Registration Statement on Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on November 4, 2021.

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

HashiCorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   7371   32-0410665

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

101 Second Street, Suite 700

San Francisco, CA 94105

(415) 301-3250

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

David McJannet

Chief Executive Officer

101 Second Street, Suite 700

San Francisco, CA 94105

(415) 301-3250

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Tony Jeffries

Michael Coke

Amanda N. Urquiza

Wilson Sonsini Goodrich & Rosati

Professional Corporation

650 Page Mill Road

Palo Alto, CA 94304

(650) 493-9300

 

Navam Welihinda

Chief Financial Officer

Paul D. Warenski

Chief Legal Officer

101 Second Street, Suite 700

San Francisco, CA 94105

(415) 301-3250

 

Richard A. Kline

John Williams

Latham & Watkins LLP

140 Scott Drive

Menlo Park, CA 94025

(650) 328-4600

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box:  

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

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 7(a)(2)(B) of Securities Act.  

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum
Aggregate
Offering Price(1)(2)

  Amount of
Registration Fee

Class A common stock, par value $0.000015 per share

  $100,000,000   $9,270

 

 

(1)

Includes the aggregate offering price of additional shares that the underwriters have the option to purchase.

(2)

Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information contained in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued                 , 2021.

            Shares

LOGO

CLASS A COMMON STOCK

 

 

This is an initial public offering of shares of Class A common stock of HashiCorp, Inc. We are offering                  shares of our Class A common stock.

 

Prior to this offering, there has been no public market for our Class A common stock. It is currently estimated that the initial public offering price will be between $          and $         per share.

We will apply to list our Class A common stock on the New York Stock Exchange, or the NYSE, under the symbol “HCP.”

Following this offering, we will have two classes of authorized common stock: Class A common stock and Class B common stock. The rights of the holders of our Class A common stock and Class B common stock will be identical, except with respect to voting and conversion rights. Each share of Class A common stock will be entitled to one vote. Each share of Class B common stock will be entitled to ten votes and will be convertible at any time into one share of Class A common stock. All shares of our capital stock outstanding immediately prior to this offering, including all shares held by our executive officers, directors and their respective affiliates, and all shares issuable on the conversion of our outstanding redeemable convertible preferred stock, will be reclassified into shares of our Class B common stock effective in connection with this offering. Immediately following the completion of this offering, holders of our Class B common stock will own approximately     % of the combined voting power of our outstanding capital stock, assuming no exercise by the underwriters of their option to purchase additional shares of Class A common stock from us in this offering.

We are an “emerging growth company” under the federal securities laws and, as such, have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings.

 

 

Investing in our Class A common stock involves risks. See the section titled “Risk Factors” beginning on page 23 to read about factors you should consider before deciding to invest in shares of our Class A common stock.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discounts and commissions(1)

   $                    $                

Proceeds, before expenses, to HashiCorp, Inc.

   $                    $                

 

(1)  See the section titled “Underwriters” for a description of the compensation payable to the underwriters.

   

We have granted the underwriters an option for a period of 30 days to purchase up to an additional                 shares of our Class A common stock at the initial public offering price less the underwriting discounts and commissions.

The underwriters expect to deliver the shares against payment in New York, New York on                 , 2021.

 

 

 

MORGAN STANLEY

  GOLDMAN SACHS & CO. LLC   J.P. MORGAN
  BOFA SECURITIES     CITIGROUP  

COWEN

  JMP SECURITIES   KEYBANC CAPITAL MARKETS

NOMURA

  OPPENHEIMER & CO.         STIFEL   WILLIAM BLAIR
BLAYLOCK VAN, LLC   R. SEELAUS & CO., LLC

                    , 2021


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LOGO

 

 

 


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1  

Risk Factors

     23  

Special Note Regarding Forward-Looking Statements

     68  

Market, Industry, and Other Data

     70  

Use of Proceeds

     71  

Dividend Policy

     72  

Capitalization

     73  

Dilution

     76  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     79  

Non-GAAP Financial Measures

     115  

Business

     118  

Management

     142  
 

 

 

Through and including                 , 2021 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

You should rely only on the information contained in this prospectus or contained in any free writing prospectus filed with the Securities and Exchange Commission. Neither we nor any of the underwriters have authorized anyone to provide any information or make any representations other than those contained in this prospectus or in any free writing prospectus filed with the Securities and Exchange Commission. Neither we nor the underwriters take any responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, shares of Class A common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the Class A common stock. Our business, financial condition, results of operations and prospects may have changed since such date.

For investors outside of the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside of the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of Class A common stock and this distribution of this prospectus outside of the United States.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our Class A common stock. You should read this entire prospectus carefully, including the sections titled “Risk Factors,” “Special Note Regarding Forward-Looking Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. Unless the context otherwise requires, all references in this prospectus to “HashiCorp,” the “company,” “we,” “our,” “us,” or similar terms refer to HashiCorp, Inc. and its subsidiaries.

HASHICORP, INC.

Overview

At HashiCorp, we believe that infrastructure enables innovation.

Our foundational technologies solve the core infrastructure challenges of cloud adoption by enabling an operating model that unlocks the full potential of modern public and private clouds. Our cloud operating model provides consistent workflows and a standardized approach to automating the critical processes involved in delivering applications in the cloud: infrastructure provisioning, security, networking, and application deployment. With our solutions, companies of all sizes and in all industries can accelerate their time to market, reduce their cost of operations, and improve their security and governance of complex infrastructure deployments.

Organizations today are undergoing a digital transformation across every business function, driven by competition and ever-increasing consumer expectations. Underlying this digital transformation is a re-platforming of static on-premises infrastructure to dynamic and distributed cloud infrastructure. In this dynamic world, existing procedures are too inefficient to scale with distributed, multi-cloud infrastructure. Inconsistent, fragmented technologies and processes are time consuming and resource intensive to manage, exacerbated by inefficient, linear ticket-driven workflows that cannot facilitate scaled, real-time operations. This digital transformation demands a new cloud operating model for enterprise information technology, or IT, requiring automation to provision, secure, connect, and run infrastructure at scale and in real time. At HashiCorp, we build industry-leading products that enable this cloud operating model and accelerate cloud adoption. Our primary commercial products are Terraform, Vault, Consul, and Nomad:

 

 

 

Terraform is our infrastructure provisioning product that allows users to easily set up and manage IT infrastructure. Terraform enables IT operations teams to apply an Infrastructure-as-Code approach, where processes and configuration required to support applications are codified and automated instead of being manual and ticket-based. Terraform is cloud-neutral, supporting all major public and private clouds, and has a broad ecosystem of more than a thousand integrations with multiple cloud, software, and hardware platforms.

 

 

 

Vault is our secrets management and data protection product. Using Vault, security teams can apply policies based on application and user identity, integrating with both on-premises and cloud-native identity providers, to govern access to credentials and secure sensitive data. Vault makes it simple for practitioners to deploy zero-trust security and automate complex workflows.

 

 

 

Consul is our application-centric networking automation product. It enables practitioners to manage application traffic, security teams to secure and restrict access between applications, and operations teams to automate the underlying network infrastructure.

 

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Nomad is our scheduler and workload orchestrator that enables organizations to deploy and manage applications. It provides practitioners with a self-service interface to manage the application lifecycle.

Our products can be adopted individually and are also designed to work together as a stack in order to solve larger, more complex challenges. For instance, deploying Vault and Consul is the basis for a complete Zero Trust security architecture with identity-driven controls, offering a full range of authentication, authorization, and access management for human users or machines, like servers or applications. We continue to innovate and deliver additional emerging products to supplement these core capabilities and provide adjacent solutions.

Today, our software is predominantly self-managed by users and customers who deploy it across public, private, and hybrid cloud environments. We also offer the HashiCorp Cloud Platform, or HCP, our fully-managed cloud platform for multiple products that further accelerates enterprise cloud migration by addressing resource and skills gaps, improving operational efficiency, and speeding up deployment time for customers.

We have deliberately built our products using an open-core software development model. All of our products are developed as open-source projects, with large communities of users, contributors, and partners collaborating on their development. We sell proprietary, commercial software that builds on our open-source products with additional enterprise capabilities. Our products are available in a non-commercial form for users to download, learn, and adopt, leading to market standardization of our products. Developers now play a larger role in deciding which technology is used within the companies for which they work, and this broad community engagement assists our go-to-market strategy by enabling technical knowledge and adoption inside our customers’ organizations. As a result, companies of all sizes and industries use our products, which have been downloaded approximately 100 million times during the fiscal year ended January 31, 2021, or fiscal 2021.

Our sales efforts build on our broad open-source reach and are driven by an enterprise sales force that focuses on large organizations. In addition, HCP supplements our direct sales motion with a self-serve offering that enables us to serve small- and medium-sized businesses, or SMBs, through a low-touch solution. HCP also addresses the needs of our largest enterprise customers who are increasingly looking for fully managed, cloud-native solutions.

Our open-core software development model and sales efforts are further strengthened by our ecosystem of partners. Our partners, including cloud service providers and independent software vendors, or ISVs, build direct integrations for our mutual customers, playing a critical role in amplifying the reach and access of our products. We partner with global and regional systems integrators and resellers to facilitate transactions and provide scalable service engagements to ensure successful customer implementations. Chief Information Officers, or CIOs, as a key IT deployment decision maker at many enterprises, standardize on our platform over time as they build their cloud adoption strategies and programs around their chosen cloud vendors and HashiCorp in concert with their cloud service providers of choice and existing ISVs. Enabling users to work within their existing infrastructure vendors creates a strong network effect with our products. We had over 1,400 providers and integrations and more than 700 partners, including over 170 ISVs, as of July 31, 2021, and these numbers continue to grow as we become mission critical to our customers and increasingly integral to their entire ecosystem.

The combination of our open-core, self-service, direct sales, and partner ecosystem components enables our powerful adopt, land, expand, and extend motion. Our open-source engagement and self-

 

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serve cloud model help us identify and accelerate initial product adoption and use cases. This broad footprint then allows our enterprise sales teams to target and sign these customers with subscription contracts for our software. Our expansion motion focuses on up-selling additional modules and increasing the footprint of usage of a given product, including across multiple buying centers within our customers’ organizations. Importantly, the multiple capabilities of our deep product portfolio allow us to extend our reach by cross-selling additional products to customers. Our adopt, land, expand, and extend motion affords us many growth opportunities within our customer base as we focus our go-to-market strategy on developing and cultivating long-term customer relationships. As of January 31, 2020, July 31, 2020, January 31, 2021, April 30, 2021, and July 31, 2021, our last four quarter average net dollar retention rate was 131%, 128%, 123%, 122%, and 124%, respectively. We are still in the early stages of our expansion and extension journey with our customers. Our focus on winning lighthouse accounts in the Forbes Global 2000 accelerates our practitioner adoption by adding new users and driving partners to integrate our ecosystem, creating a powerful flywheel helping to drive our business.

Our transformative technologies, open-source reach, and market leadership have led us to experience rapid growth. As of January 31, 2021, we had 500 customers with $100,000 or greater annual recurring revenue, or ARR, compared to 338 customers with $100,000 or greater ARR as of January 31, 2020. As of July 31, 2021, we had 558 customers with $100,000 or greater ARR compared to 419 customers with $100,000 or greater ARR as of July 31, 2020. We served over 300 of the Forbes Global 2000 companies as of July 31, 2021. Our revenue was $121.3 million and $211.9 million for the fiscal year ended January 31, 2020, or fiscal 2020, and 2021, respectively, representing year-over-year growth of 75%. Our revenue was $94.8 million and $142.0 million for the six months ended July 31, 2020 and 2021, respectively, representing period-over-period growth of 50%. Customers with $100,000 or greater ARR represented 71% and 83% of revenue for fiscal 2020 and fiscal 2021, respectively, and 80% and 87% of revenue for the six months ended July 31, 2020 and 2021, respectively. We incurred net losses of $53.4 million and $83.5 million for fiscal 2020 and 2021, respectively, and $67.3 million and $40.5 million for the six months ended July 31, 2020 and 2021, respectively. We expect we will incur net losses for the foreseeable future as we continue to invest into the market opportunity ahead of us.

Industry Background

Several key industry megatrends underpin our business:

 

 

 

Digital Transformation. Organizations are increasingly digitizing their business, driven by competition and the expectation of consumers to have rich experiences across a wide range of platforms and technologies. This digital transformation is elevating the importance of software and shifting focus to the ability to deliver new features and services. Cloud platforms are being built in part to accelerate the delivery of new applications, and IT systems are being modernized to enable more rapid iteration, improved security, and lower operational overhead.

 

 

 

Cloud Adoption. Organizations across the globe are shifting increasing proportions of their workloads and infrastructure to the cloud. According to IDC, the global public cloud services market is expected to increase from $312.4 billion in 2020 to $676.1 billion in 2024. Modern cloud environments are characterized by a multiplicity of cloud service providers, services, frequent updates, and ephemeral workloads. This contrasts sharply with traditional on-premises environments that were largely homogeneous and relatively static. The fundamental differences between these environments require new approaches to management and modern tooling built around cloud-native principles.

 

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Multi-Cloud. Modern startups are often built cloud native, while traditional enterprises have cloud adoption as a top priority. Most large businesses do not use a single cloud vendor, but rather, use a multi-cloud approach, creating complexity and challenges. According to a recent Gartner cloud adoption survey, more than 75% of organizations are using a multi-cloud adoption model. This is driven by multiple factors, including acquisition activity, regulatory requirements, vendor relationships, and the differentiated capabilities of cloud service providers.

We see these priorities coalesce into four themes driving investments that are consistent across industries and geographies:

 

 

 

Infrastructure Automation. Cloud-native applications have many services, highly dynamic and ephemeral infrastructure, and high rates of change. To support this, infrastructure must be automated end-to-end, which requires a shift from manual processes to infrastructure-as-code and automation. As organizations embrace multi-cloud environments, there is pressure to standardize to improve efficiency and reduce the overhead of security and governance.

 

 

 

Zero Trust Security. Traditional approaches to network security depend heavily on static IP-based controls and a well-defined network perimeter. As organizations adopt a multi-cloud infrastructure and have an increasingly distributed workforce, there is no longer a clear network perimeter. Security needs to shift to identity-based controls, which can handle dynamic infrastructure to ensure authentication and authorization of all communications. Increased scrutiny on data privacy also requires additional focus on protecting data at rest and in transit.

 

 

 

Application-Centric Networking. As development teams are empowered to build and deploy more services, they require self-service capabilities to efficiently manage traffic to their applications. Securing network communications between applications requires a scalable identity-based approach, given highly-dynamic infrastructure and the need to span multiple public, private, and hybrid cloud environments. Ticket-driven workflows that update networking middleware must be replaced by automated processes to enable the speed and scale of cloud-native applications.

 

 

 

Developer-Centric Application Delivery. The pressure on application teams to deliver faster code updates translates to a greater need to enable those teams to optimize the production and delivery process. Traditional environments were highly siloed, requiring developers to go through complex ticket-driven workflows, which could take days, weeks, or months of effort when building or deploying new applications. New platforms need to empower developers to manage the lifecycle of applications and deploy them directly without relying on centralized IT or other cumbersome processes.

However, customers face multiple challenges in adopting a new operating model for the cloud, including:

 

 

 

Inconsistent Operating Model. Organizations need to implement a common operating model that allows for a consistent process across their environments. This reduces their cost of training and onboarding employees, reduces operational overhead, and minimizes the security risks and challenges of governance.

 

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Significant Skills Gap. While almost all organizations are investing in digital transformation and cloud adoption, there is a significant shortage of skills, and the skills required are unevenly distributed across companies. According to 451 Research’s Voice of the Enterprise, Cloud, Hosting, and Managed Services: Organizational Dynamics study, 85% of organizations identify a skills gap related to cloud implementation expertise.

 

 

 

Cloud Fragmentation. Across public and private clouds, customers have many different approaches to provisioning, security, networking, and application deployment, leading to inconsistency, lack of interoperability, and vendor lock-in.

 

 

 

Inefficient Workflows. Developers, operators, and security teams must work together seamlessly in a collaborative and iterative manner in order to build, test, and deploy applications faster and more reliably at scale. However, most organizations define ticket-driven workflows to manage their infrastructure that are not automated. This model requires development teams to file tickets against many different internal teams to provision infrastructure, request credentials to systems, update networks, and deploy their applications. This results in significant friction across these teams, increases costs and risks, and reduces productivity.

The cloud operating model for an enterprise can be defined as implementing new architectures with standardized and consistent sets of workflows and interfaces designed to meet the dynamic needs of the cloud. HashiCorp provides the tools and capabilities to meet this requirement, and leads the way at each layer.

Our Solution

HashiCorp products were all built with common design principles around the need to enable automation in infrastructure, broad ecosystem support, and self-service for practitioners. Our products embody those principles at every layer of infrastructure needed for enterprises to successfully operate in the cloud. Our primary commercial products are Terraform, Vault, Consul, and Nomad:

 

 

 

Terraform solves end-to-end infrastructure automation by enabling organizations to easily codify their infrastructure when provisioning.

 

 

 

Vault provides identity-based controls that are appropriate for modern Zero Trust security needs by authenticating users and applications based on extensible plug-ins.

 

 

 

Consul enables application-centric networking by providing a central, real-time view of all applications so application teams can manage traffic and security policies.

 

 

 

Nomad enables developers to deliver workloads more efficiently using a self-service application lifecycle.

Our broader portfolio includes numerous other products (Waypoint, Boundary, Vagrant, and Packer) solving adjacent challenges in achieving a cloud operating model.

 

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LOGO

Our solution has the following key characteristics that define our products and approach:

 

 

 

Purpose-Built for Cloud. HashiCorp products are built for modern cloud-native architectures. To fully realize the value of cloud, HashiCorp enables infrastructure to be highly automated across provisioning, security, networking, and application deployment. Customers are able to leverage the differentiating capabilities of cloud services, while maintaining a consistency of management and governance.

 

 

 

Cloud Platform- and Technology-Neutral. A key element of our design ethos is the focus on solving user workflows rather than specific technologies or platforms. All of our solutions are built to be cloud platform- and technology-neutral, which allows a common approach to be extended to any cloud platform or on-premises technology. Our products are used in all major public clouds and also in private data centers and in edge environments such as in retail, manufacturing, hospitality, and more.

 

 

 

User-Centric Design. HashiCorp products are built by practitioners for practitioners. Traditional infrastructure management software was historically sold top-down to executives and was less focused on the experience of end users. We use the guiding principle of building tools that we would want to use ourselves to build our products. We invest heavily in product design and user research to make our products convenient and easy to use at initial adoption and in ongoing operations.

 

 

 

Enabling Self-Service Use. HashiCorp products are designed to enable self-service use. Traditional ticket-based processes forced development teams to use a linear workflow to provision infrastructure, request credentials, deploy applications, update networks, and more. HashiCorp products allow platform teams to define the blueprints and set up guardrails while also empowering developers without ticketing workflows. This can result in saving development teams days, weeks, or months of effort when building or deploying new applications.

 

 

 

Open Source Community. Unlike traditional proprietary software, the core of all HashiCorp products is developed in open source. This allows a large and vibrant community of users, contributors, and partners to participate. Users are able to give feedback directly, report issues, contribute features, and fix bugs. Partners are able to integrate their technology

 

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solutions and validate their integrations with continuous development. The community of users and partners creates a powerful network effect that drives further adoption and standardization of our open-source and paid solutions.

 

 

 

Broad User Base. The open-source nature of our products means they are free to download and widely distributed. During fiscal 2021, our products were downloaded approximately 100 million times. In addition, we estimate that approximately 11,000 organizations have downloaded at least one of our products since HashiCorp’s inception. This broad, global usage extends from small startup organizations to Fortune 100 companies across industries. Our HashiCorp User Groups, or HUGs, are self-organizing chapters of users that advocate for our products, which include over 36,000 members in more than 140 chapters across over 50 countries as of July 31, 2021.

 

 

 

Deep and Broad Ecosystem. Most enterprises have a large set of existing technology investments and platforms. It is critical that any new technologies are able to integrate into their environment. HashiCorp products are built with extensibility in mind, and we work closely with hundreds of partners to ensure interoperability of our solutions. A key component of our ecosystem is our collection of “providers.” Our providers are connections to integrate products like Terraform with cloud players, software applications, and hardware vendors using application programming interfaces, or APIs. These companies often build providers for their own technologies to connect with HashiCorp. We have certification programs for our major products so that users can be assured the integrations are validated.

 

 

 

Self-Managed and Cloud Delivery. The adoption of cloud infrastructure is accelerating, and the future of most services will be cloud delivered. However, the world’s largest organizations have substantial investments in on-premises and private cloud environments and will continue to have a large footprint for many years to come. HashiCorp products were initially built as self-managed, allowing them to be adopted in private clouds and by customers with a reluctance to offload critical infrastructure. As customers gain comfort and become increasingly cloud native, HCP enables the consumption of our products as a fully-managed service. This bi-modal delivery allows us to service the entire market with solutions that fit their needs.

 

 

 

Focused Products. Large organizations have many silos where independent technology and buying decisions are made. HashiCorp has purposely built a portfolio of products rather than a monolithic platform, so that individual products can be sold to relevant stakeholders. This provides us multiple opportunities to engage customers and reduces the complexity of a sale by avoiding the need for a top-down mandate or broad consensus within an organization.

 

 

 

End-to-End Solution. While our individual products solve specific problems, the broader HashiCorp portfolio provides a holistic approach to enabling a consistent cloud operating model. This integrated set of solutions enables us to become a strategic partner to customers, helping them define their technology strategy as they adopt a multi-cloud infrastructure.

Key Benefits to Customers

The key benefits of our solutions to our customers include:

 

 

 

Accelerate time to delivery. HashiCorp customers use our products to automate the key processes involved in application delivery and enable self-service for application teams. This can result in saving such teams days, weeks, or months of effort when building or deploying new applications. This improved agility improves their time to market and allows for rapid iteration on products and services.

 

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Reduce risk and improve security and governance. While enabling self-service is a critical goal for most of our customers, it is equally important to maintain strong security and governance controls. Our products are designed with those needs in mind and enable security and compliance teams to set policies and audit interactions, while operations teams define consistent blueprints and templates to ensure standardization of best practices. This reduces total complexity and ensures that security controls are baked into the automation and consistently enforced.

 

 

 

Business agility, flexibility, and resilience. Organizations that depend heavily on manual process become inflexible and their agility is impaired by the speed of human operations. HashiCorp customers have codified and automated their processes, which enables them to make changes rapidly at scale. This allows them to quickly respond to market opportunities, security incidents, technology failures, and other critical operational events.

 

 

 

Improved operational efficiency. As organizations adopt a multi-cloud infrastructure, they are confronted with many different interfaces and workflows native to each environment. HashiCorp customers standardize their workflows and implement a consistent cloud operating model with our products and platform. This allows them to have a single set of workflows, reduce the employee training and onboarding burden, and simplify their security and governance challenges. This consistency improves the operational efficiency of managing infrastructure at scale.

 

 

 

Access to talent. HashiCorp products represent an industry standard in infrastructure management. We believe our community has hundreds of thousands of users, over 10,000 of whom have completed our certification program as of July 31, 2021. By leveraging our products, customers can more easily hire new employees, train and certify existing employees, and ensure their organizations retain expertise in managing their systems.

Competitive Strengths

Our competitive strengths include:

 

 

 

We believe we are the leading paradigm for IT organizations to provision, secure, connect, and run in the cloud with a powerful ecosystem being built around us. Enterprises use HashiCorp as a single plane of control for cloud infrastructure automation. The simplicity that our integrated product portfolio offers is particularly relevant in a multi-cloud world. Our deep integrations and partnerships have reinforced our position as the leading paradigm for IT organizations to run in the cloud. Our customers benefit from the innovation of our partners and wider ecosystem with a common workflow to access it all at any time. We have a rich ecosystem of over 1,400 providers and integrations as well as more than 700 partners as of July 31, 2021, including all major cloud service providers and technology partners, that complement our products by enabling our customers to incorporate technologies from those partners into their workflows.

 

 

 

We provide a single, comprehensive, integrated portfolio of products that spans all critical components of cloud infrastructure automation. We serve organizations with a wide range of cloud infrastructure automation needs and provide customers with the simplicity of working with one central partner. In a fragmented competitive environment with dozens of vendors targeting application platforms, Zero Trust security, and infrastructure automation use cases, we provide one holistic approach to unlock the cloud operating model. Our integrated portfolio of products acts as a strategic growth vector. Practitioners may start by using one or more of our products before exploring and extending to our broader product portfolio, and our

 

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products’ consistency and ability to work together as a stack ease the implementation of additional products. As practitioners adopt more of our products, they also unlock more value from each of our individual products as they are able to address more advanced use cases where our integrated stack is even more compelling.

 

 

 

Our passionate user community has supported us since day one and represents a sustainable competitive advantage. Our open-source heritage and community of passionate users have helped us design practitioner-friendly software that continually adapts to evolving needs. We designed our contributor ecosystem to enable incorporation of the best aspects of an open-source model while protecting against misuse and product forking. Our ecosystem and feature development have reached significant scale and continually evolve, adding to our competitive differentiation. Our community of users has been critical to building brand awareness and supporting the growth of our partner ecosystem. We strive to deliver a seamless user experience to our community. Our passionate open source community includes the key practitioners in organizations who are increasingly core decision makers in choosing software and technology partners. We host two annual conferences for the HashiCorp community, held in the United States and Europe. At these conferences, we share the latest technical updates with our community and continue deepening our practitioner relationships.

 

 

 

We have a HashiCorp-controlled approach to our open-source model. We designed our open-source workflow to encourage practitioners and partners to contribute to projects, but unlike third-party controlled open-source projects, we maintain control over our code base. Our open-source license allows practitioners to easily download and experiment with our software and allows anyone to suggest code contributions that are reviewed by a HashiCorp-employed core committer before integration with our code base. In addition, all contributors are required to sign a contributor license agreement that grants HashiCorp exclusive license to distribute any accepted contribution commercially. This model enables us to define our future product roadmap and monetize our innovation, while benefiting from the ideas and engagement of the open source community.

 

 

 

We serve a diverse set of customers, including over 300 of the Forbes Global 2000. Our platform powers the most disruptive global leaders and innovators across various industries. We serve an expansive range of industries, including technology, consumer, business, and financial services, government and healthcare, and media and entertainment. These enterprises have complex needs and requirements that push forward further innovation on our platform and range from the largest companies in the world to the most innovative startups and software-as-a-service, or SaaS, platforms at scale, who are often early adopters of cloud-native technologies.

 

 

 

We have a powerful growth flywheel driven by our passionate user community, rich ecosystem, and diverse enterprise customers. Our passionate open source users download, contribute to, and advocate for our products. Our relevance then grows with our user base, incentivizing ecosystem partners to build integrations, adding additional value to users and customers. As customers standardize on our products, driven by bottoms-up adoption, they train and enable new users and influence their technology partners to build additional ecosystem integrations. This flywheel effect results in a broad ecosystem of partnerships and integrations, driving widespread product adoption and creating strong network effects.

 

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Our platform-agnostic approach to cloud transformation positions us as a long-term partner to all cloud providers. We enable developers to incorporate the strengths of their preferred cloud platforms while reducing the complexities of managing cloud providers’ native tooling. Regardless of whether organizations choose the private cloud, multiple public cloud vendors, or a hybrid model, we enable them to manage complex infrastructure needs in a dynamic environment. As one of the most critical partners for enabling cloud adoption, we have a strong, collaborative partnership across product and technology with the key cloud service providers. We have been recognized as a partner of the year by Microsoft and Google, highlighting our strategic importance to our cloud partners. We accelerate cloud adoption by creating a consistent set of workflows across private data centers and the public cloud, enabling rapid cloud migration.

 

 

 

Our go-to-market motion captures demand generated from our open-source approach and proprietary enterprise tools. Our platform is purpose-built for mission-critical infrastructure challenges. Our blue-chip customers serve as our references and are a testament to the scalability, performance, and strength of our platform and benefit our direct selling efforts. Our open-source engagement and self-serve cloud motion enables rapid distribution and adoption of our products and showcases the impact of our technology platform on a wide array of customers. This creates a large opportunity for our direct sales team to focus on landing commercial customers. This approach helps create a cycle where customers discover our products through open source or our self-service cloud platform, adopt our products for free, transition into paying customers through targeted sales efforts.

Our Market Opportunity

Our platform provides a comprehensive operating model that can be employed across public cloud, private cloud, and multi-cloud hybrid environments. We unlock the true opportunity associated with running in the cloud by empowering all practitioners with automation while maintaining scalability, reliability, and security in the cloud. According to IDC, the global public cloud services market is expected to be $676.1 billion by 2024, and we believe it is still in the infant stages of adoption.

We have estimated our total addressable market size by evaluating the size of the large, existing, and fast-growing markets that we are disrupting. We believe our product offering addresses four separate, yet related markets of infrastructure, security, networking, and applications. According to the 650 Group in July 2021, collectively, these four markets were estimated to be $41.7 billion in 2021 and projected to reach $72.5 billion by 2026, and include both legacy markets that are being reconstituted by the transition to cloud, as well as new markets being created by modern ways of deploying applications and managing infrastructure.

Each of our primary products corresponds to one of these markets:

 

 

 

Terraform addresses the emerging cloud infrastructure market, which was estimated to be $2.1 billion by the end of 2021 and $12.0 billion by the end of 2026.

 

 

 

Vault addresses the legacy and emerging security market, which was estimated to be $16.3 billion by the end of 2021 and $20.8 billion by the end of 2026.

 

 

 

Consul addresses the legacy and emerging networking market, which was estimated to be $22.6 billion by the end of 2021 and $30.9 billion by the end of 2026.

 

 

 

Nomad addresses the emerging applications and workload orchestration market, which was estimated to be $0.7 billion by the end of 2021 and $8.8 billion by the end of 2026.

 

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The 650 Group estimates the global public cloud market at $607.1 billion and the private cloud market at $33.0 billion by 2026 with a compound annual growth rate of 15% between 2021 and 2026.

Our Growth Strategy

We intend to pursue the following growth strategies:

 

 

 

Grow our customer base by acquiring new customers. We served 2,101 total customers as of July 31, 2021, including over 300 of the Forbes Global 2000. We believe that nearly all organizations will adopt a cloud strategy, resulting in a substantial opportunity to continue growing our customer base. Nearly all of our paid product adoption began with open-source usage. Our products were downloaded approximately 100 million times during fiscal 2021. As we continue to cultivate those users and turn them into paid customers, we also intend to drive new paying customer additions by expanding our sales and marketing efforts as well as our product portfolio.

 

 

 

Expand and extend within our existing customer base through increased usage, extensions to new products, and new use cases. Our customer base represents a significant growth opportunity as we enable their cloud adoption journeys. Our model is aligned with our customers’ usage in the cloud. As cloud adoption continues and our customers look to build more scalable and dynamic cloud architectures, they will likely move from adopting bare-necessities use cases to more complex deployments, expanding their usage of a given product. Additionally, our modular portfolio of products is structured to allow customers to extend usage of our offerings by adopting additional products and features over time as new needs arise. As a result, we expect to expand in both scale and scope within our existing customer base, with extensions in horizontal use cases and cross-sell contributing to growth. We plan to continue to invest in sales and marketing to expand our relationships with existing customers.

 

 

 

Unlock additional value and market share through HashiCorp Cloud Platform. HCP, released in 2020, addresses the needs of our largest enterprise customers and enables us to serve SMBs through a low-touch solution. HCP enables organizations that previously did not have the capacity or ability to self-manage HashiCorp products to benefit from our industry-leading product portfolio. Additionally, HCP not only increases the number and type of organizations that we can serve, but it also enables us to offer consumption-based pricing. Consumption-based pricing allows customers to align spend with usage, and it also provides an organic way to increase monetization with the adoption and usage of our products.

 

 

 

Extend our technology leadership through new products and continued investment in our platform and open source community. We have a history of technological innovation, launching new innovative products, releasing new features on a regular basis and making frequent updates to our products. We intend to continue making significant investments in research and development and hiring top technical talent to enable new use cases and increase our product differentiation. As we continually release new products, our open source community drives adoption, maturity, and ecosystem development upon which additional enterprise functionality is built. Over time, we believe our focus on innovation will provide new avenues for growth and allow us to continually deliver meaningful, differentiated value to our customers.

 

 

 

Expand and develop our technology partner and reseller ecosystem. Our HashiCorp Partner Network, which consists of the top systems integrators and resellers around the world, helps accelerate the adoption of our products and platform. In addition, we maintain

 

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and manage hundreds of integrations, like our Terraform Providers. These include more than 30 official providers (created by us), more than 100 verified providers (created by our community and verified by us), and more than 1,100 community providers (created by our community) as of July 31, 2021. We plan to continue investing in building out our partner program to drive more consumption through our platform, broaden our distribution footprint, and drive greater awareness of our platform.

 

 

 

Expand our global footprint. As organizations around the world increase their public cloud adoption, we believe there is a significant opportunity to expand the use of our products and platform even further outside of North America. Sales outside of the United States comprised 25% of our revenue for fiscal 2021 and 28% of our revenue for the six months ended July 31, 2021. We plan to make investments in sales and marketing and customer support in geographic areas of focus, and we believe there is a large opportunity to increase our global presence over time.

Risk Factors Summary

Our business is subject to numerous risks, as more fully described in the section titled “Risk Factors” immediately following this prospectus summary. These risks include, among others:

 

 

 

Our business and operations have experienced rapid growth, and if we do not appropriately manage future growth, if any, or are unable to improve our systems and processes, our business, financial condition, results of operations, and prospects will be adversely affected.

 

 

 

We have a history of net losses and may not be able to achieve or sustain profitability or positive cash flows in the future. If we cannot achieve or sustain profitability or positive cash flows, our business, financial condition, and results of operations may suffer.

 

 

 

Our limited operating history makes it difficult to evaluate our current business and prospects, and may increase the risk that we will not be successful.

 

 

 

Our future quarterly results of operations may fluctuate significantly, and our recent results of operations may not be a good indication of our future performance.

 

 

 

We rely significantly on revenue from subscriptions and, because we recognize a significant portion of the revenue from subscriptions over the term of the relevant subscription period, downturns or upturns in sales are not immediately reflected in full in our results of operations.

 

 

 

Because of the permissive rights accorded to third parties under our open-source and source available licenses, there are limited technological barriers to entry into the markets in which we compete and it is, and may continue to be, relatively easy for competitors, including public cloud operators, to enter our markets and compete with us.

 

 

 

We expect our revenue mix to vary over time, which could harm our gross margin and operating results.

 

 

 

If we are unable to increase sales of subscriptions to our products to new customers, sell additional subscriptions to our products to our existing customers, or expand the value of our existing customers’ subscriptions to our products, our future revenue and results of operations will be harmed.

 

 

 

If our existing customers do not continue to use our products and renew their subscriptions, it could have an adverse effect on our business and results of operations.

 

 

 

Our ability to increase sales of our products is highly dependent on the quality of our customer support, and our failure to offer high-quality support would have an adverse effect on our business, reputation, and results of operations.

 

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Some of our technology incorporates third-party open-source software, which could negatively affect our ability to sell our products, and subject us to possible litigation.

 

 

 

We use third-party open-source software, which could negatively affect our ability to sell our offerings, or make it easier for competitors, some of whom may have greater resources than we have, to enter our markets and compete with us.

 

 

 

Problems with our internal systems, networks, or data, including actual or perceived breaches or failures by us or our partners, could cause our products to be perceived as insecure, underperforming, or unreliable, our reputation to be damaged, and our financial results to be negatively impacted.

 

 

 

If we do not effectively focus our product development efforts, our business, results of operations, and financial condition could be adversely affected.

 

 

 

We have limited experience with respect to determining the optimal prices for our products.

 

 

 

We target enterprise customers, and sales to these customers involve risks that differ from risks associated with sales to smaller entities.

 

 

 

Health epidemics, including the COVID-19 pandemic, have had, and could in the future have, an adverse impact on our business, operations, and the markets and communities in which we, our partners, and customers operate.

 

 

 

We cannot predict the impact our dual-class structure may have on the market price of our Class A common stock.

 

 

 

The dual-class structure of our common stock will have the effect of concentrating voting control with those stockholders who held our capital stock effective prior to this offering, which will limit your ability to influence the outcome of important transactions, including a change in control.

If we are unable to adequately address these and other risks we face, our business, financial condition, operating results, and prospects may be adversely affected.

Channels for Disclosure of Information

Investors, the media, and others should note that we intend to announce material information to the public through filings with the Securities and Exchange Commission, or the SEC, the investor relations page on our website at www.ir.hashicorp.com, press releases, public conference calls, and webcasts. We use these channels, as well as social media, to communicate with our developers, practitioners, users, and the public about our company, our platform, and other issues, and the information disclosed by the foregoing channels could be deemed to be material information. We encourage investors, the media, and others to follow the channels listed above and to review the information disclosed through such channels. However, information contained on, or that can be accessed through, these channels does not constitute a part of this prospectus and is not incorporated by reference herein. Any updates to the list of disclosure channels through which we will announce information will be posted on the investor relations page on our website.

Corporate Information

We were incorporated under the laws of the state of Delaware in 2013. Our principal executive offices are located at 101 2nd Street, Suite #700, San Francisco, CA 94105, United States. Our website address is HashiCorp.com. Information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider information on our website to be part of this prospectus. Investors should not rely on such information in deciding whether to purchase our shares of Class A common stock.

 

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The HashiCorp design logo, “HashiCorp” and our other registered or common law trademarks, service marks, or trade names appearing in this prospectus are the property of HashiCorp, Inc. Other trade names, trademarks, and service marks used in this prospectus are the property of their respective owners.

Implications of Being an Emerging Growth Company

As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or JOBS Act, enacted in April 2012. An emerging growth company may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

 

 

 

not being required to comply for a certain period of time with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act;

 

 

 

reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements, and registration statements; and

 

 

 

exemptions from the requirements of holding a stockholder advisory vote on executive compensation.

We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the date of the first sale of our Class A common stock in this offering. However, if certain events occur prior to the end of such five-year period, including if (i) we become a “large accelerated filer,” with at least $700.0 million of equity securities held by non-affiliates; (ii) our annual gross revenue exceeds $1.07 billion; or (iii) we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period.

We have elected to take advantage of certain of the reduced disclosure obligations in the registration statement of which this prospectus is a part and may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests.

In addition, the JOBS Act provides that an “emerging growth company” can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

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THE OFFERING

 

Class A common stock offered by us

             shares

 

Option to purchase additional shares of Class A common stock

             shares

 

Class A common stock to be outstanding after this offering

             shares,              shares if the underwriters exercise their option to purchase additional shares in full

 

Class B common stock to be outstanding after this offering

             shares

 

Total Class A common stock and Class B common stock to be outstanding after this offering

             shares, or              shares if the underwriters exercise their option to purchase additional shares in full

 

Use of proceeds

We estimate that the net proceeds from this offering will be approximately $             million (or approximately $             million if the underwriters exercise their option to purchase additional shares in full) from the sale of the shares of Class A common stock offered by us in this offering, based on an assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

We intend to use the anticipated net proceeds from this offering for general corporate purposes, including working capital. We intend to use $             of the net proceeds to satisfy a portion of the anticipated tax withholding and remittance obligations related to the RSU Settlement (as defined below). We may use a portion of the net proceeds for acquisitions of, or investments in, businesses or technologies that complement our business, although we have no present commitments or agreements to enter into any such acquisitions or investments. See the section titled “Use of Proceeds” for additional information.

 

Voting rights

The holders of Class A common stock are entitled to one vote per share.

 

 

The holders of Class B common stock are entitled to ten votes per share.

 

 

The holders of our Class A common stock and Class B common stock will generally vote together as a single

 

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class on all matters submitted to a vote of our stockholders unless otherwise required by Delaware law or our amended and restated certificate of incorporation. See the section titled “Description of Capital Stock” for additional information.

 

Proposed NYSE trading symbol

“HCP”

The number of shares of our Class A common stock and Class B common stock that will be outstanding after this offering is based on no shares of our Class A common stock and              shares of our Class B common stock outstanding as of July 31, 2021, and reflects:

 

 

 

the conversion of all 94,127,984 shares of redeemable convertible preferred stock outstanding as of July 31, 2021 into an equal number of shares of common stock, which will automatically occur immediately prior to the closing of this offering, or the Capital Stock Conversion, and which shares will then be reclassified into an equal number of shares of Class B common stock in the Class B Reclassification described below;

 

 

 

the RSU Settlement described below; and

 

 

 

the reclassification of all 66,652,315 shares of common stock outstanding as of July 31, 2021 into an equal number of shares of Class B common stock in the Class B Reclassification described below.

The number of shares of Class A common stock and Class B common stock outstanding as of July 31, 2021 excludes the following:

 

 

 

14,401,971 shares of our Class B common stock issuable upon the exercise of options to purchase shares of common stock outstanding as of July 31, 2021 under our 2014 Stock Plan, or the 2014 Plan, at a weighted-average exercise price of $1.83 per share;

 

 

 

                 restricted stock units, or RSUs, covering shares of our Class B common stock that are issuable upon satisfaction of service-based and liquidity-based vesting conditions outstanding as of July 31, 2021, for which the service-based condition was not yet satisfied as of July 31, 2021, pursuant to our 2014 Plan (we expect that vesting of certain of these RSUs through                 , 2021 will result in the net issuance of                  shares of our Class B common stock in connection with this offering, after withholding                  shares of Class B common stock to satisfy associated estimated income tax obligations (based on the assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and an assumed     % tax withholding rate));

 

 

 

8,900 shares of our Class B common stock issuable upon the exercise of options to purchase shares of our Class B common stock that we granted after July 31, 2021 under our 2014 Plan, at a weighted-average exercise price of $39.86 per share;

 

 

 

                 RSUs covering shares of our Class B common stock that are issuable upon satisfaction of service-based and liquidity-based vesting conditions granted after July 31, 2021, pursuant to our 2014 Plan (we expect that vesting of certain of these RSUs through                 , 2021 will result in the net issuance of                      shares of our Class B common stock in connection with this offering, after withholding                  shares of Class B common stock to satisfy associated estimated income tax obligations (based on the assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and an assumed     % tax withholding rate));

 

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2,992 shares of Class B common stock issued as a restricted stock award after July 31, 2021 outside of the 2014 Plan;

 

 

 

977,680 shares of our Class A common stock, or the IPO RSU Shares, issuable in connection with the vesting of RSUs that were granted in connection with this offering under our 2021 Equity Incentive Plan, or the 2021 Plan, and are subject to commencement of vesting upon the effectiveness of the registration statement of which this prospectus forms a part (see the section titled “Executive Compensation” for additional information regarding certain of these grants);

 

 

 

18,330,000 shares of our Class A common stock reserved for future issuance under our 2021 Plan, which includes the IPO RSU Shares, as well as any automatic increases in the number of shares of our Class A common stock reserved for future issuance under this plan; and

 

 

 

1,900,000 shares of our Class A common stock reserved for future issuance under our 2021 Employee Stock Purchase Plan, or the ESPP, as well as any automatic increases in the number of shares of our Class A common stock reserved for future issuance under our ESPP.

Except as otherwise indicated, all information in this prospectus reflects and/or assumes:

 

 

 

the Capital Stock Conversion will occur immediately prior to the closing of this offering;

 

 

 

the filing and effectiveness of our amended and restated certificate of incorporation and the effectiveness of our amended and restated bylaws will occur immediately prior to the closing of this offering and will effect the reclassification of all outstanding shares of our common stock into an equal number of shares of our Class B common stock, or the Class B Reclassification;

 

 

 

the net issuance of              shares of our Class B common stock upon the vesting and settlement of RSUs, for which the service-based vesting condition was satisfied as of July 31, 2021 and for which we expect the liquidity-based vesting condition to be satisfied in connection with this offering, after withholding an aggregate of              shares to satisfy associated estimated income tax obligations (based on the assumed initial public offering price of $              per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and an assumed             % tax withholding rate), or the RSU Settlement;

 

 

 

no exercise of outstanding options or settlement of outstanding RSUs except as described above; and

 

 

 

no exercise by the underwriters of their option to purchase additional shares of our Class A common stock from us in this offering.


 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables summarize our financial data for the periods and as of the dates indicated. Except for pro forma data, we have derived our summary statements of operations data for fiscal 2020 and 2021 from our audited financial statements appearing elsewhere in this prospectus. Our summary consolidated statement of operations data for the six months ended July 31, 2020 and 2021, and the summary consolidated balance sheet data as of July 31, 2021, are derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus. Our summary consolidated statement of operations data for the fiscal year ended January 31, 2019, or fiscal 2019, has been derived from our accounting records and has been prepared on the same basis as the audited consolidated financial statements included elsewhere in this prospectus.

Our historical results are not necessarily indicative of the results that may be expected in the future. You should read the following summary financial data together with our financial statements and the related notes appearing elsewhere in this prospectus and the information in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The selected consolidated financial data included in this section are not intended to replace the consolidated financial statements and are qualified in their entirety by the consolidated financial statements and related notes included elsewhere in this prospectus.

 

    Year Ended January 31,     Six Months Ended July 31,  
            2019                       2020                     2021                     2020                     2021          
    (in thousands, except share and per share data)  

Consolidated Statements of Operations Data:

         

Revenue:

         

License

  $ 5,610      $ 18,503      $ 36,208      $ 15,204      $ 21,958   

Support

    43,462        96,820        165,607        75,622        110,888   

Cloud-hosted services

    972        2,339        4,092        1,341        6,342   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total subscription revenue

    50,044        117,662        205,907        92,167        139,188   

Professional services

    3,807        3,599        5,947        2,625        2,837   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    53,851        121,261        211,854        94,792        142,025   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

                           

Cost of license(1)

    169        294        536        243        130   

Cost of support(1)

    7,619        17,704        27,194        13,469        16,684   

Cost of cloud-hosted services(1)

    156        1,390        4,811        1,164        5,197   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of subscription revenue(1)

    7,944        19,388        32,541        14,876        22,011   

Cost of professional services(1)

    1,449        4,527        8,511        4,340        3,584   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue(1)

    9,393        23,915        41,052        19,216        25,595   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    44,458        97,346        170,802        75,576        116,430   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

                           

Sales and marketing(1)

    39,386        89,308        141,018        75,951        88,869   

Research and development(1)

    20,612        40,118        65,248        34,314        43,048   

General and administrative(1)

    32,337        24,137        48,545        32,835        25,028   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    92,335        153,563        254,811        143,100        156,945   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (47,877)       (56,217)       (84,009)       (67,524)       (40,515)  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income, net

    694        3,382        756        543        89   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (47,183)       (52,835)       (83,253)       (66,981)       (40,426)  

Provision for income taxes

    168        535        262        346        61   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (47,351)     $ (53,370)     $ (83,515)     $ (67,327)     $ (40,487)  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(2)

  $ (0.87)     $ (0.90)     $ (1.32)     $ (1.09)     $ (0.61)  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted(2)

    54,238,742        59,161,264        63,375,470        61,696,317        66,076,683   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted(3)

      $         $    
     

 

 

     

 

 

 

Weighted-average shares used to compute pro forma net loss per share attributable to common stockholders, basic and diluted(3)

               
     

 

 

     

 

 

 

 

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(1)

Includes stock-based compensation expense as follows:

 

    Year Ended January 31,     Six Months Ended
July 31,
 
        2019             2020             2021             2020             2021      
    (in thousands)  

Cost of revenue:

         

Cost of license

  $ —        $ —        $ —        $ —        $ —     

Cost of support

    221        401        1,056        867        185   

Cost of cloud-hosted services

    —          —          —          —           
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of subscription revenue

    221        401        1,056        867        190   

Cost of professional services

    43        89        308        260        24   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    264        490        1,364        1,127        214   

Sales and marketing

    2,964        2,466        11,286        10,122        1,223   

Research and development

    2,419        1,507        5,974        5,099        836   

General and administrative

    21,694        4,998        20,599        19,457        951   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense

  $ 27,341*     $ 9,461*     $ 39,223*     $ 35,805*     $ 3,224*  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

*

In connection with tender offers and secondary sales of our common stock, stock-based compensation expense for fiscal 2019, fiscal 2020, fiscal 2021, and the six months ended July 31, 2020 included $22.8 million, $1.5 million, $32.1 million, and $32.1 million of expense, respectively, related to the amount paid in excess of the estimated fair value of common stock as of the date of the transactions. There were no tender offers or secondary sales for the six months ended July 31, 2021. See Note 9 to our consolidated financial statements included elsewhere in this prospectus for further details.

 

 

(2)

See Notes 2 and 10 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to calculate basic and diluted net loss per share attributable to common stockholders and the weighted-average number of shares used in the computation of the per share amounts.

(3)

Basic and diluted pro forma net loss per share attributable to common stockholders for the year ended January 31, 2021 and the six months ended July 31, 2021 gives effect to (i) the automatic conversion of all outstanding shares of redeemable convertible preferred stock as if the conversion had occurred as of the beginning of the period or on the date of issuance, if later; and (ii) the vesting and stock-based compensation expense related to RSUs subject to service-based and performance-based vesting conditions, which conditions will be satisfied in connection with this offering, as further described in Notes 2 and 9 to our consolidated financial statements included elsewhere in this prospectus. The table presented below sets forth the calculation of basic and diluted pro forma net loss per share attributable to common stockholders for the year ended January 31, 2021 and the six months ended July 31, 2021 (in thousands, except share and per share data):

 

    Year Ended
January 31,
2021
    Six Months
Ended
July 31, 2021
 

Numerator:

   

Net loss attributable to common stockholders

  $                           $                        

Stock-based compensation expense related to RSUs for which the service-based and performance-based vesting conditions will be satisfied in connection with this offering

   
 

 

 

   

 

 

 

Pro forma net loss attributable to common stockholders

  $       $    
 

 

 

   

 

 

 

Denominator:

   

Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted

   

Pro forma adjustment to reflect automatic conversion of redeemable convertible preferred stock to Class B common stock in connection with this offering

   

Pro forma adjustment to reflect vesting of RSUs for which the service-based and performance-based vesting conditions will be satisfied in connection with this offering

   
 

 

 

   

 

 

 

Weighted-average shares used to compute pro forma net loss per share attributable to common stockholders, basic and diluted

   
 

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted

  $       $    
 

 

 

   

 

 

 

 

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Consolidated Balance Sheet Data

 

     As of July 31, 2021  
     Actual      Pro Forma(1)      Pro Forma
as adjusted(2)(3)
 
     (in thousands)  

Cash and cash equivalents

   $ 244,108       $                                $                            

Working capital(4)

     144,310         

Total assets

     421,375         

Deferred revenue, current and non-current

     146,105         

Redeemable convertible preferred stock

     349,113         

Accumulated deficit

     (256,451)        

Total stockholders’ (deficit) equity

     (156,716)        

 

(1)  The pro forma column in the consolidated balance sheet data table above reflects (i) the Capital Stock Conversion; (ii) the RSU Settlement, (iii) the related increase in liabilities and corresponding decrease in additional paid-in capital for the associated tax liabilities related to the net settlement of the RSUs; (iv) stock-based compensation expense of $                 as of July 31, 2021 related to RSUs subject to service-based and performance-based vesting conditions, which conditions will be satisfied in connection with this offering, as further described in Notes 2 and 9 to our consolidated financial statements included elsewhere in this prospectus, reflected as an increase to additional paid-in capital and accumulated deficit; and (v) the filing and effectiveness of our amended and restated certificate of incorporation, which will occur in connection with this offering.

(2)  The pro forma as adjusted column in the consolidated balance sheet data table above reflects (i) the pro forma items described immediately above; and (ii) the sale and issuance by us of          shares of Class A common stock in this offering at the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

(3)  Each $1.00 increase or decrease in the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, respectively, the amount of cash, cash equivalents, working capital, total assets, and total stockholders’ equity by $         million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase or decrease of 1,000,000 in the number of shares we are offering would increase or decrease the amount of cash, cash equivalents, working capital, total assets and total stockholders’ equity by $         million, assuming the assumed initial public offering price per share, the midpoint of the price range set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma information discussed above is illustrative only and will be adjusted based on the actual initial public offering price, the number of shares we sell and other terms of this offering that will be determined at pricing.

(4)  We define working capital as current assets less current liabilities. See our consolidated financial statements and the related notes included elsewhere in this prospectus for further details regarding our current assets and current liabilities.


 

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Key Business Metrics

 

    As of January 31,     As of July 31,  
    2019     2020     2021     2020     2021  

Total customers

    433       831       1,473       1,081       2,101  

Total customers with $100,000 or greater ARR

    174       338       500       419       558  

Percentage of quarterly subscription revenue from HCP (and its predecessor cloud offerings)

    0.0 %(1)      0.6 %(1)      2.6 %(1)      0.8 %(1)      5.0 %(1) 

Remaining performance obligations (RPOs) (in millions)

  $ 79.2     $ 152.1     $ 263.9     $ 178.5     $ 317.4  

Non-GAAP RPOs (in millions)(2)

  $ 91.2     $ 171.0     $ 286.1     $ 198.5     $ 335.8  

(1)  Represents subscription revenue for each of the quarters ended January 31, 2019, January 31, 2020, January 31, 2021, July 31, 2020, and July 31, 2021.

(2)  See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics” included elsewhere in this prospectus for our definitions of these metrics and a reconciliation of non-GAAP RPOs to the most comparable financial measure calculated in accordance with GAAP.

   

   

Other Non-GAAP Financial Measures

To supplement our consolidated financial statements prepared and presented in accordance with generally accepted accounting principles in the United States, or GAAP, we use certain non-GAAP financial measures, as described below, to facilitate analysis of our financial and business trends and for internal planning and forecasting purposes. We are presenting these non-GAAP financial measures because we believe, when taken collectively, they may be helpful to investors because they provide consistency and comparability with past financial performance by excluding certain items that may not be indicative of our business, results of operations, or outlook.

However, non-GAAP financial measures have limitations in their usefulness to investors because they have no standardized meaning prescribed by GAAP and are not prepared under any comprehensive set of accounting rules or principles. For example, these measures exclude expenses associated with our equity compensation plan, although equity compensation has been, and will continue to be, an important part of our compensation strategy.

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. As a result, our non-GAAP financial measures are presented for supplemental informational purposes only and should not be considered in isolation or as a substitute for our consolidated financial statements presented in accordance with GAAP.

 

     Year Ended January 31,     Six Months Ended July 31,  
     2019     2020     2021             2020                 2021      
     (dollars in thousands)  

Revenue

   $ 53,851     $ 121,261     $ 211,854     $ 94,792     $ 142,025  

Gross profit

   $ 44,458     $ 97,346     $ 170,802     $ 75,576     $ 116,430  

Non-GAAP gross profit

   $ 44,722     $ 97,836     $ 172,166     $ 76,703     $ 116,644  

Gross margin

     83 %        80 %        81 %        80 %        82 %   

Non-GAAP gross margin

     83 %        81 %        81 %        81 %        82 %   

Loss from operations

   $ (47,877 )        $ (56,217 )        $ (84,009 )        $ (67,524 )        $ (40,515 )     

Non-GAAP loss from operations

   $ (20,536 )        $ (46,756 )        $ (44,786 )        $ (31,719 )        $ (37,291 )     

Operating margin

     (89 )%      (46 )%      (40 )%      (71 )%      (29 )% 

Non-GAAP operating margin

     (38 )%      (39 )%      (21 )%      (33 )%      (26 )% 

 

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See the section titled “Non-GAAP Financial Measures” for a description of non-GAAP gross profit, non-GAAP gross margin, non-GAAP loss from operations, and non-GAAP operating margin as well as a reconciliation of our non-GAAP financial measures to the most directly comparable financial measure calculated in accordance with GAAP.

 

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RISK FACTORS

A description of the risks and uncertainties associated with our business and ownership of our Class A common stock is set forth below. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including the section titled “Management’s Discussion and Analysis of Financial Condition and Result of Operations” and our consolidated financial statements and the related notes thereto, before making a decision to invest in our Class A common stock. Our business, results of operations, financial condition, or prospects could also be harmed by risks and uncertainties that are not presently known to us or that we currently believe are not material. If any of the risks actually occur, our business, results of operations, financial condition, and prospects could be materially and adversely affected. In that event, the market price of our Class A common stock could decline, and you could lose all or part of your investment.

Risks Related to Our Business and Operations

Our business and operations have experienced rapid growth, and if we do not appropriately manage future growth, if any, or are unable to improve our systems and processes, our business, financial condition, results of operations, and prospects will be adversely affected.

We have experienced rapid growth and increased demand for our offerings. Our total revenues for fiscal 2020 and 2021 were $121.3 million and $211.9 million, respectively, representing an annual growth rate of 75%, and our total revenues for the six months ended July 31, 2020 and 2021 were $94.8 million and $142.0 million, respectively, representing a period-over-period growth rate of 50%. You should not rely on the revenue growth of any prior quarterly or annual period or combined periods as an indication of our future performance. Even if our revenue continues to increase, we expect our revenue growth rate to decline in future periods. We expect to continue to grow our headcount significantly for the near future. The growth and expansion of our business and products place a continuous significant strain on our management, operational, and financial resources. In addition, as customers use more of our products for an increasing number of use cases, we have had to support more complex commercial relationships. We must continue to improve and expand our information technology and financial infrastructure, our operating and administrative systems, our relationships with various partners and other third parties, and our ability to manage headcount and processes in an efficient manner to manage any future growth effectively.

We may not be able to sustain the diversity and pace of improvements to our products or implement systems, processes, and controls in an efficient or timely manner or in a manner that does not negatively affect our results of operations. Our failure to improve our systems, processes, and controls, or their failure to operate in the intended manner, may result in our inability to manage the growth of our business and to forecast our revenue, expenses, and earnings accurately, or to prevent losses.

In addition, our rapid growth may make it difficult to evaluate our future prospects. Our ability to forecast our future results of operations is subject to a number of uncertainties, including our ability to effectively plan for and model future growth. We have encountered in the past, and may encounter in the future, risks and uncertainties frequently experienced by growing companies in rapidly changing industries. If we fail to achieve the necessary level of efficiency in our organization as it grows, or if we are not able to accurately forecast future growth, our business would be harmed. Moreover, if the assumptions that we use to plan our business are incorrect or change in reaction to changes in our market or business, or we are unable to maintain consistent revenue or revenue growth, our share price could be volatile, and it may be difficult to achieve and maintain profitability.

 

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We have a history of net losses and may not be able to achieve or sustain profitability or positive cash flows in the future. If we cannot achieve or sustain profitability or positive cash flows, our business, financial condition, and results of operations may suffer.

We have incurred net losses since our incorporation. We incurred a net loss of $53.4 million and $83.5 million in fiscal 2020 and 2021, respectively, and a net loss of $40.5 million in the six months ended July 31, 2021. We had an accumulated deficit of $216.0 million as of January 31, 2021 and $256.5 million as of July 31, 2021. We anticipate that our operating expenses will increase in the foreseeable future as we continue to enhance our products, grow our relationships with existing customers, broaden our customer base, expand our sales and marketing activities, expand our operations, hire additional employees, and continue to develop our technology. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently, or at all, to offset these higher expenses. Because the markets for our products are rapidly evolving, it is difficult for us to predict our future results of operations. Revenue growth may slow or revenue may decline for a number of possible reasons, including slowing demand for our products or increasing competition. Any failure to increase our revenue as we grow our business could prevent us from achieving profitability or positive cash flow at all or on a consistent basis, which could cause our business, financial condition, and results of operations to suffer.

Our limited operating history makes it difficult to evaluate our current business and prospects, and may increase the risk that we will not be successful.

We were incorporated in Delaware in 2013. We began commercializing our software in 2016, so much of our growth has occurred in recent years. Our limited operating history makes it difficult to evaluate our current business and our future prospects, including our ability to plan for and model future growth. We have encountered and will continue to encounter risks and difficulties frequently experienced by rapidly growing companies in evolving industries. If we do not address these risks successfully, our business and results of operations will be adversely affected.

Further, we operate in a rapidly evolving market. Any predictions about our future revenue and expenses may not be as accurate as they would be if we had a longer operating history or operated in a more predictable market. We have a limited history with our products and pricing model and if, in the future, we are forced to change our pricing model or reduce prices for our products, our revenue and results of operations may be harmed.

As the market for our products evolves, or as new competitors introduce new products or services that compete with ours, we may be unable to attract new customers or convert open source users to paying customers on terms or based on pricing models that we have used historically. In the future, we may be required to reduce our prices or be unable to increase our prices, or it may be necessary for us to increase our products without additional revenue to remain competitive, all of which could harm our results of operations and financial condition.

Our future quarterly results of operations may fluctuate significantly, and our recent results of operations may not be a good indication of our future performance.

Our results of operations, including our revenue, cost of revenue, gross margin, operating expenses, cash flow, and deferred revenue have fluctuated from quarter-to-quarter in the past and may continue to vary significantly in the future so that period-to-period comparisons of our results of operations may not be meaningful. Accordingly, our financial results in any one quarter should not be relied upon as indicative of future performance. Our quarterly financial results may fluctuate as a result of a variety of factors, many of which are outside of our control, may be difficult to predict, and may or

 

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may not fully reflect the underlying performance of our business. Factors that may cause fluctuations in our quarterly financial results include:

 

 

 

our ability to attract and retain new customers;

 

 

 

the loss of existing customers;

 

 

 

customer renewal rates;

 

 

 

our ability to successfully expand our business in the United States and internationally;

 

 

 

our ability to foster an ecosystem of developers and users to expand the use cases of our products;

 

 

 

our ability to gain new partners and retain existing partners;

 

 

 

fluctuations in our number of customers, including those with $100,000 or greater in ARR;

 

 

 

fluctuations in the mix of our revenue, which may impact our gross margins and operating income;

 

 

 

the amount and timing of operating expenses related to the maintenance and expansion of our business and operations, including investments in sales and marketing, research and development, and general and administrative resources;

 

 

 

network outages or performance degradation of our products;

 

 

 

breaches of, or failures relating to, security, privacy, or data protection;

 

 

 

general economic, industry, and market conditions;

 

 

 

increases or decreases in the number of elements of our subscriptions or pricing changes upon any renewals of customer agreements;

 

 

 

changes in our pricing policies or those of our competitors;

 

 

 

the budgeting cycles and purchasing practices of customers;

 

 

 

decisions by potential customers to purchase alternative solutions;

 

 

 

decisions by potential customers to develop in-house solutions as alternatives to our products;

 

 

 

insolvency or credit difficulties confronting our customers, which could adversely affect their ability to purchase or pay for our products;

 

 

 

our ability to collect timely on invoices or receivables;

 

 

 

the cost and potential outcomes of future litigation or other disputes;

 

 

 

future accounting pronouncements or changes in our accounting policies;

 

 

 

our overall effective tax rate, including impacts caused by any reorganization in our corporate tax structure and any new legislation or regulatory developments;

 

 

 

fluctuations in stock-based compensation expense;

 

 

 

the timing and success of new products introduced by us or our competitors or any other change in the competitive dynamics of our industry, including consolidation among competitors, customers, or partners;

 

 

 

the timing of expenses related to the development or acquisition of technologies or businesses and potential future charges for impairment of goodwill from acquired companies; and

 

 

 

other risk factors described in this prospectus.

 

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The impact of one or more of the foregoing or other factors may cause our operating results to vary significantly. Such fluctuations could cause us to fail to meet the expectations of investors.

We rely significantly on revenue from subscriptions and, because we recognize a significant portion of the revenue from subscriptions over the term of the relevant subscription period, downturns or upturns in sales are not immediately reflected in full in our results of operations.

Subscription revenue accounts for the substantial majority of our revenue. We recognize a significant portion of our subscription revenue monthly over the term of the relevant time period. As a result, much of the subscription revenue we report each fiscal quarter is the recognition of deferred revenue from subscription contracts entered into during previous fiscal quarters. Consequently, a decline in new or renewed subscriptions in any one fiscal quarter will not be fully or immediately reflected in revenue in that fiscal quarter and will negatively affect our revenue in future fiscal quarters. Accordingly, the effect of significant downturns in new or renewed sales of our subscriptions will not be reflected in full in our results of operations until future periods.

Because of the permissive rights accorded to third parties under our open-source and source available licenses, there are limited technological barriers to entry into the markets in which we compete and it is, and may continue to be, relatively easy for competitors, including public cloud operators, to enter our markets and compete with us.

One of the characteristics of open source is that the governing license terms generally allow liberal modifications of the code and distribution thereof to a wide group of companies and/or individuals. Our open-source licenses allow anyone, subject to compliance with the conditions of the applicable license, to redistribute our software and share certain source code components in modified or unmodified form and use it to compete in our markets. Such competition can develop without the degree of overhead and lead time required by traditional proprietary software companies, due to the rights granted to licensees of open-source and source available software. It is possible for competitors and new entrants to develop their own software, including software based on open source or our products, and for public cloud operators to expand their offerings to compete directly with ours, potentially reducing the demand for our products and putting pricing pressure on our subscriptions. For example, a new or existing competitor may dedicate its developers to building competing offerings based on open-source and source available software provided by us or third parties, and such offerings may reduce the demand for our offerings. We cannot guarantee that we will be able to compete successfully against current and future competitors that use the open-source nature of our products to compete against us, or that competitive pressure or the availability of new software will not result in price reductions, reduced operating margins and loss of market share, any one of which would harm our business, financial condition, results of operations, and cash flows.

We expect our revenue mix to vary over time, which could harm our gross margin and operating results.

We expect our revenue mix to vary over time due to a number of factors, including the mix of our subscriptions for different products and our professional services revenue. For example, while Terraform and Vault are our most established products with commercial offerings at scale and make up the majority of our revenues, generating collectively over 85% of our revenues for fiscal 2021 and over 85% of our revenues for the six months ended July 31, 2021, we believe that our emerging and community products represent a significant growth opportunity. Currently, our self-managed offerings represent the majority of our revenues. However, we believe that HCP, our fully managed cloud platform, represents a significant growth opportunity for our business, particularly as an increasing number of our customers are looking for a fully managed offering. Shifts in our business mix from quarter to quarter could produce substantial variation in revenue recognized. Further, our gross

 

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margins and operating results could be harmed by changes in revenue mix and costs as we shift further to cloud models, together with numerous other factors, including entry into new markets or growth in lower margin markets; entry into markets with different pricing and cost structures; pricing discounts; and increased price competition. Any one of these factors or the cumulative effects of certain of these factors may result in significant fluctuations in our gross margin and operating results. This variability and unpredictability could result in our failure to meet internal expectations or those of investors for a particular period.

If we are unable to increase sales of subscriptions to our products to new customers, sell additional subscriptions to our products to our existing customers, or expand the value of our existing customers’ subscriptions to our products, our future revenue and results of operations will be harmed.

We offer certain features of our products as open-source software with no payment required. Customers purchase subscriptions to our products in order to gain access to additional functionality and support. Our future success depends on our ability to sell our subscriptions to new customers and to extend the deployment of our products with existing customers by selling paid subscriptions to our existing users and expanding the value and number of existing customers’ subscriptions. Our ability to sell new subscriptions depends on a number of factors, including the prices of our products, prices offered by our competitors, and the budgets of our customers, as well as their desire and ability to create new features and perform their own support relying on our publicly available open-source software products. We also face competition from public cloud operators, who may use our open-source software products to provide and support hosted offerings that compete with our own. We rely in large part on our customers to identify new use cases for our products and new products to meet a broader set of their needs in order to expand such deployments and grow our business. If our customers do not recognize the potential of our products, our business would be materially and adversely affected. If our efforts to sell subscriptions to new customers and to expand deployments at existing customers are not successful, our total revenue and revenue growth rate may decline and our business will suffer.

If our existing customers do not continue to use our products and renew their subscriptions, it could have an adverse effect on our business and results of operations.

We expect to derive a significant portion of our revenue from renewals of existing subscriptions for our products. As a result, achieving a high renewal rate of our subscriptions will be critical to our business. Our customers have no contractual obligation to renew their subscriptions after the completion of their subscription term. Terms of our subscriptions typically range from one to three years.

Our customers’ usage of our products and renewal rates may decline or fluctuate as a result of a number of factors, including their satisfaction with our products and our customer support, our products’ ability to integrate with new and changing technologies, the frequency and severity of product outages, our product uptime or latency, the pricing of our, or competing, products, and our customers’ own budget priorities and fluctuations in spending. Even if our customers renew their subscriptions, they may renew for shorter subscription terms or on other terms that are less economically beneficial to us. We have limited historical data with respect to rates of customer renewals, so we may not accurately predict future renewal trends. If our customers do not renew their subscriptions, or renew on less favorable terms, our revenue may grow slower than expected or decline and our net expansion rate may decline.

 

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Our ability to increase sales of our products is highly dependent on the quality of our customer support, and our failure to offer high-quality support would have an adverse effect on our business, reputation, and results of operations.

Our customers depend on our technical support services to resolve issues relating to our products. If we do not succeed in helping our customers quickly resolve post-deployment issues or provide effective ongoing support and education on our products, our existing customers may not renew their subscriptions, our ability to sell additional subscriptions to existing customers or expand the value of existing customers’ subscriptions would be adversely affected, and our reputation with potential customers could be damaged. Many larger enterprise and government entity customers have more complex IT environments and require higher levels of support than smaller customers. If we fail to meet the requirements of these enterprise customers, it may be more difficult to grow sales with them.

Additionally, it can take several months to recruit, hire, and train qualified technical support employees. We may not be able to hire such resources fast enough to keep up with demand, particularly if the sales of our products exceed our internal forecasts. To the extent that we are unsuccessful in hiring, training, and retaining adequate support resources, our ability to provide adequate and timely support to our customers, and our customers’ satisfaction with our products, will be adversely affected. Our failure to provide and maintain high-quality support services would have an adverse effect on our business, financial condition, and results of operations.

If we do not effectively focus our product development efforts, our business, results of operations, and financial condition could be adversely affected.

We are a multi-product company. Our primary commercial products are Terraform, Vault, Consul, and Nomad, and our significant investments in research and development have resulted in a strong product pipeline. Our ability to attract new customers and increase revenue from existing customers depends in part on our ability to enhance and improve our existing products, increase adoption and usage of our products, and introduce new products. The success of any enhancements or new products depends on several factors, including timely completion, adequate quality testing, actual performance quality, market-accepted pricing levels, and overall market acceptance. Continuously enhancing the significant number of our current products and advancing the new product pipeline may overextend our workforce and negatively affect product quality and development schedules. Enhancements and new products that we develop may not be introduced in a timely or cost-effective manner, may contain errors or defects, may require reworking features and capabilities, may have interoperability difficulties with our platform or other products or may not achieve the broad market acceptance necessary to generate significant revenue. Not all new products that we develop may become commercially successful, and we may prioritize the development of products that do not become commercially successful over products which may have had a more likely chance of attaining commercial success. Workforce productivity spent on these product development efforts may not be recouped in the form of sales to customers. Furthermore, our ability to increase the usage of our products depends, in part, on the development of new use cases for our products, which is typically driven by our developer community and may be outside of our control. In addition, adoption of new products or enhancements may put additional strain on our customer support team, which could require us to make additional expenditures related to further hiring and training. If we are unable to timely and successfully enhance our existing products to meet evolving customer requirements, increase adoption and usage of our products, develop new products, or if our efforts do not render the outcomes we expect, then our business, results of operations, and financial condition would be adversely affected.

 

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We have limited experience with respect to determining the optimal prices for our products.

We charge our customers a subscription fee for use of our products. We expect that we may need to change our pricing from time to time, for example, to charge our customers based on their use of our products. In the past, we have sometimes reduced our prices either for individual customers in connection with long-term agreements or for a particular product. We may also face increasing costs which we may be unable or unwilling to pass through to our customers given pricing pressure, which could adversely impact our business, results of operations, and financial condition.

Further, as competitors introduce new products or services that compete with ours or reduce their prices, we may be unable to attract new customers or retain existing customers based on our historical pricing. As we expand internationally, we also must determine the appropriate price to enable us to compete effectively internationally. Moreover, enterprises, which are a primary focus for our direct sales efforts, may demand substantial price concessions. In addition, if the mix of products sold changes, then we may need to, or choose to, revise our pricing. As a result, in the future we may be required or choose to reduce our prices or change our pricing model, which could adversely affect our business, results of operations, and financial condition.

We target enterprise customers, and sales to these customers involve risks that differ from risks associated with sales to smaller entities.

We generally target large enterprise customers. Sales to large enterprise customers involve risks that may not be present or that are present to a lesser extent with sales to smaller entities, such as longer sales cycles, more complex customer requirements and contract negotiations, substantial upfront sales costs, and less predictability in completing some of our sales. For example, enterprise customers may require considerable time to evaluate and test our solutions and those of our competitors prior to making a purchase decision and placing an order. A number of factors influence the length and variability of our sales cycle, including the need to educate potential customers about the uses and benefits of our solutions, the discretionary nature of purchasing and budget cycles, and the competitive nature of evaluation and purchasing approval processes. As a result, the length of our sales cycle, from identification of the opportunity to deal closure, may vary significantly from customer to customer, with sales to large enterprises typically taking longer to complete. Moreover, large enterprise customers often begin to deploy our products on a limited basis, but nevertheless demand integration services and pricing negotiations, with no guarantee that they will deploy our products widely across their organization.

The length of our sales cycles can be unpredictable, and our sales efforts may require considerable time and expense.

Our results of operations may fluctuate, in part, because of the length and variability of the sales cycle of our subscriptions to our products and the difficulty in making short-term adjustments to our operating expenses. Our results of operations depend in part on sales to large subscription customers and increasing sales to existing customers. The length of our sales cycle, from initial contact with our sales team to contractually committing to our subscriptions can vary substantially from customer to customer based on deal complexity. It is difficult to predict exactly when, or even if, we will make a sale to a potential customer or if we can increase sales to an existing customer. As a result, large individual sales have, in some cases, occurred in quarters subsequent to those we anticipated, or have not occurred at all. The loss or delay of one or more large transactions in a quarter could affect our cash flows and results of operations for that quarter and for future quarters. Customers often view a subscription to our products as a strategic decision and significant investment and, as a result, frequently require considerable time to evaluate, test, and qualify our products before entering into or expanding a subscription. During the sales cycle, we expend significant time and money on sales and

 

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marketing and contract negotiation activities which may not result in a sale. Because a substantial proportion of our expenses are relatively fixed in the short term, our results of operations will suffer if revenue falls below our expectations in a particular quarter.

Our revenue growth depends in part on the success of our strategic relationships with our ecosystem of partners and the continued performance of these partners.

We maintain partnership relationships with a variety of partners, including public cloud providers, systems integrators, independent software vendors, channel partners, referral partners, and technology partners to jointly deliver offerings to our end customers and complement our broad community of users. Our agreements with our partners are generally non-exclusive, meaning our partners may offer customers the offerings of several different companies, including offerings that compete with ours, or may themselves be or become competitors. If our partners do not effectively market and sell our offerings, choose to use greater efforts to market and sell their own offerings or those of our competitors, or fail to meet the needs of our customers, our ability to grow our business and sell our offerings may be harmed. Our partners may cease marketing our offerings with limited or no notice and with little or no penalty. The loss of a substantial number of our partners, our possible inability to replace them, or the failure to recruit additional partners could harm our results of operations. Likewise, because the success of our products depends on integrations with partners’ technologies, if partners decide to no longer implement or support such integrations, or if they partner with our competitors and devote greater resources to implement and support the products of competitors, our business may be harmed.

Our ability to achieve revenue growth in the future will depend in part on our success in developing and maintaining successful relationships with our partners and in helping our partners enhance their ability to market and sell our subscriptions. If we are unable to maintain our relationships with these partners, our business, results of operations, financial condition, or cash flows could be harmed.

The estimates of market opportunity and forecasts of market growth included in this prospectus may prove to be inaccurate, and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all.

The estimates of market opportunity and forecasts of market growth included in this prospectus may prove to be inaccurate. Market opportunity estimates and growth forecasts included in this prospectus, including those we have generated ourselves, and those provided by third parties, such as the 650 Group, Gartner, or IDC, are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate, including the risks described herein. Even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all.

The variables that go into the calculation of our market opportunity are subject to change over time, and there is no guarantee that any particular number or percentage of addressable users or companies covered by our market opportunity estimates will purchase our products at all or generate any particular level of revenue for us. Any expansion in our market depends on a number of factors, including the cost, performance, and perceived value associated with our products and the products provided by our competitors. Even if the market in which we compete meets the size estimates and growth forecasted in this prospectus, our business could fail to grow at similar rates, if at all. Our growth is subject to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties. Accordingly, the forecasts of market growth included in this prospectus should not be taken as indicative of our future growth.

 

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The markets for some of our products are new, unproven, and evolving, and our future success depends on the growth and expansion of these markets and our ability to adapt and respond effectively to evolving markets.

The markets for certain of our products are relatively new, rapidly evolving, and unproven. Accordingly, it is difficult to predict customer adoption and renewals for these products, customers’ demand for these products, the size, growth rate, expansion, and longevity of these markets, the entry of competitive products, or the success of existing competitive products. Our ability to penetrate these new and evolving markets depends on a number of factors, including the cost, performance, and perceived value associated with our products. If these markets do not continue to grow as expected, or if we are unable to anticipate or react to changes in these markets, our competitive position would weaken, which would adversely affect our business and results of operations.

We face competition that we expect to become more intense over time, and which could adversely affect our business, financial condition, and results of operations.

The market for our products is developing and our competition is expected to increase over time. Our business is impacted by rapid changes in technology, customer needs, frequent introductions of new offerings, and improvements to existing offerings, all of which may increase the competitive pressures that we face. We provide offerings to address the needs of a wide variety of prospective customers that compete with other approaches and solutions. For example, internal IT teams sometimes attempt to “do it themselves” using open-source software. While individuals and small teams can sometimes use our open-source products to solve their technical problems, larger enterprises face more complex needs that require our commercial products. For select companies adopting a single-cloud solution, we compete with the well-established public cloud providers such as Amazon Web Services, or AWS, and their in-house offerings. We also compete with similar in-house offerings from Microsoft Azure, Google Cloud Platform, and other cloud providers; legacy providers with point products such as Red Hat, CyberArk, VMware, and IBM; and alternative open-source projects, such as Google Istio.

As the market for our products develops, the principal competitive factors in our market may include: product capabilities, including flexibility, scalability, performance, and security; ease of use; breadth of use cases supported; ability to integrate with existing IT infrastructure, cloud platforms, and on-premises environments; offering consistency across clouds; ability to implement multi-cloud provisioning, security, networking, and application deployment; speed of implementation and time to achieving value; ability to scale up and down dynamically on demand; robustness of professional services and customer support; price and total cost of ownership; adherence to certifications; size of customer base and level of user adoption; strength of sales and marketing efforts; offering an ecosystem of vendors integrated with the products; creating new products and expanding the existing platform; ability to innovate around a cloud-delivered architecture; brand awareness, recognition, and reputation, particularly within the open source community; and ability to engage the community of open source users and partners. If we fail to innovate and improve our products and professional services to address these factors, we may become vulnerable to increased competition and therefore fail to attract new customers or lose or fail to renew existing customers, which would cause our business and results of operations to suffer.

Some of our actual and potential competitors, especially more established companies, may expand their offerings to compete with our offerings. These companies may have advantages over us, such as longer operating histories, more established relationships with current and potential customers and commercial partners, significantly greater financial, technical, marketing or other resources, stronger brand recognition, larger intellectual property portfolios, and broader global distribution and presence. Our business model also assumes that our customers are committed to a multi-cloud strategy and will not bundle their cloud services. However, if this assumption does not accurately

 

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reflect the decisions of our customers, our business may suffer. Some of our larger potential competitors and other cloud providers have substantially greater resources than we do and therefore may afford to bundle competitively priced related products and services, which may allow them to leverage existing commercial relationships, incorporate functionality into existing products, sell products with which we compete at zero or negative margins, offer fee waivers and reductions or other economic and non-economic concessions, maintain closed technology platforms, or render our products unable to interoperate with such platforms. Our actual or potential customers may prefer to bundle their cloud services with one of our potential competitors even if such competitors’ individual products have more limited functionality compared to our software. These larger potential competitors are also often in a better position to withstand any significant reduction in technology spending and will therefore not be as susceptible to competition or economic downturns. Our potential competitors may also be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, or customer requirements. In addition, some potential competitors may offer products or services that address one or a limited number of functions at lower prices, with greater depth than our products or in geographies where we do not operate. With the introduction of new technologies and new market entrants, we expect competition to grow in the future.

Furthermore, our actual and potential competitors may establish cooperative relationships among themselves or with third parties that may further enhance their resources and offerings in the markets we address. In addition, third parties with greater available resources may acquire current or potential competitors. As a result of such relationships and acquisitions, our actual or potential competitors might be able to adapt more quickly to new technologies and customer needs, devote greater resources to the promotion or sale of their products, initiate or withstand substantial price competition, take advantage of other opportunities more readily, or develop and expand their offerings more quickly than we do. For all of these reasons, we may not be able to compete successfully against our current or potential competitors.

Problems with our internal systems, networks, or data, including actual or perceived breaches or failures by us or our partners, could cause our products to be perceived as insecure, underperforming, or unreliable, our reputation to be damaged, and our financial results to be negatively impacted.

Our offerings involve the transmission and processing of data, which can include personal information and our or our customers’ or other third parties’ highly sensitive, proprietary, and confidential information. In addition to threats from traditional attackers and insider threats, we also face security threats from malicious third parties, including individual hackers, sophisticated criminal groups, nation states, and state-sponsored organizations, that could obtain unauthorized access to our internal systems, networks, and data, as well as systems of organizations using our cloud products and services, and the information they store and process. Users and organizations using our services may also disclose or leak their passwords, API keys, or secrets that could lead to unauthorized access to their accounts and data within our products. Such incidents have become more prevalent in our industry, particularly against cloud services, and may in the future result in the unauthorized, unlawful, or inappropriate access to, inability to access, disclosure of, or loss of the sensitive, proprietary, and confidential information that we own, process, or control, such as customer information and proprietary data and information, including source code and secrets. It is virtually impossible for us to entirely mitigate the risk of these security threats. While we have implemented security measures internally and have integrated security measures into our products, these measures may not function as expected and may not detect or prevent all unauthorized activity, prevent all security breaches and incidents, mitigate all security breaches or incidents, or protect against all attacks or incidents. Moreover, our products incorporate a variety of third-party components (including open-source software components) which may expose us to additional security threats, and vulnerabilities in those components may be difficult or impossible to detect, control, and manage. We may also experience security breaches and

 

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other incidents that may remain undetected for an extended period and, therefore, may have a greater impact on our products, the networks and systems used in our business, and the proprietary and other confidential data contained on such networks and systems. We expect to incur significant costs in our efforts to detect and prevent security breaches and other security-related incidents, and we may face increased costs in the event of an actual or perceived security breach or other security-related incident. These cybersecurity risks pose a particularly significant risk to a business like ours that is focused on providing highly secure products to customers. Additionally, as a remote-first company, our workforce functions in a remote work environment that requires remote access to our corporate network, which in turn imposes additional risks to our business, including increased risk of industrial espionage, theft of assets, phishing, and other cybersecurity attacks, and inadvertent or unauthorized access to or dissemination of sensitive, proprietary, or confidential information.

We also engage third-party vendors and service providers to store and otherwise process some of our and our customers’ data, including sensitive and personal information. Our vendors and service providers may also be the targets of cyberattacks, malicious software, phishing schemes, fraud, and may face other cybersecurity threats and may suffer cybersecurity breaches and incidents from these and other causes. Our ability to monitor these parties’ data security is limited. There can be no assurance that any security measures that we or our third-party service providers, including third-party providers of cloud infrastructure services, have implemented will be effective against current or future security threats, and we cannot guarantee that our systems and networks or those of our third-party service providers have not been breached or that they do not contain exploitable defects or bugs that could result in a breach of or disruption to our systems and networks or the systems and networks of third parties that support us and our products. While we maintain measures designed to protect the integrity, confidentiality, and security of our data and other data we maintain or otherwise process, our security measures or those of our third-party service providers could fail and result in unauthorized access to or disclosure, modification, misuse, loss, or destruction of such data. Unauthorized access to, other security breaches of, or security incidents affecting, systems, networks, and data of our vendors, contractors, or those with which we have strategic relationships, even if not resulting in an actual or perceived breach of our customers’ networks, systems, or data, could result in the loss, compromise, or corruption of data, loss of business, reputational damage adversely affecting customer or investor confidence, regulatory investigations and orders, litigation, indemnity obligations, damages for contract breach, penalties for violation of applicable laws or regulations, significant costs for remediation, and other liabilities.

Our products may experience errors, failures, vulnerabilities, or bugs that cause our products not to perform as intended. Any such errors, failures, vulnerabilities, or bugs may not be found until after they are deployed to our customers and may create the perception that our platform and products are insecure, underperforming, or unreliable. We also provide frequent updates and fundamental enhancements to our platform and products, which increase the possibility of errors. Our quality assurance procedures and efforts to report, track, and monitor issues with our products may not be sufficient to ensure we detect any such defects in a timely manner. There can be no assurance that our software code is or will remain free from actual or perceived errors, failures, vulnerabilities, or bugs.

Many of our customers may use our software for controlling their infrastructure and processing, transmitting, and protecting their sensitive and proprietary information, including business strategies, financial and operational data, personal or identifying information, and other related data. Our Vault product is specifically designed to assist our customers with management of their private and sensitive information. Actual or perceived breaches or other security incidents from actual or perceived errors, failures, vulnerabilities, or bugs in our products or other causes could lead to claims and litigation, indemnity obligations, regulatory audits, proceedings, investigations and significant legal fees, significant costs for remediation, the expenditure of significant financial resources in efforts to analyze, correct, eliminate, remediate, or work around errors or defects, to address and eliminate vulnerabilities,

 

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and to address any applicable legal or contractual obligations relating to any actual or perceived security breach or incident. They could damage our relationships with our existing customers and have a negative impact on our ability to attract and retain new customers. Because our business is focused in part on providing security to our customers with our Vault and other products, we believe that such products could be targets for hackers and others, and that an actual or perceived breach of, or security incident affecting, our security products and customers, could be especially detrimental to our reputation, customer confidence in our security products, and our business. The potential for an attack is compounded now that our Vault product is included as a cloud offering. Additionally, our products are designed to operate with little or no downtime. If a breach or security incident were to impact the availability of our products, our business, results of operations, and financial condition, as well as our reputation, could be adversely affected.

While we have taken steps designed to protect the confidentiality, integrity, and availability of our systems and the sensitive, proprietary, and confidential information that we own, process, or control, our security measures or those of third parties who we work with have been, and could from time to time in the future be, breached or otherwise not effective against security threats or preventing inadvertent or unauthorized access to or dissemination of sensitive, proprietary, or confidential information. For example, beginning in January 2021, a malicious third party gained unauthorized access to a third-party vendor, Codecov, that provides a software code testing tool, potentially affecting more than a thousand of Codecov’s customers, including us. Through our investigations, we have determined that the attackers leveraged a vulnerability in Codecov’s software to gain access to credentials in our development environment, and thereby obtained unauthorized read-only access to, and copied to overseas IP addresses, the private GitHub repositories containing our source code, signing keys, and references to certain customers. Upon learning of the breach, we took action to revoke Codecov’s access and discontinued our use of the Codecov service, rotated all of our credentials identified as exposed by the Codecov compromise to prevent further unauthorized access, analyzed available logs to determine whether there was evidence that the exposed credentials were leveraged to gain access to our systems or those of our customers, enhanced monitoring of our environment to identify and respond to suspicious activity. We have not found any evidence of unauthorized access to any customer data sent through or stored in our products, nor have we found any evidence that the attackers modified any of our source code or uploaded any malware or any other malicious code to our system. However, the full extent of the impact of this incident on our operations and products is not yet known, and we cannot assure you that there will be no impact in the near term or at all. This incident or any future incidents relating to the Codecov breach could result in the use of exfiltrated source code to attempt to identify vulnerabilities in our offering, future ransomware or social engineering attacks, reduced market acceptance of our offering, injury to our reputation and brand, legal claims against us, and the diversion of our resources.

These risks are likely to increase as we continue to grow and process, control, store, and transmit increasingly large amounts of data.

Additionally, we cannot be certain that our insurance coverage will be adequate or otherwise protect us with respect to claims, expenses, fines, penalties, business loss, data loss, litigation, regulatory actions, or other impacts arising out of security breaches, or that such coverage will continue to be available on acceptable terms or at all. Any of these results could adversely affect our business, financial condition, and results of operations.

 

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If our self-managed offerings do not meet our customers’ performance expectations or if we fail to meet service-level commitments to our cloud platform customers, we could face subscription terminations and a reduction in renewals, which could significantly affect our current and future revenue.

If we fail to meet the performance expectations that our self-managed customers have for our products or minimum service-level availability commitments made to our cloud platform customers, then we may not retain our customers or they may not renew at expected rates. With respect to service-level availability commitments, we may be obligated to pay monetary penalties to the impacted cloud customers. Additionally, we may be contractually obligated to provide cloud customers with additional capacity and reputationally obligated to provide self-managed customers with additional support, each of which could significantly affect our revenue.

Our reliance on public cloud providers may impact our ability to meet service-level targets or performance targets, as any interruption in all or any portion of the public cloud could result in negative impacts to the service we are able to provide. In some cases, we may not have a contractual right with our public cloud providers that compensates us for any losses due to interruptions.

Further, the failure to meet our service-level commitments or performance targets on a chronic basis could result in damage to our reputation and we could face loss of revenue from reduced subscription levels from existing and prospective customers. Any service-level or performance failures could adversely affect our business, financial condition, and results of operations and, if made public, could harm our brand.

If we are not able to keep pace with technological and competitive developments or fail to integrate our products with a variety of technologies that are developed by others, our products may become less marketable, less competitive, or obsolete, and our results of operations may be adversely affected.

The success of our new product introductions depends on a number of factors including, but not limited to, timely and successful product development, market acceptance, our ability to manage the risks associated with new product releases, the effective management of development and other spending in connection with anticipated demand for new products, and the availability of newly developed products. We have in the past experienced bugs, errors, or other defects or deficiencies in new products and product updates and delays in releasing new products, deployment options, and product enhancements and may have similar experiences in the future. As a result, some of our customers may either defer purchasing our products until we release new enhancements or switch to a competitor if we are not able to keep up with technological developments. If we are unable to successfully enhance our existing products to meet evolving customer requirements, increase adoption and use cases of our products, develop new products, quickly resolve security vulnerabilities, or if our efforts to increase the use cases of our products are more expensive than we expect, then our business, results of operations, and financial condition would be adversely affected.

In addition, our success depends on our ability to integrate our products with a variety of third-party technologies across any public or private platform or on-premises technology. Our technology partnership ecosystem powers significant extensibility of our products and offers our customers the ability to use external tools of their choice with our products and to deploy our products in their preferred environments and successfully support new package technologies as they arise. Further, our products must be compatible with the major cloud service providers in order to support local hosting of our products in geographies chosen by our customers. We also benefit from access to public and private vulnerability databases.

 

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Changes in our relationship with any provider, the instability or vulnerability of any third-party technology, or the inability of our products to successfully integrate with third-party technology may adversely affect our business and results of operations. Any losses or shifts in the market position of these providers in general, in relation to one another or to new competitors or new technologies, could lead to losses in our relationships or customers, or to our need to identify and develop integrations with new third-party technologies. Such changes could consume substantial resources and may not be effective. Further, any expansion into new geographies may require us to integrate our products with new third-party technology and invest in developing new relationships with providers. If we are unable to respond to changes in a cost-effective manner, our products may become less marketable, less competitive, or obsolete and our results of operations may be negatively impacted.

Failure of our products to satisfy customer demands or to achieve increased market acceptance could adversely affect our business, results of operations, financial condition, and growth prospects.

We derive and expect to continue to derive substantially all of our revenue from our products. As a result, market acceptance of our products is critical to our continued success. Demand for our products is affected by numerous factors beyond our control, including continued market acceptance, the timing of development and release of new products by our competitors, technological change, any developments or disagreements with the open source community, and growth or contraction in our market or the overall economy. We expect the growth and proliferation of data to lead to an increase in the data analyses demands of our customers and we may not be able to scale and perform to meet those demands or may not be chosen by users for those needs. If we are unable to continue to meet customer demands or to achieve more widespread market acceptance of our products, our business operations, financial results, and growth prospects will be materially and adversely affected.

Unfavorable conditions in our industry or the global economy or reductions in spending for products like ours could limit our ability to grow our business and negatively affect our results of operations.

Our results of operations may vary based on the impact of changes in our industry or the global economy on us or our customers. Current or future economic uncertainties or downturns could adversely affect our business and results of operations. Negative conditions in the general economy both in the United States and abroad, including conditions resulting from changes in gross domestic product growth, financial and credit market fluctuations, political turmoil, natural catastrophes, warfare, and terrorist attacks on the United States, Europe, the Asia-Pacific region, or elsewhere, could cause a decrease in business investments by our customers and potential customers, including spending on information technology, and negatively affect the growth of our business. To the extent our offerings are perceived by customers and potential customers as discretionary, our revenue may be disproportionately affected by delays or reductions in general information technology spending. Also, customers may choose to develop in-house software as an alternative to using our products. Moreover, competitors may respond to market conditions by lowering prices. We cannot predict the timing, strength, or duration of any economic slowdown, instability, or recovery, generally or within any particular industry. If the economic conditions of the general economy or markets in which we operate do not improve, or worsen from present levels, our business, results of operations, and financial condition could be adversely affected.

If we are not able to maintain and enhance our brand, especially among practitioners, our business and operating results may be adversely affected.

We believe that developing and maintaining widespread awareness of our brand, especially with practitioners, is critical to achieving widespread acceptance of our products and attracting new users

 

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and customers. Brand promotion activities may not generate user or customer awareness or increase revenue, and even if they do, any increase in revenue may not offset the expenses we incur in building our brand. Expenditures intended to maintain and enhance our brand may not be cost-effective or effective at all. If we do not successfully maintain and enhance our brand, we may have reduced pricing power relative to our competitors, we could lose customers, or we could fail to attract potential new customers or expand sales to our existing customers, all of which could materially and adversely affect our business, results of operations, and financial condition.

Our international operations expose us to significant risks, and failure to manage those risks could materially and adversely impact our business.

Our customers and employees are located worldwide, and our strategy is to continue to expand internationally. Our future results of operations depend, in part, on our ability to sustain and expand our penetration of the international markets in which we currently operate and to expand into additional international markets. We generated 25% of our revenue outside of the United States in fiscal 2021 and 28% in the six months ended July 31, 2021. Our ability to expand internationally involves various risks, including the need to invest significant resources in such expansion, and the possibility that returns on such investments will not be achieved in the near future or at all in these less familiar competitive environments. We may also choose to conduct our international business through partnerships. If we are unable to identify partners or negotiate favorable terms, our international growth may be limited. In addition, we have incurred and may continue to incur significant expenses in advance of generating material revenue as we attempt to establish our presence in particular international markets. Additional risks associated with our international operations include:

 

 

 

unexpected changes in regulatory requirements, taxes, trade laws, tariffs, export quotas, custom duties, or other trade restrictions;

 

 

 

different labor regulations, especially in the European Union, where labor laws are generally more advantageous to employees as compared to the United States, including deemed hourly wage and overtime regulations in these locations;

 

 

 

exposure to many stringent and potentially inconsistent laws and regulations relating to privacy, data protection, and data security, particularly in the European Union;

 

 

 

changes in a specific country’s or region’s political or economic conditions;

 

 

 

challenges inherent to efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits, and compliance programs;

 

 

 

risks relating to the implementation of exchange controls and trade protection regulations and measures in the United States or in other jurisdictions;

 

 

 

greater difficulty in enforcing contracts and accounts receivable collection, and longer collection periods;

 

 

 

limitations on our ability to reinvest earnings from operations derived from one country to fund the capital needs of our operations in other countries;

 

 

 

limited or unfavorable intellectual property protection; and

 

 

 

exposure to liabilities under anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act of 1977, as amended, or FCPA, and similar applicable laws and regulations in other jurisdictions.

The expansion of our existing international operations and entry into additional international markets will require significant management attention and financial resources. Our failure to

 

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successfully manage our international operations and the associated risks could limit the future growth of our business. If we are unable to address these difficulties and challenges or other problems encountered in connection with our international operations and expansion, we might incur unanticipated liabilities or we might otherwise suffer harm to our business generally.

Incorrect implementation or use of, or our customers’ failure to update, our products could result in customer dissatisfaction and negatively affect our business, operations, financial results, and growth prospects.

Our products are often operated in large scale, complex IT environments. Our customers and some partners require training and experience in the proper use of and the benefits that can be derived from our products to maximize their potential. If our customers do not implement, update or use our products correctly or as intended, inadequate performance, and/or security vulnerabilities may result. Because our customers rely on our software to manage a wide range of operations, the incorrect implementation, use of, or our customers’ failure to update, our software or our failure to train customers on how to use our software productively may result in customer dissatisfaction, negative publicity and may adversely affect our reputation and brand. Failure by us to effectively provide training and implementation services to our customers could result in lost opportunities for follow-on sales to these customers and decrease subscriptions by new customers, and adversely affect our business and growth prospects.

We depend on cooperating with public cloud operators. Changes to arrangements with such operators may significantly harm our customer retention, new customer acquisition, and product extension or expansion, or require us to change our business models, operations, practices, or advertising activities, which could restrict our ability to maintain our platform through these clouds and would adversely impact our business.

We depend upon the public cloud operators, primarily AWS, Google Cloud, and Microsoft Azure, to offer our products to our customers. Because of the significant use of our platform on public clouds, our solutions must remain interoperable with them. Further, we are subject to the standard agreements, policies, and terms of service of these public clouds, as well as agreements, policies, and terms of service of the various application stores that make our solutions available to our developers, creators, customers, and users. These agreements, policies, and terms of service govern the availability, promotion, distribution, content, and operation generally of applications and experiences on such public clouds. As a result, we may not successfully cultivate relationships with key industry participants or develop products that operate effectively with these technologies, systems, networks, regulations, or standards. If it becomes more difficult for our customers or users to access and engage with our platform on the public clouds they are already using, if our customers choose not to access or use our platform application on their cloud accounts, or if our customers or users choose to use public clouds that do not offer or discontinue access to our platform, our business and customer retention, new customer acquisition, and product extension or expansion could be significantly harmed.

The owners and operators of these public clouds each have approval authority over our platform’s deployment on their systems and offer products that compete with ours. We have no control over these public clouds, and any changes to these clouds that degrade our platform’s functionality, or give preferential treatment to competitive products, could significantly harm our platform. Those companies have no obligation to test the interoperability of their clouds with our platform. If any of these companies introduced modifications to their clouds that purposefully or inadvertently made them incompatible with or not optimal for use of our platform, such disruption to our platform would harm our business. Additionally, such operators could make our platform, or certain features of our platform, inaccessible on their public clouds for a potentially significant period of time. An operator could also limit or discontinue our access to its public cloud if it establishes more favorable relationships with one

 

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or more of our competitors, launches a competing product itself, or it otherwise determines that it is in its business interests to do so. Such operators could display their competitive offerings more prominently than ours. We plan to continue to introduce new technologies on our platform regularly and have experienced that it takes time to adjust such technologies to function with these public clouds, impacting the adoption of our new technologies and features, and we expect this trend to continue.

Each public cloud operator has broad discretion to change and interpret its agreements, terms of service, and policies with respect to our platform, and those changes may be unfavorable to us and our customers’ use of our platform. If we were to violate, or a public cloud operator believes that we have violated, its agreements, terms of service, or policies, that public cloud operator could limit or discontinue our access to its cloud. In some cases these requirements may not be clear or our interpretation of the requirements may not align with the interpretation of the public cloud operator, which could lead to inconsistent enforcement of these agreements, terms of service, or policies against us, and could also result in the public cloud operator’s limiting or discontinuing access to its cloud. Any limitation on or discontinuation of our access to any public cloud could adversely affect our business, financial condition or results of operations.

We rely upon public cloud operators to operate our platform and any disruption of or interference with our use of these operators’ services would adversely affect our business, results of operations, and financial condition.

We outsource substantially all of our cloud infrastructure to public cloud operators that host our products and platform, and our dependence will increase as we introduce new cloud products. Customers of our products need to be able to access our platform at any time, without interruption or degradation of performance. Public cloud operators run their own platforms that we access, and we are, therefore, vulnerable to service interruptions of these platforms. We have experienced, and expect that in the future we may experience interruptions, delays, and outages in service and availability from time to time due to a variety of factors, including infrastructure changes, human or software errors, website hosting disruptions, and capacity constraints. Capacity constraints could be due to a number of potential causes including technical failures, natural disasters, fraud, or security attacks. In addition, if our security, or that of public cloud operators, is or is perceived to have been compromised, our products or platform are unavailable or our users are unable to use our products within a reasonable amount of time or at all, then our business, results of operations, and financial condition could be adversely affected. In some instances, we may not be able to identify the cause or causes of these performance problems within a period of time acceptable to our customers. It may become increasingly difficult to maintain and improve our platform performance, especially during peak usage times, as our products become more complex and the usage of our products increases. To the extent that we do not effectively address capacity constraints through our public cloud operators, our business, results of operations, and financial condition may be adversely affected. In addition, any changes in service levels from our public cloud operators may adversely affect our ability to meet our customers’ requirements.

The substantial majority of the services we use cloud service providers for are cloud-based server capacity and, to a lesser extent, storage and other optimization offerings. Public cloud operators allow us to order and reserve server capacity in varying amounts and sizes distributed across multiple regions. We access public cloud operator infrastructure through standard IP connectivity. Public cloud operators provide us with computing and storage capacity pursuant to an agreement that continues until terminated by either party. Public cloud operators may terminate the agreement by providing 30 days’ prior written notice and may in some cases terminate the agreement immediately for cause upon notice. Although we expect that we could receive similar services from other third parties, if any of our arrangements with public cloud operators are terminated, we could experience interruptions on our platform and in our ability to make our products available to customers, as well as delays and additional expenses in arranging alternative cloud infrastructure services.

 

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Any of the above circumstances or events may harm our reputation, cause customers to stop using our products, impair our ability to increase revenue from existing customers, impair our ability to grow our customer base, subject us to financial penalties and liabilities under our service-level agreements, and otherwise harm our business, results of operations, and financial condition.

Interruptions or performance problems associated with our technology and infrastructure, and our reliance on technologies from third parties, may adversely affect our business operations and financial results.

Our website and internal technology infrastructure may experience performance issues due to a variety of factors, including infrastructure changes, human or software errors, website or third-party hosting disruptions, capacity constraints, technical failures, natural disasters, or fraud or security attacks. Our use and distribution of third-party open-source software and reliance on other third-party services may increase this risk. For example, we are dependent on our relationship with a third-party processor for installation and packaging solutions in one of our products. If our website is unavailable or our users are unable to download our products or order subscriptions or services within a reasonable amount of time or at all, our business could be harmed. We expect to continue to make significant investments to maintain and improve website performance and to enable rapid releases of new features and applications for our products. To the extent that we do not effectively upgrade our systems as needed and continually develop our technology to accommodate actual and anticipated changes in technology, our business and results of operations may be harmed.

If we experience an interruption in service for any reason, our cloud offerings would similarly be interrupted. An interruption in our services to our customers could cause our customers’ internal and consumer-facing applications to fail to function properly, which could have a material adverse effect on our business, operations, financial results, customer relationships, and reputation. In addition, we rely on cloud technologies from third parties in order to operate critical functions of our business, including financial management services, customer relationship management services, and lead generation management services. Accordingly, if these services become unavailable due to extended outages or interruptions or because they are no longer available on commercially reasonable terms or prices, our expenses could increase, our ability to manage our finances could be interrupted, our processes for managing sales of our products and supporting our customers could be impaired, and our ability to generate and manage sales leads could be weakened until equivalent services, if available, are identified, obtained, and implemented, all of which could harm our business and results of operations.

A real or perceived defect, security vulnerability, error, or performance failure in our products could cause us to lose revenue, damage our reputation, and expose us to liability.

Our products are inherently complex and, like all software, despite extensive testing and quality control, have in the past and may in the future contain defects or errors, especially when first introduced, or not perform as contemplated. These defects, security vulnerabilities, errors, or performance failures could cause damage to our reputation, loss of customers or revenue, product returns, order cancellations, service terminations, or lack of market acceptance of our software, which could expose us to liability. Because our products involve sensitive, secure and/or mission-critical uses by our customers, we may be subject to increased scrutiny, potential reputational risk, or potential liability should our software fail to perform as contemplated in such deployments. We have in the past and may in the future need to issue corrective releases of our software to fix these defects, errors, or performance failures, which could require us to allocate significant research and development and customer support resources to address these problems.

Techniques used to sabotage or obtain unauthorized access to systems or networks are constantly evolving and, in some instances, are not identified until launched against a target. We and

 

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our service providers may be unable to anticipate these techniques, react in a timely manner, or implement adequate preventative measures.

Further, there can be no assurance that any limitations of liability provisions in our customer and user agreements, contracts with third-party vendors and service providers, or other contracts would be enforceable or adequate or would otherwise protect us from any liabilities or damages with respect to any particular claim relating to a security breach or other security-related matter. Any cybersecurity insurance that we carry may be insufficient to cover all liabilities incurred by us in connection with any privacy or cybersecurity incidents or may not cover the kinds of incidents for which we submit claims. For example, insurers may consider cyberattacks by a nation-state as an “act of war” and any associated damages as uninsured. We also cannot be certain that our insurance coverage will be adequate for data handling or data security liabilities actually incurred, that insurance will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, results of operations, and financial condition, as well as our reputation.

We depend on our senior management and other key employees, and the loss of one or more of these employees or an inability to attract, train, and retain highly skilled employees could harm our business.

Our future success is substantially dependent on our ability to continue to attract and retain highly skilled personnel. The loss of the services of any of our key personnel, the inability to attract or retain qualified personnel, or delays in hiring required personnel, particularly in engineering and sales, may seriously harm our business, financial condition, and results of operations. We are also substantially dependent on the continued service of our existing engineering personnel because of the complexity of our products. Although we have entered into employment offer letters with our key personnel, these agreements have no specific duration and constitute at-will employment. The loss of one or more of our executive officers or key employees could seriously harm our business.

Our future performance also depends on the continued services and continuing contributions of our senior management to execute on our business plan and to identify and pursue new opportunities and product innovations. The loss of services of senior management could significantly delay or prevent the achievement of our development and strategic objectives, which could adversely affect our business, financial condition, and results of operations.

Both the industry in which we operate and the San Francisco Bay Area, where our headquarters is located, are generally characterized by significant competition for skilled personnel as well as high employee attrition. Additionally, many of the companies with which we compete for experienced personnel have greater resources than we have and may provide higher levels of compensation. We have from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. Also, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited, that they have divulged proprietary or other confidential information, or that their former employers own their inventions or other work product.

In addition, a large percentage of our sales force is new to our company. New hires require significant training and may take significant time before they achieve full productivity. Our recent hires and planned hires may not become productive as quickly as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals in the markets where we do business or plan to do

 

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business. In addition, the growth of our direct sales force leads to increasing difficulty and complexity in its organization, management, and leadership, at which we may prove unsuccessful. If we are unable to hire and train a sufficient number of effective sales personnel, we are ineffective at overseeing a growing sales force, or the sales personnel we hire are otherwise unsuccessful in obtaining new customers or increasing sales to our existing customer base, our business will be adversely affected.

Any failure to successfully attract, integrate, train, or retain qualified personnel to fulfill our current or future needs could materially and adversely affect our business, results of operations, and financial condition.

Our corporate culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the innovation, creativity, and entrepreneurial spirit we have worked to foster, which could harm our business.

We believe that our culture has been and will continue to be a key contributor to our success. If we do not continue to maintain our corporate culture as we grow, we may be unable to foster the innovation, creativity, and entrepreneurial spirit we believe we need to support our growth. Any failure to preserve our culture also could further harm our ability to retain and recruit personnel, innovate and create new products, operate effectively, and execute on our business strategy.

Operating as a remote-first company may make it difficult for us to preserve our corporate culture, have a negative impact on workforce morale and productivity, and harm our future success, including our ability to retain and recruit personnel, innovate and operate effectively, and execute on our business strategy.

We have been a remote-first company since incorporation. This subjects us to heightened operational risks. For example, technologies in our employees’ and service providers’ homes may not be as robust as in our offices and could cause the networks, information systems, applications, and other tools available to employees and service providers to be more limited or less reliable than in our offices. Further, because the security systems in place at our employees’ and service providers’ homes may be less secure than those used in our offices, we may be subject to increased cybersecurity risk, which could expose us to risks of data or financial loss and disrupt our business operations. There is no guarantee that our data security and privacy safeguards will be completely effective or that we will not encounter risks associated with employees and service providers accessing company data and systems remotely.

Operating as a remote-first company as an increasing number of our employees choose to work remotely due to the COVID-19 pandemic may make it more difficult for us to preserve our corporate culture, and our employees may have decreased opportunities to collaborate in meaningful ways. Further, we cannot guarantee that an increasing number of employees working remotely will not have a negative impact on workforce morale and productivity. Any failure to preserve our corporate culture and foster collaboration could harm our future success, including our ability to retain and recruit personnel, innovate and operate effectively, and execute on our business strategy.

Additionally, providing services to a remote-first company allows employees to move freely while undertaking their work responsibilities. On occasion, employees have and may continue to fail to inform us of changes to their work location in a timely manner. Conducting business in certain geographies may expose use to risks associated with that location, including compliance with local laws and regulations or exposure to compromised internet infrastructure. If employees fail to inform us of changes in their work location, we may be exposed to various risks without our knowledge. For example, if employees create intellectual property on our behalf while residing in a jurisdiction with weak or uncertain intellectual property laws, our ownership of such intellectual property may be

 

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questioned. Similarly, if employees access our resources through unsecured internet infrastructure, they may expose us to a heightened risk of data theft or cyberattack.

Our business is affected by seasonal demands, and our quarterly operations results fluctuate as a result.

Historically our business has been highly seasonal, with the highest percentage of our sales occurring in our fiscal fourth quarter due to increased buying patterns of our enterprise customers prior to the end of the year and a lower percentage of our sales in our second fiscal quarter due to the summer vacation slowdown that impacts many of our customers. We expect these seasonal trends to continue. We may also experience fluctuations due to factors that may be outside of our control that affect customer engagement with our platform. Additionally, activity levels may remain unpredictable due to the COVID-19 pandemic and uncertainties about the future, including the effectiveness of vaccines against various strains of the virus. Episodic experiences may also contribute to fluctuations in our quarterly results of operations. As our business matures, other seasonal trends may develop or existing seasonal trends may become more extreme.

Sales to government entities are subject to a number of challenges and risks.

We have recently started selling to U.S. federal governmental agency customers. Sales to such entities currently constitute a small portion of our revenue. Selling to such entities can be highly competitive, expensive, and time-consuming, often requiring significant upfront time and expense without any assurance that these efforts will generate meaningful sales. Government certification requirements for products like ours may change, thereby restricting our ability to sell into the government sector until we have attained such revised certification or certifications. Government demand and payment for our products may be affected by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our products. Additionally, any actual or perceived privacy, data protection, or data security incident, or even any perceived defect with regard to our practices or measures in these areas, may negatively impact public sector demand for our products.

Government contracting requirements may change and in doing so restrict our ability to sell into the government sector until we have met government-mandated requirements, which may require significant upfront cost, time, and resources. If we do not achieve and maintain government requirements, it may harm our competitive position against larger enterprises whose competitive offerings are able to meet these requirements. There can also be no assurance that we will secure commitments or contracts with government entities even following efforts to meet government requirements, which could harm our margins, business, financial condition, and results of operations. Further, government demand and payment for our offerings are affected by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our offering.

Additionally, we rely on certain partners to provide technical support services to certain of our government entity customers to resolve any issues relating to our products. If our partners do not effectively assist our government entity customers in deploying our products, succeed in helping our government entity customers quickly resolve post-deployment issues, or provide effective ongoing support, our ability to sell additional products to new and existing government entity customers would be adversely affected and our reputation could be damaged.

Further, governmental entities may demand contract terms that differ from our standard arrangements and are less favorable than terms agreed with private sector customers. Such entities may have statutory, contractual or other legal rights to terminate contracts with us or our partners for

 

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convenience or for other reasons. Any such termination may adversely affect our ability to contract with other government customers as well as our reputation, business, financial condition, and results of operations. Governments routinely investigate and audit government contractors’ administrative processes, and any unfavorable audit could result in the government refusing to continue buying our subscriptions, a reduction of revenue, or fines or civil or criminal liability if the audit uncovers improper or illegal activities, which could adversely affect our results of operations and reputation.

Risks Related to Our Intellectual Property

Some of our technology incorporates third-party open-source software, which could negatively affect our ability to sell our products, and subject us to possible litigation.

Our open-source and proprietary technologies incorporate third-party open-source software, and we expect to continue to incorporate third-party open-source software in our products in the future and it may be necessary to utilize new and upgraded versions of these software applications. There can be no assurance that new versions of the third-party open-source projects we currently use will continue to be licensed under open-source licenses, or that necessary licenses will be available on acceptable terms or under open-source licenses permitting redistribution in our open-source and proprietary offerings, if at all. The inability to obtain certain licenses or other rights or to obtain such licenses or rights on favorable terms, could result in delays in product releases until equivalent technology can be identified, licensed or developed, if at all, and integrated into our products and may have a material adverse effect on our business, results of operations, and financial condition. In addition, third parties may allege that additional licenses are required for our use of their software or intellectual property, and we may be unable to obtain such licenses on commercially reasonable terms or at all.

In addition, few of the licenses applicable to open-source software have been interpreted by courts, and there is a risk that these licenses could be construed in a manner that could adversely impact our interests and the interests of our customers both with respect to our use of third-party open source as well as our distribution of our own software under open-source licenses, including by imposing unanticipated conditions or restrictions on our ability to commercialize our products, or limiting our ability to enforce our rights in the manner we had anticipated. Moreover, we cannot ensure that our software does not include open-source software that we are unaware of, or that we have not incorporated additional open-source software in our software in a manner that is inconsistent with the terms of the applicable license or our current policies and procedures, including requiring us to make some or all of our software available under an open-source license that is unacceptable to us or to our customers. If we incorporate third-party open-source software into our software products, then certain circumstances, we and our customers may be subject to certain requirements, including requirements that we offer our solutions that incorporate such third-party open-source software under license terms that are inconsistent with our intended license, such as requiring portions of our products we create based upon, derived from, incorporating, or using such open-source software (and in turn, portions of our customers’ products that they create which are based upon, derived from, incorporating, or using our products) be made available for no cost and for the purpose of making and redistributing such software (including in source code form) and derivatives thereof. If an author or other third party that distributes such open-source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal expenses defending against such allegations and could be subject to significant damages, enjoined from the sale of our products that contained the open-source software, and required to comply with onerous conditions or restrictions on these products, which could disrupt the distribution and sale of these products.

Moreover, there have been claims challenging the ownership rights in open-source software against companies that incorporate open-source software into their products, and the licensors of such open-source software provide no warranties or indemnities with respect to such claims. In the event such a

 

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claim were made with respect to a third-party open-source component included in our products, we and our customers could be required to seek licenses from third parties in order to continue offering our products, and to re-engineer our respective products or discontinue the sale of our respective products in the event re-engineering cannot be accomplished on a timely basis. We and our customers may also be subject to suits by parties claiming infringement, misappropriation or violation due to the reliance by our solutions on certain open-source software, and such litigation could be costly for us to defend or subject us to certain types of equitable remedies, such as an injunction. Some open-source projects have known vulnerabilities and architectural instabilities and are provided on an as-is basis, which, if not properly addressed, could negatively affect the performance of our product. Any of the foregoing could require us to devote additional research and development resources to re-engineer our solutions, provide an advantage to our competitors or other entrants to the market, create new security vulnerabilities, or highlight existing security vulnerabilities in products, result in customer dissatisfaction, and may adversely affect our business, results of operations, and financial condition. We cannot ensure that our processes for identifying and controlling our use of open-source software in our platform and products will be effective.

We use third-party open-source software, which could negatively affect our ability to sell our offerings, or make it easier for competitors, some of whom may have greater resources than we have, to enter our markets and compete with us.

Unlike traditional proprietary software, the core of all of our products is developed in open source, allowing our partners and third parties to give feedback directly, report issues, contribute features, and fix bugs, which we accept and integrate into our products. Our partners are able to integrate their technology solutions and validate their integrations with continuous development. We plan to continue to develop our products in this open-source environment, and enabling third-party contributions, and the integration of open-source software from third parties into our codebase. While these open-source software licenses state that any work of authorship licensed under it may be reproduced and distributed provided that certain conditions are met, we may nevertheless be subject to suits by parties claiming ownership rights in what we believe to be permissively licensed open-source software or claiming non-compliance with the applicable open-source licensing terms.

In addition, the use of third-party open-source software may expose us to greater risks than the use of third-party commercial software because open source licensors generally do not provide warranties or controls on the functionality or origin of the software. Use of open-source software may also present additional security risks because the public availability of such software may publicize vulnerabilities or otherwise make it easier for hackers and other third parties to determine how to compromise our platform. Any of the foregoing could be harmful to our business, results of operations, financial condition, and cash flows and could help our competitors develop products that are similar to or better than ours.

Failure to obtain, maintain, protect, and enforce our proprietary technology and intellectual property rights could harm our business and results of operations.

Our success depends to a significant degree on our ability to obtain, maintain, protect, and enforce our intellectual property rights, including proprietary technology, methodologies, know-how, and brand. We rely on a combination of trademarks, copyrights, service marks, trade secret laws, patents, contractual restrictions, and other intellectual property laws and confidentiality procedures to establish and protect our proprietary rights. However, the steps we take to obtain, maintain, protect, and enforce our intellectual property rights may be inadequate. Our intellectual property rights may not protect our competitive position if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property rights, or if others are successful in designing around the protections our intellectual property rights afford. If we fail to protect our intellectual property rights adequately, our

 

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competitors may gain access to our proprietary technology, develop and commercialize substantially identical products, services, or technologies, and our business may be harmed. In addition, defending our intellectual property rights might entail significant expense.

Any patents, trademarks, or other intellectual property rights that we have or may obtain may be challenged or circumvented by others or held unenforceable or invalidated through administrative process, including re-examination inter partes review, interference and derivation proceedings, and equivalent proceedings in foreign jurisdictions (e.g., opposition proceedings), or litigation. There can be no assurance that our patent applications will result in issued patents. Even if we continue to seek patent protection in the future, we may be unable to obtain further patent protection for our technology. In addition, any patents issued in the future may not provide us with competitive advantages or may be successfully challenged by third parties. There may be issued patents of which we are not aware, held by third parties that, if found to be valid and enforceable, could be alleged to be infringed by our current or future technologies or offerings. There also may be pending patent applications of which we are not aware that may result in issued patents, which could be alleged to be infringed by our current or future technologies or offerings.

Furthermore, legal standards relating to the validity, enforceability, and scope of protection of intellectual property rights are uncertain. Despite our precautions, it may be possible for unauthorized third parties to copy our products and use information that we regard as proprietary to create offerings that compete with ours. Effective patent, trademark, copyright, and trade secret protection may not be available to us in every country in which our products are available. We may be unable to prevent third parties from acquiring domain names or trademarks that are similar to, infringe upon, or diminish the value of our trademarks and other proprietary rights. We may be unable to successfully resolve these types of conflicts to our satisfaction. In some cases, litigation or other actions may be necessary to protect or enforce our trademarks and other intellectual property rights. Furthermore, third parties may assert intellectual property claims against us, and we may be subject to liability, required to enter into costly license agreements, or required to rebrand our offering or prevented from selling our offering if third parties successfully oppose or challenge our trademarks or successfully claim that we infringe, misappropriate or otherwise violate their trademarks or other intellectual property rights. The laws of some countries may not be as protective of intellectual property rights as those in the United States, and mechanisms for enforcement of intellectual property rights may be inadequate. As we expand our international activities, our exposure to unauthorized copying and use of our products and proprietary information will likely increase. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property.

We enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements with other parties. No assurance can be given that these agreements will be effective in controlling access to and distribution of our proprietary information. Further, these agreements may not prevent our competitors from independently developing technologies that are substantially equivalent or superior to our products. These agreements may be breached, and we may not have adequate remedies for any such breach.

In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect our intellectual property rights. Litigation may be necessary in the future to enforce our intellectual property rights and to protect our trade secrets. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming, and distracting to management, and could result in the impairment or loss of portions of our intellectual property. Further, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims, and countersuits attacking the validity and enforceability of our intellectual property rights and if such defenses, counterclaims, or countersuits are successful, we could lose valuable intellectual property rights. Our inability to protect our proprietary technology against unauthorized copying or use, as well

 

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as any costly litigation or diversion of our management’s attention and resources, could delay further sales or the implementation of our products, impair the functionality of our products, delay introductions of new products, result in our substituting inferior or more costly technologies into our products, or injure our reputation.

We could incur substantial costs as a result of any claim of infringement, misappropriation, or violation of another party’s intellectual property rights.

In recent years, there has been significant litigation involving patents and other intellectual property rights in the software industry. Companies providing software are increasingly bringing and becoming subject to suits alleging infringement, misappropriation, or violation of proprietary rights, particularly patent rights, and to the extent we gain greater market visibility, we face a higher risk of being the subject of intellectual property infringement, misappropriation, or violation claims. For example, recently we and a number of other companies have been sued by a non-practicing entity in Delaware federal court alleging patent infringement with respect to certain patents relating to power savings in data centers and cloud networking management, and we intend to vigorously defend against this lawsuit. Further, the software industry is characterized by the existence of a large number of patents, copyrights, trademarks, trade secrets, and other intellectual and proprietary rights. Companies in the software industry are often required to defend against litigation claims based on allegations of infringement, misappropriation, or other violations of intellectual property rights. Our technologies may not be able to withstand any third-party claims against their use. In addition, many companies have the capability to dedicate substantially greater resources to enforce their intellectual property rights and to defend claims that may be brought against them.

We cannot predict the outcome of lawsuits and cannot ensure that the results of any such actions will not have an adverse effect on our business, financial condition, or results of operations. Accordingly, we could incur substantial costs in prosecuting or defending any current or future intellectual property litigation. Any such intellectual property litigation could be expensive and could divert our management resources possibly leading to delays in development or commercialization of our products.

Any intellectual property litigation to which we might become a party, or for which we are required to provide indemnification, may require us to do one or more of the following:

 

 

 

cease selling or using products that incorporate the intellectual property rights that we allegedly infringe, misappropriate, or violate;

 

 

 

make substantial payments for legal fees, settlement payments, license fees, royalties, or other costs or damages;

 

 

 

obtain a license, which may not be available on reasonable terms or at all, to sell or use the relevant technology; or

 

 

 

redesign the allegedly infringing products to avoid infringement, misappropriation, or violation, which could be costly, time-consuming, or impossible.

Even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business and results of operations. We expect that the occurrence of infringement claims is likely to grow as the market for our platform for data in motion and our offering grows. Accordingly, our exposure to damages resulting from infringement claims could increase, and this could further exhaust our financial and management resources.

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us or any obligation to indemnify our customers for such claims, such payments or actions could harm our business.

Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement, misappropriation, violation, and other losses.

Our agreements with customers and other third parties may include indemnification provisions under which we agree to indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement, misappropriation, or violation, damages caused by us to property or persons, or other liabilities relating to or arising from our software, services, or other contractual obligations. Large indemnity obligations and payments could disrupt and harm our business, results of operations, and financial condition. Although we generally attempt to contractually limit our liability with respect to such indemnity obligations, our efforts may not always be successful, and we may still incur substantial liability related to them even when subject to limitations. Any dispute with a customer with respect to such obligations could have adverse effects on our relationship with that customer and other existing customers and new customers and harm our business and results of operations.

Risks Related to our Regulatory, Legal, Tax, and Accounting Environment

In connection with the operation of our business, we may collect, store, transfer, and otherwise process certain personal data and personally identifiable information, and our products help our customers do so as well. As a result, our business is subject to a variety of government and industry regulations, as well as other obligations, related to privacy, data protection, and data security.

Privacy, data protection, and data security have become significant issues in various jurisdictions where we offer our products and increasingly so as we gain more traction with our cloud offerings. We process certain personal data as part of our business operations, and our Vault product is specifically designed to assist our customers with management of their private and sensitive information. As we develop our cloud offerings and are able to process more data in the cloud, these issues become more significant. The regulatory frameworks for privacy, data protection, and data security issues worldwide are rapidly evolving and are likely to remain uncertain for the foreseeable future, particularly for data processed in the cloud. Federal, state, and non-U.S. government bodies or agencies have in the past adopted, and may in the future adopt, new laws and regulations or may make amendments to existing laws and regulations affecting data protection, data privacy, and/or data security and/or regulating the use of the internet as a commercial medium. Industry organizations also regularly adopt and advocate for new standards in these areas, and we are bound by certain contractual obligations relating to our use, storage, security, and other processing of personal data and other personally identifiable information. We also post privacy policies and have made, and may make, other representations regarding our privacy and data security practices. If we fail to comply with any of these laws, regulations, standards, or other obligations, or such public representations, or are alleged to have done so, we may be subject to investigations, enforcement actions, civil litigation, fines, and other penalties, all of which may generate negative publicity and have a negative impact on our business.

In the United States, we may be subject to investigation and/or enforcement actions brought by federal agencies and state attorneys general and consumer protection agencies. We publicly post policies and other documentation regarding our practices concerning the processing, use, and disclosure of personally identifiable information. Although we endeavor to comply with our published policies and documentation, we may at times fail to do so or be alleged to have failed to do so. The publication of our privacy policy and other documentation that provide promises and assurances about privacy and security can subject us to potential state and federal action if they are found to be deceptive, unfair, or misrepresentative of our actual practices.

 

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Many states have enacted privacy and data security laws. For example, the California Consumer Privacy Act, or CCPA, which took effect on January 1, 2020, gives California residents expanded rights to access and delete their personal information, opt-out of certain personal information sharing, and receive detailed information about how their personal information is used. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. Some observers have noted that the CCPA could mark the beginning of a trend toward more stringent privacy legislation in the United States. California has already adopted a new law, the California Privacy Rights Act of 2020, or CPRA, that will substantially expand the CCPA effective January 1, 2023. Additionally, other U.S. states continue to propose, and in certain cases adopt, privacy-focused legislation such as Colorado and Virginia. Aspects of these state laws remain unclear, resulting in further uncertainty and potentially requiring us to modify our data practices and policies and to incur substantial additional costs and expenses in an effort to comply. A patchwork of differing state privacy and data security requirements would increase the cost and complexity of operating our business and increase our exposure to liability.

Internationally, we or our customers must comply with the data security, privacy, and data protection requirements of each of the jurisdictions we operate in. Within the European Union, the European General Data Protection Regulation, or the GDPR, became fully effective on May 25, 2018, and applies to the processing (which includes the collection and use) of certain personal data. The GDPR imposes substantial obligations and risk upon our business. Administrative fines under the GDPR can amount up to 20 million Euros or four percent of the group’s annual global turnover, whichever is highest. We may be required to incur substantial expense and to make significant changes to our business operations in an effort to comply with the obligations imposed by the GDPR, all of which may adversely affect our revenue and our business overall. Additionally, because the GDPR’s standards have not been previously enforced against companies, we are unable to predict how they will be applied to us. Despite our efforts to attempt to comply with the GDPR, a regulator may determine that we have not done so and subject us to fines and public censure, which could harm our company.

European privacy, data security, and data protection laws, including the GDPR, regulate and generally restrict the transfer of the personal data subject from Europe, including the European Economic Area, or EEA, the UK, and Switzerland, to third countries that have not been found to provide adequate protection to such personal data, including the United States unless the parties to the transfer have implemented specific safeguards to protect the transferred personal information. The safeguard on which we have primarily relied for such transfers has been implementation of the European Commission’s Standard Contractual Clauses, or SCCs, in our relevant data transfer agreements. We have undertaken certain efforts to conform transfers of personal data from the European Economic Area, or the EEA, to the United States and other jurisdictions based on our understanding of current regulatory obligations and the guidance of data protection authorities. The EU-U.S. Privacy Shield program administered by the U.S. Department of Commerce, to which we have self-certified, was invalidated in the “Schrems II” decision issued by the Court of Justice of the European Union, or CJEU, on July 16, 2020. On September 8, 2020, the Swiss Federal Data Protection and Information Commissioner invalidated the Swiss-U.S. Privacy Shield on similar grounds. In its July 16, 2020 opinion, the CJEU imposed additional obligations on companies when relying on SCCs to transfer personal data. The CJEU decision may result in European data protection regulators applying differing standards for, and requiring ad hoc verification of, transfers of personal data from Europe to the U.S. The European Commission released a draft of revised SCCs addressing the CJEU concerns in November 2020, and on June 4, 2021, published a new set of SCCs. The CJEU’s Schrems II decision, the revised SCCs, guidance and opinions of regulators, and other developments relating to cross-border data transfer may require us to implement additional contractual and technical safeguards for any personal data transferred out of the EEA, which may increase

 

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compliance costs, lead to increased regulatory scrutiny or liability, and which may adversely impact our business, financial condition and operating results.

We may also experience hesitancy, reluctance, or refusal by European or multi-national customers to continue to use our products due to the potential risk exposure to such customers as a result of shifting business sentiment in the EEA regarding international data transfers and the data protection obligations imposed on them. We may find it necessary to establish systems to maintain personal data originating from the EEA in the EEA, which may involve substantial expense and may cause us to need to divert resources from other aspects of our business, all of which may adversely affect our business. We may be unsuccessful in maintaining the conforming means of transferring personal data from the EEA. We, and our customers, may face a risk of enforcement actions taken by European data protection authorities until the time, if any, that personal data transfers to us and by us from the EEA are legitimized under European law.

In addition to the GDPR, the European Commission has another draft regulation in the approval process that focuses on a person’s right to conduct a private life. The proposed legislation, known as the Regulation of Privacy and Electronic Communications, or the ePrivacy Regulation, would replace the current ePrivacy Directive. Originally planned to be adopted and implemented at the same time as the GDPR, the ePrivacy Regulation is still being negotiated. Most recently, on February 10, 2021, the Council of the EU agreed on its version of the draft ePrivacy Regulation. If adopted, the earliest date for entry into force is in 2023, with broad potential impacts on the use of internet-based services and tracking technologies, such as cookies. Aspects of the ePrivacy Regulation remain for negotiation between the European Commission and the Council. We expect to incur additional costs to comply with the requirements of the ePrivacy Regulation as it is finalized for implementation.

Further, the United Kingdom enacted a Data Protection Act in May 2018 that substantially implements the GDPR, and has implemented legislation referred to as the “UK GDPR” that generally provides for the GDPR to be implemented in the United Kingdom following Brexit and the transition period that ended on December 31, 2020. This legislation provides for substantial penalties for noncompliance of up to the greater of £17.5 million or four percent of worldwide revenues. While the EU has published draft decisions that the United Kingdom may be deemed an “adequate country” to which personal data could be exported from the EEA, this decision may face challenges in the future, creating uncertainty regarding transfers of personal data to the United Kingdom from the EEA. Some countries also are considering or have passed legislation requiring local storage and processing of data, or similar requirements, which could increase the cost and complexity of delivering our products.

Finally, we publish privacy policies and other documentation regarding our collection, use, disclosure, and other processing of personal information. Although we endeavor to adhere to these policies and documentation, we and the third parties on which we rely may at times fail to do so or may be perceived to have failed to do so. Such failures could subject us to regulatory enforcement action as well as costly legal claims by affected individuals or our customers.

Because the interpretation and application of many laws and regulations relating to privacy, data protection, and data security, along with industry standards, are uncertain, particularly as they relate to our cloud offerings, it is possible that these laws and regulations may be interpreted and applied in a manner that is inconsistent with our existing data management practices or the features of our products, and we could face fines, lawsuits, regulatory investigations, and other claims and penalties, and we could be required to fundamentally change our products or our business practices, which could have an adverse effect on our business. Any inability to adequately address privacy, data protection, and data security concerns, even if unfounded, or any actual or perceived failure to comply with applicable privacy, data protection, and data security laws, regulations, and other obligations, could result in additional cost and liability to us, damage our reputation, inhibit sales, and adversely affect our business. Furthermore, the costs of compliance with, and other burdens imposed by, the laws,

 

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regulations, and policies that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our products. Privacy, data protection, and data security concerns, whether valid or not valid, may inhibit market adoption of our products, particularly in certain industries and countries outside of the United States. If we are not able to adjust to changing laws, regulations, and standards related to the internet, our business may be harmed.

We are subject to governmental export and import controls that could impair our ability to compete in international markets or subject us to liability if we violate these controls.

Our software may be subject to U.S. export control laws and regulations including the Export Administration Regulations, or EAR, and trade and economic sanctions maintained by the Office of Foreign Assets Control, or OFAC. As such, an export license may be required to export or re-export our products to certain countries, end-users, and end-uses. Because we incorporate encryption functionality into our products, we also are subject to certain U.S. export control laws that apply to encryption items. If we were to fail to comply with such U.S. export controls laws and regulations, U.S. economic sanctions, or other similar laws, we could be subject to both civil and criminal penalties, including substantial fines, possible incarceration for employees and managers for willful violations, and the possible loss of our export or import privileges. Obtaining the necessary export license for a particular sale or offering may not be possible and may be time-consuming and may result in the delay or loss of sales opportunities. Furthermore, U.S. export control laws and economic sanctions prohibit the export of products to certain U.S. embargoed or sanctioned countries, governments and persons, as well as for prohibited end-uses. Monitoring and ensuring compliance with these complex U.S. export control laws is particularly challenging because our offerings are widely distributed throughout the world and are available for download without registration. Even though we take precautions to ensure that we and our partners comply with all relevant export control laws and regulations, any failure by us or our partners to comply with such laws and regulations could have negative consequences for us, including reputational harm, government investigations, and penalties.

In addition, various countries regulate the import of certain encryption technology, including through import permit and license requirements, and have enacted laws that could limit our ability to distribute our products or could limit our end-customers’ ability to implement our products in those countries. Changes in our products or changes in export and import regulations in such countries may create delays in the introduction of our products into international markets, prevent our end-customers with international operations from deploying our products globally, or, in some cases, prevent or delay the export or import of our products to certain countries, governments, or persons altogether. Any change in export or import laws or regulations, economic sanctions, or related legislation, shift in the enforcement or scope of existing export, import, or sanctions laws or regulations, or change in the countries, governments, persons, or technologies targeted by such export, import, or sanctions laws or regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential end-customers with international operations. Any decreased use of our products or limitation on our ability to export to or sell our products in international markets could adversely affect our business, financial condition, and operating results.

Failure to comply with anti-bribery, anti-corruption, and anti-money laundering laws could subject us to penalties and other adverse consequences.

We are subject to the FCPA, the U.K. Bribery Act, and other anti-corruption, anti-bribery, and anti-money laundering laws in various jurisdictions, both domestic and abroad. We leverage third parties, including channel partners, to sell our offerings and conduct our business abroad. We and our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and may be held liable for the corrupt or other illegal activities of these third-party business partners and intermediaries, our employees, representatives,

 

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contractors, partners, and agents, even if we do not explicitly authorize such activities. While we have policies and procedures to address compliance with such laws, we cannot assure you that all of our employees and agents will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. Any violation of the FCPA or other applicable anti-bribery, anti-corruption laws, and anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions, or suspension or debarment from U.S. government contracts, all of which may have an adverse effect on our reputation, business, operating results, and prospects.

Changes in laws and regulations related to the internet or changes in the internet infrastructure itself may diminish the demand for our products, and could adversely affect our business, results of operations, and financial condition.

The future success of our business depends upon the continued use of the internet as a primary medium for commerce, communications, and business applications. Federal, state, or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the internet as a commercial medium. Changes in these laws or regulations could require us to modify our products and platform in order to comply with these changes. In addition, government agencies or private organizations have imposed and may impose additional taxes, fees, or other charges for accessing the internet or commerce conducted via the internet. These laws or charges could limit the growth of internet-related commerce or communications generally, or result in reductions in the demand for internet-based products such as our products and platform. In addition, the use of the internet as a business tool could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of internet activity, security, reliability, cost, ease of use, accessibility, and quality of service. The performance of the internet and its acceptance as a business tool has been adversely affected by “viruses,” “worms,” and similar malicious programs. If the use of the internet is reduced as a result of these or other issues, then demand for our products could decline, which could adversely affect our business, results of operations, and financial condition.

Any legal proceedings or claims against us could be costly and time consuming to defend and could harm our reputation regardless of the outcome.

We are and may in the future become subject to legal proceedings and claims that arise in the ordinary course of business, including patent infringement, other intellectual property, privacy and data protection, data security, torts, securities, employment, contractual rights, or other legal claims. Such matters can be time-consuming, divert management’s attention and resources, cause us to incur significant expenses or liability, or require us to change our business practices. In addition, the expense of litigation and the timing of this expense from period to period are difficult to estimate, subject to change, and could adversely affect our financial condition and results of operations. Because of the potential risks, expenses, and uncertainties of litigation, we may, from time to time, settle disputes, even where we have meritorious claims or defenses, by agreeing to settlement agreements. Any of the foregoing could adversely affect our business, financial condition, and results of operations.

Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could expose us to greater than anticipated tax liabilities.

Our income tax obligations are based in part on our corporate structure and intercompany arrangements, including the manner in which we develop, value, and use our intellectual property and the valuations of our intercompany transactions. The tax laws applicable to our business, including the laws of the United States and other jurisdictions, are subject to interpretation and certain jurisdictions

 

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may aggressively interpret their laws in an effort to raise additional tax revenue. The taxing authorities of the jurisdictions in which we operate may challenge our methodologies for valuing developed technology or intercompany arrangements, which could increase our worldwide effective tax rate and harm our financial position and results of operations. It is possible that tax authorities may disagree with certain positions we have taken and any adverse outcome of such a review or audit could have a negative effect on our financial position and results of operations. Further, the determination of our worldwide provision for income taxes and other tax liabilities requires significant judgment by management, and there are transactions where the ultimate tax determination is uncertain. Although we believe that our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our consolidated financial statements and may materially affect our financial results in the period or periods for which such determination is made.

Our ability to use our net operating loss carryforwards to offset future taxable income may be subject to certain limitations.

As of January 31, 2021, we had U.S. federal and state net operating loss carryforwards of $245.3 million and $188.7 million, respectively, which may be utilized against future income taxes and begin to expire in 2034 and 2025 for federal and state purposes, respectively. Limitations imposed by the applicable jurisdictions on our ability to utilize net operating loss carryforwards could cause income taxes to be paid earlier than would be paid if such limitations were not in effect and could cause such net operating loss carryforwards to expire unused, in each case reducing or eliminating the benefit of such net operating loss carryforwards. Furthermore, we may not be able to generate sufficient taxable income to utilize our net operating loss carryforwards before they expire. If any of these events occur, we may not derive some or all of the expected benefits from our net operating loss carryforwards.

Utilization of our net operating loss carryforwards and other tax attributes, such as research and development tax credits, may be subject to annual limitations, or could be subject to other limitations on utilization or benefit due to the ownership change limitations provided by Sections 382 and 383 of the U.S. Internal Revenue Code of 1986, as amended, or the Code, and other similar provisions. Under Sections 382 and 383 of the Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change attributes, such as research tax credits, to offset its post-change income may be limited. In general, an “ownership change” will occur if there is a cumulative change in our ownership by “5-percent shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. We may have experienced various ownership changes, as defined by the Code, as a result of past financing transactions (or other activities), and we may experience ownership changes in the future as a result of subsequent changes in our stock ownership, some of which may be outside our control. Accordingly, our ability to utilize the aforementioned carryforwards may be limited.

Further, the Tax Cuts and Jobs Act of 2017, or the Tax Act, as modified by the Coronavirus Aid, Relief and Economic Security Act of 2020, or the CARES Act, changed the federal rules governing net operating loss carryforwards. For net operating loss carryforwards arising in tax years beginning after December 31, 2017, the Tax Act limits a taxpayer’s ability to utilize such carryforwards in tax years beginning after December 31, 2020 to 80% of taxable income for tax years beginning after December 31, 2020. In addition, net operating loss carryforwards arising in tax years beginning after December 31, 2017 can be carried forward indefinitely; net operating losses arising in tax years 2018, 2019, and 2020 may generally be carried back five years, but carryback is generally prohibited for net operating losses arising in tax years beginning after December 31, 2020. Net operating loss carryforwards generated before January 1, 2018 (which represent the substantial majority of our net operating losses as of January 31, 2021) will not be subject to the Tax Act’s 80% taxable income limitation and will continue to have a twenty-year carryforward period. Nevertheless, our net operating loss carryforwards and other tax assets could expire before utilization and could be subject to limitations, which could harm our business, revenue, and financial results.

 

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Our corporate structure and intercompany arrangements are subject to the tax laws of various jurisdictions, and we could be obligated to pay additional taxes, which would harm our results of operations.

Based on our current corporate structure, we may be subject to taxation in several jurisdictions around the world with increasingly complex tax laws, the application of which can be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws, or revised interpretations of existing tax laws and precedents. In addition, the authorities in the jurisdictions in which we operate through our subsidiaries could review our tax returns or require us to file tax returns in jurisdictions in which we are not currently filing, and could impose additional tax, interest, and penalties. These authorities could also claim that various withholding requirements apply to us or our subsidiaries, assert that benefits of tax treaties are not available to us or our subsidiaries, or challenge our methodologies for valuing developed technology or intercompany arrangements, including our transfer pricing. The relevant taxing authorities may determine that the manner in which we operate our business does not achieve the intended tax consequences. If such a disagreement was to occur, and our position was not sustained, we could be required to pay additional taxes, and interest and penalties. Such authorities could claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of tax treaties are not available to us or our subsidiaries. Any increase in the amount of taxes we pay or that are imposed on us could increase our worldwide effective tax rate and harm our business and results of operations.

The enactment of legislation implementing changes in the United States of taxation of international business activities or the adoption of other tax reform policies could materially impact our financial position and results of operations.

Legislation or other changes to U.S. tax laws, including those that increase the U.S. corporate tax rate, could impact the tax treatment of our earnings. Due to expansion of our international business activities, such proposed changes, as well as regulations and legal decisions interpreting and applying these changes may increase our worldwide effective tax rate and adversely affect our financial position and results of operations.

Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value added, or similar taxes, and we could be subject to liability with respect to past or future sales, which could adversely affect our results of operation.

We may not collect sales and use, value added, or similar taxes in all jurisdictions in which we are deemed to have sales, and we have been advised that such taxes are not applicable to our products in certain jurisdictions. Sales and use, value added, and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties, and interest, to us or our end-customers for the past amounts, and we may be required to collect such taxes in the future. If we are unsuccessful in collecting such taxes from our end-customers, we could be held liable for such costs. Such tax assessments, penalties and interest, or future requirements may adversely affect our results of operations.

If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our results of operations could fall below expectations of investors.

The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in those consolidated financial statements. We base

 

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our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenue, and expenses that are not readily apparent from other sources. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below our publicly announced guidance or the expectations of investors. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to the determination of stand-alone selling prices of our performance obligations in revenue agreements, measurement of stock-based compensation expense, the capitalization and estimated period of benefit of deferred contract acquisition costs, and accounting for income taxes including deferred tax assets and liabilities.

Changes in accounting principles and guidance could result in unfavorable accounting charges or effects.

We prepare our consolidated financial statements in accordance with principles generally accepted in the United States. These principles are subject to interpretation by the SEC and various bodies formed to create and interpret appropriate accounting principles and guidance. Changes in existing accounting rules or practices, new accounting pronouncements rules, or varying interpretations of current accounting pronouncements practice could harm our results of operations or the manner in which we conduct our business. Further, such changes could potentially affect our reporting of transactions completed before such changes are effective. GAAP is subject to interpretation by the Financial Accounting Standards Board, or FASB, the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. Additionally, if there are changes to certain of our facts-and-circumstances or if regulators changed their interpretation, we might be required to change the way we report our financial results.

General Risks Related to Us

Acquisitions, strategic investments, partnerships, or alliances could be difficult to identify, pose integration challenges, divert the attention of management, disrupt our business, dilute stockholder value, and adversely affect our business, financial condition, and results of operations.

We expect in the future seek to acquire or invest in businesses, joint ventures, and platform technologies that we believe could complement or expand our platform, enhance our technology, or otherwise offer growth opportunities. Further, our anticipated proceeds from this offering increase the likelihood that we will devote resources to exploring larger and more complex acquisitions and investments than we have previously attempted. Any such acquisitions or investments may divert the attention of management and cause us to incur various expenses in identifying, investigating, and pursuing suitable opportunities, whether or not the transactions are completed, and may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, personnel, or operations of any acquired companies, particularly if the key personnel of an acquired company choose not to work for us, their software is not easily adapted to work with our platform, or we have difficulty retaining the customers of any acquired business due to changes in ownership, management, or otherwise. In addition, we have limited experience in acquiring other businesses. If an acquired business fails to meet our expectations, our operating results, and business and financial position may suffer. We may not be able to find and identify desirable acquisition targets, we may incorrectly estimate the value of an acquisition target, and we may not be successful in entering into an agreement with any particular

 

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target. Further, any such transactions that we are able to complete may not result in the synergies or other benefits we expect to achieve, including the introduction of new products or enhancements to existing products, which could result in substantial impairment charges. These transactions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our results of operations.

The stock-based compensation expense related to our RSUs and other equity awards will result in increases in our expenses in future periods and we may also expend substantial funds to satisfy a portion of our tax withholding and remittance obligations that arise upon the initial vesting and/or settlement of our RSUs, which may have an adverse effect on our financial condition and results of operations.

We have granted RSUs to our employees and directors, which generally vest upon the satisfaction of both service-based and liquidity event-related performance vesting conditions occurring before the award’s expiration date. The service-based vesting period is generally satisfied by the award holder providing services to us over a four-year period. The liquidity event-related performance vesting condition will be satisfied upon the effectiveness of the registration statement of which this prospectus forms a part. As of July 31, 2021, no stock-based compensation expense had been recognized for such RSUs because a qualifying event as described above was not probable. As of July 31, 2021, unrecognized stock-based compensation expense related to the performance-based RSUs was approximately $103.7 million. In connection with this offering, we will record cumulative stock-based compensation expense for those RSUs for which the service-based vesting condition was satisfied prior to this offering with the remaining expense recognized over the remaining service period. Following the completion of this offering, the stock-based compensation expense related to our RSUs and other outstanding equity awards will result in increases in our expenses in future periods, in particular in the quarter in which the offering is completed.

Additionally, we may expend substantial funds in connection with the tax withholding and remittance obligations that arise upon the vesting and/or settlement of our outstanding RSUs. Under U.S. tax laws, employment and income tax withholding and remittance obligations for RSUs arise in connection with the vesting and settlement of the RSUs. To fund the employment and income tax withholding and remittance obligations arising in connection with the vesting and settlement of vested RSUs, we will either withhold shares of our Class A common stock that would otherwise be issued with respect to such vested RSUs and pay the relevant tax authorities in cash to satisfy such tax obligations or have the holders of such vested RSUs use a broker or brokers to sell a portion of such shares into the market, with the proceeds of such sales to be delivered to us for us to remit to the relevant taxing authorities, in order to satisfy such employment and income tax withholding and remittance obligations. Any such expenditures by us of substantial funds to satisfy a portion of our tax withholding and remittance obligations that arise upon the vesting and/or settlement of RSUs may have an adverse effect on our financial condition and results of operations.

The requirements of being a public company could strain our resources, divert management’s attention, and affect our ability to attract and retain executive management and qualified board members.

As a public company listed in the United States, we will incur significant costs associated with general administration, including legal, accounting, and other expenses. In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure, including regulations implemented by the SEC and NYSE, are creating uncertainty for public companies, increasing legal and financial compliance costs, and making some activities more time-consuming. These laws, regulations, and standards are subject to varying interpretations, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies.

 

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Being a public company and complying with new rules and regulations might make it more expensive for us to obtain director and officer liability insurance, and in the future, we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain our executive management and qualified board members.

Being a public company could also lead to an increased risk of threatened or actual litigation, including by competitors and other third parties. Because we will be subject to public filing requirements with the SEC, our business and financial condition will be more visible, which we believe could result in threatened or actual litigation, including by competitors and other third parties. If such claims were successful, our business and results of operations could be harmed, and even if the claims did not result in litigation or were resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business and results of operations.

If we fail to establish or maintain an effective system of internal control over financial reporting, we may be unable to maintain accurate financial records or prevent fraud, and investor confidence may, therefore, be adversely affected.

We maintain internal control over financial reporting designed to provide reasonable assurance regarding the preparation of financial statements in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements or prevent all fraud. Moreover, we may be subject to material weaknesses in such internal controls. Our design and implementation of internal controls is time-consuming, costly, and complicated. If we fail to maintain adequate internal control over financial reporting, we may suffer inaccuracies in our financial statements, we may be subject to increased likelihood of fraud, and investors may lose confidence in the accuracy and completeness of our financial statements, any of which could require additional financial and management resources.

Our failure to maintain capital at our current level, raise additional capital, or generate the capital necessary to expand our operations and invest in new products could reduce our ability to compete and could harm our business.

Historically, we have financed our operations primarily through the sale of our equity securities as well as payments received from customers using our products and services. We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new features or otherwise enhance our offerings, improve our operating infrastructure, or acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences, and privileges superior to current holders of our securities. Any debt financing that we may secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms that are favorable to us, if at all.

Our credit facility 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.

Our revolving credit facility allows us to borrow up to $50.0 million, and we have not borrowed any amounts under this agreement. In the event we borrow amounts under our credit facility, we will

 

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become subject to a number of covenants that may limit our ability to, among other things, transfer or dispose of assets, pay dividends or make distributions, incur additional indebtedness, create liens, make investments, loans and acquisitions, engage in transactions with affiliates, merge or consolidate with other companies, and sell substantially all of our assets. Our credit facility is secured by substantially all of our assets. The terms of our credit facility may restrict our current and future operations and could adversely affect our ability to finance our future operations or capital needs, execute preferred business strategies, make it more difficult for us to successfully execute our business strategy, and compete against companies who are not subject to such restrictions. Additionally, any obligations to repay principal and interest on our indebtedness make us vulnerable to economic or market downturns.

Our failure to comply with the covenants or payment requirements, or other events specified in our credit facility, could result in an event of default and our lender may accelerate our obligations under our credit facility and foreclose upon the collateral, or we may be forced to sell assets, restructure our indebtedness, or seek additional equity capital, which would dilute our stockholders’ interests. Our failure to comply with any covenant could result in an event of default under the agreement and the lender could make the entire debt immediately due and payable. If this occurs, we might not be able to repay our debt or borrow sufficient funds to refinance it. Even if new financing is available, it may not be on terms that are acceptable to us.

The phase-out of the LIBOR, or the replacement of LIBOR with a different reference rate, may adversely affect interest rates. Borrowings under our revolving credit facility bear interest at rates determined using LIBOR as the reference rate. On July 27, 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced that it would phase out LIBOR by the end of 2021. It is unclear whether LIBOR will be discontinued or substantially modified in the future. However, the publication of LIBOR tenors that pertain to our revolving credit facility shall not cease until June 30, 2023.

Changes in the method of calculating LIBOR, or the replacement of LIBOR with an alternative rate or benchmark, may adversely affect interest rates and result in higher borrowing costs. This could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects. We cannot predict the effect of the potential changes to LIBOR or the establishment and use of alternative rates or benchmarks. Furthermore, we may need to renegotiate our revolving credit facility or incur other indebtedness, and changes in the method of calculating LIBOR, or the use of an alternative rate or benchmark, may negatively impact the terms of such indebtedness. Any of the foregoing could adversely affect our business, financial condition, or results of operations.

If our goodwill or intangible assets become impaired, we may be required to record a significant charge to earnings.

We review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. An adverse change in market conditions, particularly if such change has the effect of changing one of our critical assumptions or estimates, could result in a change to the estimation of fair value that could result in an impairment charge to our goodwill or intangible assets. Any such charges may adversely affect our results of operations.

We are exposed to fluctuations in currency exchange rates and interest rates, which could negatively affect our results of operations and our ability to invest and hold our cash.

Our sales are denominated in U.S. dollars, and therefore our revenue is not subject to foreign currency risk. However, a strengthening of the U.S. dollar could increase the real cost of our platform to our customers outside of the United States, which could adversely affect our results of operations. In addition, an increasing portion of our operating expenses is incurred outside of the United States.

 

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These operating expenses are denominated in foreign currencies and are subject to fluctuations due to changes in foreign currency exchange rates. In the future, we expect to have sales denominated in currencies other than the U.S. dollar, which will subject our revenue to foreign currency risk. If we are not able to successfully hedge against the risks associated with currency fluctuations, our results of operations could be adversely affected. In addition, we are exposed to fluctuations in interest rates, which may result in a negative interest rate environment, in which interest rates drop below zero. In such a zero interest rate environment, any cash that we may hold with financial institutions, including cash proceeds received from this offering, will yield a storage charge instead of earning interest income, and encourages us to spend our cash or make high-risk investments, all of which could adversely affect our financial position, results of operations, and cash flows.

Catastrophic events, or man-made problems such as terrorism or climate change, may disrupt our business.

A significant natural disaster, such as an earthquake, fire, flood, or significant power outage, and the risks associated with climate change could have an adverse impact on our business, results of operations, and financial condition. We have a number of our employees and executive officers located in the San Francisco Bay Area, a region known for seismic activity, drought, and wildfires, and the resultant air quality impacts and power outages associated with such wildfires. Furthermore, it is more difficult to mitigate the impact of these events on our employees while they work from home as a result of the COVID-19 pandemic. In addition, acts of terrorism, pandemics, such as the outbreak of the novel coronavirus or another public health crisis, protests, riots, and the increasing frequency and impact of extreme weather events on critical infrastructure in the U.S. and elsewhere have the potential to disrupt our business, the business of our third-party suppliers, and the business of our customers, and may cause us to experience higher attrition, losses, and additional costs to maintain or resume operations. Additionally, any disruption in the business of our partners or customers that affects sales in a given fiscal quarter could have a significant adverse impact on our quarterly results for that and future quarters. All of the aforementioned risks may be further increased if our course of action in response to catastrophic events prove to be inadequate.

Health epidemics, including the COVID-19 pandemic, have had, and could in the future have, an adverse impact on our business, operations, and the markets and communities in which we, our partners, and customers operate.

Our business and operations could be adversely affected by health epidemics, including the COVID-19 pandemic, impacting the markets and communities in which we, our partners, and customers operate. The ongoing global COVID-19 pandemic has adversely impacted, and may continue to adversely impact, certain parts of our business. In industries that were heavily impacted by the pandemic, such as travel and hospitality, we experienced a slowdown in customer spending on our products. Additionally, we also took responsive measures to the pandemic that impacted our business. For example, we suspended non-essential travel by our employees, required events to be held virtually, and temporarily closed our offices. These responsive measures negatively impacted our in-person conferences, the length and variability of our sales cycles, the rate of sales to new customers, our international operations, and the hiring and onboarding of new employees across the organization.

The pandemic was also a contributing factor that also led to existing and potential customers accelerating transitions for some customers to the cloud. As a result, we believe the value of our offering has become increasingly relevant during the course of the pandemic, which may result in a positive impact on our business over the long term. However, if customers do not transition to the cloud at anticipated rates, we may not experience these anticipated benefits.

 

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The extent of the impact of the COVID-19 pandemic on our customers and our customers’ response to the COVID-19 pandemic is difficult to assess or predict, and we may be unable to accurately forecast our revenues or financial results, especially given that the long-term impact of the pandemic remains uncertain. Our results of operations could be materially above or below our forecasts, which could adversely affect our results of operations, disappoint analysts and investors, and/or cause our stock price to decline.

The global impact of COVID-19 continues to evolve, and we will continue to monitor the situation closely. The ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, operations, ability to access capital, or the global economy as a whole. While the spread of COVID-19 may be contained or mitigated, there is no guarantee that a future outbreak of this or any other widespread epidemics will not occur, or that the global economy will recover, either of which could harm our business.

Risks Related to this Offering and Ownership of our Common Stock

No public market for our Class A common stock currently exists, and an active public trading market may not develop or be sustained following this offering.

No public market for our Class A common stock currently exists. An active public trading market for our Class A common stock may not develop following the completion of this offering or, if developed, it may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active trading market may also reduce the fair value of your shares. An inactive market may also impair our ability to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

The market price for our Class A common stock may be volatile or may decline regardless of our operating performance.

The market price of our Class A common stock may be highly volatile and may fluctuate or decline substantially as a result of a variety of factors, many of which are beyond our control, including:

 

 

 

actual or anticipated changes or fluctuations in our results of operations;

 

 

 

the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

 

 

 

announcements by us or our competitors of new offerings or new or terminated significant contracts, commercial relationships, or capital commitments;

 

 

 

industry or financial analyst or investor reaction to our press releases, other public announcements, and filings with the SEC;

 

 

 

rumors and market speculation involving us or other companies in our industry;

 

 

 

future sales or expected future sales of shares of our Class A common stock;

 

 

 

investor perceptions of us and the industries in which we operate;

 

 

 

price and volume fluctuations in the overall stock market from time to time;

 

 

 

changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;

 

 

 

the expiration of contractual lock-up agreements and sales of shares of our Class A common stock by us or our stockholders;

 

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failure of industry or financial analysts to maintain coverage of us, changes in financial estimates by any analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

 

 

 

actual or anticipated developments in our business or our competitors’ businesses or the competitive landscape generally;

 

 

 

litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors;

 

 

 

developments or disputes concerning our intellectual property rights or our solutions, or third-party proprietary rights;

 

 

 

announced or completed acquisitions of businesses or technologies by us or our competitors;

 

 

 

actual or perceived breaches of, or failures relating to, privacy, data protection, or data security;

 

 

 

interruptions, delays, or outages of our platform;

 

 

 

new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

 

 

 

any major changes in our management or our board of directors;

 

 

 

general economic conditions and slow or negative growth of our markets; and

 

 

 

other events or factors, including those resulting from war, incidents of terrorism, or responses to these events.

We cannot predict the impact our dual-class structure may have on the market price of our Class A common stock.

We cannot predict whether our dual class structure will result in a lower or more volatile market price of our Class A common stock or in adverse publicity or other adverse consequences. For example, certain index providers have restrictions on including companies with multiple-class share structures in certain of their indices. In July 2017, FTSE Russell and Standard & Poor’s announced that they would cease to allow most newly public companies utilizing dual or multi-class capital structures to be included in their indices. Affected indices include the Russell 2000 and the S&P 500, S&P MidCap 400, and S&P SmallCap 600, which together make up the S&P Composite 1500. Under these policies, our dual-class capital structure would make us ineligible for inclusion in certain indices, and as a result, mutual funds, exchange-traded funds and other investment vehicles that attempt to passively track those indices will not be investing in our stock. Because of our dual-class structure, we will likely be excluded from certain of these indices and we cannot assure you that other stock indices will not take similar actions. Given the sustained flow of investment funds into passive strategies that seek to track certain indices, exclusion from stock indices would likely preclude investment by many of these funds and could make our Class A common stock less attractive to other investors. As a result, the market price of our Class A common stock could be adversely affected.

The dual-class structure of our common stock will have the effect of concentrating voting control with those stockholders who held our capital stock prior to this offering, which will limit your ability to influence the outcome of important transactions, including a change in control.

Our Class B common stock has ten votes per share, and our Class A common stock, which is the stock we are offering in this initial public offering, has one vote per share. Following this offering, our directors, executive officers, and holders of more than 5% of our common stock, and their respective affiliates, will hold in the aggregate                 % of the combined voting power of our Class A common

 

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stock and Class B common stock. Because of the ten-to-one voting ratio between our Class B common stock and Class A common stock, the holders of our Class B common stock collectively will continue to control a majority of the combined voting power of our common stock and will therefore, if acting together, be able to control all matters submitted to our stockholders for approval until the earlier of the tenth anniversary of the filing and effectiveness of our amended and restated certificate of incorporation in connection with this offering or the affirmative vote of the holders of 66-2/3% of the voting power of our outstanding Class B common stock. This concentrated control will limit or preclude your ability to influence corporate matters, including the election of directors, amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets or other major corporate transactions requiring stockholder approval. In addition, this may prevent or discourage unsolicited acquisition proposals or offers for our capital stock that you may feel are in your best interest as one of our stockholders.

Future transfers by holders of shares of our Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions, including but not limited to, transfers effected for estate planning purposes and transfers among affiliates, to the extent the transferee continues to remain an affiliate. The conversion of Class B common stock to Class A common stock will have the effect, over time, of increasing the relative voting power of those individual holders of Class B common stock who retain their shares in the long term. See the section titled “Description of Capital Stock—Anti-Takeover Effects of Certain Provisions of Delaware Law, Our Amended and Restated Certificate of Incorporation, and Our Amended and Restated Bylaws” for additional information.

We will have broad discretion in the use of net proceeds to us from this offering and may not use them effectively.

We will have broad discretion in the application of the net proceeds to us from this offering, including for any of the purposes described in the section titled “Use of Proceeds,” and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of net proceeds from this offering, our ultimate use may vary substantially from our currently intended use. Investors will need to rely upon the judgment of our management with respect to the use of proceeds. Pending their use, we may invest our proceeds in a manner that does not produce income or that loses value. Our investments may not yield a favorable return to our investors and may adversely affect the price of our Class A common stock.

You will experience immediate and substantial dilution in the net tangible book value of the shares of Class A common stock you purchase in this offering.

The initial public offering price of our Class A common stock is substantially higher than the pro forma net tangible book value per share of Class A common stock immediately after this offering. If you purchase Class A common stock in this offering, you will suffer immediate dilution of $                 per share, or $                 per share if the underwriters exercise their over-allotment option in full, representing the difference between our pro forma as adjusted net tangible book value per share after giving effect to the sale of our Class A common stock in this offering and the assumed initial public offering price.

This dilution is due to the substantially lower price paid by our investors who purchased shares of Class B common stock prior to this offering as compared to the price offered to the public in this offering, and any previous exercise of options granted to our service providers. In addition, as of                 2021, options to purchase                 shares of Class B common stock with a weighted-average exercise price of $                 per share were outstanding as well as                  issuable shares of Class B

 

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common stock upon satisfaction of service-based vesting conditions. The exercise of any of these options or issuance of these contingent shares of Class B common stock would result in additional dilution. See the section titled “Dilution” for additional information.

Future sales of substantial amounts of our Class A common stock in the public markets, or the perception that they might occur, could reduce the price that our Class A common stock might otherwise attain.

Future sales of a substantial number of shares of Class A common stock in the public market, particularly sales by our directors, executive officers, and significant stockholders, or the perception that these sales could occur, could adversely affect the market price of our Class A common stock and may make it more difficult for you to sell your shares of Class A common stock at a time and price that you deem appropriate.

All of the shares of Class A common stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act of 1933, as amended, or the Securities Act, except for any shares held by our affiliates as defined in Rule 144 under the Securities Act (including any shares that may be purchased by any of our affiliates in this offering). The remaining shares of our common stock are subject to the lock-up agreement described below.

In addition, holders of an aggregate of 94,127,984 shares of Class B common stock, based on shares outstanding as of July 31, 2021 (after giving effect to the automatic conversion of all outstanding redeemable convertible preferred stock), are entitled to rights with respect to registration of these shares under the Securities Act pursuant to our amended and restated investors’ rights agreement. If these holders of our Class B common stock, by exercising their registration rights, sell a large number of shares, they could adversely affect the market price for our Class A common stock. We have also registered the offer and sale of all shares of Class A common stock that we may issue under our equity compensation plan.

We and all of our directors, officers, and holders of approximately         % of our outstanding stock and equity securities are subject to lock-up agreements with the underwriters that restrict their ability to transfer such shares of stock and such securities, including any hedging transactions, during the period ending on the date that is 180 days after the date of this prospectus, as further described in the section titled “Shares Eligible for Future Sale.” Certain holders of our securities representing approximately         % of our outstanding stock and equity securities, who are primarily current and former employees, have not entered into lock-up agreements with the underwriters and, therefore, are not subject to the restrictions described in this paragraph. These holders are subject to market stand-off agreements with us, and we will not waive any of the restrictions of such market stand-off agreements during the period ending 180 days after the date of this prospectus without the prior written consent of Morgan Stanley & Co. LLC, Goldman Sachs & Co. LLC, and J.P. Morgan Securities LLC on behalf of the underwriters, provided that we may waive such restrictions to the extent consistent with the terms of the lock-up agreements with the underwriters. The market stand-off agreements do not prohibit these holders from pledging or hedging activities with respect to our securities.

In addition, pursuant to the lock-up agreements, if the terms of the lock-up agreements or market stand-off agreements with any of our directors, officers, or greater than 1% stockholders are terminated or waived (other than transfers not involving a disposition for value, if the potential transferor enters into a similar lock-up agreement, and in the case of an underwritten offering with an opportunity to participate pro rata), then the parties to our investors’ rights agreement and lock-up agreement will be entitled to a pro rata termination or waiver with respect to their securities, subject to the lock-up agreements or market stand-off provisions described above, and subject to an exception for any waiver of up to 1% of our total outstanding shares of Class A common stock subject to lock-up agreements (calculated as of immediately prior to this offering).

 

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In addition, as further described in the section titled “Shares Eligible for Future Sale,” subject to certain conditions and terms of the lock-up agreements, including compliance with Rule 144 under the Securities Act, our directors, officers, and holders of our securities may sell in the public market a certain percentage of the aggregate number of shares of Class A common stock or other securities convertible into or exercisable or exchangeable for Class A common stock.

Upon the expiration of the restricted period described above, all of the securities subject to such lock-up agreements will become eligible for sale, subject to compliance with applicable securities laws. Furthermore, Morgan Stanley & Co., LLC, Goldman Sachs & Co. LLC, and J.P. Morgan Securities LLC may waive the lock-up agreements entered into by our directors, officers, and holders of our securities before they expire.

Sales of a substantial number of such shares upon expiration of the lock-up agreements, or the perception that such sales may occur, or the early release of these agreements, could cause our market price to fall or make it more difficult for you to sell your Class A common stock at a time and price that you deem appropriate.

Additional stock issuances could result in significant dilution to our stockholders and additional issuances of debt or senior equity securities could impair the value of our Class A common stock.

We may issue common stock or securities convertible into common stock from time to time in connection with a financing, acquisition, investment, our share incentive plans, or otherwise. Any such issuance could result in dilution to our existing stockholders unless pre-emptive rights exist. The amount of dilution could be substantial depending upon the size of the issuances or exercises.

Delaware law and provisions in our amended and restated certificate of incorporation and amended and restated bylaws could make a merger, tender offer, or proxy contest difficult, thereby depressing the market price of our Class A common stock.

Our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay, or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the date of the transaction in which the person became an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our amended and restated certificate of incorporation and amended and restated bylaws contains provisions that may make the acquisition of our company more difficult, including the following:

 

 

 

any amendments to our amended and restated certificate of incorporation or our amended and restated bylaws requires the approval of at least 66-2/3% of our then-outstanding voting power;

 

 

 

our board of directors is classified into three classes of directors with staggered three-year terms and stockholders will only be able to remove directors from office for cause;

 

 

 

our stockholders will only be able to take action at a meeting of stockholders and will not be able to take action by written consent for any matter;

 

 

 

our amended and restated certificate of incorporation does not provide for cumulative voting;

 

 

 

vacancies on our board of directors will be able to be filled only by our board of directors and not by stockholders;

 

 

 

a special meeting of our stockholders may only be called by an officer pursuant to a resolution adopted by our board of directors, the chairperson of our board of directors, our Chief Executive Officer, or our President (in the absence of a chief executive officer);

 

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certain litigation against us can only be brought in Delaware, unless we consent in writing to the selection of an alternative forum;

 

 

 

our amended and restated certificate of incorporation authorizes 100,000,000 shares of undesignated preferred stock, the terms of which may be established and shares of which may be issued without further action by our stockholders; and

 

 

 

advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders.

These provisions, alone or together, could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and to cause us to take other corporate actions they desire, any of which, under certain circumstances, could limit the opportunity for our stockholders to receive a premium for their shares of our Class A common stock, and could also affect the price that some investors are willing to pay for our Class A common stock.

Our amended and restated bylaws provide that the Court of Chancery of the State of Delaware and the federal district courts of the United States will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.

Our amended and restated bylaws provide that the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, another State court in Delaware or the federal district court for the District of Delaware) is the exclusive forum for the following (except for any claim as to which such court determines that there is an indispensable party not subject to the jurisdiction of such court (and the indispensable party does not consent to the personal jurisdiction of such court within ten days following such determination), which is vested in the exclusive jurisdiction of a court or forum other than such court or for which such court does not have subject matter jurisdiction):

 

 

 

any derivative action or proceeding brought on behalf of us;

 

 

 

any action asserting a claim of breach of a fiduciary duty;

 

 

 

any action asserting a claim against us arising under the Delaware General Corporation Law, our amended and restated certificate of incorporation, or our amended and restated bylaws (as either may be amended from time to time); and

 

 

 

any action asserting a claim against us that is governed by the internal affairs doctrine.

This provision would not apply to suits brought to enforce a duty or liability created by the Securities Exchange Act of 1934, as amended, or the Exchange Act, or any other claim for which the U.S. federal courts have exclusive jurisdiction.

Our amended and restated bylaws further provide that the federal district courts of the U.S. will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act.

These exclusive-forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers, and other employees. Any person or entity purchasing or otherwise acquiring any interest in any of our securities shall be deemed to have notice of and consented to these provisions. There is uncertainty as to whether a court would enforce such provisions, and the enforceability of similar choice of forum provisions in other companies’ charter documents has been challenged in legal proceedings. We also note that stockholders cannot waive compliance (or consent to noncompliance) with the federal securities laws and the rules and regulations thereunder. It is possible that a court could find these types of provisions to be inapplicable

 

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or unenforceable, and if a court were to find either exclusive-forum provision in our amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could significantly harm our business.

If industry or financial analysts do not publish research or reports about our business, or if they issue inaccurate or unfavorable research regarding our Class A common stock, our share price and trading volume could decline.

The trading market for our Class A common stock is influenced by the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts, or the content and opinions included in their reports. As a new public company, we may be slow to attract research coverage and the analysts who publish information about our Class A common stock will have had relatively little experience with our company, which could affect their ability to accurately forecast our results and make it more likely that we fail to meet their estimates. In the event we obtain industry or financial analyst coverage, if any of the analysts who cover us issues an inaccurate or unfavorable opinion regarding our company, our share price would likely decline. In addition, the share prices of many companies in the technology industry have declined significantly after those companies have failed to meet, or significantly exceed, the financial guidance publicly announced by the companies or the expectations of analysts. If our financial results fail to meet, or significantly exceed, our announced guidance or the expectations of analysts or public investors, analysts could downgrade our Class A common stock or publish unfavorable research about us. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, our visibility in the financial markets could decrease, which in turn could cause our share price or trading volume to decline.

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Class A common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and have the option to utilize certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company until the earlier of (i) the last day of the fiscal year (A) following the fifth anniversary of this initial public offering, (B) in which we have total annual revenue of at least $1.07 billion, or (C) in which we are deemed to be a large accelerated filer, with at least $700 million of equity securities held by non-affiliates as of the prior June 30th, and (ii) the date on which we have issued more than $1 billion in non-convertible debt during the prior three-year period.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. However, we may take advantage of some of the other reduced regulatory and reporting requirements that will be available to us so long as we qualify as an emerging growth company.

Among other things, this means that our independent registered public accounting firm will not be required to provide an attestation report on the effectiveness of our internal control over financial

 

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reporting so long as we qualify as an emerging growth company, which may increase the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected. Likewise, so long as we qualify as an emerging growth company, we may elect not to provide you with certain information, including certain financial information and certain information regarding compensation of our executive officers, that we would otherwise have been required to provide in filings we make with the SEC, which may make it more difficult for investors and securities analysts to evaluate our company. As a result, investor confidence in our company and the market price of our Class A common stock may be adversely affected. Further, we cannot predict if investors will find our Class A common stock less attractive because we will rely on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may be more volatile.

We do not intend to pay dividends in the foreseeable future.

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends in the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on our financial condition, operating results, contractual restrictions, capital requirements, general business conditions and other factors that our board of directors may deem relevant. As a result, stockholders must rely on sales of their capital stock after price appreciation as the only way to realize any future gains on their investment; because there is no market for any of our equity securities, stockholders may not be able to sell their capital stock when desired, or at all.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements about us and our industry that involve substantial risks and uncertainties, some of which cannot be predicted or quantified. All statements other than statements of historical fact contained in this prospectus, including statements regarding our future results of operations or financial condition, business strategy and plans, and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “hope,” “intend,” “may,” “might,” “objective,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would” or the negative of these words or other similar terms or expressions. In particular, information appearing under the sections titled “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other portions of this prospectus include forward-looking statements. These forward-looking statements include, but are not limited to, statements concerning the following:

 

 

 

our future operating and financial performance, ability to generate positive cash flow and ability to achieve and sustain profitability;

 

 

 

our ability to attract and retain customers to use our products;

 

 

 

our ability to successfully anticipate and satisfy customer demands, including through the introduction of new features, products or services and the provision of professional services;

 

 

 

our ability to increase usage of our platform and sell additional products to existing customers;

 

 

 

future investments in our business, our anticipated capital expenditures, and our estimates regarding our capital requirements;

 

 

 

the costs and success of our sales and marketing efforts, and our ability to promote our brand;

 

 

 

the estimated addressable market opportunity for our products and growth rate of those markets;

 

 

 

our reliance on key personnel and our ability to identify, recruit, and retain skilled personnel;

 

 

 

our ability to continue to build and maintain credibility with the developer community;

 

 

 

our ability to form new and expand existing strategic partnerships;

 

 

 

our ability to maintain the security of our software and adequately address privacy concerns;

 

 

 

our ability to accurately forecast our sales cycle and make changes to our pricing model;

 

 

 

our ability to effectively manage our growth, including any international expansion;

 

 

 

our ability to protect our intellectual property rights and any costs associated therewith;

 

 

 

the future trading prices of shares of our Class A common stock;

 

 

 

the effects of COVID-19 or other public health crises;

 

 

 

our ability to compete effectively with existing competitors and new market entrants;

 

 

 

the effects of any existing or future claims or litigation;

 

 

 

our ability to comply with modified or new laws and regulations applying to our business; and

 

 

 

our anticipated use of the net proceeds of this offering.

Actual events or results may differ from those expressed in forward-looking statements. As such, you should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and

 

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projections about future events and trends that we believe may affect our business, financial condition, results of operations, prospects, strategy, and financial needs. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, assumptions, and other factors described in the section titled “Risk Factors” and elsewhere in this prospectus. Moreover, we operate in a highly 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 prospectus. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this prospectus. While we believe that such information provides a reasonable basis for these statements, such information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

The forward-looking statements made in this prospectus 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 prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information, actual results, revised expectations, 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.

 

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MARKET, INDUSTRY, AND OTHER DATA

This prospectus contains estimates and information concerning our industry, including market position, market size, and growth rates of the markets in which we participate, that are based on industry publications and reports. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates. Although we are responsible for all of the disclosure contained in this prospectus and we believe the information from the industry publications and other third-party sources included in this prospectus is reliable, we have not independently verified the accuracy or completeness of the data contained in such sources. Similarly, while we believe our management estimates to be reasonable, they have not been verified by any independent sources. Forecasts and other forward-looking information with respect to industry are subject to the same qualifications and additional uncertainties regarding the other forward-looking statements in this prospectus. See the section titled “Special Note Regarding Forward-Looking Statements.” We have not independently verified the accuracy or completeness of the data contained in these industry publications and reports. The industry in which we operate is subject to a high degree of uncertainty and risk due to variety of factors, including those described in the section titled “Risk Factors.” These and other factors could cause results to differ materially from those expressed in these publications and reports.

The source of certain statistical data, estimates and forecasts contained in this prospectus include the following independent industry publications or reports:

 

 

 

451 Research, part of S&P Global Market Intelligence, Voice of the Enterprise, Cloud, Hosting & Managed Services: Organizational Dynamics, 2020;

 

 

 

650 Group, HashiCorp Product Addressable Market Sizes, June 2021;

 

 

 

Gartner, Inc., Competitive Landscape: Cloud Service Brokerage 2020, October 2020; and

 

 

 

IDC, Semiannual Public Cloud Services Tracker 2016-2025, May 2021.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from the sale of shares of our Class A common stock that we are selling in this offering of approximately $             million, based on an assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses. If the underwriters’ option to purchase additional shares in this offering is exercised in full, based on the same assumptions, we estimate that our net proceeds will be approximately $                 million.

Each $1.00 increase (decrease) in the assumed initial public offering price of $             would increase (decrease) the net proceeds to us by approximately $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. Similarly, each increase (decrease) of 1.0 million shares in the number of shares of Class A common stock offered by us would increase (decrease) the net proceeds to us from this offering by approximately $             million, assuming the assumed initial public offering price of $             per share of Class A common stock remains the same, and after deducting the estimated underwriting discounts and commissions.

The principal purposes of our selling shares in this offering are to obtain additional capital, to create a public market for our Class A common stock and to facilitate our future access to the public equity markets. We intend to use the net proceeds for general corporate purposes, including working capital. We do not have more specific plans for the net proceeds from this offering. We may also use a portion of the net proceeds for the acquisition of, or investment in, businesses or technologies that complement our business. However, we do not have agreements or commitments to enter into any such acquisitions or investments at this time.

We intend to use a portion of the net proceeds we receive from this offering to satisfy a portion of the anticipated tax withholding and remittance obligations of $             million related to the RSU Settlement based upon the assumed initial public offering price per share of $            , which is the midpoint of the price range set forth on the cover page of this prospectus. Each $1.00 increase or decrease in the assumed initial public offering price per share of $            , which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease the amount we would be required to pay to satisfy our tax withholding and remittance obligations related to the RSU Settlement by $             million.

We have not yet determined our anticipated expenditures and therefore cannot estimate the amounts to be used for each of the purposes discussed above, and we will have broad discretion over how to use the net proceeds to us from this offering. The amounts and timing of any expenditures will vary depending on the amount of cash generated by our operations, competitive and technological developments and the rate of growth, if any, of our business. Accordingly, our management will have significant flexibility in applying the net proceeds from this offering, and investors will be relying on the judgment of our management regarding the application of these net proceeds. Pending the uses described above, we intend to invest the net proceeds from this offering in short-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the United States government. The goal with respect to the investment of these net proceeds will be capital preservation and liquidity so that these funds are readily available to fund our operations.

 

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DIVIDEND POLICY

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends in the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on our financial condition, operating results, contractual restrictions, capital requirements, general business conditions and other factors that our board of directors may deem relevant. In addition, the terms of our credit facility contain restrictions on our ability to declare and pay cash dividends on our capital stock, even if no amounts are currently outstanding.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of July 31, 2021:

 

 

 

on an actual basis without any adjustments to reflect subsequent or anticipated events;

 

 

 

on a pro forma basis to give effect to (i) the Capital Stock Conversion; (ii) the Class B Reclassification; (iii) the RSU Settlement; (iv) the related increase in liabilities and corresponding decrease in additional paid-in capital for the associated tax liabilities related to the net settlement of the RSUs, (v) the filing and effectiveness of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws immediately prior to the closing of this offering, and (vi) an increase to additional paid-in capital and accumulated deficit related to stock-based compensation expense of $                 associated with RSUs for which the service-based vesting condition was satisfied as of July 31, 2021 and for which the liquidity event-related performance vesting condition will be satisfied in connection with this offering; and

 

 

 

on a pro forma as adjusted basis to give effect to (i) the pro forma adjustments set forth above; and (ii) the issuance and sale by us of                 shares of Class A common stock in this offering at the initial public offering price of $             per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The pro forma as adjusted information set forth in the table below is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. This table should be read in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this prospectus.

 

    As of July 31, 2021  
        Actual         Pro
    Forma    
     Pro Forma
as adjusted(1)
 
    (in thousands, except per share data)  

Cash and cash equivalents

  $ 244,108     $                    $                
 

 

 

   

 

 

    

 

 

 

Redeemable convertible preferred stock, $0.000015 par value per share: 94,127,984 shares authorized, 94,127,984 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

  $ 349,113      $        $    

Stockholders’ (deficit) equity:

      

Preferred Stock, $             par value per share; no shares authorized, issued and outstanding, actual;                 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

      

Common Stock, $0.000015 par value per share, 200,000,000 shares authorized; 66,652,315 shares issued and outstanding, actual;                 shares authorized,                 shares issued and outstanding, pro forma and pro forma as adjusted

          

Class A Common Stock, $             par value per              share,              shares authorized;              shares issued and outstanding, actual;                 shares authorized,                 shares issued and outstanding, pro forma; and                 shares authorized,                 shares issued and outstanding, pro forma as adjusted

      

Class B Common Stock, $             par value per share,                 shares authorized;                 shares issued and outstanding, actual;             shares authorized,                 shares issued and outstanding, pro forma and pro forma as adjusted

    —                 

Additional paid-in capital

    99,734               

 

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    As of July 31, 2021
        Actual         Pro
    Forma    
     Pro Forma
as adjusted(1)
    (in thousands, except per share data)

Accumulated deficit

    (256,451)          
 

 

 

   

 

 

    

 

Total stockholders’ (deficit) equity

  $ (156,716)     $         $      
 

 

 

   

 

 

    

 

Total capitalization

  $  436,505      $               $      
 

 

 

   

 

 

    

 

 

(1)

Each $1.00 increase (decrease) in the assumed initial public offering price of $            per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase (decrease) the amount of our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity, and total capitalization by $             , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions payable by us. An increase (decrease) of 1.0 million shares in the number of shares offered by us would increase (decrease) the amount of our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity, and total capitalization by $             , assuming the assumed initial public offering price remains the same, and after deducting estimated underwriting discounts and commissions payable by us.

If the underwriters’ option to purchase additional shares of our common stock from us were exercised in full, pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity, total capitalization, and shares outstanding as of                 would be $             , $             , $             , $            , and                 , respectively.

The number of shares of our Class A common stock and Class B common stock to be outstanding after this offering is based on                  shares of our common stock outstanding as of July 31, 2021, after giving effect to the Capital Stock Conversion, the Class B Reclassification, and the RSU Settlement, as if they had occurred on July 31, 2021, and excludes the following:

 

 

 

14,401,971 shares of our Class B common stock issuable upon the exercise of options to purchase shares of common stock outstanding as of July 31, 2021 under our 2014 Stock Plan, at a weighted-average exercise price of $1.83 per share;

 

 

 

                 RSUs covering shares of our Class B common stock that are issuable upon satisfaction of service-based and liquidity-based vesting conditions outstanding as of July 31, 2021, for which the service-based condition was not yet satisfied as of July 31, 2021, pursuant to our 2014 Plan (we expect that vesting of certain of these RSUs through                 , 2021 will result in the net issuance of                  shares of our Class B common stock in connection with this offering, after withholding                  shares of Class B common stock to satisfy associated estimated income tax obligations (based on the assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and an assumed     % tax withholding rate));

 

 

 

8,900 shares of our Class B common stock issuable upon the exercise of options to purchase shares of our Class B common stock that we granted after July 31, 2021 under our 2014 Plan, at a weighted-average exercise price of $39.86 per share;

 

 

 

                 RSUs covering shares of our Class B common stock that are issuable upon satisfaction of service-based and liquidity-based vesting conditions granted after July 31, 2021, pursuant to our Stock Plan (we expect that vesting of certain of these RSUs through                 , 2021 will result in the net issuance of                      shares of our Class B common stock in connection with this offering, after withholding                  shares of Class B common stock to satisfy associated estimated income tax obligations (based on the assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and an assumed     % tax withholding rate));

 

 

 

2,992 shares of Class B common stock issued as a restricted stock award after July 31, 2021 outside of the 2014 Plan;

 

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977,680 shares of the IPO RSU Shares issuable in connection with the vesting of RSUs that were granted in connection with this offering under our 2021 Plan and are subject to commencement of vesting upon the effectiveness of the registration statement of which this prospectus forms a part (see the section titled “Executive Compensation” for additional information regarding certain of these grants);

 

 

 

18,330,000 shares of our Class A common stock reserved for future issuance under our 2021 Plan, which includes the IPO RSU Shares, as well as any automatic increases in the number of shares of our Class A common stock reserved for future issuance under this plan; and

 

 

 

1,900,000 shares of our Class A common stock reserved for future issuance under our ESPP, as well as any automatic increases in the number of shares of our Class A common stock reserved for future issuance under our ESPP.

 

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DILUTION

If you invest in our Class A common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our Class A common stock and the pro forma net tangible book value per share of our Class A common stock immediately after this offering.

Net tangible book value per share is determined by dividing our total tangible assets less our total liabilities and redeemable convertible preferred stock by the number of shares of our common stock outstanding. Our historical net tangible book deficit as of July 31, 2021 was $223.2 million, or $3.35 per share. Our pro forma net tangible book value as of July 31, 2021 was $125.9 million, or $0.78 per share, based on the total number of shares of our Class A common stock and Class B common stock outstanding as of July 31, 2021, after giving effect to (i) the Capital Stock Conversion, (ii) the Class B Reclassification, (iii) the RSU Settlement, (iv) the related increase in liabilities and corresponding decrease in additional paid-in capital for the associated tax liabilities related to the net settlement of the RSUs, and (v) the filing and effectiveness of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws immediately prior to the closing of this offering.

After giving further effect to the receipt of the net proceeds from our issuance and sale of                shares of Class A common stock in this offering at an assumed initial public offering price of $            per share of Class A common stock, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of July 31, 2021 would have been approximately $             million, or $             per share. This amount represents an immediate increase in pro forma as adjusted net tangible book value of $             per share to our existing stockholders and an immediate dilution in pro forma as adjusted net tangible book value of approximately $            per share to new investors purchasing shares of our Class A common stock in this offering. We determine dilution by subtracting the pro forma as adjusted net tangible book value per share after this offering from the estimated offering price that a new investor will pay for a share of Class A common stock. The following table illustrates this dilution:

 

Assumed initial public offering price per share

     $                      

Historical net tangible book deficit per share as of July 31, 2021

   $ (3.35  

Increase per share attributable to the pro forma adjustments described above

    

Pro forma net tangible book value per share as of July 31, 2021, before giving effect to this offering

    

Increase in pro forma as adjusted net tangible book value per share attributable to new investors purchasing shares in this offering

    
  

 

 

   

Pro forma as adjusted net tangible book value per share after giving effect to this offering

           
    

 

 

 

Dilution per share to new investors in this offering

     $          
    

 

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $            per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted net tangible book value per share after this offering by $ per share and the dilution to new investors purchasing common stock in this offering by $            per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. An increase (decrease) of 1.0 million shares in the number of shares offered by us would increase (decrease) the pro forma as adjusted net tangible book value per share after this offering by $ and decrease (increase) the dilution per share to new investors participating in this offering by $            , assuming no change in the assumed initial public offering price and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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If the underwriters exercise their option to purchase additional shares in full, the pro forma as adjusted net tangible book value after the offering would be $            per share, the increase in pro forma as adjusted net tangible book value per share to existing stockholders would be $            per share and the dilution in pro forma as adjusted net tangible book value to new investors would be $            per share, in each case based on the initial public offering price of $         per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The following table summarizes, as of July 31, 2021, after giving effect to (i) the Capital Stock Conversion, (ii) the Class B Reclassification, (iii) the RSU Settlement, (iv) the related increase in liabilities and corresponding decrease in additional paid-in capital for the associated tax liabilities related to the net settlement of the RSUs, and (v) the filing and effectiveness of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws immediately prior to the closing of this offering, the differences between the existing stockholders and the new investors purchasing shares of our Class A common stock in this offering with respect to the number of shares purchased from us, the total consideration paid, or to be paid, to us, and the average price per share paid, or to be paid. The calculation below is based on an initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of the prospectus, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares Purchased      Total Consideration      Average
Price Per
Share
     Number      Percent      Amount      Percent  

Existing stockholders

     160,780,299            %      $ 358,228,000            %          $2.23

New investors

                   $    
  

 

 

    

 

 

    

 

 

    

 

 

    

Total

        100%      $              100%     
  

 

 

    

 

 

    

 

 

    

 

 

    

The foregoing tables assume no exercise of the underwriters’ option to purchase additional shares or of outstanding stock options after                . At                ,                shares of common stock were subject to outstanding options, at a weighted-average exercise price of $                 . To the extent these options are exercised there will be further dilution to new investors. See Note 9 of Notes to Consolidated Financial Statements.

Each $1.00 increase (decrease) in the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid by new investors by $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. An increase (decrease) of 1.0 million shares in the number of shares offered by us would increase (decrease) the total consideration paid by new investors by $            million, assuming no change in the assumed initial public offering price.

The number of shares of our Class A common stock and Class B common stock to be outstanding after this offering is based on                  shares of our common stock outstanding as of July 31, 2021, after giving effect to the Capital Stock Conversion, the Class B Reclassification, and the RSU Settlement, as if they had occurred on July 31, 2021, and excludes the following:

 

 

 

14,401,971 shares of our Class B common stock issuable upon the exercise of options to purchase shares of common stock outstanding as of July 31, 2021 under our 2014 Stock Plan, at a weighted-average exercise price of $1.83 per share;

 

 

 

                 RSUs, covering shares of our Class B common stock that are issuable upon satisfaction of service-based and liquidity-based vesting conditions outstanding as of July 31, 2021, for which the service-based condition was not yet satisfied as of July 31, 2021,

 

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pursuant to our 2014 Plan (we expect that vesting of certain of these RSUs through                 , 2021 will result in the net issuance of                  shares of our Class B common stock in connection with this offering, after withholding                  shares of Class B common stock to satisfy associated estimated income tax obligations (based on the assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and an assumed     % tax withholding rate));

 

 

 

8,900 shares of our Class B common stock issuable upon the exercise of options to purchase shares of our Class B common stock that we granted after July 31, 2021 under our 2014 Plan, at a weighted-average exercise price of $39.86 per share;

 

 

 

                 RSUs covering shares of our Class B common stock that are issuable upon satisfaction of service-based and liquidity-based vesting conditions granted after July 31, 2021, pursuant to our 2014 Plan (we expect that vesting of certain of these RSUs through                 , 2021 will result in the net issuance of                      shares of our Class B common stock in connection with this offering, after withholding                  shares of Class B common stock to satisfy associated estimated income tax obligations (based on the assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and an assumed     % tax withholding rate));

 

 

 

2,992 shares of Class B common stock issued as a restricted stock award after July 31, 2021 outside of the 2014 Plan;

 

 

 

977,680 shares of the IPO RSU Shares issuable in connection with the vesting of RSUs that were granted in connection with this offering under our 2021 Plan and are subject to commencement of vesting upon the effectiveness of the registration statement of which this prospectus forms a part (see the section titled “Executive Compensation” for additional information regarding certain of these grants);

 

 

 

18,330,000 shares of our Class A common stock reserved for future issuance under our 2021 Plan, which includes the IPO RSU Shares, as well as any automatic increases in the number of shares of our Class A common stock reserved for future issuance under this plan; and

 

 

 

1,900,000 shares of our Class A common stock reserved for future issuance under our ESPP, as well as any automatic increases in the number of shares of our Class A common stock reserved for future issuance under our ESPP.

To the extent that any outstanding options are exercised, outstanding RSUs vest and settle or new options or RSUs are issued under our stock-based compensation plans, or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering. If all outstanding options under the 2014 Plan as of                 , 2021 were exercised or vested and settled, as applicable, then our existing stockholders, including the holders of these options and RSUs, would own     % and our new investors would own         % of the total number of shares of our common stock outstanding on the closing of this offering.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such difference include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included elsewhere in this prospectus. Our fiscal year end is January 31, and our fiscal quarters end on April 30, July 31, October 31, and January 31. Our fiscal years ended January 31, 2020 and 2021 are referred to herein as fiscal 2020 and fiscal 2021, respectively.

Overview

At HashiCorp, we believe that infrastructure enables innovation.

Our foundational technologies solve the core infrastructure challenges of cloud adoption by enabling an operating model that unlocks the full potential of modern public and private clouds. Our cloud operating model provides consistent workflows and a standardized approach to automating the critical processes involved in delivering applications in the cloud: infrastructure provisioning, security, networking, and application deployment. With our solutions, companies of all sizes and in all industries can accelerate their time to market, reduce their cost of operations, and improve their security and governance of complex infrastructure deployments.

Since our founding, our focus on innovation has allowed us to achieve the following significant milestones during the years indicated below:

 

LOGO

 

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Organizations today are undergoing a digital transformation across every business function, driven by competition and ever-increasing consumer expectations. Underlying this digital transformation is a re-platforming of static on-premises infrastructure to dynamic and distributed cloud infrastructure. In this dynamic world, existing procedures are too inefficient to scale with distributed, multi-cloud infrastructure. Inconsistent, fragmented technologies and processes are time consuming and resource intensive to manage, exacerbated by inefficient, linear ticket-driven workflows that cannot facilitate scaled, real-time operations. This digital transformation demands a new cloud operating model for enterprise IT requiring automation to provision, secure, connect, and run infrastructure at scale and in real time. At HashiCorp, we build industry-leading products that enable this cloud operating model and accelerate cloud adoption. Our primary commercial products are Terraform, Vault, Consul, and Nomad.

Our products can be adopted individually and are also designed to work together as a stack in order to solve larger, more complex challenges. For instance, deploying Vault and Consul is the basis for a complete Zero Trust security architecture with identity-driven controls, offering a full range of authentication, authorization, and access management for human users or machines, like servers or applications. We continue to innovate and deliver additional emerging products to supplement these core capabilities and provide adjacent solutions.

Our Business Model

Our primary products are based on a combination of our open-source and proprietary software. We are committed to an open-source model in which we maintain free open-source offerings while developing proprietary features for paid tiers of our software. These proprietary features include collaboration modules, governance and policy modules, enterprise use cases, and premium support and services. We provide our software under a licensing model that protects our intellectual property, grows our adoption, and supports our business.

We generate revenue primarily from sales of subscriptions to our software. We offer an enterprise-ready, self-managed software offering that can be deployed in our customers’ public cloud, private cloud, and on-premises environments. HCP is our fully-managed cloud platform, available on all of the leading cloud providers. These two core offerings can be leveraged independently or together, spanning the various public cloud, private cloud, and on-premises environments in which our customers operate.

For our self-managed offerings, we offer various tiers that provide different levels of access to our proprietary products, modules, and support. Our licenses for self-managed deployments typically have terms of one to three years. We bill for one-year licenses upfront, and we primarily bill for multi-year term licenses annually in advance, with a multi-year payment schedule. The substantial majority of our revenue is recognized ratably over the subscription term. Each product is sold as a base module, with additional optional modules available that address needs like governance and policy, and a tiered pricing system that scales pricing with increased product usage. The unit of value for product usage varies by product, and generally scales with customer cloud adoption as workloads managed by our products move to cloud-based infrastructure.

Customers of our fully-managed cloud platform, HCP, can either use our offering with no minimum commitment where they pay an hourly rate, or can purchase an annual subscription contract with a minimum commitment. Customers who are on no-minimum commitment contracts are billed, and revenue from them is recognized, based on usage. Today, customers with minimum commitments are typically billed annually in advance for their subscriptions and we recognize all revenue from such subscriptions ratably over the subscription term. Over time, we intend to transition our committed contracts to a usage-based model. Our pricing schedule lists the hourly rate when deploying HCP for our various products, and actual usage is metered and calculated on a per-hour basis for increased accuracy.

 

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We sell to organizations of all sizes across a broad range of industries, with a particular focus on enterprises that are managing and moving an increasing amount of business-critical processes, applications, and large volumes of data to the cloud. Ultimately, we believe all enterprises will need to transition to the cloud to reduce operational burden, improve scalability and elasticity, and increase agility. We plan to continue to invest in our direct sales force to grow our large enterprise base both domestically and internationally.

Our sales and marketing strategy combines the best of customer self-service with our direct sales approach. Our open-source model allows developers and individuals focused on operations, IT, and security, or practitioners, to engage with and evaluate our software in a frictionless manner, which we believe has contributed to our software’s popularity. This open source leadership and the wider ecosystem around us, compels practitioners to adopt and implement our software in the enterprise. As organizations recognize the value of our products, our inside and field sales teams can nurture leads and develop direct relationships with key stakeholders across all segments. HCP has accelerated our self-service approach, as practitioners can now quickly deploy and experiment with our paid offering with a fully-managed cloud solution and no minimum commitments.

As adoption grows, our marketing organization is focused on building our brand reputation and awareness, and engages with prospective customers through our user conferences, email marketing, digital advertising, and other public relations activities. This sales and marketing strategy allows us to not only acquire new customers, but also drive increased usage within existing customers.

We operate an adopt, land, expand, and extend motion. Our open source engagement and self-serve cloud motion help us identify and accelerate initial product adoption and use cases in an account. Our enterprise sales teams land these customers with subscription contracts for our software. Our expansion motion focuses on up-selling additional modules and increasing the footprint of usage of a given product, including across multiple buying centers within our customers’ organizations. The multiple capabilities of our deep product portfolio allow us to extend by cross-selling additional integrated products to our customers. For example, a company may initially adopt an open source use case of Terraform. After initial use of the open-source product, we frequently land their first paid use of Terraform to add enterprise functionality and support mission-critical cloud workloads. As customers grow their cloud presence to support additional cloud-based workloads, they frequently expand the amount of Terraform they consume. In addition to this increased Terraform usage, customers also frequently extend into additional products such as Vault or Consul. This combination of adopt, land, expand, and extend affords us considerable growth opportunities within our customer base, and we focus our go-to-market strategy on developing and cultivating long-term customer relationships. The increased use of our platform by our customers is evidenced by our high net dollar retention rate. As of January 31, 2020, January 31, 2021, July 31, 2020, and July 31, 2021, our last four quarter average net dollar retention rate was 131%, 123%, 128%, and 124%, respectively.

Factors Affecting Our Performance

We believe that the growth and future success of our business depends on a number of key factors. While each of these factors presents significant opportunities for our business, they also pose important challenges that we must successfully address in order to sustain our growth and improve our results of operations.

Adoption of Our Products and Landing New Customers

We believe there is substantial opportunity to continue to grow our product adoption and our customer base. We intend to drive product adoption through our open-source distribution model and by continuing to cultivate our open source community. Our products were downloaded approximately

 

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100 million times in fiscal 2021, and we estimate that they have been downloaded by approximately 79% of the Fortune 500 as of July 31, 2021. In addition, we estimate that approximately 11,000 organizations have downloaded at least one of our products since HashiCorp’s inception.

We intend to drive paid customer growth by continuing to invest significantly in sales and marketing and to increase brand awareness. HCP has also improved our self-service model, and we expect HCP to continue to support our sales model and drive paid adoption. As of July 31, 2021, we served 2,101 customers spanning organizations of a broad range of sizes and industries, compared to 1,473 and 831 customers as of January 31, 2021 and 2020, respectively.

We also intend to continue to grow our base of large enterprises around the world. As of July 31, 2021, over 300 of the Forbes Global 2000 were our customers. We believe this demonstrates that our products have been adopted by many of the largest enterprises, and that there is substantial opportunity to further cultivate these large customers.

Our ability to attract new customers will depend on a number of factors, including the effectiveness and pricing of our products, development of new products and features, offerings of our competitors, engagement with the open source community, and effectiveness of our marketing and community-building efforts.

Expanding and Extending Within Existing Customer Base

Our large base of customers represents a significant opportunity for further sales growth. Our customers often expand the deployment of our products across larger teams and more broadly within the enterprise as they both do more with existing use cases and realize new use cases. At the same time, we often see customers extend to multiple products across our wider product portfolio as they realize the potential of integrating more of our products to better solve use cases. We intend to continue to invest in enhancing awareness of our brand and developing more products, features, and functionality, which we believe are important factors in achieving widespread adoption of our offerings. Our ability to increase sales to existing customers will depend on a number of factors, including our customers’ satisfaction with our products, the technical capabilities and security of our products, our customers’ progress on their cloud journey, competition, pricing, and overall changes in our customers’ spending levels.

Historically, we have experienced significant expansion after initial deployment of our products by our customers, with customers expanding usage as well as extending to additional products. The chart below illustrates this expansion and extension by presenting the ARR from each customer cohort over the years presented. We define ARR as the annualized value of all recurring subscription contracts with active entitlements as of the end of the applicable period, and in the case of our monthly, or consumption-based customers the annual value of their last month’s spend. The cohort for a given year represents customers that acquired their initial subscription from us in that fiscal year. For example, the cohort for the fiscal year ended January 31, 2018, or fiscal 2018, represents all customers that made their initial subscription from us between February 1, 2017 and January 31, 2018. The fiscal 2018 cohort increased their initial ARR from $26.0 million in fiscal 2018 to $52.2 million in fiscal 2021, representing a 2.0x multiple. A further indication of the propensity of customer relationships to expand over time is our dollar-based net retention rate, which compares ARR from the same set of customers in one period relative to the prior year period. We define dollar-based net retention rate as the ARR at the end of a period for a base set of customers from which we generated ARR in the year prior to the date of calculation, divided by the ARR one year prior to the date of the calculation for that same set of customers. As of January 31, 2020, January 31, 2021, July 31, 2020, and July 31, 2021, our last four quarter average net dollar retention rate was 131%, 123%, 128%, and 124%, respectively. We believe this demonstrates the stickiness of our products, and our offerings as a whole.

 

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LOGO

Increasing Adoption of HashiCorp Cloud Platform

We believe HCP represents a significant growth opportunity for our business. Since launching HCP in fiscal 2021, usage and sales of HCP have grown rapidly and has allowed us to better address the needs of potential customers looking for a fully-managed offering. We believe that as organizations are increasingly looking for a fully-managed cloud infrastructure platform, they will continue to adopt HCP. We offer HCP through a self-service motion which allows our customers to quickly and easily deploy our platform and increase usage over time. We expect HCP to continue to grow and represent an increasing percentage of our total revenue over time. For the fiscal quarter ended July 31, 2021, HCP accounted for approximately 5.0% of our subscription revenue.

Accelerating Technology Leadership and Product Expansion

Our success is dependent on our ability to sustain innovation and technology leadership in order to maintain our competitive advantage. We have built highly differentiated products that we believe have the ability to adapt and evolve with the support of our engineering expertise, our approach to innovation, our open source community, and our ecosystem of partners. HashiCorp is a critical part of the daily operations of practitioners and our free products make HashiCorp frictionless to adopt. We have proven initial success of our modular approach with multiple innovations and product launches, including the launch of HCP in fiscal 2021, and launch of Boundary and Waypoint in September 2020. We see continued adoption from our customers in our new products and innovations and, as of July 31, 2021, over 44% of our customers with $100,000 or greater ARR were licensing more than one product.

We intend to continue to invest in building additional products, features, and functionality to expand our products to new use cases. Our future success is dependent on our ability to successfully develop, market, and sell existing and new products to new and existing customers.

Expanding Internationally

We believe there is a significant opportunity to expand usage of our products outside of the United States as enterprises globally look to take advantage of cloud computing and look to adopt a cloud operating model across multiple clouds. For fiscal 2021 and the six months ended July 31, 2021, 25%

 

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and 28% of our revenue, respectively, was generated by customers outside of the United States. In addition, we have made and plan to continue to make investments in geographic expansion in Europe, the Middle East, Africa, and the Asia-Pacific region.

Key Business Metrics

 

     As of January 31,      As of July 31,  
     2020      2021      2020      2021  

Total customers

     831                1,473                1,081                2,101          

Total customers with $100,000 or greater ARR

     338                500                419                558          

Percentage of quarterly subscription revenue from HCP (and its predecessor cloud offerings)

     0.6%(1)        2.6%(1)        0.8%(1)        5.0%(1)  

Remaining performance obligations (RPOs) (in millions)

   $ 152.1              $ 263.9              $ 178.5              $ 317.4          

Non-GAAP RPOs (in millions)(2)

   $ 171.0              $ 286.1              $ 198.5              $ 335.8          

(1)  Represents subscription revenue for each of the quarters ended January 31, 2020, January 31, 2021, July 31, 2020, and July 31, 2021.

   

(2)  Non-GAAP RPOs is a non-GAAP financial measure. For more information regarding our use of this measure and a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP, see the subsection titled “Non-GAAP Remaining Performance Obligations” elsewhere in this section and the section titled “Non-GAAP Financial Measures” included elsewhere in this prospectus.

   

We review a number of operating and financial metrics, including the following key metrics, to measure our performance, identify trends, formulate business plans, and make strategic decisions. The calculation of the key metrics discussed below may differ from other similarly titled metrics used by other companies, securities analysts, or investors. We monitor the key business metrics set forth below to help us evaluate our business and growth trends, establish budgets, measure our performance, and make strategic decisions. The calculation of the key metrics discussed below may differ from other similarly titled metrics used by other companies, securities analysts, or investors.

Total Customers

 

LOGO

 

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We define total customers as the number of customers we have at the end of each fiscal quarter. We define the number of customers we have at the end of each fiscal quarter as the number of accounts with a unique account identifier for which we have an active contract in the period indicated. Users of our free products are not included in total customers. A single organization with multiple divisions, segments, or subsidiaries is counted as a single customer. Our customer count may also fluctuate due to acquisitions, consolidations, spin-offs, and other market activity.

Total Customers with $100,000 or Greater ARR

 

 

LOGO

We define ARR as the annualized value of all recurring subscription contracts with active entitlements as of the end of the applicable period, and in the case of our monthly, or consumption-based customers, the annual value of their last month’s spend. Relationships with large enterprise customers lead to scale and operating leverage in our business model, as large enterprise customers present a greater opportunity for us to sell additional usage and modules because they have larger budgets, a wider range of potential use cases, and greater potential for expanding to other products in our offering. As such, we count the number of customers contributing $100,000 or greater ARR as a measure of our ability to scale with our customers and attract large enterprise customers to our product offerings. For each applicable financial reporting period, we calculate revenue from customers with $100,000 or greater ARR by aggregating the quarterly revenue attributable to such customers within such period. Customers with $100,000 or greater ARR represented 71% and 83% of revenue for fiscal 2020 and 2021, respectively, and 80% and 87% of revenue for the six months ended July 31, 2020 and 2021, respectively.

 

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Percentage of Quarterly Subscription Revenue from HCP

We believe that HCP represents an important growth opportunity for our business. As organizations continue their transition to the cloud, many will begin seeking fully-managed platforms and will begin to adopt HCP. We will continue to track the percentage of our revenue generated by HCP (and its predecessor cloud offerings) as a way of measuring the adoption of our platform. The following chart represents our quarterly subscription revenue from HCP (and its predecessor cloud offerings) for the indicated quarters.

 

 

LOGO

Non-GAAP Remaining Performance Obligations

Remaining performance obligations, or RPOs, represent the amount of contracted future revenue that has not yet been recognized, including both deferred revenue and non-cancelable contracted amounts that will be invoiced and recognized as revenue in future periods. RPOs exclude customer deposits, which are refundable pre-paid amounts that are expected to be recognized as revenue in future periods. As of January 31, 2020 and January 31, 2021, our RPOs were $152.1 million and $263.9 million, respectively. As of July 31, 2020 and 2021, our RPOs were $178.5 million and $317.4 million, respectively. As of July 31, 2021, we expect to recognize approximately 63% of RPOs as revenue over the next 12 months, and the remainder thereafter. The portion of RPOs that is expected to be recognized as revenue over the next 12 months represents an estimated minimum level of revenue for the applicable period and is not necessarily indicative of future product revenue growth because it does not account for revenue from customer renewals or new customer contracts. Moreover, RPOs are influenced by a number of factors, including the timing of renewals, average contract terms, seasonality and dollar amounts of customer contracts. Due to these factors, it is important to review RPOs in conjunction with revenue and other financial metrics disclosed elsewhere herein. For a further discussion of RPOs, see Note 2 to our consolidated financial statements included elsewhere in this prospectus.

We calculate non-GAAP RPOs as RPOs plus customer deposits, which are refundable pre-paid amounts, based on the timing of when these customer deposits are expected to be recognized as revenue in future periods. As of January 31, 2020 and January 31, 2021, non-GAAP RPOs were $171.0 million and $286.1 million, respectively. As of July 31, 2020 and 2021, non-GAAP RPOs were $198.5 million and $335.8 million, respectively. As of July 31, 2021, we expect to recognize 64% of our non-GAAP RPOs as revenue over the next 12 months, and the remainder thereafter.

 

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We use non-GAAP RPOs in conjunction with RPOs as part of our overall assessment of our performance, to evaluate the effectiveness of our business strategies and to communicate with our board of directors concerning our business and financial performance. Our management believes that presenting non-GAAP RPOs is useful to investors because the portion of non-GAAP RPOs that is expected to be recognized as revenue over the next 12 months represents an estimated minimum level of revenue for the applicable period, including customer deposits that are expected to be recognized as revenue in future periods but are not included in GAAP RPOs. Our definitions of non-GAAP RPOs may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Non-GAAP RPOs should be considered in addition to, not as substitutes for, or in isolation from, RPOs prepared in accordance with GAAP. We compensate for the limitations in the use of non-GAAP RPOs by providing a reconciliation of non-GAAP RPOs to RPOs. We encourage investors and others to review our results of operations and financial information in its entirety, not to rely on any single financial measure, and to view non-GAAP RPOs with RPOs and revenue.

The following table presents a reconciliation of our non-GAAP RPOs to our GAAP RPOs for the periods presented:

 

    As of  
    April 30,
2019
    July 31,
2019
    October 31,
2019
    January 31,
2020
    April 30,
2020
    July 31,
2020
    October 31,
2020
    January 31,
2021
    April 30,
2021
    July 31,
2021
 
    (in thousands)  

GAAP RPOs

                   

GAAP short-term RPOs

  $ 59,808     $ 67,983     $ 80,372     $ 97,392     $ 100,606     $ 116,238     $ 131,645     $ 165,798     $ 178,703     $ 198,590  

GAAP long-term RPOs

    26,228       25,370       34,622       54,711       54,837       62,274       74,339       98,131       109,207       118,799  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total GAAP RPOs

    86,036       93,353       114,994       152,103       155,443       178,512       205,984       263,929       287,910       317,389  

Add:

                   

Customer deposits

                   

Customer deposits expected to be recognized within the next 12 months

    11,602       13,644       14,374       16,027       17,338       18,063       17,496       20,421       18,347       17,133  

Customer deposits expected to be recognized after the next 12 months

    3,851       3,454       3,265       2,856       2,460       1,924       1,330       1,798       1,404       1,255  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total customer deposits

    15,453       17,098       17,639       18,883       19,798       19,987       18,826       22,219       19,751       18,388  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP RPOs

  $ 101,489     $ 110,451     $ 132,633     $ 170,986     $ 175,241     $ 198,499     $ 224,810     $ 286,148     $ 307,661     $ 335,777  

Non-GAAP short-term RPOs

  $ 71,410     $ 81,627     $ 94,746     $ 113,419     $ 117,944     $ 134,301     $ 149,141     $ 186,219     $ 197,050     $ 215,723  

Non-GAAP long-term RPOs

    30,079       28,824       37,887       57,567       57,297       64,198       75,669       99,929       110,611       120,054  

Impact of COVID-19

The ongoing COVID-19 pandemic has caused business disruption worldwide. The extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations, cash flows, financial condition or our customers will depend on many factors, including the duration and continued spread of COVID-19; public health measures; national, state, and local government responses; and the impact of the pandemic on the global economy, all of which remain uncertain.

 

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During 2020 and through the date of this prospectus, we experienced, and may continue to experience, adverse impacts on certain parts of our business as a result of the pandemic and our responsive measures. In industries that were heavily impacted by the pandemic, such as travel and hospitality, we experienced a slowdown in customer spending on our products. Additionally, we also took responsive measures to the pandemic that impacted our business. For example, we suspended non-essential travel by our employees, required events to be held virtually, and temporarily closed our offices. These responsive measures negatively impacted our in-person conferences, the length and variability of our sales cycles, the rate of sales to new customers, our international operations, and the hiring and onboarding of new employees across the organization.

The pandemic was a contributing factor that also led to existing and potential customers accelerating transitions to the cloud. As a result, we believe the value of our offering has become increasingly relevant during the course of the pandemic, which may result in a positive impact on our business over the long term. The global impact of COVID-19 continues to rapidly evolve, and while the broader implications of the ongoing COVID-19 pandemic remain uncertain, we will continue to monitor the situation and the effects on our business and operations.

Key Components of Results of Operations

Revenue

We generate revenue primarily from subscriptions and, to a lesser extent, professional services.

Subscription revenue. We generate revenue primarily from subscriptions which include licenses of proprietary features, support and maintenance revenue (collectively referred to as Support Revenue in the consolidated statements of operations), and cloud-hosted services. Licenses for self-managed software consist of term licenses and provide the customer with a right to use the software for a fixed term commencing upon delivery to the customer. Support and maintenance are bundled with each license subscription for the term of the license period. Cloud-hosted services are provided on a subscription basis and give customers access to our cloud solutions, which include related customer support.

Subscription revenue on self-managed software includes both upfront revenue recognized when the license is delivered as well as revenue recognized ratably over the contract period for support and maintenance. The substantial majority of our revenue is recognized ratably over the subscription term. Revenue on committed cloud-hosted services is recognized ratably when we satisfy the performance obligation over the contract period, whereas revenue from non-committed, pay-as-you-go cloud-hosted services are recognized when usage occurs.

We generate subscription revenue from contracts with typical durations ranging from one to three years. We typically invoice our customers annually in advance and, to a lesser extent, multi-year in advance. Amounts that have been invoiced and are nonrefundable are recorded in deferred revenue, or they are recorded in revenue if the revenue recognition criteria have been met. Our current and non-current deferred revenue represents contracts that are invoiced annually in advance or multi-year in advance. Customer payments that are contractually refundable are recorded as customer deposits.

Professional services. Professional services revenue consists of revenue from professional services and training services, which were generally sold on a time-and-materials basis prior to fiscal 2021. Commencing in fiscal 2021 we began to sell professional services on a predominantly fixed-fee basis. Revenue for professional services and training services is recognized as these services are delivered. Professional services are services utilized by some of our self-managed customers to accelerate the deployment of our products.

 

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Support and maintenance revenue and cloud-hosted services make up the majority of our revenue and are typically recognized ratably over the terms of our subscription contracts. Therefore, a substantial portion of the revenue that we report in each period is attributable to the recognition of deferred revenue relating to agreements that we entered into during previous periods. Consequently, increases or decreases in new sales or renewals in any one period may not be immediately reflected as revenue for that period. Any downturn in sales, however, may negatively affect our revenue in future periods. Accordingly, the effect of downturns in sales and market acceptance of our products, and potential changes in our rate of renewals, may not be fully reflected in our results of operations until future periods.

Cost of Revenue

Cost of Subscription Revenue. Cost of subscription revenue primarily includes personnel-related costs, such as salaries, bonuses and benefits, and stock-based compensation for employees associated with customer support and maintenance, third-party cloud infrastructure costs, amortization of internal-use software, and allocated overhead. We expect our cost of subscription revenue to increase as our subscription revenue increases.

Cost of Professional Services. Cost of professional services primarily includes personnel-related costs, such as salaries, bonuses and benefits, and stock-based compensation for employees associated with our professional services, costs of third-party contractors, and allocated overhead. We expect our cost of professional services to increase as our professional services revenue increases.

Gross Profit and Margin

Gross profit is revenue less cost of revenue.

Gross margin is gross profit expressed as a percentage of revenue. Our gross margin has been, and will continue to be affected by, a number of factors, including the average sales price of our subscriptions and professional services, changes in our revenue mix, the timing and extent of our investments in our global customer support personnel, hosting-related costs, and the amortization of internal-use software. We expect our gross margin to fluctuate over time depending on the factors described above. We expect our revenue from cloud-hosted services to increase as a percentage of total revenue, which we expect to lead to an increase in associated hosting and managing costs, which, in turn, would be expected to adversely impact our gross margin.

Operating Expenses

Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Personnel costs, which consist of salaries, bonuses, benefits, stock-based compensation and, with regard to sales and marketing expenses, sales commissions, are the most significant component of our operating expenses. We also incur other non-personnel costs such as software and subscription services and an allocation of our general overhead costs for facilities, IT, and depreciation expenses.

As of July 31, 2021, unrecognized stock-based compensation expense related to performance-based RSUs was $103.7 million. Stock-based compensation expense would have increased approximately $55.2 million and $48.5 million for fiscal 2021 and the six months ended July 31, 2021, respectively, had the RSU service-based and performance-based vesting conditions been met as of January 31, 2021. After the performance-based vesting condition is met, we expect to recognize stock-based compensation related to RSUs as the service-based vesting conditions are subsequently fulfilled. We expect to recognize $         million of stock-based compensation related to these

 

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performance-based RSUs in                     . In connection with this offering, we will record cumulative stock-based compensation expense for those RSUs for which the service-based vesting condition was satisfied prior to this offering with the remaining expense recognized over the remaining service period. Following the completion of this offering, the stock-based compensation expense related to our RSUs and other outstanding equity awards will result in increases in our expenses in future periods, in particular in the quarter in which the offering is completed.

Sales and Marketing. Sales and marketing expenses consist primarily of personnel-related costs, such as salaries, sales commissions that are recognized as expenses over the period of benefit, bonuses, benefits, stock-based compensation, costs related to marketing programs, travel-related costs, software and subscription services, and allocated overhead. Marketing programs consist of advertising, events, corporate communications, brand-building, and developer-community activities. We expect our sales and marketing expenses will increase over time and continue to be our largest operating expense for the foreseeable future as we expand our sales force, increase our marketing efforts, and expand into new markets. While we expect our sales and marketing expenses to decrease as a percentage of revenue over the long term due to business growth, our sales and marketing expenses may fluctuate as a percentage of revenue from period to period due to the timing and extent of these expenses.

Research and Development. Research and development expenses consist primarily of personnel-related costs, such as salaries, bonuses, benefits, and stock-based compensation, net of capitalized amounts, contractor and professional services fees, software and subscription services dedicated for use by our research and development organization and allocated overhead. We continue to focus our research and development efforts on the addition of new features and products and enhancing the functionality and ease of use of our existing products. We expect our research and development expenses will continue to increase as our business grows and we continue to invest in our offering. While we expect our research and development expenses to decrease as a percentage of revenue over the long term due to this business growth, our research and development expenses may fluctuate as a percentage of revenue from period to period due to the timing and extent of these expenses.

General and Administrative. General and administrative expenses for administrative functions including finance, legal, and human resources, consist primarily of personnel-related costs, such as salaries, bonuses, benefits, and stock-based compensation, as well as software and subscription services, and legal and other professional fees. Following the closing of this offering, we expect to incur additional general and administrative 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 national securities exchange, costs related to compliance and reporting obligations, and increased expenses for investor relations and professional services. We expect that our general and administrative expenses will increase as our business grows. However, we expect our general and administrative expenses to decrease as a percentage of revenue over the long term due to this business growth, our general and administrative expenses may fluctuate as a percentage of revenue from period to period due to the timing and extent of these expenses.

Other Income, Net

Other income, net consists primarily of interest income, interest expense, and foreign exchange gains and losses.

Provision for Income Taxes

Provision for income taxes consists primarily of income taxes in certain foreign jurisdictions in which we conduct business, as well as state income taxes in the United States. We have recorded

 

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deferred tax assets for which we provide a full valuation allowance, which includes net operating loss carryforwards and tax credits. We expect to maintain this full valuation allowance for the foreseeable future as it is more likely than not that some or all of those deferred tax assets may not be realized based on our history of losses.

Results of Operations

The following tables summarize our consolidated statements of operations data for the periods presented. The period-to-period comparison of results is not necessarily indicative of results for future periods.

 

     Year Ended January 31,      Six Months Ended July 31,  
           2020                 2021                    2020                    2021         
     (in thousands)  

Revenue:

         

License

   $ 18,503      $ 36,208       $ 15,204      $ 21,958   

Support

     96,820        165,607         75,622        110,888   

Cloud-hosted services

     2,339        4,092         1,341        6,342   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total subscription revenue

     117,662        205,907         92,167        139,188   

Professional services

     3,599        5,947         2,625        2,837   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total revenue

     121,261        211,854         94,792        142,025   
  

 

 

   

 

 

    

 

 

   

 

 

 

Cost of revenue:

         

Cost of license(1)

     294        536         243        130   

Cost of support(1)

     17,704        27,194         13,469        16,684   

Cost of cloud-hosted services(1)

     1,390        4,811         1,164        5,197   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total cost of subscription revenue(1)

     19,388        32,541         14,876        22,011   

Cost of professional services(1)

     4,527        8,511         4,340        3,584   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total cost of revenue(1)

     23,915        41,052         19,216        25,595   
  

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     97,346        170,802         75,576        116,430   
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating expenses:

         

Sales and marketing(1)

     89,308        141,018         75,951        88,869   

Research and development(1)

     40,118        65,248         34,314        43,048   

General and administrative(1)

     24,137        48,545         32,835        25,028   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total operating expenses

     153,563        254,811         143,100        156,945   
  

 

 

   

 

 

    

 

 

   

 

 

 

Loss from operations

     (56,217)       (84,009)        (67,524)       (40,515)  

Other income, net

     3,382        756         543        89   
  

 

 

   

 

 

    

 

 

   

 

 

 

Loss before income taxes

     (52,835)       (83,253)        (66,981)       (40,426)  

Provision for income taxes

     535        262         346        61   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net loss

   $ (53,370)     $ (83,515)      $ (67,327)     $ (40,487)  
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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(1)  Includes stock-based compensation expense as follows:

 

     Year Ended January 31,      Six Months Ended July 31,  
         2020              2021              2020              2021  
     (in thousands)  

Cost of revenue:

           

Cost of license

   $ —         $ —         $ —         $ —     

Cost of support

     401         1,056         867         185   

Cost of cloud-hosted services

     —           —           —            
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cost of subscription revenue

     401         1,056         867         190   

Cost of professional services

     89         308         260         24   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cost of revenue

     490         1,364         1,127         214   

Sales and marketing

     2,466         11,286         10,122         1,223   

Research and development

     1,507         5,974         5,099         836   

General and administrative

     4,998         20,599         19,457         951   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 9,461*      $ 39,223*      $ 35,805*      $ 3,224*  
  

 

 

    

 

 

    

 

 

    

 

 

 

*   In connection with tender offers and secondary sales of our common stock, stock-based compensation expense for fiscal 2020, fiscal 2021, and the six months ended July 31, 2020 included $1.5 million, $32.1 million, and $32.1 million of expense, respectively, related to the amount paid in excess of the estimated fair value of common stock as of the date of the transactions. There were no tender offers or secondary sales for the six months ended July 31, 2021. See Note 9 to our consolidated financial statements included elsewhere in this prospectus for further details.

    

Based upon the assumed initial public offering price of $     per share, the midpoint of the price range set forth on the cover page of this prospectus, the aggregate intrinsic value of stock options and RSUs outstanding as of                 , 2021 was $         million, of which $         related to vested stock options and $         million related to unvested stock options and RSUs.

 

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The following table sets forth our consolidated statements of operations data expressed as a percentage of revenue for the periods indicated:

 

    Year Ended January 31,     Six Months Ended July 31,  
         2020               2021               2020               2021  

Revenue:

       

License

    15%         17%         16%         15%    

Support

    80             78             80             79        

Cloud-hosted services

    2             2             1             4        
 

 

 

   

 

 

   

 

 

   

 

 

 

Total subscription revenue

    97             97             97             98        

Professional services

    3             3             3             2        
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    100             100             100             100        
 

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

       

Cost of license

    —             —             —             —        

Cost of support

    15             13             14             11        

Cost of cloud-hosted services

    1             2             1             4        
 

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of subscription revenue

    16             15             15             15        

Cost of professional services

    4             4             5             3        
 

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    20             19             20             18        
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    80             81             80             82        
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

       

Sales and marketing

    73             67             80             63        

Research and development

    33             31             36             30        

General and administrative

    20             23             35             18        
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    126             121             151             111        
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (46)            (40)            (71)            (29)       

Other income, net

    2             1             —             —        
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (44)            (39)            (71)            (29)       

Provision for income taxes

    —             —             —             —        
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (44)%        (39)%        (71)%        (29)%   
 

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of the Six Months Ended July 31, 2020 and 2021

Revenue

 

     Six Months Ended July 31,      Change  
          2020                2021           $          %      
     (in thousands, except percentages)  

Revenue:

           

License

   $ 15,204      $ 21,958      $ 6,754        44%  

Support

     75,622        110,888        35,266        47%  

Cloud-hosted services

     1,341        6,342        5,001        373%  
  

 

 

    

 

 

    

 

 

    

Total subscription revenue

     92,167        139,188        47,021        51%  

Professional services

     2,625        2,837        212        8%  
  

 

 

    

 

 

    

 

 

    

Total revenue

   $ 94,792      $ 142,025      $ 47,233        50%  
  

 

 

    

 

 

    

 

 

    

 

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Subscription revenue increased by $47.0 million, or 51%, for the six months ended July 31, 2021 compared to the six months ended July 31, 2020. This increase is attributable to the addition of new customers, which contributed $21.2 million for the six months ended July 31, 2021, as we increased our customer base by 94% from July 31, 2020 to July 31, 2021. The remainder of this increase in revenue is attributable to expanded product adoption among existing customers, as reflected by our average net dollar retention rate of 124% for the trailing four quarters ended July 31, 2021.

Professional services revenue increased by $0.2 million, or 8%, for the six months ended July 31, 2021 compared to the six months ended July 31, 2020. This was primarily due to the completion of certain professional services projects.

Cost of Revenue and Gross Margin

 

    Six Months Ended July 31,     Change  
         2020               2021              $              %      
    (in thousands, except percentages)  

Cost of revenue:

        

Cost of license

  $ 243     $ 130     $ (113      (47)%  

Cost of support

    13,469       16,684       3,215        24%   

Cost of cloud-hosted services

    1,164       5,197       4,033        346%   
 

 

 

   

 

 

   

 

 

    

Total cost of subscription revenue

    14,876       22,011       7,135        48%   

Cost of professional services

    4,340       3,584       (756      (17)%  
 

 

 

   

 

 

   

 

 

    

Total cost of revenue

  $  19,216     $  25,595     $  6,379        33%   
 

 

 

   

 

 

   

 

 

    

 

    Six Months Ended July 31,  
    2020     2021  

Gross margin

   

License

    98     99

Support

    82     85

Cloud-hosted services

    13     18

Total subscription margin

    84     84

Professional services

    (65 )%      (26 )% 

Total gross margin

    80     82

Cost of subscription revenue increased by $7.1 million, or 48%, for the six months ended July 31, 2021 compared to the six months ended July 31, 2020. The increase in cost of subscription revenue was driven by an increase in employee-related expenses of $4.7 million due to a 49% increase in headcount in our customer support organization from July 31, 2020 to July 31, 2021 and a $1.2 million one-time funding of paid time off, or PTO, balances as we transitioned to a PTO model in the United States partially offset by a $0.7 million decrease in stock-based compensation expense from secondary sales of our common stock during the six months ended July 31, 2020. The increase in cost of subscription revenue was also attributable to a $1.1 million increase in cloud hosting fees as well as a $1.0 million increase in software and third-party services. We launched cloud-hosted versions of our products during fiscal 2020 and 2021. As cloud becomes a larger portion of our revenue, our gross margin profile will change because we have a lower gross margin on cloud-hosted services due to headcount related to our cloud offering operations and cloud hosting fees.

Cost of professional services decreased by $0.8 million, or 17%, for the six months ended July 31, 2021 compared to the six months ended July 31, 2020. The decrease in cost of professional services was driven by a 17% decrease in headcount due to a change in the organizational structure, a

 

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$0.2 million decrease in stock-based compensation expense from secondary sales of our common stock during the six months ended July 31, 2020, and fewer partner service hours driving a $0.3 million decrease in partner costs. Our professional services gross margin has been negative, and will continue to be negative for the near-term. Our professional services are generally priced at a low margin which, combined with allocated overhead, has resulted in a negative margin.

Gross margin increased to 82% for the six months ended July 31, 2021 from 80% for the six months ended July 31, 2020, driven by our overall growth in revenue.

Operating Expenses

Sales and Marketing

 

     Six Months Ended July 31,      Change  
          2020                2021           $          %      
     (in thousands, except percentages)  

Sales and marketing

   $ 75,951      $ 88,869      $ 12,918        17

Sales and marketing expenses increased by $12.9 million, or 17%, for the six months ended July 31, 2021 compared to the six months ended July 31, 2020. The increase was primarily driven by $13.3 million in employee-related costs due to a 44% increase in headcount in our sales and marketing organization from July 31, 2020 to July 31, 2021 and a $4.8 million one-time funding of PTO balances as we transitioned to a PTO model in the United States. The increase in employee-related costs includes a $0.9 million net increase in sales commissions that were recognized as expenses and is partially offset by an $8.9 million decrease in stock-based compensation expense from secondary sales of our common stock during the six months ended July 31, 2020. The remainder of the increase was attributable to increased expenses of $0.9 million in software expenses and $0.5 million in allocated overhead due to increased headcount and partially offset by a $2.4 million decrease in employee development primarily due to company events being held virtually during the COVID-19 pandemic.

Research and Development

 

     Six Months Ended July 31,      Change  
          2020                2021           $          %      
     (in thousands, except percentages)  

Research and development

   $ 34,314      $ 43,048      $ 8,734        25

Research and development expenses increased by $8.7 million, or 25%, for the six months ended July 31, 2021 compared to the six months ended July 31, 2020 as we continued to develop and enhance the functionality of our existing products and release new products. This increase was primarily driven by a $8.5 million increase in employee-related costs due to a 51% increase in research and development headcount from July 31, 2020 to July 31, 2021 and a $3.6 million one-time funding of PTO balances as we transitioned to a PTO model in the United States. The increase in employee-related costs was offset by a decrease of $4.2 million in stock-based compensation expense from secondary sales of our common stock during the six months ended July 31, 2020. The remainder of the increase was attributable to increased software and subscription expenses of $1.4 million driven primarily by the increase in headcount, partially offset by $1.8 million in higher research and development costs capitalized to internal-use software for our cloud platform compared to the six months ended July 31, 2020.

 

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General and Administrative

 

     Six Months Ended July 31,      Change  
          2020                2021           $            %        
     (in thousands, except percentages)  

General and administrative

   $ 32,835      $ 25,028      $ (7,807      (24 )% 

General and administrative expenses decreased by $7.8 million, or 24%, for the six months ended July 31, 2021 compared to the six months ended July 31, 2020. The decrease was primarily driven by a $18.1 million decrease in stock-based compensation expense from secondary sales of our common stock during the six months ended July 31, 2020. The decrease was offset by a $6.4 million increase in employee-related costs exclusive of stock-based compensation expense due to a 94% increase in general and administrative headcount from July 31, 2020 to July 31, 2021 and a $1.1 million one-time funding of PTO balances as we transitioned to a PTO model in the United States. In addition, professional service and consulting fees increased $1.9 million net of capitalized deferred offering costs in anticipation of an initial public offering and software expenses increased $1.3 million due to increased headcount.

Other Income, Net

 

     Six Months Ended July 31,      Change  
          2020                2021           $            %        
     (in thousands, except percentages)  

Other income, net

   $ 543      $ 89      $ (454      (84 )% 

Other income, net decreased by $0.5 million, or 84%, for the six months ended July 31, 2021 compared to the six months ended July 31, 2020. The decrease was primarily attributed to a change in the mix of our investment portfolio coupled with lower yields on balances invested in money market funds and the weakening of the U.S. dollar against other major currencies.

Provision for Income Taxes

 

     Six Months Ended July 31,      Change  
          2020                2021           $            %        
     (in thousands, except percentages)  

Provision for income taxes

   $ 346      $ 61      $ (285      (82 )% 

Provision for income taxes decreased by $0.3 million, or 82%, for the six months ended July 31, 2021 compared to the six months ended July 31, 2020, primarily due to certain credits and deductions taken against income in foreign tax jurisdictions. We maintain a full valuation allowance on our U.S. deferred tax assets, and the significant components of the tax expense recorded are current cash tax expenses in various jurisdictions. Current cash tax expenses are impacted by each jurisdiction’s individual tax rates, laws on the timing of recognition of income and deductions, and availability of net operating losses and tax credits. Our effective tax rate may fluctuate significantly on a quarterly basis and could be adversely affected to the extent earnings are lower than anticipated in countries that have lower statutory rates and higher than anticipated in countries that have higher statutory rates.

 

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Comparison of Fiscal 2020 and 2021

Revenue

 

     Year Ended January 31,      Change  
     2020      2021      $          %      
     (in thousands, except percentages)  

Revenue

           

License

   $ 18,503      $ 36,208      $ 17,705        96

Support

     96,820        165,607        68,787        71

Cloud-hosted services

     2,339        4,092        1,753        75
  

 

 

    

 

 

    

 

 

    

Total subscription revenue

     117,662        205,907        88,245        75

Professional services

     3,599        5,947        2,348        65
  

 

 

    

 

 

    

 

 

    

Total revenue

   $ 121,261      $ 211,854      $ 90,593        75
  

 

 

    

 

 

    

 

 

    

Subscription revenue increased by $88.2 million, or 75%, for fiscal 2021 compared to fiscal 2020. This increase is attributable to the addition of new customers, which contributed $49.7 million for fiscal 2021, as we increased our customer base by 77% from January 31, 2020 to January 31, 2021. The remainder of this increase in revenue is attributable to expanded product adoption among existing customers, as reflected by our average net dollar retention rate of 123% for the trailing four quarters ended January 31, 2021.

During fiscal 2021, we experienced a modest adverse impact on our subscription revenue growth as a result of decreases in customer spending on our offering and a lengthening of, and increased variability in, our sales cycles, and a decrease in the rate of sales to new customers, which we believe were primarily due to the effects of the COVID-19 pandemic on our enterprise customer base.

Professional services revenue increased by $2.3 million, or 65%, for fiscal 2021 compared to fiscal 2020. This was primarily due to an increase in delivery of professional services as we grew our professional services organization with increased hiring to address additional demand by our customers so that they could further realize the benefits of our offering.

Cost of Revenue and Gross Margin

 

     Year Ended January 31,      Change  
         2020              2021              $              %      
     (in thousands, except percentages)  

Cost of revenue

           

Cost of license

   $ 294      $ 536      $ 242        82%  

Cost of support

     17,704        27,194        9,490        54%  

Cost of cloud-hosted services

     1,390        4,811        3,421        246%  
  

 

 

    

 

 

    

 

 

    

Total cost of subscription revenue

     19,388        32,541        13,153        68%  

Cost of professional services

     4,527        8,511        3,984        88%  
  

 

 

    

 

 

    

 

 

    

Total cost of revenue

   $ 23,915      $ 41,052      $ 17,137        72%  
  

 

 

    

 

 

    

 

 

    

 

     Year Ended January 31,  
     2020     2021  

Gross margin

    

License

     98     99

Support

     82     84

Cloud-hosted services

     41     (18 )% 

Total subscription margin

     84     84

Professional services

     (26 )%      (43 )% 

Total gross margin

     80     81

 

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Cost of subscription revenue increased by $13.2 million, or 68%, for fiscal 2021 compared to fiscal 2020. The increase in cost of revenue was driven by an increase in employee-related expenses of $10.2 million due to a 49% increase in headcount in our customer support organization from January 31, 2020 to January 31, 2021. The increase in cost of revenue was also attributable to a $2.2 million increase in software and third-party services as well as a $0.7 million increase in cloud hosting fees. We launched cloud-hosted versions of our products during fiscal 2020 and 2021. As cloud becomes a larger portion of our revenue, our gross margin profile will change because we have a lower gross margin on cloud-hosted services, including due to headcount related to our cloud offering operations and cloud hosting fees. During the 12 months ended January 31, 2021, there was a negative margin on cloud-hosted services due to investment in headcount to grow HCP.

Cost of professional services increased by $4.0 million, or 88%, for fiscal 2021 compared to fiscal 2020. The increase in cost of revenue was driven by an increase in employee-related expenses, which was driven by a 58% increase in headcount in our professional services organization from January 31, 2020 to January 31, 2021. Our professional services gross margin has been negative, and will continue to be negative for the near-term, due to growth in our professional services organization to support the deployment of our software. Our professional services are generally priced at a low margin which combined with allocated overhead, result in a negative margin.

Gross margin increased to 81% in fiscal 2021 from 80% in fiscal 2020, driven by our overall growth in revenue.

Operating Expenses

Sales and Marketing

 

     Year Ended January 31,      Change  
     2020      2021      $          %      
     (in thousands, except percentages)  

Sales and marketing

   $ 89,308      $ 141,018      $ 51,710        58

Sales and marketing expenses increased by $51.7 million, or 58%, for fiscal 2021 compared to fiscal 2020. The increase was primarily driven by $51.5 million in employee-related costs due to a 38% increase in headcount in our sales and marketing organization from January 31, 2020 to January 31, 2021, which includes a $10.3 million net increase in sales commissions that were recognized as expenses and an $8.9 million increase in stock-based compensation expense from secondary sales of our common stock during fiscal 2021. The remainder of the increase was attributable to increased expenses of $1.0 million in employee development, $2.6 million in software expenses and $1.7 million in allocated overhead due to increased headcount and partially offset by a $4.5 million decrease in travel and entertainment caused by decreased travel during the COVID-19 pandemic, as meetings and conferences were canceled and held virtually, and a $0.5 million decrease in professional services.

Research and Development

 

     Year Ended January 31,      Change  
         2020              2021          $          %      
     (in thousands, except percentages)  

Research and development

   $ 40,118      $ 65,248      $ 25,130        63

Research and development expenses increased by $25.1 million, or 63%, for fiscal 2021 compared to fiscal 2020 as we continued to develop and enhance the functionality of our existing products and release new products. This increase was primarily driven by a 28% increase in research and development headcount from January 31, 2020 to January 31, 2021 which resulted in additional expenses of $26.3 million in employee-related costs, including an increase of $4.2 million in stock-

 

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based compensation expense from secondary sales of our common stock during fiscal 2021. The remainder of the increase was attributable to increased software and subscription expenses of $2.0 million driven primarily by the increase in headcount. Increases in research and development expenses were partially offset by $2.9 million in capitalized internal-use software for our cloud platform.

General and Administrative

 

     Year Ended January 31,      Change  
         2020              2021          $           %       
     (in thousands, except percentages)  

General and administrative

   $ 24,137      $ 48,545      $ 24,408        101

General and administrative expenses increased by $24.4 million, or 101%, for fiscal 2021 compared to fiscal 2020. The increase was primarily driven by a 41% increase in general and administrative headcount from January 31, 2020 to January 31, 2021, which resulted in an additional $22.5 million of employee-related costs, including an increase of $16.6 million in stock-based compensation expense from secondary sales of our common stock during fiscal 2021 compared to fiscal 2020. The remainder of the increase was primarily due to increased software and subscription expenses, office administrative expenses, and depreciation and amortization expenses related to our San Francisco headquarters lease going into service.

Other Income, Net

 

     Year Ended January 31,      Change  
         2020              2021          $            %        
     (in thousands, except percentages)  

Other income, net

   $ 3,382      $ 756      $ (2,626      (78 )% 

Other income, net decreased by $2.6 million, or 78%, for fiscal 2021 compared to fiscal 2020. The decrease was primarily attributed to a change in the mix of our investment portfolio coupled with lower yields on balances invested in money market funds and the weakening of the U.S. dollar against other major currencies.

Provision for Income Taxes

 

     Year Ended January 31,      Change  
         2020              2021          $            %