employ a go-to-market business model whereby a portion of our revenue is generated by sales through our channel partners, such as independent software vendors, resellers, managed service providers, managed security service providers, and cloud infrastructure providers, that further expand the reach of our direct sales force into additional geographies, sectors, and industries. In particular, we have entered, and intend to continue to enter, into strategic sales distributor and reseller relationships in certain international markets where we do not have a local presence. We provide certain of our channel partners with specific training and programs to assist them in selling access to our platform, but there can be no assurance that these steps will be effective, and restrictions on travel and other limitations as a result of the COVID-19 pandemic undermine our efforts to provide training and build relationships. In addition, if our channel partners are unsuccessful in marketing and selling access to our platform, it would limit our expansion into certain geographies, sectors, and industries. If we are unable to develop and maintain effective sales incentive programs for our channel partners, we may not be able to incentivize these partners to sell access to our platform to customers.
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Some of these partners may also market, sell, and support offerings that are competitive with ours, may devote more resources to the marketing, sales, and support of such competitive offerings, may have incentives to promote our competitors’ offerings to the detriment of our own, or may cease selling access to our platform altogether. Our channel partners could subject us to lawsuits, potential liability, and reputational harm if, for example, any of our channel partners misrepresents the functionality of our platform to customers or violates laws or our or their corporate policies. Our ability to achieve revenue growth in the future will depend, in part, on our success in maintaining successful relationships with our channel partners, identifying additional channel partners, and training our channel partners to independently sell access to our platform. If our channel partners are unsuccessful in selling access to our platform, or if we are unable to enter into arrangements with or retain a sufficient number of high quality channel partners in each of the regions in which we sell access to our platform and keep them motivated to sell access to our platform, our business, financial condition, results of operations, and growth prospects could be adversely affected.
Our ability to increase sales depends, in part, on the quality of our customer support, and our failure to offer high quality support would harm our reputation and adversely affect our business and results of operations.
Our customers sometimes depend on our technical support services to resolve issues relating to our platform. If we do not succeed in helping our customers quickly resolve issues or provide effective ongoing education related to our platform, our reputation could be harmed and our existing customers may not renew or upgrade their subscriptions. To the extent that we are unsuccessful in hiring, training, and retaining adequate customer support resources, our ability to provide adequate and timely support to our customers, and our customers’ satisfaction with our platform, will be adversely affected. Our failure to provide and maintain high quality customer support would harm our reputation and brand and adversely affect our business, financial condition, and results of operations.
Our international operations and continued international expansion subject us to additional costs and risks, which could adversely affect our business, financial condition, and results of operations.
We have a limited history of marketing, selling, and supporting our platform internationally. We generated 16% of our revenue outside the United States in each of fiscal 2020 and 2021, respectively, and 18% in fiscal 2022. We generated 16% and 21% of our revenue outside the United States for the three months ended April 30, 2021 and April 30, 2022, respectively. Our growth strategy depends, in part, on our continued international expansion. We are continuing to adapt to and develop strategies to address international markets, but there is no guarantee that such efforts will be successful.
Additionally, our international sales and operations are subject to a number of risks, including the following:
greater difficulty in enforcing contracts and managing collections in countries where our recourse may be more limited, as well as longer collection periods;
higher costs of doing business internationally, including costs incurred in establishing and maintaining office space and equipment for our international operations;
differing labor regulations, especially in the European Union, or EU, where labor laws may be more favorable to employees;
challenges inherent to efficiently recruiting and retaining talented and capable employees in foreign countries and maintaining our company culture and employee programs across all of our offices;
fluctuations in exchange rates between the U.S. dollar and foreign currencies in markets where we do business;
management communication and integration problems resulting from language and cultural differences and geographic dispersion;
costs associated with language localization of our platform;
risks associated with trade restrictions and foreign legal requirements, including any importation, certification, and localization of our platform that may be required in foreign countries;
greater risk of unexpected changes in regulatory requirements, tariffs and tax laws, trade laws, export quotas, customs duties, treaties, and other trade restrictions;
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costs of compliance with foreign laws and regulations and the risks and costs of non-compliance with such laws and regulations, including, but not limited to data privacy, data protection, and data security regulations, particularly in the EU;
compliance with anti-bribery laws, including, without limitation, the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the FCPA, the U.S. Travel Act, and the UK Bribery Act 2010, violations of which could lead to significant fines, penalties, and collateral consequences for our company;
risks relating to the implementation of exchange controls, including restrictions promulgated by the OFAC, and other similar trade protection regulations and measures;
heightened risk of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact our financial condition and result in restatements of, or irregularities in, financial statements;
the uncertainty of protection for intellectual property rights in some countries;
exposure to regional or global public health issues, such as the outbreak of the COVID-19 pandemic, and to travel restrictions and other measures undertaken by governments in response to such issues;
challenges caused by the conflict in Ukraine on countries in the region in which we have operations, such as Poland and Macedonia;
general economic and political conditions in these foreign markets, including political and economic instability in some countries;
foreign exchange controls or tax regulations that might prevent us from repatriating cash earned outside the United States; and
double taxation of our international earnings and potentially adverse tax consequences due to changes in the tax laws of the United States or the foreign jurisdictions in which we operate.
These and other factors could harm our ability to generate revenue outside of the United States and, consequently, adversely affect our business, financial condition, and results of operations.
We may fail to effectively manage our growth, which would adversely affect our business, financial condition, and results of operations.
We are a rapidly growing company, and our future growth depends, in part, on our ability to continue to meet the expanding needs of our customers and to attract new customers. Our customer count increased from 2,137 as of January 31, 2020, to 2,164 as of January 31, 2021, and 2,396 as of January 31, 2022, respectively. As existing customers gain more experience with our platform, they may broaden their reliance on our platform, which may require that we expand our operations infrastructure as well as our dependence on third parties to support that infrastructure. To manage this growth effectively, we will need to continue to improve and expand our internal IT systems, technological operations infrastructure, financial infrastructure, and operating and administrative systems and controls, which we may not be able to do efficiently in a timely manner, or at all. To do so, we may seek to deploy offerings from third-party providers, which may not be available on commercially reasonable terms, or at all, and may not perform to our expectations. Any future growth would add complexity to our organization and require effective coordination across our organization, and failure to manage such future growth effectively could result in increased costs. If we do not accurately predict our architecture requirements, our existing customers may experience delays, interruptions, or service outages that may subject us to financial liabilities or customer losses. If we are unable to effectively manage our growth, our business, financial condition, and results of operations would be adversely affected.
We depend on our management team and other highly skilled personnel, and we may fail to attract, retain, motivate, or integrate highly skilled personnel, which could adversely affect our business, financial condition, and results of operations.
We depend on the continued contributions of our management team, key employees, and other highly skilled personnel. Our management team and key employees are at-will employees, which means they may terminate their relationship with us at any time. The loss of the services of any of our key personnel or delays in hiring required personnel, particularly within our research and development and engineering teams, could adversely affect our business, financial condition, and results of operations.
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Our future success also depends, in part, on our ability to continue to attract and retain highly skilled personnel. Competition for these personnel in the San Francisco Bay Area, where our headquarters is located, and in other locations where we maintain offices, is intense, and the industry in which we operate is generally characterized by significant competition for skilled personnel as well as high employee attrition. We may not be successful in attracting, retaining, training, or motivating qualified personnel to fulfill our current or future needs. Furthermore, our ability to attract and retain employees may be affected by the COVID-19 pandemic and its effects on global workforce patterns and employee expectations regarding returning to offices, and may result in a more geographically distributed workforce than we anticipate. Additionally, the former employers of our new employees may attempt to assert that our new employees or we have breached their legal obligations, which may be time-consuming, distracting to management, and may divert our resources. Current and potential personnel also often consider the value of equity awards they receive in connection with their employment, and to the extent the perceived value of our equity awards declines relative to our competitors, our ability to attract and retain highly skilled personnel may be harmed. If we fail to attract and integrate new personnel or retain and motivate our current personnel, our business, financial condition, and results of operations could be adversely affected.
We may be unable to make acquisitions and investments, successfully integrate acquired companies into our business, or our acquisitions and investments may not meet our expectations, any of which could adversely affect our business, financial condition, and results of operations.
We have in the past acquired, and we may in the future acquire or invest in, businesses, offerings, technologies, or talent that we believe could complement or expand our platform, enhance our technical capabilities, or otherwise offer growth opportunities. We may not be able to fully realize the anticipated benefits of such acquisitions or investments. For example, we acquired DFLabs and Sensu in the second quarter of fiscal 2022. We may not successfully integrate DFLabs’ or Sensu’s people or solutions with ours, or achieve market acceptance of our combined solutions. The pursuit of potential acquisitions may divert the attention of management and cause us to incur significant expenses related to identifying, investigating, and pursuing suitable acquisitions, whether or not they are consummated.
There are inherent risks in integrating and managing acquisitions. If we acquire additional businesses, we may not be able to assimilate or integrate the acquired personnel, operations, solutions, and technologies successfully, or effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits or synergies from the acquired business due to a number of factors, including, without limitation:
unanticipated costs or liabilities associated with the acquisition, including the failure to adequately identify or assess significant problems, liabilities or other issues, including issues with the acquired company's technology or intellectual property, product quality, data security, privacy practices, accounting practices, employees, customers or partners, regulatory compliance, or legal or financial contingencies, particularly when the acquired company operates in international jurisdictions;
incurrence of acquisition-related expenses, which would be recognized as a current period expense;
inability to generate sufficient revenue to offset acquisition or investment costs, including addressing issues related to the availability of offerings on multiple platforms and from cross-selling and up-selling our products to the acquired company's installed customer base or the acquired company's products to our installed customer base;
inability to maintain relationships with customers and partners of the acquired business;
challenges with incorporating acquired products, technologies, and rights into our platform and maintaining quality and security standards consistent with our brand;
challenges and costs associated with successfully integrating or incorporating the acquired company's services, employees, customers, partners, business operations and administrative systems with ours, particularly when the acquired company operates in international jurisdictions;
inability to identify security vulnerabilities in acquired technology prior to integration with our technology and platform;
inability to achieve anticipated synergies or unanticipated difficulty with integration into our corporate culture;
failure to accurately predict how the acquired company's pipeline will convert into sales or revenues following the acquisition, as conversion rates post-acquisition may be quite different from the acquired company's historical conversion rates and can be affected by changes in business practices that we implement;
delays in customer purchases due to uncertainty related to any acquisition;
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the need to integrate or implement additional controls, procedures, and policies;
any difficulties in consolidating the acquired company's financial results with ours, in particular as a result of different accounting principles or financial reporting standards, and the adverse consequences to us of any delay in obtaining the necessary financial information for such consolidation, any unanticipated change in financial information previously reported to us, or the impact the acquired company's financial performance has on our financial performance as a result of such consolidation;
challenges caused by distance, language, and cultural differences;
harm to our existing business relationships with business partners and customers as a result of the acquisition;
potential loss of key employees;
use of resources that are needed in other parts of our business and diversion of management and employee resources;
inability to recognize acquired deferred revenue in accordance with our revenue recognition policies;
the disruption of our ongoing business and the diversion of management's attention by transition or integration issues; and
use of substantial portions of our available cash or the incurrence of debt to consummate the acquisition.
Acquisitions also increase the risk of unforeseen legal liability, including for potential violations of applicable law or industry rules and regulations, arising from prior or ongoing acts or omissions by the acquired businesses that are not discovered by due diligence during the acquisition process. We may have to pay cash, incur debt, or issue equity or equity-linked securities to pay for any future acquisitions, each of which could adversely affect our financial condition or the market price of our common stock. The sale of equity or issuance of equity-linked debt to finance any future acquisitions could result in dilution to our stockholders. The incurrence of indebtedness would result in increased fixed obligations and could also include covenants or other restrictions that would impede our ability to manage our operations. Any of the foregoing could adversely affect our business, financial condition, and results of operations.
Our reputation and brand are important to our success, and we may not be able to maintain and enhance our reputation and brand, which would adversely affect our business, financial condition, and results of operations.
We believe that maintaining and enhancing our reputation as a leader in security and reliability for cloud applications is critical to our relationship with our existing customers, users, and channel partners and our ability to attract new customers and channel partners. The successful promotion of our brand will depend on a number of factors, including our marketing efforts, our ability to continue to develop high-quality features for our platform, our ability to successfully differentiate our platform from those of our competitors, our ability to maintain the reputation of our platform for data security, and our ability to obtain, maintain, protect and enforce our intellectual property and proprietary rights. Our brand promotion activities may not be successful or yield increased revenue. In addition, independent industry analysts often provide reports of our platform, as well as the offerings of our competitors, and perception of our platform in the marketplace may be significantly influenced by these reports. If these reports are negative, or less positive as compared to those of our competitors, our reputation and brand may be adversely affected. Additionally, the performance of our channel partners may affect our reputation and brand if customers do not have a positive experience with our platform as implemented by our channel partners or with the implementation generally. At times, competitors may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. Additionally, our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented or declared generic or determined to be infringing on other marks, or if we are otherwise unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected. The promotion of our brand requires us to make substantial expenditures, and we anticipate that the expenditures will increase as our market becomes more competitive, as we expand into new geographies and markets and as more sales are generated through our channel partners. Any increase in revenue from such brand promotion initiatives may not offset the increased expenses we incur. If we do not successfully maintain and enhance our reputation and brand, our business, financial condition, and results of operations would be adversely affected.
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We provide service level commitments under our customer contracts. If we fail to meet these contractual commitments, we could be obligated to provide credits for future service, or face contract termination with refunds of prepaid amounts related to unused subscriptions, which could harm our business, financial condition, and results of operations.
Our customer contracts contain service level commitments, which contain specifications regarding the availability and performance of our platform. Any failure of or disruption to our infrastructure could impact the performance of our platform and the availability of services to customers. If we are unable to meet our stated service level commitments or if we suffer extended periods of poor performance or unavailability of our platform, we may be contractually obligated to provide affected customers with service credits for future subscriptions, and, in certain cases, face contract termination with refunds of prepaid amounts related to unused subscriptions. If we suffer performance issues or downtime that exceeds the service level commitments under our contracts with our customers, our business, financial condition, and results of operations would be adversely affected.
A portion of our revenue is generated by sales to government entities, which subject us to a number of challenges and risks.
We have historically derived a small portion of our revenue from contracts with federal, state, local, and foreign governments, and we believe that the future success and growth of our business will depend in part on our ability to continue to procure government contracts. Sales to public sector customers include additional challenges that affect our ability to enter into agreements, including:
changes in fiscal or contracting policies;
decreases in available government funding;
changes in government programs or applicable requirements;
changes in government sanctions programs and related policies;
the adoption of new laws or regulations or changes to existing laws or regulations;
noncompliance with contract provisions or government procurement or other applicable regulations;
an extended government shutdown or other potential delays or changes in the government appropriations or other funding authorization processes; and
delays in the payment of our invoices by government payment offices.
Additionally, although we have achieved FedRAMP Moderate Authorization, any change in our FedRAMP certification would impede our ability to enter into contracts with government entities. If we do not successfully manage our FedRAMP certification, our sales to governments and governmental agencies could be delayed or limited, and as a result, our business, financial condition, and results of operations would be adversely affected.
Our business could be adversely affected by economic downturns.
Prolonged economic uncertainties or downturns could adversely affect our business, financial condition, and results of operations. Negative conditions in the general economy in either the United States or abroad, including conditions resulting from financial and credit market fluctuations, changes in economic policy, trade uncertainty, including changes in tariffs, sanctions, international treaties, and other trade restrictions, the occurrence of a natural disaster or global public health crisis, such as the COVID-19 pandemic, or armed conflicts, could continue to cause a decrease in corporate spending on IT offerings in general and negatively affect the growth of our business. We are currently experiencing uncertainty with respect to the macroeconomic environment, and believe that the macroeconomic environment may become more challenging in the future.
These conditions could make it extremely difficult for our customers and us to forecast and plan future business activities accurately and could cause our customers to reevaluate their decision to purchase access to our platform, which could delay and lengthen our sales cycles or result in cancellations of planned purchases. For example, the impact of the COVID-19 pandemic on the current economic environment has caused and may in the future cause our customers to reduce their spending on, or duration of, their contracts with us, or request concessions including extended payment terms or better pricing. Further, during challenging economic times our customers may face issues in gaining timely access to sufficient credit, which could result in an impairment of their ability to make timely payments to us, if at all. If that were to occur, we may be required to increase our allowance for doubtful accounts, which would adversely affect our results of operations.
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A substantial downturn in any of the industries in which our customers operate may cause firms to react to worsening conditions by reducing their capital expenditures in general or by specifically reducing their spending on IT offerings. Customers in these industries may delay or cancel projects or seek to lower their costs by renegotiating vendor contracts. To the extent purchases of access to our platform are perceived by customers and potential customers to be discretionary, our revenue may be disproportionately affected by delays or reductions in general information technology spending.
We cannot predict the timing, strength, or duration of any economic slowdown, instability, or recovery, generally or within any particular industry or geography. Any economic downturns of the general economy or industries in which we operate would adversely affect our business, financial condition, and results of operations. For example, the full impact of the COVID-19 pandemic is unknown at this time, but could result in adverse changes in our results of operations for an unknown period of time as the virus and its related social and economic impacts spread.
Our business and results of operations are subject to the effects of a rising rate of inflation.
The United States has recently experienced higher levels of inflation than historical norms. According to the U.S. Department of Labor, the annual inflation rate for the United States was approximately 7.0% for 2021. If the inflation rate stays at this level or continues to increase, such as increases in the costs of labor, it will likely affect our expenses, especially employee compensation expenses. Additionally, the United States is experiencing an acute workforce shortage, which in turn, has created a hyper-competitive wage environment that may increase our operating costs. Further, inflation is likely to result in rising interest rates and have other adverse effects on the macroeconomic environment, which could adversely impact our customers and their ability to purchase our products and services. As such, inflation could adversely affect our business and results of operations.
Our business could be adversely affected by unexpected events such as pandemics, natural disasters, political crises, or social instability.
A significant natural disaster, such as an earthquake, fire, hurricane, tornado, flood, or significant power outage, could disrupt our operations, mobile networks, the Internet, or the operations of our third-party technology providers. In particular, our corporate headquarters are located in the San Francisco Bay Area, a region known for seismic activity. In addition, any unforeseen public health crises, such as the ongoing COVID-19 pandemic, political crises, such as terrorist attacks, war, and other political instability, or other catastrophic events, whether in the United States or abroad, can continue to adversely affect our operations or the economy as a whole. For example, the impact of the ongoing conflict in Ukraine on global economic conditions and our business are unknown at this time. The impact of any natural disaster, act of terrorism, or other disruption to us or our third-party providers’ abilities could result in decreased demand for our platform or a delay in the provision of our platform, which would adversely affect our business, financial condition, and results of operations. All of the aforementioned risks would be further increased if our disaster recovery plans prove to be inadequate.
We use certain third-party services to manage and operate our business, and any failure or interruption in the services provided by these third parties could adversely affect our business, financial condition, and results of operations.
We use a number of third-party services to manage and operate our business, including pricing software to assist our sales and marketing teams and our finance and accounting teams. These services are critical to our ability to increase our sales to customers, operate, and maintain our platform, and accurately maintain books and records. Any disruption in these services could impair our ability to execute on our operating plan and disrupt our business. Further, if these services cease to be available to us on commercially reasonable terms, or at all, we may be required to use additional or alternative services, or to develop additional capabilities within our business, any of which could require significant resources and adversely affect our business, financial condition, and results of operations.
We believe our long-term value as a company will be greater if we focus on growth, which may negatively impact our results of operations in the near term.
We believe our long-term value as a company will be greater if we focus on growth over short-term results. As a result, our results of operations may be negatively impacted in the near term compared to if our strategy were to maximize short-term profitability. Significant expenditures on sales and marketing efforts, developing and enhancing our platform, and expanding our research and development efforts may not ultimately grow our business or lead to expected long-term results. If our strategy does not lead to expected growth or if we are ultimately unable to achieve results of operations at the levels expected by securities analysts and investors, the market price of our common stock could decline.
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Risks Related to Privacy, Cybersecurity, Intellectual Property, and Technical Infrastructure
Any actual or perceived security or privacy breach could interrupt our operations, harm our reputation and brand, result in financial exposure, and lead to loss of user confidence in us or decreased use of our platform, any of which could adversely affect our business, financial condition, and results of operations.