ASANA: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)

0
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed consolidated
financial statements and related notes appearing elsewhere in this Quarterly
Report on Form 10-Q and our Annual Report on Form 10-K filed with the SEC on
March 30, 2021. As discussed in the section titled "Special Note Regarding
Forward-Looking Statements," the following discussion and analysis contains
forward-looking statements that involve risks and uncertainties, as well as
assumptions that, if they never materialize or prove incorrect, could cause our
results to differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those identified below, and those
discussed in the section titled "Risk Factors" included under Part II, Item 1A
below.
Overview
Asana is a work management platform that helps teams orchestrate work, from
daily tasks to cross-functional strategic initiatives. Over 107,000 paying
customers use Asana to manage everything from product launches to marketing
campaigns to organization-wide goal setting. Our platform adds structure to
unstructured work, creating clarity, transparency, and accountability to
everyone within an organization-individuals, team leads, and executives-so they
understand exactly who is doing what, by when.
Asana is flexible and applicable to virtually any use case across departments
and organizations of all sizes. We designed our platform to be easy to use and
intuitive to all users, regardless of role or technical proficiency. Users can
start a project within minutes and onboard team members seamlessly without
outside support. We allow users to work the way they want with the interface
that is right for them, using lists, calendars, boards, timelines, and workload.
Key Business Metrics
We believe that our growth and financial performance are dependent upon many
factors, including the key factors described below.
Paying Customers
We are focused on continuing to grow the number of customers that use our
platform. Our operating results and growth opportunity depend, in part, on our
ability to attract new customers. We believe we have significant greenfield
opportunities among addressable customers worldwide and we will continue to
invest in our research and development and our sales and marketing organizations
to address this opportunity.
As of July 31, 2021, we had over 107,000 paying customers, compared to over
82,000 as of July 31, 2020. We define a customer as a distinct account, which
could include a team, company, educational or government institution,
organization, or distinct business unit of a company, that is on a paid
subscription plan, a free version, or a free trial of one of our paid
subscription plans. A single organization may have multiple customers. We define
a paying customer as a customer on a paid subscription plan.
Customers Spending Over $5,000 and $50,000
We focus on growing the number of customers spending over $5,000 and $50,000 on
an annualized basis as a measure of our ability to scale within organizations.
We define customers spending over $5,000 and $50,000 as those organizations on a
paid subscription plan that had $5,000 or more or $50,000 or more in annualized
GAAP revenues in a given quarter, respectively, inclusive of discounts. As
customers realize the productivity benefits we provide, our platform often
becomes critical to managing their work and achieving their objectives, which
drives further adoption and expansion opportunities, and results in higher
annualized contract values. We believe that our ability to increase the number
of these customers is an important indicator of the components of our business,
including: the continued acquisition of new customers, retaining and expanding
our user base within existing customers, our continued investment in product
development and functionality required by larger organizations, and the growth
of our direct sales force.

From July 31, 2021, we had 12,806 customers who spent more than $ 5,000 who contributed approximately 66% and 65% of income for the three and six months then ended, respectively. From July 31, 2020, we had 7,933 customers

                                       24
--------------------------------------------------------------------------------

spending over $5,000 who contributed approximately 58% and 57% of revenue for
the three and six months then ended, respectively.
As of July 31, 2021 and 2020, we had 598 and 283 customers spending over
$50,000, respectively.
Dollar-based Net Retention Rate
We expect to derive a significant portion of our revenue growth from expansion
within our customer base, where we have an opportunity to expand adoption of
Asana across teams, departments, and organizations. We believe that our
dollar-based net retention rate demonstrates our opportunity to further expand
within our customer base, particularly those that generate higher levels of
annual revenues.
Our reported dollar-based net retention rate equals the simple arithmetic
average of our quarterly dollar-based net retention rate for the four quarters
ending with the most recent fiscal quarter. We calculate our dollar-based net
retention rate by comparing our revenues from the same set of customers in a
given quarter, relative to the comparable prior-year period. To calculate our
dollar-based net retention rate for a given quarter, we start with the revenues
in that quarter from customers that generated revenues in the same quarter of
the prior year. We then divide that amount by the revenues attributable to that
same group of customers in the prior-year quarter. Current period revenues
include any upsells and are net of contraction or attrition over the trailing 12
months, but exclude revenues from new customers in the current period. We expect
our dollar-based net retention rate to fluctuate in future periods due to a
number of factors, including the expected growth of our revenue base, the level
of penetration within our customer base, and our ability to retain our
customers.
As of July 31, 2021 and 2020, our dollar-based net retention rate was over 118%
and over 115%, respectively. As of July 31, 2021 and 2020, our dollar-based net
retention rate for customers spending over $5,000 with us on an annualized basis
was over 125%. Our dollar-based net retention rate for customers spending over
$50,000 with us on an annualized basis for the same periods was over 145% and
over 140%, respectively.
Impact of COVID-19
As a result of the COVID-19 pandemic, we temporarily closed our headquarters and
other physical offices, required our employees and contractors to work remotely,
and implemented travel restrictions, all of which represent a significant
disruption in how we operate our business. The operations of our partners and
customers have likewise been disrupted, with a disproportionate impact on
smaller businesses that were particularly affected by the pandemic. This impact
was most evident in our overall dollar-based net retention rate, which declined
early in the pandemic, but increased for the three months ended July 31, 2021,
whereas the dollar-based net retention rates for customers who spent over $5,000
and over $50,000 has remained relatively consistent throughout the pandemic.
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
extent and effectiveness of containment and mitigation actions, the emergence of
variant strains of the virus, and the availability and widespread use of
effective vaccines, it continues to have adverse effects on the global economy
and the ultimate societal and economic impact of the COVID-19 pandemic remains
unknown. In particular, the conditions caused by this pandemic could affect the
rate of global IT spending and could adversely affect demand for our platform,
lengthen our sales cycles, reduce the value or duration of subscriptions,
negatively impact collections of accounts receivable, reduce expected spending
from new customers, cause some of our paying customers to go out of business,
limit the ability of our direct sales force to travel to customers and potential
customers, and affect contraction or attrition rates of our customers, all of
which could adversely affect our business, results of operations, and financial
condition during fiscal 2022 and potentially future periods.
Non-GAAP Financial Measures
The following tables present certain non-GAAP financial measures for each period
presented below. In addition to our results determined in accordance with GAAP,
we believe these non-GAAP financial measures are useful in
                                       25
--------------------------------------------------------------------------------

assess our operational performance. See below for a description of non-GAAP financial measures and their limitations as an analytical tool.

                                               Three Months Ended July 31,                 Six Months Ended July 31,
                                                 2021                  2020                 2021                  2020

                                                                           (in thousands)
Non-GAAP loss from operations              $      (38,582)         $ (27,157)         $      (71,885)         $ (51,074)
Non-GAAP net loss                          $      (39,764)         $ (26,282)         $      (73,567)         $ (49,968)
Free cash flow                             $       (9,267)         $ (21,909)         $      (16,931)         $ (38,972)


Non-GAAP Loss From Operations and Non-GAAP Net Loss
We define non-GAAP loss from operations as loss from operations plus stock-based
compensation expense and the related employer payroll tax associated with RSUs
as well as non-recurring costs, such as direct listing expenses. The amount of
employer payroll tax-related items on employee stock transactions is dependent
on our stock price and other factors that are beyond our control and that do not
correlate to the operation of the business. When evaluating the performance of
our business and making operating plans, we do not consider these items (for
example, when considering the impact of equity award grants, we place a greater
emphasis on overall stockholder dilution rather than the accounting charges
associated with such grants). We believe it is useful to exclude these expenses
in order to better understand the long-term performance of our core business and
to facilitate comparison of our results to those of peer companies and over
multiple periods.
We define non-GAAP net loss as net loss plus stock-based compensation expense
and the related employer payroll tax associated with RSUs, amortization of
discount and non-cash contractual interest expense related to our senior
mandatory convertible promissory notes, and non-recurring costs such as direct
listing expenses.
We use non-GAAP loss from operations and non-GAAP net loss in conjunction with
traditional GAAP measures to evaluate our financial performance. We believe that
non-GAAP loss from operations and non-GAAP net loss provide our management and
investors consistency and comparability with our past financial performance and
facilitates period-to-period comparisons of operations.
Free Cash Flow
We define free cash flow as net cash used in operating activities less cash used
for purchases of property and equipment and capitalized internal-use software
costs, plus non-recurring expenditures such as capital expenditures from the
purchases of property and equipment associated with the build-out of our
corporate headquarters in San Francisco, and direct listing expenses. We believe
that free cash flow is a useful indicator of liquidity that provides information
to management and investors, even if negative, about the amount of cash used in
our operations other than that used for investments in property and equipment
and capitalized internal-use software costs, adjusted for non-recurring
expenditures.
Limitations and Reconciliations of Non-GAAP Financial Measures
Non-GAAP financial measures have limitations as analytical tools and should not
be considered in isolation or as substitutes for financial information presented
under GAAP. There are a number of limitations related to the use of non-GAAP
financial measures versus comparable financial measures determined under GAAP.
For example, other companies in our industry may calculate these non-GAAP
financial measures differently or may use other measures to evaluate their
performance. In addition, free cash flow does not reflect our future contractual
commitments and the total increase or decrease of our cash balance for a given
period. All of these limitations could reduce the usefulness of these non-GAAP
financial measures as analytical tools. Investors are encouraged to review the
related GAAP financial measures and the reconciliations of these non-GAAP
financial measures to their most directly comparable GAAP financial measures and
to not rely on any single financial measure to evaluate our business.
                                       26
--------------------------------------------------------------------------------

The following tables reconcile the most directly comparable GAAP financial measure to each of these non-GAAP financial measures. Non-GAAP operating loss

                                               Three Months Ended July 31,                    Six Months Ended July 31,
                                                 2021                  2020                    2021                    2020

                                                                              (in thousands)
Loss from operations                       $      (60,051)         $ (33,584)         $     (110,033)              $ (62,669)

Add:

Stock-based compensation and related
employer payroll tax associated with RSUs          21,469              5,376                  38,148                   9,358
Direct listing expenses                                 -              1,051                       -                   2,237

Non-GAAP loss from operations              $      (38,582)         $ (27,157)         $      (71,885)              $ (51,074)



Non-GAAP Net Loss
                                              Three Months Ended July 31,                    Six Months Ended July 31,
                                                2021                  2020                    2021                    2020

                                                                             (in thousands)
Net loss                                  $      (68,355)         $ (41,066)         $     (129,013)              $ (76,911)
Add:
Stock-based compensation and related
employer payroll tax associated with RSUs         21,469              5,376                  38,148                   9,358
Amortization of discount on convertible
notes                                              4,382              5,207                  10,628                   9,609
Non-cash interest expense                          2,740              3,150                   6,670                   5,739
Direct listing expenses                                -              1,051                       -                   2,237
Non-GAAP net loss                         $      (39,764)         $ (26,282)         $      (73,567)              $ (49,968)



Free Cash Flow
                                               Three Months Ended July 31,                 Six Months Ended July 31,
                                                 2021                  2020                 2021                  2020

                                                                           (in thousands)
Net cash provided by (used in) investing
activities                                 $        9,538          $  

(1,134) $ 3,087 $ 25,723
Net cash flow generated by financing activities $ 5,471 $ 153,577 $ 23,392 $ 154,480

Net cash used in operating activities $ (8,516) $ (22,116) $ (15,960) $ (40,270)
Less: Purchases of goods and equipment

               (12,588)           (10,320)                (29,557)           (12,401)
Capitalized internal-use software                    (113)              (357)                   (296)              (818)

Add:

Purchases of property and equipment for
build-out of corporate headquarters                11,950              9,650                  28,612             11,308
Direct listing expenses paid                            -              1,234                     270              3,209
Free cash flow                             $       (9,267)         $ (21,909)         $      (16,931)         $ (38,972)


                                       27
--------------------------------------------------------------------------------

Components of Results of Operations
Revenues
We generate subscription revenues from paying customers accessing our
cloud-based platform. Subscription revenues are driven primarily by the number
of paying customers, the number of paying users within the customer base, and
the level of subscription plan. We recognize revenues ratably over the related
contractual term beginning on the date that the platform is made available to a
customer.
Due to the ease of implementation of our platform, revenues from professional
services have been immaterial to date.
Cost of Revenues
Cost of revenues consists primarily of the cost of providing our platform to
free users and paying customers and is comprised of third-party hosting fees,
third-party and personnel-related expenses for our operations and support
personnel, credit card processing fees, and amortization of our capitalized
internal-use software costs.
As we acquire new customers and existing customers increase their use of our
cloud-based platform, we expect that our cost of revenues will continue to
increase in dollar amount.
Gross Profit and Gross Margin
Gross profit, or revenues less cost of revenues, and gross margin, or gross
profit as a percentage of revenues, has been and will continue to be affected by
various factors, including the timing of our acquisition of new customers,
renewals of and follow-on sales to existing customers, costs associated with
operating our cloud-based platform, and the extent to which we expand our
operations and customer support organizations. We expect our gross profit to
increase in dollar amount and our subscription gross margin to remain relatively
consistent over the long term.
Operating Expenses
Our operating expenses consist of research and development, sales and marketing,
and general and administrative expenses. Personnel-related expenses are the most
significant component of operating expenses and consist of salaries, benefits,
stock-based compensation expense, and, in the case of sales and marketing
expenses, sales commissions. Operating expenses also include an allocation of
overhead costs for facilities and shared IT-related expenses, including
depreciation expense.
Research and Development
Research and development expenses consist primarily of personnel-related
expenses. These expenses also include product design costs, third-party services
and consulting expenses, software subscriptions and expensed computer equipment
used in research and development activities, and allocated overhead costs. A
substantial portion of our research and development efforts are focused on
enhancing our software architecture and adding new features and functionality to
our platform. We anticipate continuing to invest in innovation and technology
development, and as a result, we expect research and development expenses to
continue to increase in dollar amount, but to decrease as a percentage of
revenues over time.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel-related expenses and
expenses for performance marketing and lead generation, brand marketing, and
sponsorship activities. These expenses also include allocated overhead costs and
travel-related expenses. Sales commissions earned by our sales force that are
considered incremental and recoverable costs of obtaining a subscription with a
customer are deferred and amortized on a straight-line basis over the expected
period of benefit of three years.
We continue to make investments in our sales and marketing organization, and we
expect sales and marketing expenses to remain our largest operating expenses in
dollar amount. We expect our sales and marketing expenses to continue to
increase in dollar amount but to decrease as a percentage of revenues over time,
although the percentage may fluctuate from quarter to quarter depending on the
extent and timing of our marketing initiatives.
                                       28
--------------------------------------------------------------------------------

General and Administrative
General and administrative expenses consist primarily of personnel-related
expenses for our finance, human resources, information technology, and legal
organizations. These expenses also include non-personnel costs, such as outside
legal, accounting, and other professional fees, software subscriptions and
expensed computer equipment, certain tax, license, and insurance-related
expenses, and allocated overhead costs.
We have recognized and will continue to recognize certain expenses as part of
our transition to a publicly traded company, consisting of professional fees and
other expenses. In the quarters leading up to the listing of our Class A common
stock on the NYSE, we incurred professional fees and expenses, and in the
quarter of our listing we incurred fees paid to our financial advisors in
addition to other professional fees and expenses related to such listing. We
expect to continue to incur additional expenses as a result of operating as a
public company, including costs to comply with the rules and regulations
applicable to companies listed on a U.S. securities exchange and costs related
to compliance and reporting obligations pursuant to the rules and regulations of
the SEC. In addition, as a public company, we incur additional costs associated
with accounting, compliance, insurance, and investor relations. As a result, we
expect our general and administrative expenses to continue to increase in dollar
amount for the foreseeable future but to generally decrease as a percentage of
our revenues over the longer term, although the percentage may fluctuate from
period to period depending on the timing and amount of our general and
administrative expenses.
Interest Income and Other Income (Expense), Net and Interest Expense
Interest income and other income (expense), net consists of income earned on our
marketable securities and foreign currency transaction gains and losses.
Interest expense consists of contractual interest expense and amortization of
the debt discount on the senior mandatory convertible promissory notes we issued
in January and June 2020 to a trust affiliated with our CEO, and interest
expense from our term loan.
Provision for Income Taxes
Provision for income taxes consists primarily of income taxes in certain foreign
jurisdictions in which we conduct business. To date, we have not recorded any
U.S. federal income tax expense, and our state and foreign income tax expenses
have not been material. We have recorded deferred tax assets for which we
provide a full valuation allowance, which primarily include net operating loss
carryforwards and research and development tax credit carryforwards. We expect
to maintain this full valuation allowance for the foreseeable future as it is
more likely than not the deferred tax assets will not be realized based on our
history of losses.
                                       29
--------------------------------------------------------------------------------

Results of Operations
The following tables set forth our results of operations for the periods
presented and as a percentage of our revenues for those periods. The
period-to-period comparison of financial results is not necessarily indicative
of financial results to be achieved in future periods.
                                                Three Months Ended July 31,                    Six Months Ended July 31,
                                                  2021                  2020                    2021                    2020

                                                                               (in thousands)
Revenues                                    $       89,478          $  52,024          $      166,151               $  99,730
Cost of revenues (1)                                 9,869              7,021                  17,783                  13,227
Gross profit                                        79,609             45,003                 148,368                  86,503
Operating expenses:
Research and development (1)                        48,454             25,959                  88,421                  48,342
Sales and marketing (1)                             63,930             38,822                 120,714                  74,913
General and administrative (1)                      27,276             13,806                  49,266                  25,917
Total operating expenses                           139,660             78,587                 258,401                 149,172
Loss from operations                               (60,051)           (33,584)               (110,033)                (62,669)
Interest income and other income (expense),
net                                                   (328)             1,045                    (320)                  1,399
Interest expense                                    (7,351)            (8,364)                (17,725)                (15,355)

Loss before provision for income taxes             (67,730)           (40,903)               (128,078)                (76,625)
Provision for income taxes                             625                163                     935                     286
Net loss                                    $      (68,355)         $ (41,066)         $     (129,013)              $ (76,911)


__________________

(1) Amounts include stock-based compensation expense as follows:

                                                 Three Months Ended July 31,                 Six Months Ended July 31,
                                                   2021                  2020                 2021                  2020

                                                                             (in thousands)
Cost of revenues                            $           150          $      54          $          270          $     100
Research and development                             11,250              2,656                  20,390              4,737
Sales and marketing                                   5,350              1,522                   9,503              2,621
General and administrative                            3,631              1,144                   6,249              1,900

Total stock-based compensation expense $ 20,381 $ 5,376 $ 36,412 $ 9,358

                                       30
--------------------------------------------------------------------------------

The following table presents the components of our income statement data, for each of the periods presented, as a percentage of revenues.

                                                 Three Months Ended July 31,                  Six Months Ended July 31,
                                                 2021                  2020                  2021                  2020

                                                                          (percent of revenues)
Revenues                                             100  %                100  %                100  %                100  %
Cost of revenues                                      11                    13                    11                    13
Gross margin                                          89                    87                    89                    87
Operating expenses:
Research and development                              54                    50                    53                    48
Sales and marketing                                   71                    75                    73                    75
General and administrative                            30                    27                    30                    26
Total operating expenses                             156                   151                   156                   150
Loss from operations                                 (67)                  (65)                  (66)                  (63)
Interest income and other income (expense),
net                                                       *                  2                        *                  1
Interest expense                                      (8)                  (16)                  (11)                  (15)

Loss before provision for income taxes               (76)                  (79)                  (77)                  (77)
Provision for income taxes                                *                     *                     *                     *
Net loss                                             (76) %                (79) %                (78) %                (77) %


________________
* Less than 1%
Note: Certain figures may not sum due to rounding.
Comparison of Three Months Ended July 31, 2021 to Three Months Ended July 31,
2020
Revenues
                   Three Months Ended July 31,
                       2021                   2020        $ Change      % Change

                     (dollars in thousands)
Revenues    $       89,478                 $ 52,024      $ 37,454           72  %


Revenues increased $37.5 million, or 72%, during the three months ended July 31,
2021 compared to the three months ended July 31, 2020. The increase in revenues
was primarily due to the addition of new paying customers, a continued shift in
our sales mix toward larger customer contracts, and revenues generated from our
existing paying customers as reflected by our dollar-based net retention rate
of over 118% as of July 31, 2021.
Cost of Revenues and Gross Margin
                            Three Months Ended July 31,
                           2021                         2020        $ Change      % Change

                               (dollars in thousands)
Cost of revenues     $       9,869                   $ 7,021       $  2,848           41  %
Gross margin                    89   %                    87  %


Cost of revenues increased $2.8 million, or 41%, during the three months ended
July 31, 2021 compared to the three months ended July 31, 2020. The increase was
primarily due to an increase of $1.0 million in personnel-related costs due to
increased headcount, an increase of $0.6 million in third-party hosting costs as
we increased capacity to support customer usage and growth of our customer base,
an increase of $0.5 million in credit card processing fees, an increase of
$0.3 million in fees to third-party support vendors, and an increase of
$0.2 million in allocated overhead costs as a result of increased overall costs
to support the growth of our business and related infrastructure.
                                       31
--------------------------------------------------------------------------------

Our gross margin increased during the three months ended July 31, 2021 compared
to the three months ended July 31, 2020 as we increased our revenues, more
efficiently managed third-party hosting costs, and realized benefits due to
economies of scale resulting from increased efficiency with our technology and
infrastructure.
Operating Expenses
                                    Three Months Ended July 31,
                                        2021                   2020        $ Change      % Change

                                      (dollars in thousands)
Research and development     $        48,454                $ 25,959      $ 22,495           87  %
Sales and marketing                   63,930                  38,822        25,108           65  %
General and administrative            27,276                  13,806        13,470           98  %
Total operating expenses     $       139,660                $ 78,587      $ 61,073           78  %


Research and Development
Research and development expenses increased $22.5 million, or 87%, during the
three months ended July 31, 2021 compared to the three months ended July 31,
2020. The increase was primarily due to $17.9 million in personnel-related costs
due to increased headcount and an increase of $3.5 million in allocated overhead
costs as a result of increased overall costs to support the growth of our
business and related infrastructure.
Sales and Marketing
Sales and marketing expenses increased $25.1 million, or 65%, during the three
months ended July 31, 2021 compared to the three months ended July 31, 2020. The
increase was primarily due to an increase of $12.2 million in personnel-related
expenses driven by higher headcount, an increase of $5.5 million in performance
marketing, branding spend, and lead generation, an increase of $3.4 million in
allocated overhead costs as a result of increased overall costs to support the
growth of our business and related infrastructure, and an increase of $1.7
million in fees to marketing vendors.
General and Administrative
General and administrative expenses increased $13.5 million, or 98%, during the
three months ended July 31, 2021 compared to the three months ended July 31,
2020. The increase was primarily due to an increase of $6.9 million in
personnel-related expenses as a result of higher headcount, an increase of $2.2
million in allocated overhead costs as a result of increased overall costs to
support the growth of our business and related infrastructure expenses, an
increase of $1.4 million related to increased insurance incurred as a result of
becoming a public company, an increase of $0.8 million in other operating
expenses, and an increase of $0.4 million related to professional fees including
audit, legal, and recruiting services.
Interest Income, Interest Expense, and Other Income (Expense), Net
                                               Three Months Ended July 31,
                                                 2021                  2020             $ Change              % Change

                                                  (dollars in thousands)
Interest income and other income
(expense), net                             $         (328)         $   1,045          $  (1,373)                    (131) %
Interest expense                                   (7,351)            (8,364)             1,013                      (12) %


Interest income and other income (expense), net decreased $1.4 million during
the three months ended July 31, 2021 compared to the three months ended July 31,
2020 due primarily to an increase in losses on foreign currency transactions and
decreased gains from our investments in marketable securities. Interest expense
decreased by $1.0 million during the three months ended July 31, 2021 compared
to the three months ended July 31, 2020, primarily due to the conversion of the
senior mandatory convertible promissory notes to a trust affiliated with our
CEO.
Comparison of Six Months Ended July 31, 2021 to Six Months Ended July 31, 2020
                                       32
--------------------------------------------------------------------------------
Revenues
                  Six Months Ended July 31,
                      2021                 2020        $ Change      % Change

                    (dollars in thousands)
Revenues    $      166,151              $ 99,730      $ 66,421           67  %


Revenues increased $66.4 million, or 67%, during the six months ended July 31,
2021 compared to the six months ended July 31, 2020. The increase in revenues
was primarily due to the addition of new paying customers, a continued shift in
our sales mix toward larger customer contracts, and revenues generated from our
existing paying customers as reflected by our dollar-based net retention rate of
over 118% as of July 31, 2021.
Cost of Revenues and Gross Margin
                           Six Months Ended July 31,
                           2021                    2020         $ Change      % Change

                             (dollars in thousands)
Cost of revenues     $     17,783               $ 13,227       $  4,556           34  %
Gross margin                   89   %                 87  %


Cost of revenues increased $4.6 million, or 34%, during the six months ended
July 31, 2021 compared to the six months ended July 31, 2020. The increase was
primarily due to an increase of $1.6 million in personnel-related costs due to
increased headcount, an increase of $1.1 million in credit card processing fees,
an increase of $0.7 million in third-party hosting costs as we increased
capacity to support customer usage and growth of our customer base, an increase
of $0.4 million in fees to third-party support vendors, and an increase of
$0.3 million in allocated overhead costs as a result of increased overall costs
to support the growth of our business and related infrastructure.
Our gross margin increased during the six months ended July 31, 2021 compared to
the six months ended July 31, 2020 as we increased our revenues, more
efficiently managed third-party hosting costs, and realized benefits due to
economies of scale resulting from increased efficiency with our technology and
infrastructure.
Operating Expenses
                                   Six Months Ended July 31,
                                      2021                 2020         $ Change       % Change

                                     (dollars in thousands)
Research and development     $       88,421             $  48,342      $  40,079           83  %
Sales and marketing                 120,714                74,913         45,801           61  %
General and administrative           49,266                25,917         23,349           90  %
Total operating expenses     $      258,401             $ 149,172      $ 109,229           73  %


Research and Development
Research and development expenses increased $40.1 million, or 83%, during the
six months ended July 31, 2021 compared to the six months ended July 31, 2020.
The increase was primarily due to $33.1 million in personnel-related costs due
to increased headcount and an increase of $5.7 million in allocated overhead
costs as a result of increased overall costs to support the growth of our
business and related infrastructure.
Sales and Marketing
Sales and marketing expenses increased $45.8 million, or 61%, during the six
months ended July 31, 2021 compared to the six months ended July 31, 2020. The
increase was primarily due to an increase of $23.1 million in personnel-related
expenses driven by higher headcount, an increase of $9.5 million in performance
marketing, branding spend, and lead generation, an increase of $5.6 million in
allocated overhead costs as a result of increased overall costs to support the
growth of our business and related infrastructure, and an increase of $3.9
million in fees to marketing vendors.
                                       33
--------------------------------------------------------------------------------

General and Administrative
General and administrative expenses increased $23.3 million, or 90%, during the
six months ended July 31, 2021 compared to the six months ended July 31, 2020.
The increase was primarily due to an increase of $12.5 million in
personnel-related expenses as a result of higher headcount, an increase of $3.7
million in allocated overhead costs as a result of increased overall costs to
support the growth of our business and related infrastructure expenses, an
increase of $2.8 million related to increased insurance incurred as a result of
becoming a public company, an increase of $2.3 million in other operating
expenses, partially offset by a decrease of $0.3 million in fees related to
professional fees including audit, legal, and recruiting services.
Interest Income, Interest Expense, and Other Income (Expense), Net
                                                Six Months Ended July 31,
                                                2021                 2020              $ Change              % Change

                                                 (dollars in thousands)
Interest income and other income
(expense), net                             $       (320)         $    1,399          $  (1,719)                    (123) %
Interest expense                                (17,725)            (15,355)            (2,370)                      15  %


Interest income and other income (expense), net decreased $1.7 million during
the six months ended July 31, 2021 compared to the six months ended July 31,
2020 due primarily to an increase in losses on foreign currency transactions and
decreased gains from our investments in marketable securities. Interest expense
increased $2.4 million during the six months ended July 31, 2021 compared to the
six months ended July 31, 2020, primarily due to the issuance of the senior
mandatory convertible promissory notes to a trust affiliated with our CEO in
January 2020 and June 2020
Liquidity and Capital Resources
Since inception, we have financed operations primarily through the net proceeds
we have received from the sales of our preferred stock and common stock, the
issuance of senior mandatory convertible promissory notes in January and June
2020 to a trust affiliated with our CEO, and cash generated from the sale of
subscriptions to our platform. We have generated losses from our operations as
reflected in our accumulated deficit of $670.5 million as of July 31, 2021 and
negative cash flows from operating activities for the six months ended July 31,
2021 and 2020. Our future capital requirements will depend on many factors,
including revenue growth and costs incurred to support customer usage and growth
in our customer base, increased research and development expenses to support the
growth of our business and related infrastructure, and increased general and
administrative expenses to support being a publicly traded company.
As of July 31, 2021, our principal sources of liquidity were cash, cash
equivalents, and marketable securities including non-current investments of
$382.3 million.
In April 2020, we entered into a five-year $40.0 million term loan agreement
with Silicon Valley Bank. The agreement provides for a senior secured term loan
facility, in an aggregate principal amount of up to $40.0 million, to be used
for the construction of our new corporate headquarters. Interest will accrue on
any outstanding balance at a floating rate per annum equal to the prime rate (as
publicly announced from time to time by the Wall Street Journal) plus an
applicable margin equal to either (a) 0% if our unrestricted cash at the lender
is equal to or less than $80.0 million, or (b) (0.5)% if our unrestricted cash
at the lender is between $80.0 million and $100.0 million, or (c) (1.0)% if our
unrestricted cash balance at the lender is equal to or greater than $100.0
million. Interest shall be payable monthly. As of July 31, 2021, $40.0 million
was drawn and $39.3 million was outstanding under this term loan.
A substantial source of our cash provided by operating activities is our
deferred revenue, which is included on our condensed consolidated balance sheets
as a liability. Deferred revenue consists of the unearned portion of billed fees
for our subscriptions, which is recorded as revenues over the term of the
subscription agreement. As of July 31, 2021, we had $139.6 million of deferred
revenue, of which $136.0 million was recorded as a current liability. This
deferred revenue will be recognized as revenues when all of the revenue
recognition criteria are met.
                                       34
--------------------------------------------------------------------------------

We assess our liquidity primarily through our cash on hand as well as the
projected timing of billings under contract with our paying customers and
related collection cycles. We believe our current cash, cash equivalents,
marketable securities, and amounts available under our senior secured term loan
facility will be sufficient to meet our working capital and capital expenditure
requirements for at least the next 12 months.
Cash Flows
The following table shows a summary of our cash flows for the periods presented:
                                                  Six Months Ended July 31,
                                                     2021                 2020

                                                        (in thousands)
Net cash used in operating activities       $      (15,960)            $ 

(40,270)

Net cash provided by investing activities            3,087                

25 723

Net cash provided by financing activities           23,392               

154,480



Operating Activities
Our largest source of operating cash is cash collection from sales of
subscriptions to our paying customers. Our primary uses of cash from operating
activities are for personnel-related expenses, marketing expenses, and
third-party hosting-related and software expenses. In the last several years, we
have generated negative cash flows from operating activities and have
supplemented working capital requirements through net proceeds from the sale of
equity and equity-linked securities.
Net cash used in operating activities of $16.0 million for the six months ended
July 31, 2021 reflects our net loss of $129.0 million, adjusted by non-cash
items such as stock-based compensation expense of $36.4 million, amortization of
discount on convertible notes of $10.6 million, non-cash lease expense of $8.8
million, non-cash interest expense of $6.7 million, amortization of deferred
contract acquisition costs of $3.6 million, depreciation and amortization of
$2.4 million, provision for doubtful accounts of $0.8 million, and net cash
inflows of $43.2 million from changes in our operating assets and liabilities.
The net cash inflows from changes in operating assets and liabilities primarily
consisted of a $33.7 million increase in deferred revenue, resulting from
increased billings for subscriptions, a $13.4 million increase in accrued
expenses and other liabilities primarily from an increase in accrued payroll
liabilities, accrued sales and value-added taxes, and accrued property and
equipment related to the build out of our headquarters, a $4.5 million increase
in operating lease liabilities, and a $1.7 million increase in accounts payable.
These amounts were partially offset by a $5.6 million increase in prepaid
expenses and other current assets related to an increase in deferred contract
acquisition costs, a $3.5 million increase in other assets, and a $1.0 million
increase in accounts receivable due to higher customer billings.
Net cash used in operating activities of $40.3 million for the six months ended
July 31, 2020 reflects our net loss of $76.9 million, adjusted by non-cash items
such as amortization of discount on convertible notes of $9.6 million,
stock-based compensation expense of $9.4 million, non-cash lease expense of $6.6
million, non-cash interest expense of $5.7 million, amortization of deferred
contract acquisition costs of $1.6 million, depreciation and amortization of
$1.5 million, net cash inflows of $1.2 million from changes in our operating
assets and liabilities, and provision for doubtful accounts of $1.1 million. The
net cash inflows from changes in operating assets and liabilities primarily
consisted of a $10.9 million increase in deferred revenue resulting from
increased billings for subscriptions, a $3.5 million increase in accrued
liabilities and other liabilities primarily from an increase in accrued
advertising, and a $1.5 million increase in accounts payable. These amounts were
partially offset by a $4.8 million increase in accounts receivable due to higher
customer billings, a $4.4 million increase in prepaid expenses and other current
assets primarily related to an increase in deferred contract acquisition costs,
a $4.3 million decrease in operating lease liabilities and a $1.4 million
increase in other assets.
Investing Activities
Net cash provided by in investing activities of $3.1 million for the six months
ended July 31, 2021 consisted of $81.0 million in maturities of marketable
securities and $0.4 million in sales of marketable securities. This was
partially offset by $48.5 million in purchases of marketable securities, $29.6
million in purchases of property and
                                       35
--------------------------------------------------------------------------------

equipment from an increase in leasehold improvements and furniture and fixtures
primarily related to the build out of our new headquarters, and $0.3 million in
capitalized internal-use software costs.
Net cash provided by investing activities of $25.7 million for the six months
ended July 31, 2020 consisted of $38.9 million in maturities of marketable
securities. This amount was partially offset by $12.4 million in purchases of
property and equipment from an increase in construction in progress, and $0.8
million in capitalized internal-use software costs.
Financing Activities
Net cash provided by financing activities of $23.4 million for the six months
ended July 31, 2021 consisted of $9.0 million in net proceeds from our term
loan, $9.0 million in proceeds from the exercise of stock options, and $6.1
million in proceeds from our employee stock purchase plan, partially offset by
$0.7 million for the repayment of our term loan.
Net cash provided by financing activities of $154.5 million for the six months
ended July 31, 2020 primarily consisted of $150.0 million of proceeds from the
issuance of a senior mandatory convertible promissory note in June 2020 to a
trust affiliated with our CEO, $2.9 million in net proceeds from our term loan,
and $1.8 million in proceeds from the exercise of stock options, partially
offset by $0.2 million in taxes paid related to the net share settlement of
equity awards.
Contractual Obligations and Commitments
During the six months ended July 31, 2021, there were no material changes in our
contractual obligations and other commitments, as disclosed in our Annual Report
on Form 10-K filed with the SEC on March 30, 2021, other than the amendments to
the operating lease for our corporate headquarters in San Francisco, which
commenced in May 2020 and expires in October 2033. We expect to incur a total of
approximately $382.7 million of future minimum payments and capital commitments
related to this lease of as of July 31, 2021.
For further information on our commitments and contingencies, refer to Note 8 in
the condensed consolidated financial statements contained within this Quarterly
Report on Form 10-Q.
In January and June 2020, we issued two unsecured senior mandatory convertible
promissory notes for an aggregate principal amount of $450.0 million, or the
2020 Notes, to a trust affiliated with our CEO, which were scheduled to mature
on January 30, 2025 and June 26, 2025, respectively. The 2020 Notes were senior,
unsecured obligations of the Company. The 2020 Notes bore interest at a fixed
rate of 3.5% per annum that was compounded annually and payable in-kind,
resulting in an aggregate $534.5 million to be due upon settlement. The 2020
Notes would be converted into shares of our Class B common stock, on the
applicable maturity date, unless earlier converted into shares of our Class B
common stock or redeemed in connection with our bankruptcy, insolvency, or other
similar events. The holder of the 2020 Notes was not entitled to convert the
2020 Notes at any time. The 2020 Notes were only convertible into shares of our
Class B common stock at our option under certain scenarios, including if the
closing price of our Class A common stock for at least 20 trading days in the 30
consecutive trading days ending on the last trading day of the immediately
preceding calendar quarter equals or exceeds the conversion price (initially
$31.58 and $31.09 for the January 2020 Convertible Note and June 2020
Convertible Note, respectively), or upon the occurrence of specified corporate
events.

On July 1, 2021, pursuant to the terms of the 2020 Notes, upon meeting the
closing trading price criteria for optional conversion, we elected to convert
the outstanding principal of $450.0 million, together with the amount of
interest that would have accrued thereon from the effective date of the 2020
Notes until the maturity date, into 17,012,822 shares of the Company's Class B
Common Stock based on a conversion price of $31.58 for the note issued in
January and $31.09 for the note issued in June 2020.

In April 2020, we entered into a $40.0 million term loan agreement with Silicon
Valley Bank, as discussed in Liquidity and Capital Resources above.
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, including,
but not limited to, losses arising out of the breach of such agreements,
services to be provided by us, or
                                       36

————————————————– ——————————


from intellectual property infringement claims made by third parties.
Additionally, in connection with the listing of our Class A common stock on the
NYSE, we have entered into indemnification agreements with our directors and
certain officers and employees that will require us, among other things, to
indemnify them against certain liabilities that may arise by reason of their
status or service as directors, officers, or employees. 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 financial
position, results of operations, or cash flows.
Off-Balance Sheet Arrangements
For all periods presented in this Quarterly Report on Form 10-Q, we did not have
any relationships with unconsolidated organizations or financial partnerships,
such as structured finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements are prepared in
accordance with GAAP. The preparation of these unaudited condensed consolidated
financial statements requires us to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenue, expenses and related
disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our
estimates are based on historical experience and various other assumptions that
we believe to be reasonable under the circumstances. Our actual results could
differ from these estimates.
There have been no changes to our critical accounting policies and estimates
during the six months ended July 31, 2021 as compared to those disclosed in our
Management's Discussion and Analysis of Financial Condition and Results of
Operations set forth in our Annual Report on Form 10-K filed with the SEC on
March 30, 2021.
Recent Accounting Pronouncements
See Note 2 to our condensed consolidated financial statements included in Part
I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding
recent accounting pronouncements.

© Edgar online, source Previews


Source link

Leave A Reply

Your email address will not be published.